[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