[Federal Register Volume 64, Number 7 (Tuesday, January 12, 1999)]
[Notices]
[Pages 1831-1834]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-591]



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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 23633; 812-11184]


Franklin Gold Fund, et al.; Notice of Application

January 5, 1999.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under sections 6(c), 
12(d)(1)(J), and 17(b) of the Investment Company Act of 1940 (the 
``Act'') for exemptions from sections 12(d)(1)(A) and (B) and 17(a) of 
the Act, and under section 17(d) of the Act and rule 17d-1 to permit 
certain joint transactions.

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SUMMARY OF APPLICATION: The requested order would permit certain 
registered management investment companies and private accounts to use 
uninvested cash and cash collateral to purchase shares of one or more 
affiliated money market funds, and engage in certain transactions with 
each other. The order would supersede a prior order.\1\ The order also 
would amend a prior order permitting a fund of funds to purchase shares 
of certain registered investment companies in the same group of 
investment companies in excess of the limits of section 12(d)(1)(A).\2\

    \1\ Franklin Investors Securities Trust, et al., Investment 
Company Act Release Nos. 18363 (Oct. 10, 1991) (notice) and 18401 
(Nov. 7, 1991) (order) (``Cash Sweep Order'').
    \2\ Franklin Templeton Fund Manager, et al., Investment Company 
Act Release Nos. 21964 (May 20, 1996) (notice) and 22022 (June 17, 
1996) (order) (``Fund of Funds Order'').
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APPLICANTS: Franklin Gold Fund, Franklin Asset Allocation Fund, 
Franklin Equity Fund, Franklin High Income Trust, Franklin Custodian 
Funds, Inc., Franklin California Tax-Free Income Fund, Inc., Franklin 
New York Tax-Free Income Fund, Franklin Federal Tax-Free Income Fund, 
Franklin Tax-Free Trust, Franklin California Tax-Free Trust, Franklin 
New York Tax-Free Trust, Franklin Investors Securities Trust, 
Institutional Fiduciary Trust, Franklin Value Investors Trust, Franklin 
Strategic Mortgage Portfolio, Franklin Municipal Securities Trust, 
Franklin Managed Trust, Franklin Strategic Series, Adjustable Rate 
Securities Portfolios, Franklin Templeton International Trust, Franklin 
Real Estate Securities Trust, Franklin Templeton Global Trust, Franklin 
Valuemark Funds, Franklin Universal Trust, Franklin Multi-Income Trust, 
Franklin Templeton Fund Allocator Series, Franklin Money Fund, Franklin 
Templeton Money Fund Trust, Franklin Federal Money Fund, Franklin Tax-
Exempt Money Fund, Franklin Mutual Series Fund Inc., Franklin Floating 
Rate Trust, The Money Market Portfolios (collectively, the ``Franklin 
Funds''), Templeton Growth Fund, Inc., Templeton Funds, Inc., Templeton 
Global Smaller Companies Fund, Inc., Templeton Income Trust, Templeton 
Global Real Estate Fund, Templeton Capital Accumulator Fund, Inc., 
Templeton Globe Opportunities Trust, Templeton American Trust, Inc., 
Templeton Institutional Funds, Inc., Templeton Developing Markets 
Trust, Templeton Global Investment Trust, Templeton Emerging Markets 
Fund, Inc., Templeton Global Income Fund, Inc., Templeton Global 
Governments Income Trust, Templeton Emerging Markets Income Fund, Inc., 
Templeton China World Fund, Inc., Templeton Emerging Markets 
Appreciation Fund, Inc., Templeton Dragon Fund, Inc., Templeton Vietnam 
and Southeast Asia Fund, Inc., Templeton Russia Fund, Inc., Templeton 
Variable Products Series Fund (collectively, the ``Templeton Funds,'' 
together with the Franklin Funds, the ``Franklin Templeton Funds''),\3\ 
Franklin Adviser, Inc., Franklin Advisory Services, Inc., Franklin 
Investment Advisory Services, Inc., Templeton Asset Management, Ltd., 
Templeton Global Advisors Limited, Franklin Mutual Advisers, Inc., 
Templeton Investment Counsel, Inc., (collectively, ``Franklin Templeton 
Advisers''), and institutional and individual managed accounts advised 
by the Franklin Templeton Advisers or an entity controlling, controlled 
by, or under common control with the Franklin Templeton Advisers 
(``Managed Accounts'').

    \3\ All existing Franklin Templeton Funds that currently intend 
to rely on the order are named as applicants. Any other existing 
Franklin Templeton Fund and any future Franklin Templeton Fund will 
rely on the order only in accordance with the terms and conditions 
of the application.
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FILING DATE: The application was filed on June 22, 1998, and amended on 
November 12, 1998. Applicants have agreed to file an amendment during 
the notice period, the substance of which is incorporated in this 
notice.

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 February 1, 1999, 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 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549. Applicants, 777 Mariners Island 
Boulevard, San Mateo, CA 94404.

FOR FURTHER INFORMATION CONTACT: Kathleen L. Knisely, Staff Attorney, 
at (202) 942-0517, or Edward P. Macdonald, Branch Chief, at (202) 942-
0564 (Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 Fifth Street, NW., 
Washington, DC 20549 (tel. 202-942-8090).

Applicants' Representations

    1. Each of the Franklin Templeton Funds is a management investment 
company registered under the Act. Certain of the Franklin Templeton 
Funds are money market funds subject to the requirements of rule 2a-7 
under the Act (``Money Market Funds''). The Franklin Templeton Funds 
are advised by the Franklin Templeton Advisers, each of which is, or 
will be, registered under the Investment Advisers Act of 1940. The 
Franklin Templeton Advisers also serve as investment advisers to the 
Managed Account. The accountholders of the Managed Accounts are 
individual institutions and natural persons. The Managed Accounts are 
not pooled investment vehicles.
    2. Applicants state that each of the Franklin Templeton Funds has, 
or may be expected to have, uninvested cash held by its custodian bank. 
Such cash may result from a variety of sources, including dividends or 
interested received on portfolio securities, unsettled securities 
transactions, reserves held for investment strategy purposes, scheduled 
maturity of investments, liquidation of securities to meet anticipated 
redemptions, and new monies received from investors (``Uninvested 
Cash''). Some of the Franklin Templeton Funds also may loan their 
portfolio securities to registered broker-dealers or other 
institutional investors (``Securities Lending Program''). The loans are 
secured by cash collateral equal at all times to the market value of 
the

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securities loaned (``Cash Collateral,'' together with Uninvested Cash, 
``Cash Balances''). The Managed Accounts also may have Cash Balances.
    3. Applicants request an order to permit (i) a Franklin Templeton 
Fund or Managed Account to use its Cash Balances to purchase shares of 
one or more of the Money Market Funds; and (ii) the Money Market Funds 
to sell their shares to, and redeem their shares from, the Franklin 
Templeton Funds and Managed Accounts. The order also would amend the 
Fund of Funds Order to permit certain funds in which the Franklin 
Templeton Allocator Series may invest pursuant to the Fund of Funds 
Order to invest in shares of the Money Market Funds to the extent 
permitted by this order.
    4. Applicants also state that certain of the Franklin Templeton 
Funds and Managed Accounts currently engage in purchase and sale 
transactions involving short-term money market instruments in reliance 
on rule 17a-7 under the Act (``Interfund Transactions''). Applicants 
request relief to permit these transactions when the Franklin Templeton 
Funds and Managed Accounts become affiliated persons by reason of 
owning more than 5% of a Money Market Fund.

Applicants' Legal Analysis

Section 12(d)(1)

    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
if such securities represent more than 3% of the acquired company's 
outstanding voting stock, more than 5% of the acquiring company's total 
assets, or if such securities, together with the securities of other 
acquired investment companies, represent more than 10% of the acquiring 
company's outstanding total assets. Section 12(d)(1)(B) of the Act 
provides that no registered open-end investment company may sell its 
securities to another investment company if the sale will cause the 
acquiring company to own more than 3% of the acquired company's voting 
stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by the investment company.
    2. Section 12(d)(1)(J) of the Act provides that the Commission may 
exempt any person, security, or transaction from any provision of 
section 12(d)(1) if and to the extent that such exemption is consistent 
with the public interest and the protection of investors.
    3. Applicants request relief under section 12(d)(1)(J) to permit 
the Franklin Templeton Funds to use their Cash Balances to acquire 
shares of the Money Market Funds in excess of the percentage 
limitations in section 12(d)(1)(A), provided however, that in all cases 
a Franklin Templeton Fund's aggregate investment of Uninvested Cash in 
shares of the Money Market Funds will not exceed 25% of the Franklin 
Templeton Fund's total assets at any time. Applicants also request 
relief to permit the Money Market Funds to sell their securities to a 
Franklin Templeton Fund in excess of the percentage limitations in 
section 12(d)(1)(B). The Money Market Funds will not acquire securities 
of any other investment company in excess of the limitations contained 
in section 12(d)(1)(A) of the Act.
    4. Applicants state that the proposed arrangement will not result 
in the abuses that sections 12(d)(1)(A) and (B) were intended to 
prevent. Applicants state that the proposed arrangement will not result 
in inappropriate layering of either sales charges or investment 
advisory fees. Shares of the Money Market Funds sold to the Franklin 
Templeton Funds will not be subject to a sales load, redemption fee, 
asset-based distribution fee or service fee. In connection with 
approving any advisory contract for a Franklin Templeton Group Fund, 
the board of directors or trustees of each Fund (``Board''), including 
a majority of the directors or trustees who are not ``interested 
persons,'' as defined in section 2(a)(19) of the Act (``Independent 
Directors''), shall consider to what extent, if any, the advisory fees 
charged to the Franklin Templeton Fund by the Franklin Templeton 
Adviser should be reduced to account for reduced services provided to 
the Fund by the Adviser as a result of Cash Balances being invested in 
the Money Market Funds.
    5. Applicants also state that there is no threat of redemption to 
gain undue influence over the Money Market Funds. The Franklin 
Templeton Advisers and entities controlling, controlled by, and under 
common control with the Franklin Templeton Advisers will serve as 
investment advisers to the Franklin Templeton Funds and the Money 
Market Funds. Applicants also state that due to the highly liquid 
nature of each of the Money Market Fund's portfolios, there will be no 
need to maintain any special reserve or balances to meet redemptions by 
the Franklin Templeton Funds.

Section 17(a)

    6. Section 17(a) of the Act makes it unlawful for any affiliated 
person of a registered investment company, acting as principal, to sell 
or purchase any security to or from the company. Section 2(a)(3) of the 
Act defines an affiliated person of an investment company to include 
any investment adviser to the investment company and any person 
directly or indirectly controlling, controlled by, or under common 
control with the investment adviser. The Franklin Templeton Funds, the 
Managed Accounts, and Money Market Funds share a common investment 
adviser and thus may be deemed to be under common control. As a result, 
section 17(a) would prohibit the sale of the shares of Money Market 
Funds to the Franklin Templeton Funds and the Managed Accounts, and the 
redemption of the shares by Money Market Funds.
    7. Rule 17a-7 under the Act excepts from the prohibitions of 
section 17(a) the purchase or sale of certain securities between 
registered investment companies which are affiliated persons, or 
affiliated persons of affiliated persons, of each other or between a 
registered investment company and a person which is an affiliated 
person of such company (or an affiliated person of an affiliated 
person) solely by reason of having a common investment adviser, common 
officers, and/or common directors. Applicants state that the Franklin 
Templeton Funds and the Managed Accounts could be deemed to be 
affiliated persons of each other, and of the Money Market Funds, by 
virtue of the Franklin Templeton Funds and the Managed Accounts owning 
5% or more of the outstanding voting securities of a Money Market Fund. 
Thus, applicants believe they would be unable to rely on rule 17a-7 to 
effect Interfund Transactions.
    8. Section 17(b) of the Act authorizes the Commission to exempt a 
transaction from section 17(a) of the act if the terms of the proposed 
transaction, including the consideration to be paid or received, are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned, the proposed transaction is consistent with the 
policy of each investment company concerned, and with the general 
purposes of the Act. Section 6(c) of the Act permits the Commission to 
exempt persons or transactions from any provision of the Act, if the 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly

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intended by the policy and provisions of the Act.
    9. Applicants submit that their request for relief to permit the 
purchase and redemption of shares of the Money Market Funds by the 
Franklin Templeton Funds and the Managed Accounts satisfies the 
standards in sections 6(c) and 17(b). Applicants state that the 
Franklin Templeton Funds will retain their ability to invest Uninvested 
Cash directly in money market instruments as authorized by their 
respective investment objectives and policies, if they believe they can 
obtain a higher rate of return, or for any other reason. Similarly, the 
Money Market Funds have the right to discontinue selling shares to any 
of the Franklin Templeton Funds or the Managed Accounts if the Money 
Market Fund's Board determines that such sale would adversely affect 
its portfolio management and operations. In addition, applicants note 
that shares of Money Market Funds will be purchased and redeemed at 
their net asset value, the same consideration paid and received for 
these shares by any other shareholder.
    10. Applicants also request relief under sections 6(c) and 17(b) to 
permit the Interfund Transactions. Applicants submit that the Franklin 
Templeton Funds, the Managed Accounts, and Money Market Funds will 
comply with rule 17a-7 under the Act in all respects, other than the 
requirement that the participants be affiliated solely by reason of 
having a common investment adviser or affiliated investment advisers, 
common officers or common directors, solely because the Franklin 
Templeton Funds and the Managed Accounts might become affiliated person 
within the meaning of section 2(a)(3)(A) and (B) of the Act. Applicants 
state that the Interfund Transactions do not raise the types of 
concerns that section was designed to address. Applicants also state 
that the Interfund Transactions will be reasonable and fair, will not 
involve overreaching, and will be consistent with the purposes of the 
Act and the policy of each registered investment company concerned.

Section 17(d) and Rule 17d-1

    11. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
an affiliated person of an investment company, acting as principal, 
from participating or effecting any transaction in connection with any 
joint enterprise or joint arrangement in which the investment company 
participates. Applicants believe that each Franklin Templeton Fund and 
each Managed Account, by participating in the proposed transactions, 
and each Franklin Templeton Adviser of a Franklin Templeton Fund or of 
a Managed Account, by managing the assets of the Franklin Templeton 
Funds, the Managed Accounts, and the Money Market Funds, could be 
deemed to be participating in a joint arrangement within the meaning of 
section 17(d) and rule 17d-1 under the Act.
    12. In considering whether to grant an exemption under rule 17d-1, 
the Commission considers whether the investment company's participation 
in such joint enterprise is consistent with the provisions, policies, 
and purposes of the Act, and the extent to which such participation is 
on a basis different from or less advantageous than that of other 
participants. Applicants submit that the investments by the Franklin 
Templeton Funds and the Managed Accounts in the Money Market Funds will 
be on the same basis and will be indistinguishable from that of any 
other participant or shareholder and that the transactions will be 
consistent with the Act.

Applicants' Conditions

    Applications agree that the order granting the requested relief 
shall be subject to the following conditions:
    1. Shares of the Money Market Funds sold to and redeemed by the 
Franklin Templeton Funds and the Managed Accounts will not be subject 
to a sales load, redemption fee, distribution fee under a plan adopted 
in accordance with rule 12b-1 under the Act, or service fee (as defined 
in rule 2830(b)(9) of the NASD's Conduct Rules).
    2. No Money Market Fund will acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.
    3. Each Franklin Templeton Fund will invest Uninvested Cash in a 
Money Market Fund only to the extent that the Franklin Templeton Fund's 
aggregate investment of Uninvested Cash in all the Money Market Funds 
does not exceed 25% of the Franklin Templeton Fund's total assets. For 
purposes of this limitation, each Franklin Templeton Fund or series 
thereof will be treated as a separate investment company.
    4. Each Franklin Templeton Fund, each Managed Account, each Money 
Market Fund, and any future fund relying on the order will be advised 
by a Franklin Templeton Adviser or a person controlling, controlled by, 
or under common control with a Franklin Templeton Adviser.
    5. Investment by a Franklin Templeton Fund in shares of a Money 
Market Fund will be consistent with each Franklin Templeton Fund's 
respective investment restrictions and policies as set forth in its 
prospectus and statement of additional information.
    6. Before the next meeting of the Board of a Franklin Templeton 
Fund is held for the purpose of voting on an advisory contract under 
section 15 of the Act, the Franklin Templeton Adviser to the Franklin 
Templeton Fund will provide the Board with specific information 
regarding the approximate cost to the Franklin Templeton Adviser of, or 
portion of the advisory fee under the existing advisory fee 
attributable to, managing the Cash Balances of the Franklin Templeton 
Fund that can be expected to be invested in the Money Market Funds. In 
connection with approving any advisory contract for a Franklin 
Templeton Fund, the Board, including a majority of Independent 
Directors, shall consider to what extent, if any, the advisory fees 
charged to the Franklin Templeton Fund by the Franklin Templeton 
Adviser should be reduced to account for reduced services provided to 
the Fund by the Adviser as a result of Cash Balances being invested in 
the Money Market Funds. The minute books of the Franklin Templeton Fund 
will record fully the Board's consideration in approving the investment 
advisory contract, including the considerations referred to above.
    7. Before a Franklin Templeton Fund may participate in the 
Securities Lending Program, a majority of the directors or trustees 
(including a majority of the Independent Directors) of the Franklin 
Templeton Fund will approve the Fund's participation in the Securities 
Lending Program. Such directors or trustees also will evaluate the 
securities lending arrangement no less frequently than annually and 
determine that any investment of Cash Collateral in the Money Market 
Funds is in the best interests of the shareholders of the Franklin 
Templeton Fund.
    8. To engage in Interfund Transactions, the Franklin Templeton 
Funds, the Managed Accounts, and Money Market Funds will comply with 
rule 17a-7 under the Act in all respects other than the requirement 
that the parties to the transactions be affiliated persons (or 
affiliated persons of affiliated persons) of each other solely by 
reason of having a common investment adviser or investment advisers 
which are affiliated persons of each other, common officers, and/or 
common directors, solely because the Franklin Templeton Funds and the 
Managed Accounts might become affiliated persons within the meaning of 
section 2(a)(3)(A) and (B) of the Act.

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    Condition 2 to the Fund of Funds order is amended to read as 
follows: ``No Underlying Portfolio will acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act, except to the extent that the Underlying 
Portfolio other than a Money Market Fund acquires securities of another 
investment company pursuant to exemptive relief from the Commission 
permitting the Underlying Portfolio to purchase securities of an 
affiliated money market fund for short-term cash management purposes.''

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-591 Filed 1-11-99; 8:45 am]
BILLING CODE 8010-01-M