
[Federal Register: December 9, 2009 (Volume 74, Number 235)]
[Notices]               
[Page 65175-65178]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr09de09-112]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29066; File No. 812-13640]

 
PNC Bank, National Association; Notice of Application

December 3, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') granting an exemption from 
section 18(f)(1) of the Act.

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Applicant: PNC Bank, National Association (``PNC Bank'').

Summary of the Application: Applicant requests an order that that would 
permit certain registered open-end management investment companies to 
participate as borrowers in loan facilities to be administered by PNC 
Bank.

Filing Dates: The application was filed on March 11, 2009, and amended 
on November 30, 2009.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on December 28, 2009 and should be accompanied by proof of service 
on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request by 
writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-1090. Applicant, PNC Bank, National 
Association, One PNC Plaza, 21st Floor, 249 Fifth Avenue, Pittsburgh, 
PA 15222.

FOR FURTHER INFORMATION CONTACT: Lewis B. Reich, Senior Counsel, at 
(202) 551-6919, or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(Office of Investment Company Regulation, Division of Investment 
Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained via the 
Commission's Web site by searching for the file number, or for an 
applicant using the Company name box at http://www.sec.gov/search/
search.htm or by calling (202) 551-8090.

Applicant's Representations

    1. PNC Bank, a wholly-owned indirect subsidiary of The PNC 
Financial Services Group, Inc. (``PNC Financial''), is a national 
banking association with its principal office in Pittsburgh, 
Pennsylvania. PNC Financial is one of the largest diversified financial 
services companies in the United States based on assets, with 
businesses engaged in retail banking, corporate and institutional 
banking, asset management, and global fund processing services. PNC 
Bank has extensive experience and expertise as an administrator of 
asset-backed commercial paper programs, having administered the 
commercial paper program of Market Street Funding LLC (``Market 
Street''), a limited purpose securitization entity, since 1995.
    2. Market Street is organized as a Delaware limited liability 
company and is exempt from registration under the Act in reliance on 
section 3(c)(7) of the Act. All of the membership interests of Market 
Street are owned by Market Street Holding Corporation (``MSHC''). All 
of the capital stock of MSHC is owned by Amacar Investments, LLC, an 
entity unaffiliated with PNC Financial. As of September 30, 2009, 
Market Street's purchase commitments totaled approximately $6.0 
billion, and its outstanding loans and other assets totaled 
approximately $3.3 billion.
    3. PNC Bank requests relief to permit any registered open-end 
management investment company or series thereof to participate from 
time to time as a borrower (``Borrowing Fund'') in a loan facility to 
be administered by PNC Bank (``Loan Facility''). Market Street, which 
would be the principal source of financing for each Loan Facility, will 
issue commercial paper and will utilize liquidity support provided by 
highly rated financial institutions that are ``banks'' within the 
meaning of section 2(a)(5) of the Act (``Liquidity Providers''). Market 
Street issues unsecured commercial paper with maturities of up to 270 
days (``Promissory Notes'') to fund uncommitted purchases of and 
uncommitted loans secured by various types of financial assets.
    4. The Promissory Notes issued by Market Street are sold only to 
institutional investors that are ``accredited investors'' as defined in 
rule 501(a) of Regulation D under the Securities Act of 1933 (the 
``Securities Act'') or to ``qualified institutional buyers'' as defined 
in rule 144A under the Securities Act. PNC Bank, which has extensive 
experience as an administrator of asset-backed commercial paper 
programs, will perform the administrative functions for Market Street. 
PNC Bank will negotiate the business arrangements on behalf of Market 
Street, including loan amounts, interest rates, and fees. PNC Bank will 
act as agent for Market Street and the related Liquidity Providers 
under the agreements executed with each Borrowing Fund and in such 
capacity will exercise rights and enforce remedies on behalf of Market 
Street and Liquidity Providers.
    5. As security for a loan, Borrowing Funds will pledge assets 
(``Pledged Assets'') for the benefit of Market Street and the 
applicable Liquidity Provider. The Pledged Assets will meet eligibility 
criteria set by Market Street that will be consistent with the 
Borrowing Fund's investment objectives and policies. For each loan 
transaction, PNC Bank will evaluate: (a) The type and nature of a 
Borrowing Fund's Pledged Assets to determine whether they meet Market 
Street's standards for collateral; (b) the operations and history of 
the Borrowing Fund; and (c) the financial position and operations of 
the Borrowing Fund's investment adviser.
    6. Applicant states that Market Street would make loans to a 
Borrowing Fund on an uncommitted basis and the applicable Liquidity 
Provider would be obligated to make loans to the Borrowing Fund in the 
event Market Street was unable or unwilling to make such loans. Market 
Street will have the right in its sole discretion to require the 
Liquidity Providers to acquire outstanding loans made by Market Street 
to a Borrowing Fund at an agreed-upon amount determined pursuant to the 
formula set forth in the related agreements. Applicant states that 
these liquidity support arrangements provide additional assurances to 
the holders of Promissory Notes that they will be paid at maturity, as 
well as protection for Borrowing Funds.
    7. Applicant states that Market Street currently provides financing 
for assets originated by customers of PNC Bank and their affiliates as 
sellers of those assets to Market Street. The assets purchased by 
Market Street include financial assets and securities backed by 
financial assets. Some transactions are

[[Page 65176]]

structured as loans to the sellers, secured by the assets being 
financed, or as agreements to acquire future cash flows from asset 
interests. In addition to purchasing interests in pools of assets 
directly, Market Street has purchased publicly registered, rule 144A 
eligible or privately placed asset-backed securities in open market or 
privately negotiated transactions. Market Street finances its purchase 
of asset pools primarily through the issuance of its Promissory Notes. 
All loans made by Market Street to the Borrowing Funds are not expected 
to be in the aggregate more than 20% of Market Street's outstanding 
loans and other assets.
    8. Applicant represents that the revolving credit and security 
agreement of a Loan Facility, which will be negotiated by the parties, 
will contain representations, warranties, covenants and events of 
default that are customary for secured loan transactions involving 
registered open-end management investment companies, as well as such 
other terms that are specific to a particular Borrowing Fund and the 
conduct of its business. A Borrowing Fund will have the right at any 
time to prepay any outstanding loans under its Loan Facility on certain 
monthly or quarterly dates without any premium or penalty. The Pledged 
Assets of a Borrowing Fund will be available solely to secure the 
repayment of the loans and other outstanding obligations of that 
Borrowing Fund under the Loan Facility. Applicant further states that a 
Borrowing Fund would have the same rights and remedies under state and 
federal law with respect to a Loan Facility from Market Street that it 
would have with respect to a comparable loan from a bank. PNC Bank also 
states that the arrangements with the Liquidity Providers protect 
Borrowing Funds by providing an alternative source of financing in the 
event Market Street is unable to continue lending funds.
    9. Before a Loan Facility is established, a Borrowing Fund must 
represent, in writing, to PNC Bank, Market Street and the Liquidity 
Providers that: (a) Its policies permit borrowing and, if applicable, 
the use of leverage; (b) all borrowing transactions pursuant to the 
Loan Facility will be subject to the requirements of the Act, the rules 
and regulations thereunder, and any other applicable interpretations or 
guidance from the Commission or its staff; and (c) each borrowing 
transaction will be conducted in accordance with all applicable 
representations and conditions of the application. Before a Borrowing 
Fund may participate in a Loan Facility, its board of directors or 
trustees (``Board''), including a majority of the directors or trustees 
that are not ``interested persons'' within the meaning of section 
2(a)(19) of the Act (``Disinterested Directors''), will determine that 
its participation is consistent with the Borrowing Fund's investment 
objectives and policies and in the best interests of the Borrowing Fund 
and its shareholders. Each Borrowing Fund's Board, including a majority 
of the Disinterested Directors, will also adopt procedures for 
evaluating and making certain determinations concerning the terms of 
each loan transaction between the Borrowing Fund and Market Street.
    10. PNC Bank states that the proposed Loan Facilities would enable 
Borrowing Funds to borrow money from Market Street at lower cost than 
obtaining comparable loans from a bank. PNC Bank states that Market 
Street's cost of funds is lower than that of banks, and this advantage 
will be passed on to the Borrowing Funds.\1\
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    \1\ The rate at which a Liquidity Provider would make a loan to 
a Borrowing Fund would not be as favorable as that of Market Street, 
but would be comparable to the rates on secured lines of credit from 
banks. PNC Bank anticipates that Market Street, rather than a 
Liquidity Provider, will be the lender to the Borrowing Funds under 
a Loan Facility, absent extenuating circumstances.
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Applicant's Legal Analysis

    1. Section 18(f)(1) of the Act prohibits an open-end investment 
company from issuing any senior security except that a company is 
permitted to borrow from any bank, if immediately after the borrowing, 
there is an asset coverage of at least 300% for all borrowings of the 
company.\2\ Section 2(a)(5) defines ``bank'' as a depository 
institution, a branch or agency of a foreign bank, a member bank of the 
Federal Reserve System, a banking institution or other trust company 
that, as a substantial portion of its business, receives deposits or 
exercises fiduciary powers similar to those permitted to national 
banks. Applicant states that while Market Street engages in many of the 
same business activities as banks, it is not a ``bank'' under this 
definition.
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    \2\ 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.
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    2. Section 6(c) of the Act permits the Commission to exempt any 
person or transaction or any class or classes of persons or 
transactions from any provision or provisions of the Act, if and to the 
extent that such 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. PNC 
Bank requests exemptive relief from section 18(f)(1) solely to the 
extent necessary to allow a Borrowing Fund to borrow from Market 
Street. PNC Bank believes that permitting the Borrowing Funds to borrow 
from Market Street is fully consistent with the purposes and policies 
of section 18(f)(1) and would not implicate the concerns underlying 
that provision.
    3. PNC Bank states that section 18(f) of the Act reflects 
Congressional concern about excessive borrowing and the issuance of 
senior securities by open-end investment companies because these 
practices could unduly increase the speculative character and 
investment risk of junior securities. PNC Bank notes that Borrowing 
Funds would remain subject to the 300% asset coverage requirement in 
section 18(f)(1) of the Act for all borrowings, including those from 
Market Street. PNC Bank further represents that Market Street's loans 
will not impose any restrictions on a Borrowing Fund's shareholders 
that are different from those imposed by a collateralized bank loan. 
Finally, PNC Bank argues that permitting a Borrowing Fund to borrow 
from Market Street rather than a bank is expected to reduce its costs 
of borrowing, which should decrease the risk that a Borrowing Fund's 
borrowing costs will exceed the return from securities purchased with 
borrowed money and lessen any related incentive to purchase more 
speculative portfolio securities to cover those costs.
    4. PNC Bank states that section 18(f) of the Act also limited open-
end investment companies to borrowing from traditional institutional 
lending sources out of a Congressional concern that public holders of 
senior securities might be unaware that they were much riskier 
instruments than senior securities issued by operating companies. 
Senior securities of investment companies typically were secured by 
assets that were subject to wide fluctuations in value. Further, common 
shareholders could redeem at any time, which also might affect an open-
end investment company's ability to repay its outstanding debt.
    5. PNC Bank argues that the Loan Facilities do not involve the type 
of senior security holder that section 18(f)(1) of the Act was designed 
to protect and that the structure of the Loan Facilities and Market 
Street provide sufficient protection to the parties that face any risk 
of loss by lending to an open-end investment company. Market Street is 
administered by PNC Bank, which applicant states has expertise in 
administering loans collateralized by financial instruments that equals 
or exceeds the expertise of

[[Page 65177]]

most banks. The Liquidity Providers are banks as defined by the Act and 
thus not the type of potential senior security holder that Congress 
believed needed protection. PNC Bank states that the Promissory Notes 
are general obligations of Market Street and loans to Borrowing Funds 
are not expected to exceed 20% of Market Street's outstanding assets 
and loans to any individual Borrowing Fund are not expected to exceed 
10% of Market Street's assets. Any risk of loss on the Promissory Notes 
posed by loans to registered open-end investment companies is further 
reduced by PNC Bank's expertise, Market Street's ability to sell the 
loans under the Loan Facilities to the Liquidity Providers, Market 
Street's external liquidity and credit enhancement sources and the 
capital of Market Street.
    6. Applicant states that section 18(f) also reflects a concern that 
complex capital structures may permit insiders to manipulate the 
allocation of expenses and profits; facilitate control of the 
investment company by junior security shareholders with little 
investment; and make it difficult for investors in the investment 
company to understand what their stock is worth. PNC Bank states that 
borrowing from Market Street would not facilitate pyramiding of control 
or manipulative reallocation of expenses and profits. Further, PNC Bank 
believes that borrowings from Market Street would not be any more 
difficult for shareholders of a Borrowing Fund to understand than bank 
borrowings.
    7. Applicant also states that section 18(f) reflects a concern that 
existed when the Act was adopted that borrowings by open-end investment 
companies could be used to invest in securities without being subject 
to limitations of the Board of Governors of the Federal Reserve System 
(the ``FRB'') on the amount of credit that could be used for these 
purposes (``margin requirements''). Under Regulations U and T under the 
Securities Exchange Act of 1934, in effect prior to enactment of the 
Act, only borrowings for such purposes made by a domestic bank or 
broker-dealer were subject to margin requirements. Regulation U as 
currently in effect imposes restrictions on banks and lenders other 
than broker-dealers that extend credit to borrowers for the purpose of 
purchasing or carrying margin stock. If Market Street makes loans to a 
Borrowing Fund in excess of the threshold amounts under Regulation U, 
Market Street will register with the FRB as a nonbank lender and would 
be subject to the same credit restrictions as a bank under Regulation 
U.
    8. Finally, applicant believes the requested relief will benefit 
Borrowing Funds by providing them with an alternative, lower-cost 
source of financing. For all of these reasons and in light of the 
protections afforded by the conditions set forth below, PNC Bank 
believes that permitting Borrowing Funds to borrow from Market Street 
would be in the best interests of the Borrowing Funds and their 
shareholders, 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.

Applicant's Conditions

    The applicant agrees that any order granting the requested relief 
will be subject to the following conditions:
    1. All Borrowing Funds will comply with the asset coverage 
requirements in section 18(f)(1) of the Act, including with respect to 
all borrowings from Market Street.
    2. A loan by Market Street to a Borrowing Fund will be at an 
interest rate equal to Market Street's cost of funds (i.e., the 
weighted average Promissory Note rate plus dealer commissions).
    3. Before a Borrowing Fund may participate in a Loan Facility, the 
Borrowing Fund's Board, including a majority of the Disinterested 
Directors, will determine that participation in the Loan Facility is 
consistent with the Borrowing Fund's investment objectives and policies 
and is in the best interests of the Borrowing Fund and its 
shareholders. In addition, a Borrowing Fund will disclose in its 
statement of additional information all material facts about its 
participation in the Loan Facility.
    4. Before a Borrowing Fund may participate in a Loan Facility, its 
Board, including a majority of the Disinterested Directors, will adopt 
procedures governing the Borrowing Fund's participation in the Loan 
Facility (``Procedures''). In addition to any other provisions the 
Board may find necessary or appropriate to be included in the 
Procedures, the Procedures will require that, before a Borrowing Fund 
may enter into loan transactions with Market Street, the Board, 
including a majority of the Disinterested Directors, will determine 
that:
    a. The borrowing is in the best interests of the Borrowing Fund and 
its shareholders;
    b. The borrowing and pledge of assets are consistent with the 
Borrowing Fund's investment objectives and policies;
    c. The total anticipated cost of the Loan Facility (including fees 
and interest) does not exceed the total anticipated costs of comparable 
financing alternatives that are available to the Borrowing Fund;
    d. The asset eligibility criteria for the Loan Facility are 
consistent with the Borrowing Fund's investment objectives and 
policies; and
    e. The Borrowing Fund's investments, consistent with the asset 
eligibility criteria and any other requirements of participating in the 
Loan Facility, will be in the best interests of the Borrowing Fund and 
its shareholders.
    5. If Market Street determines (a) to require the Liquidity 
Providers to acquire from Market Street outstanding loans made to a 
Borrowing Fund, or (b) not to extend additional loans to a Borrowing 
Fund, the Board of the Borrowing Fund, including a majority of the 
Disinterested Directors, will be notified promptly. As soon as 
practicable, the Board, including a majority of the Disinterested 
Directors, must determine whether it is in the best interests of the 
Borrowing Fund and its shareholders to continue to participate in the 
Loan Facility or to terminate the Borrowing Fund's participation in the 
Loan Facility in accordance with its terms.
    6. At each regular quarterly meeting, the Board, including a 
majority of the Disinterested Directors, will (a) review a Borrowing 
Fund's loan transactions under its Loan Facility during the preceding 
quarter, including the terms of each transaction, and (b) determine 
whether the transactions were effected in compliance with the 
Procedures and the terms and conditions of the order. At least 
annually, the Board, including a majority of the Disinterested 
Directors, will (a) with respect to a Borrowing Fund's continued 
participation in a Loan Facility, make the determinations required in 
condition 3 above, and (b) approve such changes to the Procedures as it 
deems necessary or appropriate.
    7. A Borrowing Fund will maintain and preserve permanently in an 
easily accessible place a written copy of the Procedures and any 
modifications to the Procedures. The Borrowing 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 with a Loan Facility occurred, the 
first two years in an easily accessible place, a written record of each 
transaction setting forth a description of the terms of the 
transaction, including the amount, maturity, and the rate of interest 
on the loan, and all information upon which the determinations required 
by these conditions were made.
    8. The applicant will not enter into a Loan Facility with any 
Borrowing Fund if, at the time of such transaction, the

[[Page 65178]]

applicant, Market Street or any Liquidity Provider is an affiliated 
person of that Borrowing Fund, within the meaning of section 2(a)(3) of 
the Act, or an affiliated person of any affiliated person of that 
Borrowing Fund.

Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-29321 Filed 12-8-09; 8:45 am]

BILLING CODE 8011-01-P
