[Federal Register Volume 61, Number 55 (Wednesday, March 20, 1996)]
[Notices]
[Pages 11444-11448]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 96-6638]



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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Release No. 21825; 812-9778]


Vanguard Money Market Reserves, Inc., et al.; Notice of 
Application

March 13, 1996.
AGENCY: Securities and Exchange Commission (``SEC'').

ACTION: Notice of Application for Exemption under the Investment 
Company Act of 1940 (the ``Act'').

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APPLICANTS: Vanguard Money Market Reserves, Inc., Vanguard 
Institutional Portfolios, Inc., Vanguard Municipal Bond Fund, Inc., 
Vanguard California Tax-Free Fund, Vanguard New Jersey Tax-Free Fund, 
Vanguard New York Insured Tax-Free Fund, Vanguard Ohio Tax-Free Fund, 
Vanguard Pennsylvania Tax-Free Fund, Vanguard Florida Tax-Free Fund, 
Vanguard Bond Index Fund, Vanguard Fixed Income Securities Fund, Inc., 
Vanguard/Wellesley Income Fund, Inc., Vanguard Asset Allocation Fund, 
Inc., Vanguard Convertible Securities Fund, Inc., Vanguard STAR Fund, 
Vanguard/Wellington Fund, Inc., Vanguard/Trustees Equity Fund, Vanguard 
Equity Income Fund, Inc., Vanguard Index Trust, Vanguard International 
Equity Index Fund, Inc., Vanguard Quantitative Portfolios, Inc., 
Vanguard Preferred Stock Fund, Vanguard/Windsor Funds, Inc., Vanguard/
PRIMECAP Fund, Inc., Gemini II, Inc., Vanguard World Fund, Inc., 
Vanguard/Morgan Growth Fund, Inc., Vanguard Explorer Fund, Inc., 
Vanguard Specialized Portfolios, Inc., Vanguard Variable Insurance 
Fund, Vanguard Tax-Managed Fund, Inc., Vanguard Horizon Fund, Inc., 
Vanguard Admiral Funds (together with any future investment company, or 
portfolio thereof, that proposed to participate in the proposed credit 
facility that (a) is part of a group of investment companies which 
holds itself out to investors as related companies for purposes of 
investment and investor services, and (b) obtains corporate management, 
administrative, and distribution services from The Vanguard Group, Inc. 
(``TVGI'') (the ``Funds'');\1\ and TVGI.

    \1\ All Funds that presently intend to rely on the requested 
relief are included as named applicants. Other Funds will be covered 
by the order if they later decide to participate in the proposed 
credit facility.
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RELEVANT ACT SECTIONS: Order under section 6(c) of the Act for an 
exemption from sections 12(d)(1), 18(f), and 21(b) of the Act, under 
sections 6(c) and 17(b) for an exemption from sections 17(a)(1) and 
17(a)(3) of the Act, and under section 17(d) of the Act and rule 17d-1 
thereunder to permit certain joint arrangements.

SUMMARY OF APPLICATION: Applicants request an order that would permit 
the Funds to borrow from and lend to each other through a proposed 
credit facility.

FILING DATES: The application was filed on September 22, 1995 and 
amended on January 16, 1996. Applicants have agreed to file an 
amendment during the notice period, the substance of which is included 
in this notice.

HEARING OR NOTIFICATION OF HEARING: An order granting the application 
will be issued unless the SEC orders a hearing. Interested persons may 
request a hearing by writing to the SEC's Secretary and serving 
applicants with a copy of the request, personally or by mail. Hearing 
requests should be received by the SEC by 5:30 p.m. on April 8, 1996, 
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 may request 
notification of a hearing by writing to the SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549. 
Applicants: Vanguard Financial Center, Valley Forge, Pennsylvania 
19482.

FOR FURTHER INFORMATION CONTACT:
Marianne H. Khawly, Staff Attorney, at (202) 942-0562, or Alison E. 
Baur, 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 from 
the SEC's Public Reference Branch.

Applicants' Representations

    1. Each of the Funds, except Vanguard STAR Fund and Vanguard 
Institutional Index Fund are members of the Vanguard group of 
investment companies. Each of the Funds, except Gemini II, is 
registered as a open-end, management investment company under the Act. 
Gemini II is registered as a closed-end investment company under the 
Act. TVGI is a wholly and jointly owned subsidiary of the Funds that 
provides corporate management, administrative, transfer agent, and 
distribution services on an at-cost basis to each Fund, except Vanguard 
Institutional Index Fund, pursuant to a service agreement. TVGI 
provides such services to Vanguard Institutional Index Fund on an at-
cost basis pursuant to a separate service agreement.
    2. In 1987, the Funds and TVGI obtained an order exempting them 
from the provisions of section 17(d) of the Act and rule 17d-1 
thereunder to the extent necessary to permit the Funds to establish a 
joint account (the ``Joint Account'') for investing in certain 
repurchase agreements.\2\ At the end of each trading day, the Funds' 
uninvested cash balances are deposited in the Joint Account. Cash 
balances in the Joint Account are then invested in one or more large 
short-term repurchase agreements, each of which has a duration of no 
more than seven days. TVGI invests these cash balances as part of its 
duties under its existing management and service agreement with each of 
the Funds and does not charge any additional fee for this service.
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    \2\ Wellington Fund, Inc., Investment Company Act Release Nos. 
15605 (March 5, 1987) (notice) and 15653 (March 31, 1987) (order).
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    3. At any particular time, while some Funds are lending money by 
entering into repurchase agreements (either directly or through the 
Joint Account) other Funds may be borrowing money to satisfy redemption 
requests. Currently, the Funds have loan agreements with four banks, 
although no Fund has agreements with all four banks. The interest rate 
paid by the Funds for bank borrowings is usually significantly higher 
(ranging between 60 and 85 basis points) than the rate earned on 
investments in repurchase agreements. Applicants believe that the 
differential does not reflect a material difference in the quality or 
the risk or respective

[[Page 11445]]

transactions, but rather reflects the power of the banks to negotiate a 
higher rate of interest on Fund borrowings than they pay on repurchase 
agreements.
    4. The Funds propose to enter into master loan agreements that 
would permit the Funds to lend money to each other for temporary 
purposes through a proposed credit facility. The credit facility is 
intended to reduce substantially the Funds borrowing costs and to 
enhance the ability of the Funds to earn higher rates of interest for 
their short-term lendings. Although the credit facility would 
substantially reduce the Funds' reliance on bank credit arrangements, 
the Trusts would continue to maintain existing loan agreements and to 
borrow money from banks.
    5. The proposed transactions are likely to provide the Funds with 
significant savings at times when the cash position of a Fund is 
insufficient to meet temporary cash requirements. This situation 
generally arises when shareholder redemptions exceed anticipated 
volumes and the 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 seven days (or longer for certain foreign transactions). 
However, shareholder redemption requests are normally effected 
immediately. Therefore, the Funds need a source of immediate, short-
term liquidity pending settlement of the sale of portfolio securities.
    6. While bank borrowings will continue to be available to supply 
such liquidity, the rates charged under the proposed credit facility 
would be below those offered by the banks on short-term loans. 
Likewise, Funds making cash loans to other Funds would earn interest at 
a rate higher than they otherwise could obtain from investing their 
cash in short-term repurchase agreements. Thus, the credit facility 
would benefit both those Funds that are borrowers and those Funds that 
are lenders.
    7. The interest rate to be charged to the Funds on any loan made 
pursuant to the credit facility would be the average of the highest 
interest rate available through the Joint Account and a single 
benchmark rate set for all Funds. The benchmark rate would be 
calculated each day by TVGI according to a formula established by the 
Funds' boards of directors/trustees to approximate the lowest interest 
rate at which bank loans are available to the Funds. The formula would 
be based upon a publicly available rate (e.g., Federal Funds plus 25 
basis points) and would vary with this rate so as to reflect changing 
bank loan rates.
    8. The Cash Management Department of TVGI would administer the 
credit facility. On each business day, the Cash Management Department 
would compare the interfund loan rate with the available Joint Account 
repurchase agreement rate for that day (which will reflect actual rates 
negotiated by the Cash Management Department that day for the Joint 
Account) and the available borrowing rates quoted by at least three of 
the banks with which the Funds have loan agreements. The Cash 
Management Department will make cash available to borrowing Funds only 
if the interfund loan rate is more favorable to the lending Fund than 
the Joint Account repurchase agreement rate and more favorable to the 
borrowing Fund than the lowest quoted bank loan rate.
    9. The lending banks are currently large banks of national 
standing. Generally, the size and prominence of banks able to make 
loans of this size ensure that the rates quoted to the Funds and loans 
will be representative of the available market rates. TVGI currently 
solicits daily rate quotes from each bank with which the Funds have 
loan agreements. While applicants anticipate that this practice will 
continue, TVGI will obtain three such representative quotes on any day 
on which an interfund loan takes place. If quotes are solicited from 
fewer than all lending banks, TVGI will solicit quotes from those banks 
which, on the basis of the facts and circumstances known at the time, 
it believes will offer loan interest rates as favorable to the 
borrowing Funds as comparable loans from the other banks with which one 
or more Funds have lending agreements. Applicants submit that these 
procedures provide a high level of assurance that quoted rates will be 
representative of the prevailing bank loan rates.
    10. Under the proposal, the portfolio managers for each 
participating Fund, other than the money market Funds, may provide the 
Cash Management Department with standing instructions to participate in 
the credit facility daily as a borrower or lender. A Fund would not 
participate in the credit facility as a lender unless it also elected 
to participate in the Joint Account or, in the case of money market 
Funds, unless the Fund would invest on any given day in the Joint 
Account. As in the case of the Joint Account, the Cash Management 
Department on each business day would collect data on the uninvested 
cash balances and borrowing requirements of all participating Funds, 
other than the money market Funds, from the Funds' custodians. With 
respect to the money market Funds, the portfolio managers would inform 
the Cash Management Department directly each day by a time or times 
specified by the Cash Management Department (initially midmorning) of 
the amount of cash, if any, they wished to direct to the credit 
facility as a lender.\3\ The money market Funds typically would not 
participate as borrowers because they rarely need to borrow cash to 
meet redemptions.
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    \3\ Money market Fund managers would not delegate investment of 
cash balances to the Cash Management Department under standing 
instructions because applicants believe that the investment 
objective of such Funds and the unique requirements of rule 2a-7 
require their direct management of all money market Fund assets, 
including short-term cash positions.
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    11. The Cash Management Department would allocate borrowing demand 
and cash available for lending among the Funds on an equitable basis, 
subject to certain administrative procedures applicable to all Funds, 
such as the time of filing requests to participate, minimum loans lot 
sizes, and the need to keep the number of transactions and associated 
administrative costs to a minimum. To reduce transaction costs, each 
single loan normally would be allocated in a manner that would minimize 
the number of participants necessary to complete the loan transaction.
    12. Applicants expect that there would be far more available 
uninvested cash each day than borrowing demand. Therefore, after the 
Cash Management Department has allocated cash for interfund loans, it 
will inform the money market portfolio managers of the amount of 
interfund loans, if any, made for each money market Fund so that the 
Fund portfolio managers may invest any remaining cash in the Joint 
Account or other available investments. With respect to other 
participating Funds, the Cash Management Department would follow 
standing instructions from the portfolio managers to invest the 
remaining amounts daily through the Joint Account.
    13. No Fund would be permitted to participate in the proposed 
credit facility unless: (a) the Fund had obtained shareholder approval 
for its participation or, if such approval were not required by law, 
the Fund's prospectus and/or statement of additional information had 
disclosed at all times the possibility of the Fund's participation in 
the credit facility upon receipt of requisite regulatory approvals; (b) 
the Fund had fully disclosed all material information concerning the 
proposed credit facility in its prospectus and/or statement of 
additional

[[Page 11446]]

information; and (c) the Fund's participation in the credit facility 
was consistent with its investment objective, fundamental limitations 
and/or Declaration of Trust or Articles of Incorporation. Even if a 
Fund's participation in the credit facility were found not to require 
shareholder approval, each Fund would seek such approval unless it had 
previously obtained such approval or its prospectus and/or statement of 
additional information had at all times disclosed the possibility of 
its participation upon receipt of requisite regulatory approvals.

Applicants' Legal Analysis

    1. Applicants request an order under section 6(c) of the Act for an 
exemption from sections 12(d)(1), 18(f), and 21(b) of the Act, under 
sections 6(c) and 17(b) of the Act for an exemption from sections 
17(a)(1) and 17(a)(3) of the Act, and under section 17(d) of the Act 
and rule 17d-1 thereunder to permit certain joint arrangements. The 
requested order would permit the Funds to borrow from and lend to each 
other through a proposed credit facility.
    2. Applicants contend that the interfund loans would be equivalent 
in credit quality to other money market instruments rated ``high 
quality'' by independent statistical rating organizations because of: 
(a) the very high asset coverage requirement for all interfund loans; 
(b) the high quality and liquidity of the assets covering the loans; 
(c) the fact that all interfund loans having less than 1000% asset 
coverage will be fully collateralized; (d) the requirement that if a 
lending bank requires collateral from a Fund, all interfund loans to 
the Fund will be similarly collateralized regardless of asset coverage 
level; (e) the ability to call interfund loans on any business day; and 
(f) the fact that the independent directors/trustees will exercise 
effective oversight of the interfund lending program as administered by 
TVGI.
    3. Applicants also believe that the program would involve no 
realistic risk resulting from potential conflicts of interest. TVGI has 
no pecuniary interest in the administration of the program. TVGI would 
administer the credit facility as part of its duties under its existing 
management and service agreement with each Fund and would receive no 
additional fee as compensation for its services. Thus, TVGI would 
administer the facility as a disinterested fiduciary.
    4. The interfund lending program does not involve any potential 
that one Fund might receive a preferential rate to the disadvantage of 
another Fund. Under the credit facility, the Funds would neither 
negotiate interest rates between themselves, nor would TVGI set the 
rates in its discretion. Rather, rates would be set pursuant to a 
preestablished formula, approved by the directors/trustees, which would 
be the function of the current rates quoted by an independent third-
party for short-term borrowings and for short-term repurchase 
agreements. All Funds participating in the credit facility on any given 
day would receive the same rate.
    5. Because of the broad definition of ``security'' in section 
2(a)(36) of the Act, the obligation of a borrowing Fund to repay an 
interfund loan could constitute a security for the purposes of section 
12(d)(1) of the Act. Applicants request an exemption from the 
provisions of section 12(d)(1) of the Act only to the extent necessary 
for applicants to participate in the credit facility. Applicants will 
in all other respects comply with section 12(d)(1) of the Act and the 
terms of any Commission orders granted to applicants, including the 
order granted in the matter of Vanguard STAR Fund, Investment Company 
Act Release Nos. 21372 (Sept. 22, 1995) (notice) and 21426 (Oct. 18, 
1995) (order).
    6. Applicants submit that the credit facility would not involve the 
type of abuses at which section 12(d)(1) of the Act was directed. 
Section 12(d)(1) of the Act was intended to prevent the pyramiding of 
investment companies and the additional and duplicative costs and fees 
attendant upon multiple layers of investments. In this case, the 
purpose of the proposed credit facility is to save money for all 
participating Funds. In addition, there would be no duplicative costs 
to the Funds or their shareholders.
    7. Applicants also submit that the credit facility would not 
involve the type of abuses that section 18(f) was intended to prevent. 
Applicants seek relief from section 18(f) to the limited extent 
necessary to allow a Fund to borrow from other Funds in amounts, as 
measured on the day when the most recent loan was made, not to exceed 
125% of the borrowing Funds net cash redemptions for the preceding 
seven calendar days. Applicants would be subject to all of the proposed 
conditions, including the percentage and collateral limitations on 
interfund borrowings. The Funds would remain subject to the requirement 
of section 18(f)(1) that all borrowings of a Fund, including interfund 
and bank borrowings, have at least 300% asset coverage.
    8. Applicants contend that the proposed credit facility is 
consistent with the overall purpose of section 21(b) of the Act. This 
section is intended to prevent a party with strong potential adverse 
interests and influence over the investment decisions of a registered 
investment company from causing or inducing the investment company to 
engage in lending transactions that are detrimental to the best 
interests of the investment company and its shareholders. The proposed 
transactions do not raise such concerns because: (a) TVGI would 
administer the program as a disinterested fiduciary; (b) all loans made 
by any Fund to another Fund would consist only of uninvested cash 
reserves that the Fund otherwise would invest in short-term repurchase 
agreements or comparable short-term instruments; (c) the interfund 
loans would not involve a significantly greater risk than such other 
investments; (d) the lending Fund would receive interest at a higher 
rate than it could obtain through such other investments; and (e) the 
borrowing Fund would pay interest at a rate lower than would otherwise 
be available to it under its bank loan agreements. Moreover, the 
proposed conditions would effectively preclude the possibility of any 
undue advantage.
    9. Section 6(c) provides, in relevant part, that the SEC may, 
conditionally or unconditionally, by order, exempt any person or class 
of persons from any provision of the Act or from any rule thereunder, 
if such exemption is necessary or appropriate in the public interest, 
consistent with the protection of investors, and consistent with the 
purposes fairly intended by the policy and provisions of the Act. 
Applicants submit that the relief requested from the above provisions 
satisfies this standard.
    10. Funds that are advised by the same entity are ``affiliated 
person'' of each other under section 2(a)(3)(C) of the Act by reason of 
being under common control. As investment adviser and/or principal 
underwriter to the Funds, TVGI is deemed an ``affiliated person'' of 
the Funds under section 2(a)(3) of the Act. Section 17(a)(1) is 
intended to prevent the same abuses contemplated by section 12(d)(1) by 
generally prohibiting an affiliated person of a registered investment 
company from selling any security to such registered investment 
company. Section 17(a)(3) is intended to prevent the same abuses 
contemplated by section 21(b) by generally prohibiting an affiliated 
person of a registered investment company from borrowing money or other 
property from such investment company.
    11. Section 17(b) authorizes the SEC to exempt a proposed 
transaction from section 17(a) if evidence establishes that the terms 
of the transaction, including

[[Page 11447]]

the consideration to be paid or received, are reasonable and fair and 
do not involve overreaching on the part of any person concerned, the 
transaction is consistent with the policies of the registered 
investment company, and the general purposes of the Act. For the 
reasons discussed above, applicants assert that the proposed 
transaction satisfies the criteria of section 17(b).
    12. Section 17(d) and rule 17d-1 generally prohibit a registered 
investment company's joint or joint and several participation with an 
affiliated person in a transaction in connection with any joint 
enterprise or joint arrangement or profit-sharing plan ``on a basis 
different from or less advantageous than that of'' the affiliated 
person. For the reasons discussed above, each applicant's participation 
in the credit facility would not involve overreaching or unfair 
advantage over any other applicant, would be consistent with the 
provisions, policies, and purposes of the Act, and participation by 
each Fund would be on the same terms that are no different from or less 
advantageous than that of other participating Funds.

Applicant's Conditions

    1. The interest rates to be charged to the Funds under the credit 
facility will be the average of the current Joint Account repurchase 
agreement rate and a benchmark rate established periodically to 
approximate the lowest rate available from banks on loans to the Funds.
    2. The Cash Management Department on each business day will compare 
the interfund loan rate set pursuant to the formula calculated as 
provided in condition 1 with the Joint Account repurchase agreement 
rate negotiated that day and all short-term borrowing rates quoted to 
any of the Funds by any bank with which any Fund has a loan agreement. 
At least three such quotations will be obtained each day in which any 
Fund borrows through the credit facility prior to such borrowing. The 
Cash Management Department will make cash available for interfund loans 
only if the interfund rate is more favorable to the lending Fund than 
the Joint Account repurchase agreement rate and more favorable to the 
borrowing Fund than the lowest quoted bank loan rate.
    3. If a Fund has outstanding borrowings, any interfund loans: (a) 
Will be at an interest rate equal to or lower than any outstanding bank 
loan; (b) will be secured at least on an equal priority basis with at 
least an equivalent percentage of collateral to loan value as any 
outstanding bank loan that requires collateral; (c) will have a 
maturity no longer than any outstanding bank loan (and in no event over 
seven days); and (d) will provide that, if an event of default by the 
Fund occurs under any agreement evidencing an outstanding bank loan to 
the Fund, that event of default will automatically (without need for 
action or notice by the lending Fund) constitute an immediate event of 
default under the interfund loan 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 Fund.
    4. A Fund may make an unsecured borrowing through the credit 
facility if its outstanding borrowings from all sources immediately 
after the borrowing total less than 10% of its total assets, provided 
that if a Fund has a secured loan outstanding from any 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 credit facility only on a secured basis. A Fund could not borrow 
through the credit facility if its total outstanding borrowings 
immediately after the interfund borrowing would be more than 33\1/3\% 
of its total assets.
    5. Before any Fund that has outstanding interfund borrowings may, 
through additional borrowings, cause its outstanding borrowings from 
all sources to exceed 10% of its total assets, the Fund must first 
secure each outstanding interfund loan by the pledge of segregated 
collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Fund with outstanding interfund loans exceeds 10% of 
its total assets for any other reason (such as decline in net asset 
value or because of shareholder redemptions), the Fund will within one 
business day thereafter: (a) Repay all its outstanding interfund loans; 
(b) reduce its outstanding indebtedness to 10% or less of its total 
assets; or (c) secure each outstanding interfund loan by the pledge of 
segregated collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan until the Fund's total 
outstanding borrowings cease to exceed 10% of its total assets, at 
which time the collateral called for by this condition 5 shall no 
longer be required. Until each interfund loan that is outstanding at 
any time that a Fund's total outstanding borrowings exceeds 10% is 
repaid or the Fund's total outstanding borrowings cease to exceed 10% 
of its total assets, the Fund will mark the value of the collateral to 
market each day and will pledge such additional collateral as is 
necessary to maintain the market value of the collateral that secures 
each outstanding interfund loan at least equal to 102% of the 
outstanding principal value of the interfund loan.
    6. No equity, taxable bond, or money market Fund may loan funds 
through the credit facility if the loan would cause its aggregate 
outstanding loans through the credit facility to exceed 5%, 7.5%, or 
10%, respectively, of its 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 credit facility, as measured on 
the day the most recent interfund loan was made to the Fund, will not 
exceed 125% of the Fund's total net cash redemptions for the preceding 
seven calendar days.
    10. Each interfund loan may be called on one business day's notice 
by the lending Fund and may be repaid on any day by the borrowing Fund.
    11. A Fund's participation in the credit facility must be 
consistent with its investment policies and limitations and Declaration 
of Trust or Articles of Incorporation.
    12. The Cash management Department will calculate total Fund 
borrowing and lending demand through the credit facility, and allocate 
interfund loans on an equitable basis among Funds, without the 
intervention of the portfolio manager of any Fund. The Cash management 
Department will not solicit cash for the credit facility from any Fund 
or prospectively publish or disseminate loan demand data to portfolio 
managers. The Cash Management Department will invest amounts remaining 
after satisfaction of borrowing demand in accordance with standing 
instructions from portfolio managers or return remaining amounts for 
investment directly by the portfolio managers of the money market 
Funds.
    13. TVGI will monitor the interest rates charged and the other 
terms and conditions of the interfund loans and

[[Page 11448]]

will make a quarterly report to the boards of directors/trustees of the 
Funds concerning their participation in the credit facility and the 
terms and other conditions of any extensions of credit thereunder.
    14. Each Fund's board of directors/trustees, including a majority 
of the independent directors/trustees: (a) will review no less 
frequently than quarterly the Fund's participation in the credit 
facility during the preceding quarter for compliance with the 
conditions of any order permitting such transactions; (b) will 
establish the benchmark rate formula used to determine the interest 
rate on interfund loans, and review no less frequently than annually 
the continuing appropriateness of such benchmark rate formula; and (c) 
will review no less frequently than annually the continuing 
appropriateness of the Fund's participation in the 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 loan agreement, TVGI 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. 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 boards 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 credit facility occurred, the first two years in an 
easily accessible place, written records of all such transactions 
setting forth a description of the terms of the transaction, including 
the amount, the maturity, and the rate of interest available at the 
time on short-term repurchase agreements and commercial bank 
borrowings, and such other information presented to the Funds' board of 
directors/trustees in connection with the review required by conditions 
13 and 14.
    17. TVGI will prepare and submit to the Fund boards for review an 
initial special report on the ``Design of a system'' with respect to 
the operations of the interfund credit facility prior to the 
commencement of operations of the facility, including a report thereon 
of its independent public accountants. A test program of modest 
duration involving actual transactions may be conducted prior to 
submission of the initial report to the boards. An appropriate single 
Fund which next files its form N-SAR after board review of the initial 
report will file the report with its Form N-SAR, and the other Funds 
will incorporate the report by reference in their next N-SAR filings. 
Thereafter, an annual report on the ``Design of the System and Certain 
Compliance Tests'' with respect to the accounting control procedures 
for the credit facility which includes an opinion of the independent 
public accountants will be filed for two years (measured from the 
commencement of the facility subsequent to the test program) with the 
Form N-SAR of an appropriate single Fund which next files its Form N-
SAR after the release of such annual report and opinion, and the other 
Funds will incorporate each such annual report by reference to their 
next subsequent Form N-SAR filings. A form of the independent public 
accountants' opinion is attached as an exhibit to the application. The 
initial ``Design'' report and the annual ``Design and Compliance 
Tests'' report will each be prepared in accordance with the 
requirements of Statement of Auditing Standards No. 70 (``SAS 70'') as 
it may be amended from time to time or pursuant to similar auditing 
standards as may be adopted by the American Institute of Certified 
Public Accountants from time to time, including reports of independent 
accountants thereon. Each SAS report will include a description of the 
principal procedures used by TVGI to monitor compliance with certain of 
the conditions the Funds have agreed to as part of the relief 
requested. The principal procedures described in the initial ``Design'' 
report and the annual ``Design and Certain Compliance Tests'' reports 
will include, at a minimum, procedures that are designed to achieve the 
following objectives: (a) the Funds are required to comply with the net 
redemption and percentage limitations on borrowing, and the percentage 
limitations on lending; (b) the Funds are required to make loans only 
at the interfund rate and such rate must be higher than the Joint 
Account repurchase agreement rate but lower than the lowest daily quote 
rate for available borrowing; (c) the Funds are required to allocate 
borrowing and lending demand in accordance with procedures established 
by the boards of directors/trustees; (d) if a Fund, at the time of its 
borrowing from a Fund, also has outstanding third-party borrowings, the 
interest rate on such interfund borrowing cannot exceed the interest 
rate on third-party borrowings; and (e) the Funds are required to 
pledge collateral for interfund loans when and to the extent provided 
by the conditions to any order issued on the application. Each annual 
SAS 70 report will consider compliance with the procedures designed to 
achieve the foregoing objectives. After the final annual SAS 70 report, 
compliance with the conditions to any order issued on the application 
will be considered by the external auditors as part of their internal 
accounting control procedures, performed in connection with Fund audit 
examinations, which form the basis, in part, of the auditors' report on 
internal accounting controls in Form N-SAR.
    18. No fund will be permitted to participate in the Credit Facility 
upon receipt of requisite regulatory approval unless the Fund has fully 
disclosed in its prospectus all material facts about its intended 
participation.

    For the SEC, by the Division of Investment Management, under 
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 96-6638 Filed 3-19-96; 8:45 am]
BILLING CODE 8010-01-M