File No. 812-13869 |
UNITED STATES OF AMERICA |
BEFORE THE |
SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549 |
--------------------------------------- |
SECOND AMENDED AND RESTATED |
APPLICATION FOR AN ORDER: (A) PURSUANT TO SECTION 6(c) OF THE |
INVESTMENT COMPANY ACT OF 1940, AS AMENDED (THE "ACT"), EXEMPTING |
APPLICANTS FROM SECTIONS 18(f) AND 21(b) OF THE ACT; (B) PURSUANT TO |
SECTION 12(d)(1)(J) OF THE ACT FOR AN EXEMPTION FROM SECTION 12(d)(1) |
OF THE ACT; (C) PURSUANT TO SECTIONS 6(c) AND 17(b) OF THE ACT FOR AN |
EXEMPTION FROM SECTIONS 17(a)(1), 17(a)(2) AND 17(a)(3) OF THE ACT; AND (D) |
PURSUANT TO SECTION 17(d) OF THE ACT AND RULE 17d-1 THEREUNDER |
TO PERMIT CERTAIN JOINT TRANSACTIONS |
--------------------------------------- |
PRINCIPAL FUNDS, INC., |
PRINCIPAL VARIABLE CONTRACTS FUNDS, INC. |
and |
PRINCIPAL MANAGEMENT CORPORATION |
Please send all communications, notices and orders to: |
John W. Blouch, Esq. |
Drinker Biddle & Reath, LLP |
1500 K Street, N.W. |
Washington, DC 20005-1209 |
Copies to: |
Adam U. Shaikh, Esq. |
Principal Financial Group |
Des Moines, Iowa 50392-0300 |
Page 1 of 33 Pages, including Exhibits |
Exhibit Index appears at Page 27 |
As Filed on October 12, 2011 |
UNITED STATES OF AMERICA |
BEFORE THE |
SECURITIES AND EXCHANGE COMMISSION |
WASHINGTON, D.C. 20549 |
SECOND AMENDED AND RESTATED | |
In the Matter of | APPLICATION FOR AN ORDER: (A) |
PURSUANT TO SECTION 6(c) OF THE | |
PRINCIPAL FUNDS, INC., | INVESTMENT COMPANY ACT OF |
1940, AS AMENDED (THE “ACT”), | |
PRINCIPAL VARIABLE CONTRACTS | EXEMPTING APPLICANTS FROM |
FUNDS, INC. | SECTIONS 18(f) AND 21(b) OF THE |
ACT; (B) PURSUANT TO SECTION | |
and | 12(d)(1)(J) OF THE ACT FOR AN |
EXEMPTION FROM SECTION | |
PRINCIPAL MANAGEMENT | 12(d)(1) OF THE ACT; (C) PURSUANT |
CORPORATION | TO SECTIONS 6(c) AND 17(b) OF THE |
ACT FOR AN EXEMPTION FROM | |
c/o Principal Financial Group | SECTIONS 17(a)(1), 17(a)(2) AND |
Des Moines, Iowa 50392-2080 | 17(a)(3) OF THE ACT; AND (D) |
PURSUANT TO SECTION 17(d) OF | |
File No. 812-13869 | THE ACT AND RULE 17d-1 |
THEREUNDER TO PERMIT | |
Investment Company Act of 1940 | CERTAIN JOINT TRANSACTIONS |
I. INTRODUCTION |
Principal Funds, Inc. (“PFI”), Principal Variable Contracts Funds, Inc. (“PVC”) (each of |
PFI and PVC a “Company” and collectively the “Companies”) and Principal Management |
Corporation (“PMC”) (collectively, the “Applicants”) hereby apply for an order of the Securities |
and Exchange Commission (the “Commission”): pursuant to Section 6(c) of the Act for an |
exemption from Sections 18(f) and 21(b) of the Act; pursuant to Section 12(d)(1)(J) of the Act |
for an exemption from Section 12(d)(1) of the Act; pursuant to Sections 6(c) and 17(b) of the Act |
for an exemption from Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Act; and pursuant to |
Section 17(d) of the Act and Rule 17d-1 thereunder to the extent necessary to permit certain joint |
arrangements as described below (the “Application”). |
Each of the Companies consists of multiple series and may offer additional series in the |
future (collectively, the “Funds”). Applicants hereby file this Application for an order permitting |
the Funds to participate in an interfund lending facility whereby the Funds may directly lend to |
and borrow money from each other for temporary purposes, provided that the loans are made in |
Page 2 of 33 Pages |
accordance with the terms and conditions set forth in this Application. Currently, certain Funds |
may, at any given time, be investing their daily cash balances in repurchase agreements with |
banks or other lenders, while other Funds may be borrowing money from banks for temporary |
purposes to satisfy redemption requests or for other temporary purposes. The Companies |
propose to enter into loan agreements on behalf of the Funds whereby the Funds would be |
permitted to lend money directly to, and borrow money directly from, each other for temporary |
purposes. Through the use of the proposed credit facility, the Funds intend to: (i) reduce the |
costs that would be incurred in borrowing from banks and other lenders; and (ii) earn higher |
interest rates on their cash balances. |
Section 12(d)(1) of the Act prohibits, subject to certain limited exceptions, the purchase |
by one investment company of the securities of another investment company. Section 17(a)(1) |
of the Act prohibits an affiliated person of a registered investment company from selling |
securities or other property to the registered investment company, Section 17(a)(2) of the Act |
prohibits an affiliated person of a registered investment company from purchasing securities or |
other property from the registered investment company, and Section 17(a)(3) of the Act |
generally prohibits such an affiliated person from borrowing money or other property from the |
investment company. Section 17(d) of the Act and Rule 17d-1 thereunder generally prohibit an |
affiliated person of a registered investment company, acting as principal, from entering into any |
transaction in which the investment company is a joint, or a joint and several, participant unless |
it has been approved by an order of the Commission. Section 18(f)(1) of the Act prohibits any |
registered open-end investment company from issuing any “senior security”; however, the |
investment company may borrow from a bank, provided the company maintains 300% asset |
coverage for such loans. Finally, 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 such person controls or is under common control with such registered company. |
Applicants request that the exemptive relief requested herein apply to: (i) any Funds; (ii) |
any successor entity to PMC;1 and (iii) any other registered open-end investment company or |
series thereof (included in the term “Funds”) for which PMC or a person controlling, controlled |
by or under common control (within the meaning of Section 2(a)(9) of the Act) with PMC serves |
as investment adviser. 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 this Application. |
Applicants request an order to the extent necessary to establish and operate the proposed |
credit facility as described in this Application, subject to the terms and conditions set forth |
herein. The proposed credit facility is intended to be used by the Funds solely as a means of: (i) |
reducing the costs that would be incurred by the Funds in obtaining bank loans for temporary |
purposes; and (ii) increasing the return received by the Funds in the investment of their otherwise |
uninvested daily cash balances. Accordingly, Applicants believe the relief requested is |
appropriate in the public interest and is consistent with the protection of investors and the |
purposes fairly intended by the policy and provisions of the Act. |
_____________________ |
1 The term “successor” is limited to entities that result from a reorganization into another |
jurisdiction or a change in the type of business organization. |
Page 3 of 33 Pages |
II. | BACKGROUND | |
A. PFI | ||
PFI is a Maryland corporation which is registered as an open-end management | ||
investment company under the Act. PFI is a series investment company which currently offers | ||
64 Funds, each of which has its own investment objective and policies.2 Shares of PFI are | ||
registered under the Securities Act of 1933, as amended (the “1933 Act”). They are offered | ||
directly to the public as well as to certain separate accounts of Principal Life Insurance Company | ||
(“Principal Life”), an Iowa stock life insurance company, that are excepted from the definition of | ||
investment company by Section 3(c)(11) of the Act and, therefore, are not registered as | ||
investment companies under the Act. These separate accounts are used to fund group annuity | ||
contracts that are not registered under the 1933 Act because they are issued to qualified | ||
retirement plans pursuant to Section 3(a)(2) of the 1933 Act. | ||
B. PVC | ||
PVC is a Maryland corporation which is registered as an open-end management | ||
investment company under the Act. PVC is a series investment company which currently offers | ||
34 Funds, each of which has its own investment objective and policies.3 Shares of PVC are | ||
registered under the 1933 Act. They are sold principally to separate accounts, registered as | ||
investment companies under the Act, of Principal Life and other, unaffiliated insurance | ||
companies. These separate accounts are used to fund variable life insurance and variable annuity | ||
contracts issued by Principal Life and such other insurance companies that are registered under | ||
the 1933 Act.4 | ||
C. PMC | ||
PMC is an Iowa corporation and an indirect wholly-owned subsidiary of Principal | ||
Financial Group, Inc., the ultimate parent entity of Principal Life. PMC is registered as an | ||
investment adviser under the Investment Advisers Act of 1940, as amended, and serves as the | ||
investment manager for all the Funds of PFI and PVC. As investment manager, PMC provides | ||
investment advisory and certain corporate administrative services to the Funds. Pursuant to sub- | ||
advisory agreements, PMC has delegated day-to-day portfolio management responsibilities for | ||
certain Funds or portions of the assets thereof to various sub-advisers that may be affiliated or | ||
unaffiliated with PMC. | ||
_____________________ | ||
2 | Each of the PFI Funds is listed in Exhibit A hereto. | |
3 | Each of the PVC Funds is listed in Exhibit B hereto. | |
4 | PVC has obtained “mixed and shared funding” relief from the Commission. In the Matter of | |
Principal Variable Contracts Fund, Inc., et al., Investment Company Act Release Nos. 27852 | ||
(Jun. 18, 2007) (notice) and 27887 (Jul. 17, 2007) (order). | ||
Page 4 of 33 Pages |
D. Current Borrowing Practices |
At any particular time, while some Funds are making short-term loans to banks or other |
entities by entering into repurchase agreements or purchasing short-term instruments either |
directly or through the “Joint Account” (as defined below), 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. Pursuant to a Commission |
order, each Fund may deposit uninvested cash balances in a single joint trading account |
administered by PMC (the “Joint Account”) for purposes of investing those balances in one or |
more short-term instruments, including repurchase agreements and short-term money market |
instruments, to the extent consistent with each participating Fund’s investment objectives, |
policies and restrictions.5 In addition, PMC has implemented and administers a “cash |
management program” for certain Funds (the “Cash Management Program”). Under the Cash |
Management Program, PMC may invest a Fund’s available cash (to meet redemption requests |
and pay expenses) as well as cash flows from investments in the Fund in stock index futures |
contracts to gain exposure to the relevant market or in the Joint Account. |
The Companies, each on behalf of certain of its Funds, have entered into a credit |
agreement (the “Credit Agreement”) with certain lenders, including the Funds’ Custodian, Bank |
of New York Mellon, under which such Funds have access to a $150 million joint line of credit. |
Borrowings under the Credit Agreement are made to facilitate the handling of unusual and/or |
unanticipated short-term cash requirements. The interest rate charged under the Credit |
Agreement is the Federal Funds Rate plus 37.5 basis points. In addition, there is an annual |
commitment fee of 10 basis points on the unused portion of the available credit. If the relief |
requested herein is granted, the Companies intend to maintain the Credit Agreement but may at |
some future time determine to reduce the amount of the joint line of credit or terminate the |
Credit Agreement. |
When a Fund borrows money from a bank or under the Credit 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 Credit 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. |
E. The Proposed Credit Facility |
The Companies seek to enter into master interfund lending agreements (“Interfund |
Lending Agreements”) with each other on behalf of the Funds that would permit each Fund to |
lend money directly to and borrow money directly from other Funds through a credit facility for |
temporary purposes (an “Interfund Loan”). The proposed credit facility would both reduce the |
Funds' potential borrowing costs and enhance the ability of the lending Funds to earn higher rates |
_____________________ |
5 In the Matter of Principal Aggressive Growth Fund, et al., Investment Company Act Release |
Nos. 21855 (Mar. 25, 1996) (notice) and 21912 (Apr. 23, 1996) (order). |
Page 5 of 33 Pages |
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. |
It is anticipated 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. |
Similarly, it is anticipated 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: (i) “fail” on its |
intended purchase due to lack of funds from the previous sale, resulting in additional cost to the |
Fund; or (ii) 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 without the Fund incurring custodian overdraft |
or other charges. |
While bank borrowings could generally supply needed cash to cover unanticipated |
redemptions and sales fails, the borrowing Funds would incur commitment fees and/or other |
charges involved in obtaining a bank loan. 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, the proposed credit facility |
would benefit both borrowing and lending Funds.6 |
The interest rate to be charged to the Funds on any Interfund Loan (the “Interfund Loan |
Rate”) would be the average of: (i) the “Repo Rate,” as defined below; and (ii) the “Bank Loan |
Rate,” as defined below. The Repo Rate for any day would be the highest rate available to a |
lending Fund, directly or through the Joint Account, from investment in overnight repurchase |
_____________________ |
6 In this respect, Applicants' proposal is analogous to direct purchase and sale transactions |
between affiliated investment companies covered by Rule 17a-7. Rule 17a-7 is designed to |
allow funds to reduce their brokerage costs by dealing directly with one another without the |
intervention of a broker-dealer. Like the Applicants' proposal, Rule 17a-7 allows direct dealings |
between funds where the funds’ board of trustees has adopted procedures to assure that the |
transactions are effected at prices that are fair to both sides of the transaction and are consistent |
with the investment policy of each fund. Cf. Safeco Growth Fund, Inc. (pub. avail. Mar. 4, |
1985). |
Page 6 of 33 Pages |
agreements. The Bank Loan Rate for any day would be calculated by PMC each day an |
Interfund Loan is made according to a formula established by the Board of Directors (the |
“Board”) of each Fund and intended to approximate the lowest interest rate at which bank short- |
term loans would be available to the Funds.7 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. The continual monitoring and adjustment of the Bank |
Loan Rate, as well as the method of determining the Bank Loan Rate, should ensure that the |
Bank Loan Rate reflects current market rates. Applicants submit that these procedures provide a |
level of assurance that the Bank Loan Rate would be representative of prevailing market rates. |
The proposed credit facility would be administered by one or more investment, |
administrative and fund accounting personnel from PMC, a portfolio manager for the |
Companies’ money market Funds, which are sub-advised by Principal Global Investors, LLC, an |
affiliate of PMC, and a representative of the Corporate Treasury of Principal Life8 (collectively, |
the “Credit Facility Team”). No portfolio manager of any other Fund will serve as a member of |
the Credit Facility Team. The proposed credit facility would be available to any Fund, although |
the Companies’ money market Funds would not participate as borrowers. 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 (ii) more favorable to the borrowing Fund than the Bank |
Loan Rate. |
Under the proposed credit facility, it is anticipated that most loans extended to the Funds |
would be unsecured. The proposed credit facility would permit a Fund to borrow on an |
unsecured basis if the Fund's total borrowings from all sources were less than or equal to 10% of |
its total assets immediately after the interfund borrowing. If a Fund had a secured loan |
outstanding from any other source or if the Fund's outstanding borrowings immediately after the |
interfund borrowing were greater than 10% of its total assets, the Fund could borrow only on a |
secured basis. Each Fund will borrow in compliance with the investment restrictions for that |
Fund. If the total outstanding borrowings from all sources of a Fund with outstanding Interfund |
Loans exceeded 10% of its total assets, the Fund would reduce indebtedness to 10% or less of |
total assets, or secure each outstanding Interfund Loan. |
_____________________ |
7 The composition of the Boards of Directors of PFI and PVC, and therefore of each of the |
currently existing Funds, is the same. |
8 The Corporate Treasury of Principal Life (the “Corporate Treasury”) has broad experience |
and expertise with respect to treasury and cash operations generally. Applicants believe that the |
Credit Facility Team will benefit from the availability to it of this experience and expertise |
through the membership on the Credit Facility Team of a representative of the Corporate |
Treasury. This representative may be the Treasurer of Principal Life or another senior employee |
with the Corporate Treasury who similarly also holds a position with PMC or has been made |
available to PMC pursuant to a service agreement with Principal Life. |
Page 7 of 33 Pages |
In addition, amounts borrowed through the proposed credit facility would be reasonably |
related to a Fund's temporary borrowing need. In order to facilitate monitoring of these |
conditions, Applicants will limit a Fund’s borrowings through the proposed credit facility, as |
measured on the day when the most recent loan was made, to 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. The duration of any loans made under the proposed |
credit facility would be limited to the time required to receive payment for securities sold, but in |
no event more than seven days. All loans would be callable on one business day's notice by the |
lending Fund. A borrowing Fund could repay an outstanding loan in whole or in part at any |
time. While the Funds would pay interest on the borrowings, the Funds would not pay any fees |
in connection therewith. |
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 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 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: (i) the time of filing |
requests to participate; (ii) minimum loan lot sizes; and (iii) the need to minimize the number of |
transactions and associated administrative costs. To reduce transaction costs, each loan normally |
would be allocated in a manner intended to minimize the number of participants necessary to |
complete the loan transaction. |
The Credit Facility Team would not solicit cash for loans from any Fund or prospectively |
publish or disseminate the amount of current borrowing demand to portfolio managers (other |
than the money market Fund portfolio manager who is on the Credit Facility Team). Once it had |
determined the aggregate amount of cash available for loans and borrowing demand, 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 Fund portfolio 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, other than the money market Fund portfolio 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 by PMC in the Joint Account or pursuant |
to the Cash Management Program. |
The method of allocation and related administrative procedures would be approved by the |
Board of each Fund, including a majority of the 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. PMC would report |
quarterly to each Fund’s Board on the participation of the Fund in the proposed credit facility. |
Each Fund’s Board would review at least quarterly the Fund's participation in the proposed credit |
facility to assure that transactions were effected in compliance with any order permitting such |
transactions and would review at least annually the continuing appropriateness of: (i) the |
Page 8 of 33 Pages |
administrative procedures; (ii) the Interfund Loan Rate; and (iii) the Fund’s participation in the |
proposed credit facility. In the event an Interfund Loan is not paid according to its terms and a |
default is not cured within two business days from maturity or from demand for payment, PMC |
would promptly refer the loan for arbitration to an independent arbitrator selected by the Board |
of each Fund involved, who would have binding authority to resolve any problem promptly. |
PMC would: (i) monitor the Interfund Loan Rate and the other terms and conditions of |
the loans; (ii) limit the borrowings and loans entered into by each Fund to ensure that they |
comply with the Fund’s investment policies and limitations; (iii) ensure equitable treatment of |
each Fund; and (iv) make quarterly reports to each Fund’s Board concerning any transactions by |
the Funds under the proposed credit facility and the Interfund Loan Rate charged. PMC, 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. PMC 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. |
If the requested order is granted, no Fund may participate in the proposed credit facility |
unless: (i) the Fund has obtained shareholder approval for its participation, if such approval is |
required by law; (ii) the Fund has fully disclosed all material information concerning the credit |
facility in its prospectus and/or statement of additional information; and (iii) the Fund's |
participation in the credit facility is consistent with its investment objectives, limitations and |
organizational documents. |
III. STATUTORY PROVISIONS |
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. 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 17(a)(3) of the Act generally prohibits any such affiliated person, |
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 17(d) |
of the Act and Rule 17d-1 thereunder 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 transaction in which the investment company is a joint or a joint and several |
participant, unless, upon application, the transaction has been approved by an order of the |
Commission. |
Page 9 of 33 Pages |
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.” |
Section 18(f)(1) of the Act prohibits an open-end investment company from issuing “any |
senior security except that any such registered company shall be permitted to borrow from any |
bank, provided that immediately after any such borrowing there is an asset coverage of at least |
300 per centum for all borrowings of such registered company.” Under Section 18(g) of the Act, |
the term “senior security” includes any bond, debenture, note or similar obligation or instrument |
constituting a security and evidencing indebtedness. |
Section 17(b) of the Act generally provides that the Commission may grant an order, |
upon application, exempting a proposed transaction from the provisions of Section 17(a) of the |
Act provided that: (i) 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; (ii) the transaction is consistent with the policy of the investment company as recited |
in its registration statement and reports filed under the Act; and (iii) the transaction is consistent |
with the general purposes of the Act. |
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. |
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].” |
Similarly, 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. |
IV. REQUEST FOR ORDER |
Applicants seek an order: pursuant to Section 6(c) of the Act exempting them, to the |
extent described herein, from the provisions of Sections 18(f) and 21(b) of the Act; pursuant to |
Section 12(d)(1)(J) of the Act exempting them from the provisions of Section 12(d)(1) of the |
Act; pursuant to Sections 6(c) and 17(b) of the Act exempting them from the provisions of |
Sections 17(a)(1), 17(a)(2) and 17(a)(3) of the Act; and pursuant to Section 17(d) of the Act and |
Rule 17d-1 thereunder, to permit certain joint arrangements and to allow them to participate in |
the proposed credit facility. |
Applicants agree that any order of the Commission granting the requested relief will be |
subject to the following conditions: |
Page 10 of 33 Pages |
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: (i) more favorable to the lending Fund than the Repo Rate; and (ii) 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: (i) will be |
at an interest rate equal to or lower than the interest rate of any outstanding bank loan; (ii) | |
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; (iii) will | |
have a maturity no longer than any outstanding bank loan (and in any event not over | |
seven days); and (iv) 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 | |
such 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: (i) repay all of its outstanding Interfund Loans; (ii) reduce its | |
outstanding indebtedness to 10% or less of its total assets; or (iii) 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 | |
Page 11 of 33 Pages |
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 lnterfund 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 Fund portfolio 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, other than the money market | |
Fund portfolio 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 fund portfolio manager on | |
the Credit Facility Team has access to loan demand data). Any amounts remaining after | |
satisfaction of borrowing demand will be invested in the Joint Account or pursuant to the | |
Cash Management Program in accordance with the instructions of the portfolio managers. | |
13. PMC will monitor the lnterfund Loan Rate and the other terms and conditions of the | |
Interfund Loans and will make a quarterly report to the Board of each Company | |
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 12 of 33 Pages |
(a) review, no less frequently than quarterly, the 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 such 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, | |
PMC will promptly refer such 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.9 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 commercial bank | |
borrowings and such other information presented to the Fund's Board in connection with | |
the review required by conditions (13) and (14). | |
17. | PMC 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, PMC 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 PMC have established procedures reasonably designed to |
_____________________ |
9 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. |
Page 13 of 33 Pages |
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, 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 audit | |
examination of the Fund, will review the operation of the proposed 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 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. |
V. STATEMENT IN SUPPORT OF REQUESTED ORDER |
A. Discussion of Precedents |
The Commission has granted orders permitting numerous other mutual fund complexes |
to establish interfund lending programs based on terms and conditions substantially identical to |
those proposed herein. In the Matter of Northern Funds, et al., Investment Company Act Rel. |
Nos. 29368 (Jul. 23, 2010) (notice) and 29381 (Aug. 18, 2010) (order); In the Matter of The |
Alger Funds, et al., Investment Company Act Rel. Nos. 28819 (Jul. 16, 2009) (notice) and 28844 |
(Aug. 11, 2009) (order); In the Matter of the Managers Funds, et al., Investment Company Act |
Rel. Nos. 28748 (May 28, 2009) (notice) and 28770 (Jun. 23, 2009) (order) In the Matter of |
Dodge & Cox Funds, et al., Investment Company Act Rel. Nos. 28409 (Sep. 29, 2008) (notice) |
and 28740 (Oct. 27, 2008) (order); In the In the Matter of Pioneer Bond Fund, et al., Investment |
Company Act Rel. Nos. 28144 (Feb. 5, 2008) (notice) and 28182 (Mar. 4, 2008) (order); In the |
Matter of Riversource Diversified Income Series, et al., Investment Company Act Rel. Nos. |
27506 (Sep. 28, 2006) (notice) and 27525 (Oct. 24, 2006) (order); In the Matter of Wells Fargo |
Funds Trust, et al., Investment Company Act Rel. Nos. 27309 (May 1, 2006) (notice) and 27385 |
(May 30, 2006) (order); In the Matter of Frank Russell Investment Company, et al., Investment |
Company Act Rel. Nos. 27292 (Apr. 25, 2006) (notice) and 27325 (May 23, 2006) (order); In the |
Matter of Thrivent Mutual Funds, et al., Investment Company Act Rel. Nos. 27201 (Jan. 3, 2006) |
(notice) and 27222 (January 31, 2006) (order); and In the Matter of Marshall Funds, et al., |
Investment Company Act Rel. Nos. 27060 (Sep. 8, 2005) (notice) and 27111 (Oct. 5, 2005) |
(order). |
B. Discussion in Support of the Application |
The proposed credit facility is intended to be used by the Funds solely as a means of: (i) |
reducing the costs incurred by the Funds in obtaining bank loans for temporary purposes; and (ii) |
Page 14 of 33 Pages |
increasing the return received by the Funds in the investment of their daily cash balances. Other |
than the receipt of its regular advisory fee, PMC has no pecuniary or other interest in establishing |
the program. The Boards of the Companies have carefully considered the benefits and possible |
additional risk to the Funds as a result of their participation in the proposed credit facility and |
have concluded that participation in the proposed credit facility would be in the best interests of |
the Funds. The Boards also have determined that the significant benefits derived from |
participation in the proposed credit facility more than outweigh the nominal additional risks that |
may be incurred by the Funds. The Board of any Fund that determines to participate in the |
proposed credit facility in the future would be required to make a similar determination before |
the Fund could participate in the proposed credit facility. |
The significant benefits to be derived from participation in the proposed credit facility |
will be shared by both the Funds making loans directly to other Funds as well as those Funds |
borrowing money directly from other Funds. The interest rate formula is designed to ensure that |
lending Funds always receive a higher return on their uninvested cash balances than they |
otherwise would have obtained from investment of such cash in repurchase agreements, and that |
borrowing Funds always incur lower borrowing costs than they otherwise would under bank loan |
arrangements. Interfund Loans will be made only when both of these conditions are met. To |
ensure that these conditions are met, the Credit Facility Team will compare the Interfund Loan |
Rate set under the interest rate formula with the available Bank Loan Rate and the Repo Rate on |
each business day. A Fund would be allowed to participate in the proposed credit facility only if |
the Interfund Loan Rate were higher than the Repo Rate and lower than the Bank Loan Rate. |
Furthermore, Applicants believe that these benefits can be achieved without any significant |
increase in risk. Applicants believe that the risk of default on Interfund Loans is likely to be de |
minimus given the extremely high asset coverage requirements for any Interfund Loan, the |
highly liquid nature of Fund assets, and the other terms and conditions for effecting Interfund |
Loans as proposed in this Application. |
The proposed credit facility has been designed to serve only as a supplemental source of |
credit for the Funds’ normal short-term borrowing and short-term cash investment activities, |
which do not involve any significant risks of default. |
The Board of each Company has determined that each Fund should be permitted to |
borrow under the proposed credit facility on an unsecured basis only if the Fund’s total |
borrowings immediately after the interfund borrowing are equal to or less than 10% of its total |
assets. Moreover, if a borrowing Fund has a secured loan from any other lender, its Interfund |
Loans also would be secured on the same basis. If any other lender to a borrowing Fund imposes |
conditions with respect to the quality of or access to collateral securing a borrowing, the Fund’s |
collateral for any Interfund Loan will be subject to the same conditions (if the other lender is |
another Fund) or the same or better conditions (in any other circumstance). If a Fund’s total |
outstanding borrowings from all sources exceed 10% of its total assets, the Fund would repay |
any outstanding Interfund Loans, would reduce its borrowings to 10% or less of total assets, or |
would secure each outstanding Interfund Loan. |
To assure that a lending Fund’s use of the proposed credit facility reflects only the |
normal levels of short-term investment activity, the Board of each Company has determined that |
Page 15 of 33 Pages |
the Funds should limit their loans extended through the proposed credit facility to no more than |
15% of a Fund’s current net assets at the time an Interfund Loan is made. |
The Board of each Company has further concluded that, given these asset coverage limits |
and the other terms and conditions discussed herein, any Interfund Loan made through the |
proposed credit facility would represent high quality debt with minimal credit risk, fully |
comparable with, and in many cases superior to, other short-term instruments available to the |
Funds. It is anticipated that a Fund would extend an Interfund Loan only when the borrower's |
total borrowings immediately after the Interfund Loan are 10% or less of its total assets (1,000% |
asset coverage). In the relatively few instances when a Fund would extend an Interfund Loan to |
a borrowing Fund with outstanding loans immediately after the Interfund Loan representing |
more than 10% of its total assets (up to the 33 1/3% limit), any loan would be fully secured by |
segregated assets, as well as protected by the borrowing Fund’s asset coverage of at least 300%. |
If the total outstanding borrowing from all sources of a Fund with outstanding Interfund Loans |
exceeds 10% of its total assets, the Fund would: (i) repay all outstanding Interfund Loans; (ii) |
reduce indebtedness to 10% or less of total assets; or (iii) secure each outstanding Interfund |
Loan, until the Fund's total outstanding borrowings cease to exceed 10% of its total assets. |
In addition, if a Fund borrows from one or more banks, all Interfund Loans to that Fund |
will become subject to at least equivalent terms and conditions with respect to interest rate, |
collateral, maturity, and events of default as any outstanding bank loan. If a bank were to require |
collateral for a loan to a borrowing Fund, the lending Fund would also require the pledge of |
collateral by the borrowing Fund on the same basis regardless of the level of the borrowing |
Fund’s asset coverage. Similarly, if the bank were to call its loan because of default, the lending |
Fund also would be required to call its loan. In addition, the maturity of an Interfund Loan would |
never be longer than the maturity of any outstanding bank loan and would in no event exceed |
seven days. Under these conditions, all Interfund Loans would be effected at not less than the |
same level of protection as required by any bank or other third-party lender to the Fund. |
In light of all the protections set forth above, the high quality and liquidity of the assets |
covering the loans, the ability of lending Funds to call Interfund Loans on one business day's |
notice, and the fact that the Independent Directors will exercise effective oversight of the |
proposed credit facility, the Board of each Company believes Interfund Loans to be comparable |
in credit quality to money market (short-term) instruments that are of a high credit quality and |
present minimal credit risk. Because Applicants believe that the risk of default on Interfund |
Loans is so remote as to be little more than a theoretical possibility, the Funds would not require |
collateral for Interfund Loans except on the few occasions when a Fund’s total borrowings |
represent more than 10% of its total assets (or when a third-party lending bank requires |
collateral). Moreover, with respect to loans when the Fund’s total borrowings represent 10% or |
less of its assets, collateralizing each Interfund Loan would be burdensome and expensive and |
would reduce or eliminate the benefits from the proposed credit facility. Collateralization would |
provide no significant additional safeguard in light of: (i) the high credit quality and liquidity of |
the borrowing Funds; (ii) the 1,000% or greater asset coverage standard for unsecured Interfund |
Loans; (iii) the demand feature of Interfund Loans; and (iv) the fact that the program for both the |
borrowing and lending Funds would be administered by PMC, through the Credit Facility Team, |
and would be subject to the oversight of the Independent Trustees. |
Page 16 of 33 Pages |
Applicants, however, are sensitive to the need for adequate safeguards in the unlikely |
event there is any possibility of a loan default or payment dispute between a lending and |
borrowing Fund. To address these concerns, Applicants propose the following: |
1. | Each Fund’s aggregate Interfund Loans to all Funds will be limited to 15% of its current |
net assets at the time the loan is made. Although the Board of each Fund believes | |
Interfund Loans will be of substantially comparable (if not superior) quality and liquidity | |
to overnight repurchase agreements or other comparable short-term instruments, the | |
Funds will impose the foregoing limit on their Interfund Lending as an additional | |
safeguard against the possibility, however remote, that a default by a borrowing Fund | |
might impact a lending Fund’s liquidity. | |
2. | In the event an Interfund Loan is not paid according to its terms and such 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 loan agreement, PMC will | |
promptly refer the loan for arbitration to an independent arbitrator, selected by the Board | |
of each Fund involved in the loan as described above, who will act as arbitrator of | |
disputes concerning the Interfund Loan. 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 such Fund setting forth a | |
description of the nature of any dispute and the actions taken by the Funds to resolve the | |
dispute. |
Applicants believe that the program would not involve any significant risk resulting from |
potential conflicts of interest. PMC has no pecuniary interest in the administration of the |
program. As noted earlier, PMC, through the Credit Facility Team, would administer the |
proposed credit facility as a disinterested fiduciary as part of the Funds’ overall cash |
management program. PMC, through the Credit Facility Team, would administer the program 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, although it 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. These fees would be no higher than those applicable for |
comparable bank loan transactions. |
The proposed credit facility would not present any significant potential for one Fund to |
obtain a preferential rate to the disadvantage of any other Fund. Under the proposed credit |
facility, the Funds would not negotiate interest rates between themselves, and PMC would not set |
rates in its discretion. Rather, rates would be determined pursuant to a pre-established formula, |
approved by the Board of each Fund, which would be a function of the current rates quoted by |
independent third-parties for short-term bank borrowing and for short-term repurchase |
agreements. All Funds participating in the credit facility on any given day would receive the |
same rate. |
The proposed credit facility would also not present any significant potential that any |
Fund’s portfolio manager would maintain or expand the Fund's uninvested cash balance beyond |
Page 17 of 33 Pages |
that needed for prudent cash management in order to extend credit to, and thereby help the |
performance of, another Fund. |
First, the amount of total credit available for Interfund Loans and the amount of interfund |
borrowing demand would be determined by the Credit Facility Team. As discussed above, the |
Credit Facility Team operates and would continue to operate independently of the Funds’ |
portfolio managers (other than the money market Fund portfolio manager acting in his or her |
capacity as a member of the Credit Facility Team). The Credit Facility Team will accumulate |
data at least once each business day on the Funds’ total short-term borrowing needs to meet |
redemptions and to cover sales fails and the Funds’ total uninvested cash positions. The Credit |
Facility Team would not solicit cash for the proposed credit facility from any Fund or |
disseminate total borrowing demand data to any portfolio managers (other than the money |
market Fund portfolio manager who is a member of the Credit Facility Team). The Credit |
Facility Team would allocate available cash to borrowing Funds on an equitable basis. No |
portfolio manager would be able to cause his or her Fund’s cash balance to be loaned to any |
particular Fund or otherwise intervene in the Credit Facility Team's allocation of loans. No |
portfolio manager (other than the money market Fund portfolio manager acting in his or her |
capacity as a member of the Credit Facility Team) would be able to influence the Credit Facility |
Team's allocation of loans.10 |
Second, portfolio managers typically limit their Funds’ cash reserves to the minimum |
desirable for prudent cash management in order to remain fully invested consistent with the |
investment policies of the Funds.11 It would generally not be in the interest of a portfolio |
manager to jeopardize his or her Fund’s performance in order to extend additional credit to other |
Funds. |
Third, a portfolio manager’s decision regarding the amount of his or her Fund’s |
uninvested cash balance would be unlikely to affect the ability of other Funds to obtain Interfund |
Loans. |
The Funds anticipate that, whenever the Interfund Loan Rate is higher than the Repo |
Rate, the cash available each day for interfund lending normally would greatly exceed the |
demand from borrowing Funds. Although Funds might in rare instances have extraordinary |
borrowing needs, the high asset coverage limitations of the proposed credit facility are expected |
to restrict its use to customary levels of Fund borrowing. |
In addition, Applicants believe it would be appropriate to include the money market Fund |
portfolio manager on the Credit Facility Team for the following reasons. First, Applicants do not |
believe that the position of the money market Fund portfolio manager on the Credit Facility |
_____________________ |
10 As a member of the Credit Facility Team, the money market Fund portfolio manager would |
participate in the Team’s allocation of loans. However, his or her “influence” would be limited |
to activities consistent with his or her role as a member of the Team. |
11 A Fund may, however, have a large cash position when the portfolio manager believes that |
market conditions are not favorable for profitable investing or is otherwise unable to locate |
favorable investment opportunities. |
Page 18 of 33 Pages |
Team would subject him or her to influence from other portfolio managers regarding his or her |
determination of the amount of a Fund’s excess cash or would result in the allocation of more |
cash than would otherwise be appropriate. With the exception of the money market Funds, the |
money market Fund portfolio manager has no discretion as to the amount of cash in the Funds’ |
portfolios and no interest in the investment return of such portfolios; this is the responsibility of |
the portfolio manager of each Fund. Allocation of the money market Funds’ investment |
portfolio to excess cash is not an issue, since the money market Funds’ investments are invested |
in short-term instruments pursuant to Rule 2a-7 under the Act. |
Similarly, the position of the money market Fund portfolio manager on the Credit Facility |
Team would not enable him or her to influence other portfolio managers regarding allocation of |
a Fund’s investment portfolio in cash. The money market Funds would typically only participate |
in the proposed credit facility as lenders because they rarely need to borrow cash to meet |
redemptions or for other temporary purposes. Since it is expected that there would generally be |
more uninvested cash available for lending than borrowing demand each day, there would be no |
incentive for the money market Fund portfolio manager to encourage the portfolio managers of |
the other Funds to make more cash available for Interfund Loans. |
Finally, the money market Fund portfolio manager would not have sole discretion for |
allocating loans through the proposed credit facility. Specific procedures would govern all |
allocations and would require that all allocations be made on an equitable basis among |
participating Funds. In addition, the procedures would require that all allocations be approved |
by at least one member of the Credit Facility Team, who is a high level employee, other than the |
money market Fund portfolio manager. Such approval should serve as an independent check on |
the money market Fund portfolio manager. |
For all the foregoing reasons, and subject to the above terms and conditions, Applicants |
submit that the order requested herein meets the standards set forth in Sections 6(c) and 17(b) of |
the Act and Rule 17d-1 thereunder. |
1. Exemption from Sections 17(a)(3) and 21(b) of the Act |
PMC is the investment adviser of each Fund, and each of the Companies has the same |
principal officers and Directors. Although the power of the officers and Directors of each |
Company arises solely as result of their official positions with the Company, in view of the |
overlap of the investment adviser, and of all of the Directors and principal officers of the |
Companies, the Companies and the Funds might be deemed to be under common control and |
thus "affiliated persons" of each other within the meaning of that term under Section 2(a)(3) of |
the Act. Therefore, Applicants request an order pursuant to Sections 6(c) and 17(b) of the Act |
exempting them from the provisions of Sections 17(a)(3) and 21(b) which prohibit, respectively, |
borrowing by an affiliated person from an investment company and loans by an investment |
company to a person under common control with that investment company. |
The Terms of the Proposed Transaction Are Fair and Reasonable and Do Not Involve |
Overreaching on the Part of Any Person Concerned |
Page 19 of 33 Pages |
Applicants submit that the Interfund Loans will be on terms which are reasonable and fair |
to participating Funds and that substantially eliminate opportunities for overreaching. As |
discussed earlier, the interest rates for all Interfund Loans will be based on the same objective |
and verifiable standards (i.e., the average of the current available Repo Rate and the Bank Loan |
Rate). Thus, the rate for a borrowing Fund will be lower, and for a lending Fund will be higher, |
than that otherwise available to them. Because the interest rate formula is objective and |
verifiable and the same rate applies equally to all Funds participating on any given day, the use |
of the formula provides an independent basis for determining that the terms of the transactions |
are fair and reasonable and do not involve overreaching. |
Furthermore, because each Fund's daily borrowing demand or cash reserve would be |
determined independently of any others and all such decisions would be aggregated by the Credit |
Facility Team and matched on an equitable basis pursuant to procedures approved by the Board, |
the operation of the program will substantially eliminate the possibility of one Fund taking |
advantage of any other. In addition, each Fund will have substantially equal opportunity to |
borrow and lend to the extent consistent with its investment policies and limitations. |
Periodic review by each Fund’s Board, including the Independent Directors, and the other |
terms and conditions adopted hereunder also provide additional assurance that the transactions |
will be fair and reasonable and free of overreaching. |
The Proposed Transactions Will Be Consistent with the Policies Set Forth in the Funds’ |
Registration Statements and the General Purposes of the Act |
All borrowings and Interfund Loans by the Funds will be consistent with the |
organizational documents and investment policies of the respective Funds. |
Section 21(a) of the Act provides that a registered investment company may not lend |
money “directly or indirectly” to any person if such lending is not permitted by its investment |
policies as described in its registration statement and reports filed with the Commission. |
Similarly, subparagraphs (B) and (G) of Section 8(b)(1) of the Act require that registered |
investment companies must disclose the extent to which, if at all, they intend to engage in |
borrowing money and making loans to other persons. If the relief herein is granted, each Fund |
will include disclosure in its statement of additional information on the possibility of the Fund's |
participation in the proposed credit facility. A Fund would include disclosure regarding the |
proposed credit facility in its statement of additional information as long as the Fund participates |
in the proposed credit facility. |
The proposed credit facility also is consistent with the general purposes of the Act and |
specifically Sections 17(a)(3) and 21(b). These sections are intended to prevent a party with |
strong potential adverse interests 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.12 The proposed transactions do |
_____________________ |
12 The affiliated borrowing transactions covered by Section 21(b) are also covered by Section |
17(a)(3). To the extent that Congress intended Section 21(b) to cover some more specific abuse, |
Page 20 of 33 Pages |
not raise such concerns because: (i) PMC, through the Credit Facility Team, would administer |
the program as a disinterested fiduciary as part of its duties under the relevant advisory or |
administrative contract with each Fund; (ii) all Interfund Loans would consist only of uninvested |
cash reserves that the lending Fund otherwise would invest in the Joint Account or pursuant to |
the Cash Management Program; (iii) the Interfund Loans would not involve a significantly |
greater risk than other such investments; (iv) the lending Fund would receive interest at a rate |
higher than it could otherwise obtain through such other investments; and (v) 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, 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. |
For the foregoing reasons, and in light of the other terms and conditions that Applicants |
propose in this Application, Applicants submit that the transactions to be effected under the |
proposed credit facility are consistent with the general purposes of the Act. |
2. Exemption from Sections 17(a)(1), 17(a)(2), and 12(d)(1) of the Act |
As noted above, Applicants submit that the proposed credit facility may not involve |
transactions by any "affiliated persons" of a Fund. Applicants further submit that the proposed |
credit facility would involve cash items and not the issuance or sale of any "security" by a |
borrowing Fund to a lending Fund within the meaning of Sections 17(a)(1) or 12(d)(1) of the |
Act. However, because of the broad definition of a "security" in Section 2(a)(36) of the Act, 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. Thus, Applicants seek |
through this Application to eliminate any possible questions or doubts concerning their |
participation in the proposed credit facility. |
Section 17(a)(2) of the Act 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. Pursuant to conditions (3), (4) and (5), a borrowing Fund would |
be required to pledge assets to a lending Fund under certain circumstances. If such a pledge of |
assets were to be construed as a purchase of the borrowing Fund’s securities or other property for |
purposes of Section 17(a)(2) of the Act, exemptive relief from the provisions of that section |
would be required.13 |
Applicants submit that the requested exemptions are appropriate in the public interest, |
and consistent with the protection of investors and policies and purposes of the Act for all the |
reasons set forth above in support of their request for relief from Sections 17(a)(3) and 21(b). |
____________________________________________________________________________________ |
the section appears to have been directed at prohibiting upstream loans. See S. Rep. No. 1775, |
76th Cong. 3d Sess. 15 (1940), House Hearings on H.R. 10065, 76th Cong., 3d Sess. 124 (1940). |
The lending transactions at issue here, of course, do not involve upstream loans. |
13 See Rubin v. United States, 449 U.S. 424 (1981). See also Salomon Brothers Asset |
Management Inc., et al., Investment Company Act Release Nos. 24181 (Dec. 1, 1999) (notice) |
and 24222 (Dec. 28, 1999) (order). |
Page 21 of 33 Pages |
The primary purpose of Sections 17(a)(1) and 17(a)(2) is to prevent persons with the |
power to control an investment company from using that power to their own pecuniary |
advantage in connection with the purchase or sale of securities or other property, i.e., to prevent |
self-dealing.14 Because the interest rate formula is objective and verifiable and the same rate |
would apply equally to all Funds participating in the proposed credit facility on any given day, |
the use of the formula provides an independent basis for determining that the terms of the |
transactions are fair and reasonable and do not involve overreaching. In addition, because each |
Fund's daily borrowing demand or cash reserve would be determined independently of those of |
any other participating Funds and all such decisions would be aggregated by the Credit Facility |
Team and matched on an equitable basis pursuant to procedures approved by the Board of the |
relevant Fund, the operation of the program will substantially eliminate the possibility of any one |
Fund being disadvantaged by another participating Fund. |
The requested relief from Section l7(a)(2) of the Act meets the standards of Sections 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 other lender is a Fund) or the same or better |
conditions (in any other circumstance). Any collateral pledged to secure an Interfund Loan will |
be available solely to secure repayment of such Interfund Loan. |
Furthermore, Applicants submit that the proposed credit facility does not involve the type |
of abuse at which Section 12(d)(1) was directed. Section 12(d)(1) imposes certain limits on an |
investment company's acquisitions of securities issued by another investment company. To the |
extent that the obligation of a borrowing Fund to repay an Interfund Loan could be deemed a |
security, as described above, an Interfund Loan could involve an acquisition of securities of the |
borrowing Fund in excess of the limits of Section 12(d)(1). That Section 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. In the instant case, the |
entire purpose of the proposed credit facility is to provide economic benefits for all the |
participating Funds and their shareholders. There would be no duplicative costs or fees to the |
Funds or their shareholders. PMC, through the Credit Facility Team, would administer the |
proposed credit facility as a disinterested fiduciary under its existing advisory or administrative |
agreements with the Funds, and would receive no additional compensation for its services in |
connection with the administration of the credit facility. PMC 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. Fees paid to PMC in connection with |
an Interfund Loan would be no higher than those applicable for comparable bank loan |
transactions. |
Under these circumstances, to include Interfund Loans within the limitations of Section |
12(d)(1) would not enhance investor protection, but rather would restrict a lending Fund's ability |
to acquire the securities of other investment companies which the Fund otherwise could acquire |
_____________________ |
14 See, e.g., S. Rep. No. 1775, 76th Cong., 3d Sess. 6 (1940). |
Page 22 of 33 Pages |
under Section 12(d)(1). Applicants submit that such a restriction upon a Fund’s investment |
flexibility would be contrary to the best interest of Fund shareholders. |
3. Order Pursuant to Section 17(d) of the Act and Rule 17d-1 Thereunder |
Applicants also believe that the proposed credit facility would not involve any "joint |
enterprise" with any affiliated person subject to Section 17 (d) and Rule 17d-1 thereunder. To |
avoid any possible issue, however, Applicants seek an order under these provisions to the extent |
necessary to implement the proposed credit facility. |
Section 17(d), like Section 17(a), was designed to deal with transactions of investment |
companies in which affiliates have a conflict of interest and with respect to which the affiliate |
has the power to influence decisions of the investment company. Thus, the purpose of Section |
17(d) is to avoid overreaching and unfair advantage to insiders.15 For the same reasons discussed |
above with respect to Section 17(a), each Applicant's participation in the proposed credit facility |
would not involve the overreaching or unfair advantage of any other Applicant. Furthermore, the |
proposed 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 |
Funds and their shareholders. Finally, the requested order is appropriate because, as previously |
discussed, each Fund would have an equal opportunity to borrow and lend on equal terms |
consistent with its investment policies and fundamental investment limitations. Thus, each |
Fund's participation in the proposed credit facility would be on terms which are no different from |
or less advantageous than that of other participating Funds. |
4. Exemption from Section 18(f)(1) of the Act |
Applicants request exemptive relief under Section 6(c) from Section 18(f)(1) to the |
limited extent necessary to implement the proposed credit facility (because the lending Funds are |
not banks). Section 18(f)(1) of the Act prohibits an open-end investment company from issuing |
“any senior security or to sell any senior security of which it is the issuer, except that any such |
registered company shall be permitted to borrow from any bank: provided, that immediately after |
any such borrowing there is an asset coverage of at least 300 per centum for all borrowings of |
such registered company ” Applicants seek exemption from these provisions only to the |
limited extent necessary to permit a Fund to lend to or borrow directly from other Funds in |
amounts, as measured on the day when the most recent loan was made, and subject to all the |
other terms and conditions proposed hereunder, including the condition that immediately after |
any unsecured borrowing there is at least 1,000% asset coverage for all interfund borrowings of |
the borrowing Fund. The Funds would remain subject to the requirement of Section 18(f)(1) that |
all borrowings of the Fund, including combined interfund and bank borrowings, have at least |
300% asset coverage. |
Based on the numerous conditions and substantial safeguards described in this |
Application, Applicants submit that allowing the Funds to borrow directly from other Funds |
pursuant to the proposed credit facility is fully consistent with the purposes and policies of |
_____________________ |
15 See, e.g., Hearings on S3580 Before a Subcomm. of the Sen. Comm. on Banking and |
Currency, 76th Cong., 3d Sess. 762 (1940) at 211-213. |
Page 23 of 33 Pages |
Section 18(f)(1). Applicants further submit that the exemptive relief requested for the operation |
of the proposed credit facility is necessary and appropriate in the public interest because it will |
help the borrowing Funds to satisfy their short-term cash needs at substantial savings and it will |
enable lending Funds to earn a higher return on their uninvested cash balances without materially |
increased risk and without involving any overreaching. |
VI. CONCLUSION |
For the foregoing reasons, Applicants submit that the proposed transactions, conducted |
subject to the terms and conditions set forth above, would be reasonable and fair, would not |
involve overreaching, and would be consistent with the investment policies of the Funds and |
with the general purposes of the Act. Applicants also submit that their participation in the |
proposed credit facility would be consistent with the provisions, policies and purposes of the Act, |
and would be on a basis which is not different from or less advantageous than that of other |
participating Funds. |
Page 24 of 33 Pages |
VII. PROCEDURAL MATTERS | ||
Pursuant to Rule 0-2(f) under the Act, Applicants state that their respective addresses are | ||
as follows: | ||
Principal Funds, Inc. | Principal Variable Contracts | Principal Management Corporation |
680 8th Street | Funds, Inc. | Principal Financial Group |
Des Moines, Iowa 50392 | 680 8th Street | Des Moines, Iowa 50392 |
Des Moines, Iowa 50392 | ||
Applicants further state that all communications, notices and orders concerning this | ||
Application should be directed to John W. Blouch, Esq., Drinker Biddle & Reath, LLP, 1500 K | ||
Street, N.W., Washington, DC 20005-1209, telephone: (202) 230-5422, fax: (202) 842-8465. | ||
Copies should be directed to Adam U. Shaikh, Esq., Principal Financial Group, Des Moines, | ||
Iowa 50392-0300. | ||
Pursuant to Rule 0-2(c)(1) under the Act, each Applicant hereby represents that all | ||
requirements of its Articles of Incorporation and By-laws have been complied with in connection | ||
with the execution and filing of this Application, and the undersigned officer of each of the | ||
Applicants is fully authorized to execute this Application and any amendments hereto. The | ||
resolutions adopted by the respective Applicants that authorize the filing of this Application and | ||
any amendments hereto are attached hereto as Exhibits D and E. | ||
Applicants request that the Commission issue an order without a hearing pursuant to Rule | ||
0-5 under the Act. |
Page 25 of 33 Pages |
SIGNATURES |
Pursuant to the requirements of the Investment Company Act of 1940, each of the |
Applicants has caused this Second Amended and Restated Application to be duly signed on its |
behalf in the City of Des Moines in the State of Iowa on the 12th day of October, 2011. |
PRINCIPAL FUNDS, INC. |
PRINCIPAL VARIABLE CONTRACTS FUNDS, INC. |
/s/ Adam U. Shaikh |
__________________________________________ |
Adam U. Shaikh |
Assistant Counsel |
PRINCIPAL MANAGEMENT CORPORATION |
/s/ Adam u. Shaikh |
__________________________________________ |
Adam U. Shaikh |
Counsel |
Page 26 of 33 Pages |
EXHIBIT INDEX | |
Exhibit | Document |
A | List of PFI Funds |
B | List of PVC Funds |
C | Verification |
D | Authorization |
E | Authorization |
Page 27 of 33 Pages |
Exhibit A |
List of PFI Funds |
Bond & Mortgage Securities Fund | MidCap Value Fund I |
Bond Market Index Fund | MidCap Value Fund III |
California Municipal Fund | Money Market Fund |
Core Plus Bond Fund I | Preferred Securities Fund |
Disciplined LargeCap Blend Fund | Principal Capital Appreciation Fund |
Diversified International Fund | Principal LifeTime 2010 Fund |
Diversified Real Asset Fund | Principal LifeTime 2015 Fund |
Equity Income Fund | Principal LifeTime 2020 Fund |
Global Diversified Income Fund | Principal LifeTime 2025 Fund |
Global Real Estate Securities Fund | Principal LifeTime 2030 Fund |
Government & High Quality Bond Fund | Principal LifeTime 2035 Fund |
High Yield Fund | Principal LifeTime 2040 Fund |
High Yield Fund I | Principal LifeTime 2045 Fund |
Income Fund | Principal LifeTime 2050 Fund |
Inflation Protection Fund | Principal LifeTime 2055 Fund |
International Emerging Markets Fund | Principal LifeTime Strategic Income Fund |
International Equity Index Fund | Real Estate Securities Fund |
International Fund I | SAM Balanced Portfolio * |
International Growth Fund | SAM Conservative Balanced Portfolio * |
International Value Fund I | SAM Conservative Growth Portfolio * |
LargeCap Blend Fund II | SAM Flexible Income Portfolio * |
LargeCap Growth Fund | SAM Strategic Growth Portfolio * |
LargeCap Growth Fund I | Short-Term Income Fund |
LargeCap Growth Fund II | SmallCap Blend Fund |
LargeCap S&P 500 Index Fund | SmallCap Growth Fund |
LargeCap Value Fund | SmallCap Growth Fund I |
LargeCap Value Fund I | SmallCap Growth Fund II |
LargeCap Value Fund III | SmallCap S&P 600 Index Fund |
MidCap Blend Fund | SmallCap Value Fund |
MidCap Growth Fund | SmallCap Value Fund II |
MidCap Growth Fund III | Small MidCap Dividend Income Fund |
MidCap S&P 400 Index Fund | Tax-Exempt Bond Fund |
__________________________________ | |
* Strategic Asset Management (SAM) Portfolios |
Page 28 of 33 Pages |
Exhibit B |
List of PVC Funds |
Asset Allocation Account | Principal Capital Appreciation Account |
Balanced Account | Principal LifeTime 2010 Account |
Bond & Mortgage Securities Account | Principal LifeTime 2020 Account |
Diversified Balanced Account | Principal LifeTime 2030 Account |
Diversified Growth Account | Principal LifeTime 2040 Account |
Diversified International Account | Principal LifeTime 2050 Account |
Equity Income Account | Principal LifeTime Strategic Income Account |
Government & High Quality Bond Account | Real Estate Securities Account |
Income Account | SAM Balanced Portfolio * |
International Emerging Markets Account | SAM Conservative Balanced Portfolio* |
LargeCap Blend Account II | SAM Conservative Growth Portfolio* |
LargeCap Growth Account | SAM Flexible Income Portfolio* |
LargeCap Growth Account I | SAM Strategic Growth Portfolio * |
LargeCap S&P 500 Index Account | Short-Term Income Account |
LargeCap Value Account | SmallCap Blend Account |
MidCap Blend Account | SmallCap Growth Account II |
Money Market Account | SmallCap Value Account I |
______________________________ | |
* Strategic Asset Management (SAM) Portfolios |
Page 29 of 33 Pages |
Exhibit C |
Verification |
The undersigned states: that he has duly executed the attached Application, dated October 12, |
2011, for and on behalf of each of Principal Funds, Inc., Principal Variable Contracts Funds, |
Inc., and Principal Management Corporation; that he is Assistant Counsel of each such company; |
and that all action by stockholders, directors and other bodies necessary to authorize the |
undersigned to execute and file such instrument has been taken. The undersigned further states |
that he is familiar with such instrument, and the contents thereof, and that the facts therein set |
forth are true to the best of his knowledge, information and belief. |
PRINCIPAL FUNDS, INC. |
PRINCIPAL VARIABLE CONTRACTS FUNDS, INC. |
/s/ Adam U. Shaikh |
____________________________ |
Adam U. Shaikh |
Assistant Counsel |
PRINCIPAL MANAGEMENT CORPORATION |
/s/ Adam U. Shaikh |
_____________________________ |
Adam U. Shaikh |
Counsel |
Page 30 of 33 Pages |
Exhibit D |
Authorization |
I, Beth C. Wilson, do hereby certify that I am the Vice President and Secretary of |
Principal Funds, Inc. and Principal Variable Contracts Funds, Inc., and that the following |
resolutions were duly adopted by the Board of Directors of each such corporation on |
December 14, 2010, and remain in full force and effect as of the date hereof: |
“BE IT RESOLVED, That the establishment of an interfund lending facility (the |
“Credit Facility”) whereby the Funds and the Accounts may directly lend to and |
borrow money from each other for temporary purposes, as described in and |
subject to the terms and conditions set forth in the Application for an Order of the |
Securities and Exchange Commission (the “SEC”) (the Application”) presented at |
this meeting and to be filed with the SEC by the Corporation and Principal |
Management Corporation (the “Manager”) for purposes of obtaining exemptions |
from provisions of and rules promulgated under the Investment Company Act of |
1940, as amended (the “Act”), to the extent necessary to permit the establishment |
and operation of the proposed Credit Facility, is hereby approved; and |
BE IT FURTHER RESOLVED, That the Application, in substantially the form |
presented at this meeting, is hereby approved, subject to such changes therein as |
the officers of the Corporation shall deem necessary or appropriate, and that the |
proposed Credit Facility shall be established and operated in the manner specified |
in the Application at the time that the SEC issues an order granting the exemptive |
relief requested therein, and in that connection the Board notes that it has |
determined that: |
(i) | participation in the proposed Credit Facility by the Funds and the Accounts is |
in the best interests of the Funds and the Accounts, and the significant | |
benefits to be derived from such participation more than outweigh the | |
additional risks that may be incurred by the Funds and the Accounts; and | |
(ii) | each Fund and Account will be permitted to borrow under the proposed |
Credit Facility on an unsecured basis only if the Fund’s or the Account’s | |
total borrowings from all sources immediately after the such interfund | |
borrowing are equal to or less than 10% of its total assets; and | |
(iii) | the Funds and the Accounts will limit their loans extended through the |
proposed Credit Facility to no more than 15% of a Fund’s or Account’s | |
current net assets at the time an interfund loan is made; and | |
(iv) | any interfund loan made through the proposed Credit Facility, given the asset |
coverage limits and the other terms and conditions set forth in the | |
Application, will be comparable in credit quality to money market (short- | |
term) instruments rated “high quality” by independent, nationally recognized | |
statistical rating organizations; and |
Page 31 of 33 Pages |
BE IT FURTHER RESOLVED, That, prior to the implementation of the | |
proposed Credit Facility, the Manager shall prepare and submit to the Board for | |
approval procedures for the establishment and operation of the Credit Facility that | |
are in accordance with the terms and conditions of the Application; and | |
BE IT FINALLY RESOLVED, That the officers of the Corporation are | |
authorized to take such steps as they deem necessary or appropriate to carry out | |
the foregoing resolutions and effectuate the establishment and operation of the | |
proposed Credit Facility, including the execution and filing with the SEC of the | |
Application and any amendments thereto.” | |
IN WITNESS WHEREOF, I have executed this certificate on this 12th day of October, | |
2011. |
/s/ Beth C. Wilson |
_____________________________________ |
Beth C. Wilson |
Vice President and Secretary |
Principal Funds, Inc. |
Principal Variable Contracts Funds, Inc. |
Page 32 of 33 Pages |
Exhibit E |
Authorization |
I, Patricia A. Barry, do hereby certify that I am the Assistant Corporate Secretary of |
Principal Management Corporation and that the following resolution was duly adopted by the |
Board of Directors of such corporation on January 13, 1998, and remains in full force and effect |
as of the date hereof: |
“RESOLVED, that the Chairman of the Board, the President, any Vice President, the | |
Secretary or such other officers as may be designated, by the Chairman or the President, | |
be and hereby authorized and directed to prepare for the corporation individually, or | |
individually or jointly with Princor Financial Services Corporation, any registered | |
investment company or companies for which Princor Financial Services Corporation | |
and/or Principal Management Corporation serve as investment advisor or principal | |
underwriter, respectively, Principal Mutual Life Insurance company or any affiliate, | |
including any of its separate accounts, applications pursuant to any federal securities | |
laws, including the Securities Act of 1933, the Securities Exchange Act of 1934, the | |
Investment Company Act of 1940, and the Investment Advisers Act of 1940 (the “Acts”), | |
for orders granting such exemptions from the Acts as are necessary or desirable, and to | |
execute and file on behalf of this corporation such applications and any amendments | |
thereto with the Securities and Exchange Commission.” | |
IN WITNESS WHEREOF, I have executed this certificate on this 12th day of October, | |
2011. |
/s/ Patricia A. Barry |
Patricia A. Barry |
Assistant Corporate Secretary |
Principal Management Corporation |
Page 33 of 33 Pages |