[Federal Register: January 8, 2003 (Volume 68, Number 5)]
[Notices]
[Page 1071-1073]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr08ja03-50]
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SECURITIES AND EXCHANGE COMMISSION
[Release No. IC-25880; 812-12676]
Neuberger Berman Equity Funds, et al.; Notice of Application
January 2, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').
ACTION: Notice of application for an order under sections 6(c) and
17(b) of the Investment Company Act of 1940 (``Act'') for an exemption
from section 17(a) of the Act, and under section 17(d) of the Act and
rule 17d-1 thereunder to permit certain joint transactions.
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Summary of Application: Applicants request an order to permit (a)
Certain registered investment companies to pay an affiliated lending
agent a fee based on a share of the revenue derived from securities
lending activities; and (b) the registered investment companies to lend
portfolio securities to affiliated broker-dealers. The requested order
would supersede certain prior orders. \1\
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\1\ Energy Fund Incorporated, Investment Company Act Release
Nos. 11175 (May 19, 1980) (notice) and 11249 (July 3, 1980) (order);
Energy Fund Inc., Investment Company Act Release Nos. 14452 (April
4, 1985) (notice) and 14498 (May 2, 1985) (order).
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Applicants: Neuberger Berman Equity Funds, Neuberger Berman Income
Funds, Neuberger Berman Advisers Management Trust, Neuberger Berman
Intermediate Municipal Fund Inc., Neuberger Berman California
Intermediate Municipal Fund Inc., Neuberger Berman New York
Intermediate Municipal Fund Inc., Neuberger Berman Real Estate Income
Fund Inc. (the ``Funds''), Neuberger Berman, LLC (``Neuberger
Berman''), and Neuberger Berman Management Inc. (``NBMI'').
Filing Dates: The application was filed on October 26, 2001 and
amended on December 23, 2002.
Hearing or Notification of Hearing: An order granting the
application will be issued unless the Commission orders a hearing.
Interested persons may request a hearing by writing to the Commission's
Secretary and serving applicants with a copy of the request, personally
or by mail. Hearing requests should be received by the Commission by
5:30 p.m. on January 27, 2003, and should be accompanied by proof of
service on the applicants, in the form of an affidavit or, for lawyers,
a certificate of service. Hearing requests should state the nature of
the writer's interest, the reason for the request, and the issues
contested. Persons who wish to be notified of a hearing may request
notification by writing to the Commission's Secretary.
ADDRESSES: Secretary, Commission, 450 5th Street, NW, Washington, DC
20549-0609. Applicants: c/o Ellen Metzger, Esq., Neuberger Berman, LLC,
605 3rd Avenue, 21st Floor, New York, NY 10158-3698.
FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202)
942-0582, or Mary Kay Frech, Branch Chief, at (202) 942-0564 (Division
of Investment Management, Office of Investment Company Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
Commission's Public Reference Branch, 450 5th Street, NW, Washington,
DC 20549-0102 (tel. 202-942-8090).
Applicants' Representations
1. Each of the Funds is either an open-end or closed-end management
investment company registered under the Act. Several of the Funds are
comprised of multiple series (the Funds and any existing or future
series thereof, collectively, the ``Lending Funds''). NBMI is the
investment manager and administrator to the Funds and their series and
the principal underwriter of those Funds that are open-end management
investment companies. Neuberger Berman serves as the sub-adviser to the
Funds. Pursuant to the sub-advisory agreement with NBMI, Neuberger
Berman is compensated for providing investment research; however, all
investment decisions for the Funds are made by NBMI. Both NBMI and
Neuberger Berman are registered as investment advisers under the
Investment Advisers Act of 1940 and broker-dealers under the Securities
Exchange Act of 1934. NBMI and Neuberger Berman are wholly owned
subsidiaries of Neuberger Berman Inc., a publicly owned holding
company.
2. Applicants request that any relief granted pursuant to the
application also apply to any other registered investment company or
series thereof for which NBMI or any entity controlling, controlled by
or under common control with NBMI serves as investment adviser. All
existing entities that currently intend to rely on the order have been
named as applicants. Any other existing or future entity that wishes to
rely on the order will do so only in accordance with the terms and
conditions of the application.
3. The Lending Funds propose to enter into an agency securities
lending program (the ``Securities Lending Program''). The agent for the
Securities Lending Program will be an operating unit of Neuberger
Berman (the ``NB Securities Lending Group'').\2\ The NB Securities
Lending Group's activities as lending agent for the Lending Funds will
be conducted under the supervision of investment management personnel
of NBMI. Subject to the parameters set forth in procedures approved by
the board of trustees or directors (``Board'') of each Lending Fund,
NBMI will pre-approve eligible borrowers. In addition, NBMI will be
responsible for determining what portion, if any, of assets of the
Lending Funds will be allocated to securities lending activities,
subject to each Lending Fund's fundamental or operating policies. NBMI
will be responsible for investing all cash collateral received in
respect of the securities loans.
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\2\ In addition, the applicants may utilize the employees of
entities controlling, controlled by or under common control with
Neuberger Berman in performing the securities lending activities to
be performed by NB Securities Lending Group.
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4. As securities lending agent for the Lending Funds, the NB
Securities Lending Group will be responsible for, among other things,
selecting borrowers from the pre-approved list, entering into loans of
pre-approved securities with pre-approved borrowers on pre-approved
terms, and performing administrative or ministerial functions in
connection with each Lending Fund's securities lending program. The NB
Securities Lending Group will deliver loaned securities received from
the Lending Funds to borrowers; arrange for the return of loaned
securities to the Lending Funds at the termination of the loans;
monitor daily the value of the loaned securities and collateral;
request that borrowers add to the collateral when required by the loan
agreement; and provide recordkeeping and accounting services necessary
for the
[[Page 1072]]
operation of the Securities Lending Program.\3\
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\3\ The personnel of the NB Securities Lending Group who will
provide day-to-day lending agency services to the Lending Funds do
not and will not provide investment advisory services to the Lending
Funds, or participate in any way in the selection of portfolio
securities or other aspects of the management of the Lending Funds.
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5. Securities loans generally are collateralized by U.S. Government
securities, cash or letters of credit. When the collateral is cash, the
lender invests the cash collateral during the loan period and, after
paying the borrower an agreed upon interest rate, retains the remainder
thereof, which is usually shared with the securities lending agent. If
the collateral is a U.S. Government security or letter of credit, the
borrower pays a lending fee, which is usually shared between the lender
and the securities lending agent.
6. The applicants request relief to permit: (a) The Lending Funds
to pay Neuberger Berman, or an entity controlling, controlled by, or
under common control with Neuberger Berman, a fee based on a share of
the revenue derived from securities lending activities; and (b) the
Lending Funds to lend portfolio securities to Neuberger Berman and any
broker-dealer, other than NBMI, that controls, is controlled by, or is
under common control with, Neuberger Berman (collectively, the
``Affiliated Broker-Dealers'').
Applicants' Legal Analysis
A. Payment of Lending Agent Fees
1. Section 17(d) of the Act and rule 17d-1 thereunder prohibit any
affiliated person of or principal underwriter for a registered
investment company or any affiliated person of such person or principal
underwriter, acting as principal, from effecting any transaction in
connection with any joint enterprise or other joint arrangement or
profit-sharing plan, in which the investment company participates
unless the Commission has approved the transaction. Section 2(a)(3) of
the Act defines an affiliated person of an investment company to
include the investment company's adviser. As the Lending Funds' sub-
adviser, Neuberger Berman may be deemed to be an affiliated person of
the Lending Funds. Because a fee arrangement between a lending agent
and a Lending Fund, under which compensation is based on a percentage
of the revenue generated by securities lending transactions, may be a
joint enterprise or other joint arrangement or profit sharing plan
within the meaning of section 17(d) and rule 17d-1, applicants request
an order to permit each Lending Fund to pay, and Neuberger Berman to
accept, such fees in connection with services provided by Neuberger
Berman to a Lending Fund.
2. Applicants propose that each Lending Fund adopt the following
procedures to ensure that the proposed fee arrangement and the other
terms governing the relationship with the NB Securities Lending Group
will meet the standards of rule 17d-1:
a. In connection with the approval of the NB Securities Lending
Group as lending agent for the Lending Funds, and implementation of the
proposed fee arrangement, a majority of the Board of each Lending Fund
(including a majority of the trustees or directors of each Lending Fund
who are not ``interested persons'' as defined in section 2(a)(19) of
the Act (the ``Independent Trustees/Directors'')) will determine that
(i) The contract with the NB Securities Lending Group is in the best
interests of the Lending Fund and its shareholders; (ii) the services
to be performed by the NB Securities Lending Group are appropriate for
the Lending Fund; (iii) the nature and quality of the services to be
provided by the NB Securities Lending Group are at least equal to those
provided by others offering the same or similar services; and (iv) the
fees for the NB Securities Lending Group's services are fair and
reasonable in light of the usual and customary charges imposed by
others for services of the same nature and quality.
b. In connection with the approval of the NB Securities Lending
Group as lending agent for the Lending Funds and the initial
implementation of the proposed fee arrangement, the Board of each
Lending Fund will review competing quotes with respect to lending
agency fees from at least three independent lending agents to assist
the Board in making the findings referred to in paragraph (a) above.
c. Each Lending Fund's contract with the NB Securities Lending
Group for lending agent services will be reviewed annually and will be
approved for continuation only if a majority of the Board, including a
majority of the Independent Trustees/Directors, makes the findings
referred to in paragraph (a) above.
d. The Board, including a majority of the Independent Trustees/
Directors, will (i) determine at each regular quarterly meeting on the
basis of reports submitted by the NB Securities Lending Group that the
loan transactions during the prior quarter were effected in compliance
with the conditions and procedures set forth in the application and
(ii) review not less frequently than annually the conditions and
procedures for continuing appropriateness.
e. Each Lending Fund will (i) Maintain and preserve permanently in
an easily accessible place a written copy of the procedures and
conditions described in the application and (ii) maintain and preserve
for a period not less than six years from the end of the fiscal year in
which any loan transaction pursuant to the Securities Lending Program
occurred, the first two years in an easily accessible place, a written
record of each loan transaction setting forth a description of the
security loaned, the identity of the person on the other side of the
loan transaction, the terms of the loan transaction, and the
information or materials upon which the determination was made that
each loan was made in accordance with the procedures set forth above
and the conditions to the application.
B. Lending to Affiliated Broker-Dealers
1. Section 17(a)(3) of the Act makes it unlawful for any affiliated
person of or principal underwriter for a registered investment company,
or an affiliated person of such a person (``second-tier affiliate''),
acting as principal, to borrow money or other property from the
registered investment company. Applicants state that because Neuberger
Berman is sub-adviser to the Lending Funds, and the other Affiliated
Broker-Dealers are under common control with Neuberger Berman and NBMI,
an Affiliated Broker-Dealer may be considered an affiliated person, or
a second-tier affiliate, of a Lending Fund. Accordingly, section
17(a)(3) would prohibit the Affiliated Broker-Dealers from borrowing
securities from the Lending Funds.
2. As noted above, section 17(d) and rule 17d-1 generally prohibit
joint transactions involving registered investment companies and their
affiliates unless the Commission has approved the transaction.
Applicants request relief under sections 6(c) and 17(b) of the Act
exempting them from section 17(a)(3), and under section 17(d) and rule
17d-1 to permit the Lending Funds to lend portfolio securities to
Affiliated Broker-Dealers.
3. Applicants state that each loan to an Affiliated Broker-Dealer
by a Lending Fund will be made with a spread that is no lower than that
applied to comparable loans to unaffiliated broker-dealers.\4\ In this
regard, applicants state
[[Page 1073]]
that at least 50% of the loans made by the Lending Funds, on an
aggregate basis, will be made to unaffiliated borrowers. Moreover, all
loans will be made with spreads that are no lower than those set forth
in a schedule of spreads established by the Board, including a majority
of the Independent Trustees/Directors, or by a committee of the Board
made up of Independent Trustees/Directors (the ``Lending Committee''),
and all transactions with Affiliated Broker-Dealers will be reviewed
periodically by an officer of the Lending Fund. The Board, including a
majority of the Independent Trustees/Directors, also will review
quarterly reports on all lending activity.
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\4\ A ``spread'' is the compensation earned by a Lending Fund
from a securities loan, which compensation is in the form either of
a lending fee payable by the borrower to the Lending Fund (when non-
cash collateral is posted) or of the excess retained by the Lending
Fund over a rebate rate payable by the Lending Fund to the borrower
(when cash collateral is posted and then invested by the Lending
Fund).
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Applicants' Conditions
Applicants agree that any order granting the requested relief will
be subject to the following conditions:
1. The Securities Lending Program will comply with all present and
future applicable Commission and staff positions regarding securities
lending arrangements.
2. Approval of the Board, including a majority of the Independent
Trustees/Directors, shall be required for the initial and subsequent
approvals of the NB Securities Lending Group as lending agent for a
Lending Fund, for the institution of all procedures relating to the
Securities Lending Program, and for any periodic review of loan
transactions for which the NB Securities Lending Group acted as lending
agent.
3. Each Lending Fund will (i) Maintain and preserve permanently in
an easily accessible place a written copy of the procedures (with any
modifications) that are followed in connection with lending securities
and (ii) maintain and preserve for a period not less than six years
from the end of the fiscal year in which any loan transaction occurred,
the first two years in an easily accessible place, a written record of
each such loan transaction setting forth the number of shares loaned,
the face amount of the securities loaned, the fee received (or rebate
remitted), the identity of the borrower, the terms of the loan, and any
other information or materials upon which the finding was made that
each loan made to an Affiliated Broker-Dealer was fair and reasonable,
and that the procedures followed in making such loan were in accordance
with the other undertakings set forth in the application.
4. The Lending Funds, on an aggregate basis, will make at least 50%
of their portfolio securities loans to unaffiliated borrowers.
5. a. All loans will be made with spreads no lower than those
provided for in a schedule of spreads, which will be established and
may be modified from time to time by the Board and by a majority of the
Independent Trustees/Directors or by the Lending Committee (``Schedule
of Spreads''). The Schedule of Spreads and any modifications thereto
will be ratified by the full Board of each Lending Fund and by a
majority of the Independent Trustees/Directors.
b. The Schedule of Spreads will provide for rates of compensation
to the Lending Funds that are reasonable and fair, and that are
determined in light of those considerations set forth in the
application.
c. The Schedule of Spreads will be uniformly applied to all
borrowers of the Lending Funds' portfolio securities, and will specify
the lowest allowable spread with respect to a loan of securities to any
borrower.
d. If a security is loaned to an unaffiliated borrower with a
spread higher than the minimum provided for in the Schedule of Spreads,
all comparable loans to an Affiliated Broker-Dealer will be made at no
less than the higher spread.
e. Each Lending Fund's Securities Lending Program will be monitored
on a daily basis by an officer of the Lending Fund who is subject to
section 36(a) of the Act. This officer will review the terms of each
loan to an Affiliated Broker-Dealer for comparability with loans to
unaffiliated borrowers and conformity with the Schedule of Spreads, and
will periodically, and at least quarterly, report his or her findings
to the Lending Fund's Board, including a majority of the Independent
Trustees/Directors, or the Lending Committee.
6. A Lending Fund will not make any loan to an Affiliated Broker-
Dealer unless the income to the Lending Fund attributable to such loan
fully covers the transaction costs, if any, incurred in making the
loan.
7. The Boards of the Lending Funds, including a majority of the
Independent Trustees/Directors, (a) will determine no less frequently
than quarterly that all transactions with Affiliated Broker-Dealers
effected during the preceding quarter were effected in compliance with
the requirements of the procedures adopted by the Board and the
conditions of any order that may be granted and that such transactions
were conducted on terms that were reasonable and fair, and (b) will
review no less frequently than annually such requirements and
conditions for their continuing appropriateness.
8. The total value of securities loaned to any one borrower on the
approved list will be in accordance with a schedule to be approved by
the Board of each Lending Fund, but in no event will the total value of
securities lent to any one Affiliated Broker-Dealer exceed 10% of the
net assets of the Lending Fund, computed at market value.
For the Commission, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-300 Filed 1-7-03; 8:45 am]
BILLING CODE 8010-01-P