[Federal Register Volume 66, Number 138 (Wednesday, July 18, 2001)]
[Notices]
[Pages 37501-37507]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-17928]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25062; 812-12184]


Apex Municipal Fund, Inc., et al.; Notice of Application

July 12, 2001.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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    Summary of Application: Applicants request an order to permit (a) 
certain registered investment companies to pay an affiliated lending 
agent a fee based on a share of the revenue derived from securities 
lending activities; (b) the registered investment companies and certain 
affiliated institutional accounts to use cash collateral from 
securities lending transactions and/or uninvested cash to purchase 
shares of affiliated money market funds or affiliated private 
investment companies; (c) the registered investment companies to lend 
portfolio securities to affiliated broker-dealers; and (d) the 
registered investment companies to engage in certain purchase and sale 
transactions with each other.
    Applicants: Apex Municipal Fund, Inc., The Asset Program, Inc., CBA 
Money Fund, CMA Government Securities Fund, CMA Money Fund, CMA Multi-
State Municipal Series Trust, CMA Tax-Exempt Fund, CMA Treasury Fund, 
The Corporate Fund Accumulation Program, Inc., Corporate High Yield 
Fund II, Inc., Corporate High Yield Fund III, Inc., Corporate High 
Yield Fund, Inc., Debt Strategies Fund, Inc., Financial Institutions 
Series Trust--Summit Cash Reserves Fund, Global Financial Services 
Master Trust, Master Basic Value Trust, Master Equity Income Fund, 
Master Focus Twenty Trust, Master Internet Strategies Trust, Master 
Large Cap Series Trust, Master Mid Cap Growth Trust, Master Premier 
Growth Trust, Master Senior Floating Rate Trust, Master Small Cap Value 
Trust, Master U.S. High Yield Fund Trust, Mercury Global Holdings, 
Inc., Mercury Index Funds, Inc., Mercury QA Equity Series, Inc., 
Mercury QA Strategy Series, Inc., Merrill Lynch Arizona Municipal Bond 
Fund, Merrill Lynch Arkansas Municipal Bond Fund, Merrill Lynch 
Balanced Capital Fund, Inc., Merrill Lynch Bond Fund, Inc., Merrill 
Lynch California Insured Municipal Bond Fund, Merrill Lynch California 
Limited Maturity Municipal Bond Fund, Merrill Lynch California 
Municipal Bond Fund, Merrill Lynch Colorado Municipal Bond Fund, 
Merrill Lynch Connecticut Municipal Bond Fund, Merrill Lynch Developing 
Capital Markets Fund, Inc., Merrill Lynch Disciplined Equity Fund, 
Inc., Merrill Lynch Dragon Fund, Inc., Merrill Lynch Emerging Markets 
Debt Fund, Inc., Merrill Lynch Eurofund, Merrill Lynch Florida Limited 
Maturity Municipal Bond Fund, Merrill Lynch Florida Municipal Bond 
Fund, Merrill Lynch Focus Value Fund, Inc., Merrill Lynch Fundamental 
Growth Fund, Inc., Merrill Lynch Funds for Institutions Series, Merrill 
Lynch Global Allocation Fund, Inc., Merrill Lynch Global Bond Fund for 
Investment and Retirement, Merrill Lynch Global Growth Fund, Inc., 
Merrill Lynch Global Small Cap Fund, Inc., Merrill Lynch Global 
Technology Fund, Inc., Merrill Lynch Global Value Fund, Inc., Merrill 
Lynch Growth Fund, Merrill Lynch Healthcare Fund, Inc., Merrill Lynch 
High Income Municipal Bond Fund, Inc., Merrill Lynch Index Funds, Inc., 
Merrill Lynch Intermediate Term Fund of Merrill Lynch Municipal Series 
Trust, Merrill Lynch International Equity Fund, Merrill Lynch Latin 
America Fund, Inc., Merrill Lynch Maryland Municipal Bond Fund, Merrill 
Lynch Massachusetts Municipal Bond Fund, Merrill Lynch Michigan 
Municipal Bond Fund, Merrill Lynch Minnesota Municipal Bond Fund, 
Merrill Lynch Municipal Bond Fund, Inc., Merrill Lynch Municipal 
Strategy Fund, Inc., Merrill Lynch Natural Resources Trust, Merrill 
Lynch New Jersey Municipal Bond Fund, Merrill Lynch New Mexico 
Municipal Bond Fund, Merrill Lynch New York Municipal Bond Fund, 
Merrill Lynch North Carolina Municipal Bond Fund, Merrill Lynch Ohio 
Municipal Bond Fund, Merrill Lynch Oregon Municipal Bond Fund, Merrill 
Lynch Pacific Fund, Inc., Merrill Lynch Pennsylvania Municipal Bond 
Fund, Merrill Lynch Ready Assets Trust, Merrill Lynch Real Estate Fund, 
Inc., Merrill Lynch Retirement Reserves Money Fund of Merrill Lynch 
Retirement Series Trust, Merrill Lynch Senior Floating Rate Fund, Inc., 
Merrill Lynch Series Fund, Inc., Merrill Lynch Short-Term Global Income 
Fund, Inc., Merrill Lynch Short-Term U.S. Government Fund, Inc., 
Merrill Lynch Texas Municipal Bond Fund, Merrill Lynch U.S. Government 
Mortgage Fund, Merrill Lynch U.S. Treasury Money Fund, Merrill Lynch 
USA Government Reserves, Merrill Lynch Utility and Telecommunications 
Fund, Inc., Merrill Lynch Variable Series Funds, Inc., Merrill Lynch 
World Income Fund, Inc., MuniAssets Fund, Inc., The Municipal Fund 
Accumulation Program, Inc., MuniEnhanced Fund, Inc., MuniHoldings 
California Insured Fund, Inc., MuniHoldings Florida Insured Fund, 
MuniHoldings Fund, Inc., MuniHoldings Fund II, Inc., MuniHoldings 
Insured Fund II, Inc., MuniHoldings Insured Fund, Inc., MuniHoldings 
Michigan Insured Fund II, Inc., MuniHoldings New Jersey Insured Fund, 
Inc., MuniHoldings New York Insured Fund, Inc., MuniInsured

[[Page 37502]]

Fund, Inc., MuniVest Fund, Inc., MuniVest Fund II, Inc., MuniYield 
Arizona Fund, Inc., MuniYield California Fund, Inc., MuniYield 
California Insured Fund II, Inc., MuniYield California Insured Fund, 
Inc., MuniYield Florida Fund, MuniYield Florida Insured Fund, MuniYield 
Fund, Inc., MuniYield Insured Fund, Inc., MuniYield Michigan Fund, 
Inc., MuniYield Michigan Insured Fund, Inc., MuniYield New Jersey Fund, 
Inc., MuniYield New Jersey Insured Fund, Inc., MuniYield New York 
Insured Fund, Inc., MuniYield Pennsylvania Insured Fund, MuniYield 
Quality Fund II, Inc., MuniYield Quality Fund, Inc., Quantitative 
Master Series Trust, Senior High Income Portfolio, Inc., Somerset 
Exchange Fund, and The S&P 500 Protected Equity Fund, Inc. 
(each a ``Fund''); Merrill Lynch Investment Managers, L.P. (``MLIM''), 
Fund Asset Management, L.P. (``FAM''), and Merrill Lynch Asset 
Management U.K. Limited (``MLAM UK'') (each an ``Adviser''); QA 
Advisers LLC (``QALLC''); and Merrill Lynch & Co., Inc., (``ML & 
Co.''), Merrill Lynch Pierce, Fenner & Smith Incorporated, Merrill 
Lynch Government Securities, Inc., and Merrill Lynch International 
(each an ``Affiliated Broker-Dealer'').
    Filing Date: The application was filed on July 20, 2000 and amended 
on July 6, 2001. Applicants have agreed to file an amendment during the 
notice period, the substance of which is reflected 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 August 2, 2001, 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, Commission, 450 Fifth Street, N.W., Washington, 
DC 20549-0609. Applicants, c/o MLIM, L.P., P.O. Box 9011, Princeton, 
New Jersey 08543-9011.

FOR FURTHER INFORMATION CONTACT: Sara Crovitz, Senior Counsel, or 
Michael W. Mundt, 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, N.W., 
Washington, D.C. 20549-0101 (telephone (202) 942-8090).

Applicants' Representations

    1. Each of the Funds is either an open-end or closed-end management 
investment company registered under the Act. Several of the Funds are 
comprised of multiple series. Certain of the Funds are ``master funds'' 
in a ``master-feeder structure.'' Fifteen of the Funds are money market 
funds that comply with the requirements of rule 2a-7 under the Act 
(``Money Market Funds''). Each of the Funds is advised by either MLIM 
or FAM, and certain of the Funds are subadvised by MLAM U.K.
    2. ML & Co. is a holding company incorporated in Delaware that 
provides investment, financing, insurance, and related services through 
its subsidiaries. Each of the Advisers is a wholly owned subsidiary of 
ML & Co. and is registered as an investment adviser under the 
Investment Advisers Act of 1940 (``Advisers Act''). Each of the 
Affiliated Broker-Dealers is a subsidiary of ML & Co.
    3. QALLC (also referred to as ``Lending Agent'') is a Delaware 
limited liability company of which MLIM is the sole member and is 
registered as an investment adviser under the Advisers Act. QALLC will 
serve as lending agent in a securities lending program (``Lending 
Program'') for certain Funds (``Lending Funds'') and institutional 
clients of entities controlled by or under common control with ML & Co. 
(``Institutional Clients''). Institutional Clients may include 
qualified employee benefit plans, trusts, corporate cash accounts, 
unregistered funds (including those exempted from the definition of 
investment company by sections 3(c)(1) or 3(c)(7) of the Act), Taft-
Hartley plans, foundations, endowments and bank collective investment 
trusts. QALLC also will form a private investment company (``New 
Fund''), for which it will serve as managing member. New Fund will 
serve as an investment option for the cash collateral and/or uninvested 
cash of Funds and Institutional Clients. New Fund will not register 
under the Act in reliance on the exemption from the definition of 
investment company provided by section 3(c)(7).
    4. Applicants request that the order also apply to (a) any other 
registered investment company or series thereof that currently is or in 
the future may be advised or sub-advised (subject to the condition set 
forth below) by any of the Advisers or any other entity controlling, 
controlled by, or under common control with any of the Advisers or ML & 
Co. (each Adviser or entity, and ``Advisory Entity''); (b) any other 
registered investment advisers that currently are or in the future may 
be controlling, controlled by, or under common control with any of the 
Advisers or ML & Co.; (c) any other broker-dealers now or in the future 
controlling, controlled by, or under common control with ML & Co.; and 
(d) any other unregistered fund organized to receive cash collateral 
and uninvested cash that may be managed by QALLC or any entity 
controlling, controlled by, or under common control with QALLC and/or 
ML & Co.\1\ A Fund that is subadvised, but not advised, by an Advisory 
Entity may rely on the order, provided that the Advisory Entity manages 
the Cash Balances (as defined below) and that any relief granted from 
the provisions of sections 12(d)(1)(A) and (B) of the Act shall be 
available only if the Fund is in the same group of investment companies 
(as defined in section 12(d)(1)(G) of the Act) as the Money Market Fund 
in which the Fund invests Cash Balances.
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    \1\ All registered investment companies, unregistered investment 
vehicles, and investment advisers that currently intend to rely on 
the order are named as applicants. Any future Funds, unregistered 
investment vehicles, broker-dealers and investment advisers that 
rely on the requested relief will do so only in compliance with the 
terms and conditions of the application.
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    5. Each Lending Fund has the ability to increase its income by 
participating in the Lending Program, under which it may lend portfolio 
securities to broker-dealers, including Affiliated Broker-Dealers, or 
institutional investors deemed by its Adviser to be of good standing. 
Each Lending Fund will participate in the Lending Program subject to 
securities lending guidelines adopted by the Fund's board of directors/
trustees (``Board''), including by a majority of the directors/trustees 
who are not interested persons within the meaning of section 2(a)(19) 
of the Act (``Disinterested Directors''). The agreements governing any 
loans will require that the loans be continuously secured by collateral 
equal at all times in value to at least the market value of the 
securities loaned. Collateral for such loans may include cash )``Cash 
Collateral'') or other collateral, such as U.S. Government securities.
    6. Under the Lending Program, the Lending Agent will be responsible 
for soliciting borrowers for each Lending

[[Page 37503]]

Fund's securities, monitoring daily the value of the loaned securities 
and collateral, and requesting that borrowers add to the collateral 
when required by the loan arrangements.\2\ The Lending Agent may manage 
Cash Collateral only in accordance with specific parameters provided by 
the Lending Fund's Adviser. These guidelines include permissible 
investment of the Cash Collateral as well as a list of eligible types 
of investments.
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    \2\ The personnel who will provide day-to-day lending agency 
services to the Lending Funds do not and will not provide investment 
advisory services to the Lending Funds, or participate in any way in 
the selection of the portfolio securities or other aspects of the 
management of the Lending Funds.
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    7. When a securities loan is collateralized with Cash Collateral, 
the Lending Fund will receive a portion of the return earned on the 
investment of the Cash Collateral. Depending on the arrangements 
negotiated with the borrower by the Lending Agent, the Lending Fund may 
pay the borrower a rate of interest for use of the Cash Collateral. 
When the collateral is not Cash Collateral, the Lending Agent will 
negotiate a lending fee to be paid by the borrower to the Lending Fund. 
For its services to the Lending Funds, the Lending Agent will receive 
fees based on a share of the revenue generated from the securities 
lending transactions.
    8. Funds may have uninvested cash (``Uninvested Cash'') that comes 
from a variety of sources, including dividend or interest payments, 
unsettled securities transactions, reserves held for investment 
strategy purposes, scheduled maturity of investments, liquidation of 
portfolio securities to meet anticipated redemptions, as well as new 
monies received from investors.
    9. Applicants propose that Funds (``Investing Funds'') and 
Institutional Clients invest Cash Collateral and Uninvested Cash 
(together, ``Cash Balances'') in shares of Money Market funds or New 
fund. At least one series of New Fund in which the Investing Funds 
invest will operate as a money market portfolio that complies with the 
requirements of rule 2a-7 under the Act. Another series will invest in 
high quality securities with relatively short maturities, but which 
will not necessarily comply with all of the investment restrictions of 
rule 2a-7.\3\ Series of New Fund in which the Investing Funds invest 
will offer daily redemption of shares at current net asset value per 
share. New Fund will not impose any sales load or redemption or 
distribution fees on any series in which the Investing Funds invest. 
QALLC will not charge any investment advisory fee with respect to 
shares of any series of New Fund owned by an Investing Fund.
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    \3\ An Investing Fund can invest Cash Collateral, but not 
Uninvested Cash, in a series of New Fund that does not comply with 
rule 2a-7.
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    10. Applicants request an order to permit (a) Lending Funds to pay 
the Lending Agent a fee based on a share of the revenue derived from 
securities lending activities; (b) Investing Funds and Institutional 
Clients to invest Cash Balances in Money Market Funds and/or New Fund; 
(c) Lending Funds to lend portfolio securities to Affiliated Broker-
Dealers; and (d) Investing Funds to engage in certain transactions with 
each other.

Applicant's Legal Analysis

A. Payment of Lending Agent Fees

    1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
any affiliated person of or principal underwriter for a registered 
investment company or any affiliated person of such person or principal 
underwriter, acting as principal, from effecting any transaction in 
connection with any joint enterprise or other joint arrangement or 
profit sharing plan, in which the investment company participates. Rule 
17d-1 permits the Commission to approve a proposed joint transaction 
covered by the terms of section 17(d). In determining whether to 
approve a transaction, the Commission considers whether the proposed 
transaction is consistent with the provisions, policies, and purposes 
of the Act, and the extent to which the participation of the investment 
companies is on a basis different from or less advantageous than that 
of the other participants.
    2. Section 2(a)(3) of the Act defines an affiliated person to 
include any person directly or indirectly controlling, controlled by, 
or under common control with, the other person, and if the other person 
is an investment company, the investment adviser. The Advisers, as 
investment advisers to the Lending Funds, are affiliated persons of the 
Lending Funds. Applicants state that because the Lending Agent and the 
Advisers are under the common control of ML & Co., the Lending Agent 
may be deemed an affiliated person of the Advisers, and an affiliated 
person of an affiliated person (``second-tier affiliate'') of the 
Lending Funds. Accordingly, applicants request an order under section 
17(d) and rule 17d-1 to permit each Lending Fund to pay and the Lending 
Agent to accept lending agent fees that are based on a share of the 
proceeds derived by the Lending Funds from the loans of portfolio 
securities.
    3. Applicants propose that each Lending Fund adopt the following 
procedures to ensure that the proposed fee arrangement and the other 
terms governing the relationship with the Lending Agent will meet the 
standards of rule 17d-1:
    (a) In connection with the initial approval of QALLC as Lending 
Agent for the Lending Funds, and implementation of the proposed fee 
arrangement, a majority of the Board of each Lending Fund (including a 
majority of the Disinterested Directors) will determine that: (i) the 
contract with QALLC is in the best interest of the Lending Fund and its 
shareholders; (ii) the services to be performed by QALLC are 
appropriate for the Lending Fund; (iii) the nature and quality of the 
services provided by QALLC are at least equal to those provided by 
others offering the same or similar services; and (iv) the fees for 
QALLC's services are fair and reasonable in light of the usual and 
customary charges imposed by others for services of the same nature and 
quality;
    (b) In connection with the approval of QALLC as Lending Agent for 
the Lending Funds and the initial implementation of the proposed fee 
arrangement, the Board of each Lending Fund will review competing 
quotations with respect to lending agency fees from at least three 
independent lending agents to assist the Board in making the findings 
referred to in paragraph (a) above;
    (c) Each Lending Fund's contract with QALLC for lending agent 
services will be reviewed annually and will be approved for 
continuation only if a majority of the Board (including a majority of 
the Disinterested Directors) makes the findings referred to in 
paragraph (a) above.
    (d) The Board, including a majority of Disinterested Directors, 
will (i) determine at each regular quarterly meeting that the loan 
transactions during the prior quarter were conducted in compliance with 
the conditions and procedures set forth in the application and (ii) 
review no less frequently than annually the conditions and procedures 
for continuing appropriateness; and
    (e) Each Lending Fund will (i) maintain and preserve permanently 
and in an easily accessible place a written copy of the procedures and 
conditions described in the application and (ii) maintain and preserve 
for a period of not less than six years from the end of the fiscal year 
in which any loan transaction pursuant to the Lending Program occurred, 
the first two years in an easily accessible place, a written record of 
each loan transaction setting

[[Page 37504]]

forth a description of the security loaned, the identity of the person 
on the other side of the loan transaction, the terms of the loan 
transaction, and the information or materials upon which a 
determination was made that each loan was made in accordance with the 
procedures set forth above and the conditions to the application.

B. Investment of Cash Balances in Money Market Funds and New Fund

    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
representing more than 3% of the acquired company's outstanding voting 
stock, more than 5% of the acquiring company's total assets, or, 
together with the securities of other investment companies, more than 
10% of the acquiring company's 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 investment companies. Section 
12(d)(1)(J) of the Act provides that the Commission may exempt any 
person or transaction from any provision of section 12(d)(1) if, and to 
the extent that, the exemption is consistent with the public interest 
and the protection of investors.
    2. Applicants request an exemption under section 12(d)(1)(J) to 
permit each Investing Fund to use Cash Balances to acquire shares of 
one or more Money Market Funds in excess of the limits imposed by 
section 12(d)(1)(A), and the Money Market Funds to sell their 
securities to the Investing Funds in excess of the percentage 
limitations in section 12(d)(1)(B).\4\ Applicants state that the 
proposed arrangement will not result in the abuses that sections 
12(d)(1)(A) and (B) were intended to address. Applicants state that the 
arrangement will not result in an inappropriate layering of fees 
because the Money Market Funds will not charge a sales load, redemption 
fee, distribution fee adopted in accordance with rule 12b-1 under the 
Act, or service fee (as defined in rule 2830(b)(9) of the National 
Association of Securities Dealers Inc. Conduct rules (``NASD Conduct 
Rules''), or if such shares are subject to any such fees, the 
respective Adviser will waive its advisory fee for each Investing Fund 
in an amount that offsets the amount of such fees incurred by the 
Investing Fund. In addition, before approving or renewing any advisory 
contract, the Board, including a majority of the Disinterested 
Directors, will consider the extent to which the advisory fees charged 
to an Investing Fund by its Adviser should be reduced or waived to 
account for reduced services provided to the Investing Fund by the 
Adviser as a result of Uninvested Cash being invested in the Money 
Market Funds. If a Money Market Fund offers more than one class of 
shares, each Investing Fund will invest its Cash Balances only in the 
class with the lowest expense ratio at the time of investment. 
Applicants also represent that no Money Market Fund whose shares are 
acquired by an Investing Fund will acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A).
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    \4\ No exemptive relief is sought from the provisions of section 
12(d)(1)(A) and (B) with respect to any investments in a Money 
Market Fund by (a) any Fund that is subadvised (but not advised) by 
an Advisory Entity and that is not in the same group of investment 
companies (as defined in section 12(d)(1)(G) of the Act) as the 
Money Market Fund, and (b) any Institutional Client that is a 
section 3(c)(1) or 3(c)(7) entity.
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    3. Sections 17(a)(1) and (2) of the Act prohibit an affiliated 
person of a registered investment company, or any second-tier 
affiliate, acting as principal, from selling any security to, or 
purchasing any security from, the registered investment company. As 
noted above, section 2(a)(3) defines an affiliated person of another 
person to include persons that are under common control. Applicants 
state that because the Advisers may be deemed to control the Funds and 
because QALLC may be deemed to control New Fund, the Funds and New Fund 
may be deemed to be affiliated persons, or second-tier affiliates. In 
addition, section 2(a)(3) defines an affiliated person of another 
person to include any person 5% or more of whose outstanding voting 
securities are directly or indirectly owned, controlled, or held with 
power to vote by the other person. To the extent that an Investing Fund 
owns 5% or more of the voting securities of a Money Market Fund or New 
Fund, applicants state that the Money Market Fund or New Fund could be 
an affiliated person of the Investing Fund. Accordingly, applicant 
state that section 17(a) would prohibit the sale of shares of the Money 
Market Fund or New Fund to an Investing Fund, and the redemption of 
such shares by the Money Market Fund or New Fund from the Investing 
Fund.
    4. Section 17(b) of the Act authorizes the Commission to exempt a 
transaction from section 17(a) 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, and the proposed transaction is consistent with the 
policy of each registered investment company concerned and with the 
general purposes of the Act. Section 6(c) of the Act authorizes the 
Commission to exempt any person or transaction 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 intended by the policy and provisions of the Act.
    5. Applicants request an order under sections 6(c) and 17(b) of the 
Act to permit the Investing Funds to use Cash Balances to purchase 
shares of the Money Market Funds or a series of New Fund and to permit 
the redemption of the shares. Applicants maintain that the terms of the 
proposed transaction are reasonable and fair because the Investing 
Funds will purchase and sell shares of the Money Market Fund or New 
Fund on the same terms and on the same basis as other shareholders. 
Applicants assert that the proposed transactions comply with each 
Investing Funds' investment restrictions and policies. Applicants state 
that Investing Funds that comply with the requirements of rule 2a-7 
under the Act will only invest in a series of New Fund complying with 
the provisions of rule 2a-7. Applicants further state that investment 
of Cash Collateral in new Fund and the Money Market Funds will be 
conducted in accordance with the securities lending guidelines of the 
Commission's staff. Applicants also state that New Fund will comply 
with the major substantive provisions of the Act, including the 
prohibitions against affiliated transactions, leveraging and issuing 
senior securities, and rights of redemption.
    6. As noted above, section 17(d) and rule 17d-1 generally prohibit 
joint transactions involving registered investment companies and their 
affiliates unless the Commission has approved the transaction. In 
addition to the potential affiliations described above, applicants 
state that Institutional Clients also may be deemed affiliated persons 
of the Money Market Funds or New Fund because the Institutional Clients 
may be advised by Advisers or may own 5% or more of the outstanding 
voting securities of a Money Market Fund or a series of New Fund. 
Applicants state that the Investing Funds and Institutional Clients (by 
purchasing and redeeming shares of New Fund or a Money Fund), the

[[Page 37505]]

Advisers (by managing the assets of the Investing Funds and certain 
Institutional Clients), QALLC (by acting as investment adviser to New 
Fund and as Lending Agent), New Fund (by selling shares to and 
redeeming shares from the Investing Funds), and each Money Market Fund 
(by selling shares to and redeeming shares from the Investing Funds and 
Institutional Clients) may be deemed to be participants in a joint 
enterprise or arrangement within the meaning of section 17(d) and rule 
17d-1 to permit the described transactions relating to investments of 
Cash Balances in the New Fund and Money Market Funds. For the reasons 
discussed above, applicants believe that the proposed transactions meet 
the standards of rule 17d-1

C. Lending to Affiliated Broker-Dealers

    1. Section 17(a)(3) of the Act makes it unlawful for any affiliated 
person of or principal underwriter for a registered investment company 
or an affiliated person of such a person, acting as principal, to 
borrow money or other property from the registered investment company. 
Applicants state that because an Affiliated Broker-Dealer would be 
under common control with the Advisers, an Affiliated Broker-Dearler 
may be considered an affiliated person, or a second-tier affiliate, of 
a Lending Fund. Applicants state that section 17(a)(3) would prohibit 
Affiliated Broker-Dealers from borrowing securities from Lending Funds.
    2. As noted above, section 17(d) and rule 17d-1 generally prohibit 
joint transactions involving registered investment companies and their 
affiliates unless the Commission has approved the transaction. 
Applicants request relief under sections 6(c) and 17(b) of the Act 
exempting them from section 17(a)(3), and under section 17(d) and rule 
17d-1 to permit Lending Funds to lend portfolio securities to 
Affiliated Broker-Dealers.
    3. Applicants state that each loan to an Affiliated Broker-Dealer 
by a Lending Fund will be made with a spread that is no longer than 
that applied to comparable loans to unaffiliated broker-dealers.\5\ In 
this regard, applicants state that at least 50% of the loans made by 
the Lending Funds, on an aggregate basis, will be made to unaffiliated 
borrowers. Moreover, all loans will be made with spreads that are no 
lower than those set forth in a schedule of spreads established by the 
Board of each Lending Fund, including a majority of the Disinterested 
Directors, and all transactions with Affiliated Broker-Dealers will be 
reviewed periodically by an officer of the Lending fund. The Board, 
including a majority of the Disinterested Directors, also will review 
detailed quarterly compliance reports on all lending activity.
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    \5\ A ``spread'' is the compensation earned by a Lending Fund 
from a securities loan, which compensation is in the form either of 
a lending fee payable by the borrower to the Lending Fund (when non-
cash collateral is posted) or the excess retained by the Lending 
Fund over a rebate rate payable by the Lending Fund to the borrower 
(when cash collateral is posted and then invested by the Lending 
Fund).
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D. Interfund Transactions

    1. Applicants state that the Funds currently rely on rule 17a-7 
under the Act to engage in purchase and sale transactions of certain 
securities (``Interfund Transactions''). Rule 17a-7 excepts from the 
prohibitions of section 17(a) the purchase or sale of certain 
securities between registered investment companies that are affiliated 
persons, or second-tier affiliates, of each other or between a 
registered investment company and a person that is an affiliated person 
of such company (or a second-tier affiliate) solely by reason of having 
a common investment adviser or affiliated investment advisers, common 
officers, and/or common directors. Applicants state that the Funds may 
become affiliated persons of each other by virtue of an Investing Fund 
owning 5% or more of the outstanding voting securities of a Money 
Market Fund or a series of New Fund. Thus, applicants state that 
certain Funds may not be able to rely on rule 17a-7 to effect Interfund 
Transactions.
    2. Applicants request an order under sections 6(c) and 17(b) to 
permit the Interfund Transactions. Applicants state that the 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, and/or common directors. Applicants state that the 
additional affiliation created under sections 2(a)(3)(A) and (B) by the 
investment of Cash Balances does not affect the other protections 
provided by rule 17a-7, including the integrity of the pricing 
mechanism employed and oversight by each Fund's Board.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:

A. General

    1. New Fund will be advised by QALLC or an entity controlling, 
controlled by, or under common control with QALLC and/or ML & Co. Each 
Fund will be advised and/or subadvised by an Advisory Entity. A Fund 
that is subadvised, but not advised, by an Advisory Entity may rely on 
the order, provided that the Advisory Entity manages the Cash Balances 
and that any relief granted from the provisions of sections 12(d)(1)(A) 
and (B) of the Act shall be available only if the Fund is in the same 
group of investment companies (as defined in section 12(d)(1)(G) of the 
Act) as the Money Market Fund in which the Fund invests Cash Balances.
    2. The Lending Program of each Lending fund will comply with all 
present and future applicable Commission and staff positions regarding 
securities lending agreements.
    3. Before a Lending Fund may participate in the Lending Program, a 
majority of the Board (including a majority of the Disinterested 
Directors) of the Lending Fund will approve the Lending Fund's 
participation in the Lending Program. The Board of each Lending Fund 
will evaluate the Lending Program and its results no less frequently 
than annually and a majority of the Board (including a majority of the 
Disinterested Directors) will determine that investing Cash Collateral 
in any of the Money Market Funds is in the best interests of the 
shareholders of the Lending Fund.
    4. Each investing Fund will invest Uninvested Cash in, and hold 
shares of, the Money Market Funds and New Fund only to the extent that 
the Investing Fund's aggregate investment of such Uninvested Cash in 
the Money Market Funds and New Fund does not exceed 25% of the 
Investing Fund's total assets. For purposes of this limitation, each 
Investing Fund will be treated as a separate investment company.

B. Investment of Cash Balances in New Fund

    1. A majority of the Board of an Investing Fund (including a 
majority of the Disinterested Directors), will initially and at least 
annually thereafter determine that the investment of Cash Balances in 
shares of New Fund is in the best interest of the shareholders of the 
Investing Fund.
    2. QALLC will not charge any advisory fees with respect to a class 
or series of shares of New Fund in which any Investing Fund may invest.
    3. Investment in shares of any series of New Fund by a particular 
Investing Fund will be consistent with that Investing Fund's investment 
objectives and policies.

[[Page 37506]]

    4. An Investing Fund's Cash Balances will be invested in a 
particular investment series of New Fund only if that investment series 
invests solely in the types of instruments that the Investing Fund has 
authorized for the investment of its Cash Balances.
    5. Any investment series of New Fund that uses the penny rounding 
method of valuation as defined in rule 2a-7 under the Act will comply 
with rule 2a-7 under the Act. With respect to such series, New Fund 
(through QALLC as the managing member) will adopt and monitor the 
procedures described in rule 2a-7(c)(8) under the Act and QALLC will 
take such other actions as are required to be taken pursuant to such 
procedures. An Investing Fund may purchase shares of an investment 
series of New Fund using the penny rounding method of valuation only if 
QALLC determines on an ongoing basis that such investment series is in 
compliance with rule 2a-7. QALLC will preserve for a period not less 
than six years from the date of determination, the first two years in 
an easily accessible place, a record of such determination and the 
basis upon which such determination was made. This record will be 
subject to examination by the Commission and the staff.
    6. An Investing Fund that complies with the requirements of rule 
2a-7 under the Act will not invest its Cash Balances in an investment 
series of New Fund that does not comply with the requirements of rule 
2a-7.
    7. New Fund will comply as to each investment series in which any 
Investing Fund invests with the requirements, other than to the extent 
of transactions described in the application, of sections 17(a), (d) 
and (e) and 18 of the Act as if New Fund were a registered open-end 
investment company. With respect to all redemption requests made by an 
Investing Fund, New Fund will comply with section 22(e) of the Act. 
QALLC shall, as managing member, adopt procedures designed to ensure 
that any such series of New Fund complies with sections 17(a), (d) and 
(e), 18, and 22(e) of the Act. QALLC will also periodically review and 
periodically update as appropriate such procedures and will maintain 
books and records describing such procedures, and maintain the records 
required by rules 31a-1(b)(1), 31a-1(b)(2)(ii) and 31a-1(b)(9) under 
the Act. All books and records required to be made pursuant to this 
condition will be maintained and preserved for a period of not less 
than six years from the end of the fiscal year in which any transaction 
occurred, the first two years in an easily accessible place, and will 
be subject to examination by the Commission and the staff.
    8. The net asset value per share of each series of New Fund in 
which the Investing Funds may invest will be determined separately for 
each series by dividing the value of the assets belonging to that 
series, less the liabilities of that series, by the number of shares of 
New Fund outstanding with respect to that series.
    9. The shares of New Fund in which the Investing Funds may invest 
will not be subject to a sales load, redemption fee, any asset-based 
sales charge or service fee (as defined in rule 2830(b)(9) of the NASD 
Conduct Rules).
    10. Each Investing Fund will purchase and redeem shares of New Fund 
on the same basis as of the same time and at the same price, and will 
receive dividends and bear its proportionate share of expenses on the 
same basis as other shareholders investing in the same series of New 
Fund (except that QALLC will not charge any investment advisory fee 
with respect to shares owned by an Investing Fund). A separate account 
will be established in the shareholder records of New Fund for the 
account of each applicable Investing Fund.
    11. New Fund will not acquire any securities of any investment 
company in excess of the limits contained in section 12(d)(1)(A) of the 
Act.

C. Investment of Cash Balances in Money Market Funds

    1. Shares of the Money Market Funds sold to and redeemed by the 
Investing Funds will not be subject to 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 Conduct Rules), or if the shares are subject to any such fee, the 
respective Adviser will waive its advisory fee for each Investing Fund 
in an amount that offsets the amount of the fees incurred by the 
Investing Fund.
    2. Prior to reliance on this order, an Investing Fund will hold a 
meeting of the Board for the purpose of voting on the advisory contract 
under section 15 of the Act. Before approving or renewing any advisory 
contract for an Investing Fund, the Board, including a majority of the 
Disinterested Directors, taking into account all relevant factors, 
shall consider to what extent, if any, the advisory fees charged to the 
Investing Fund by the Adviser should be reduced to account for reduced 
services provided to the Investing Fund by the Adviser as a result of 
the Uninvested Cash being invested in the Money Market Fund. In 
connection with this consideration, the Adviser will provide the 
Investing Fund's Board with specific information regarding the 
approximate cost to the Adviser of, or portion of the advisory fee 
under the existing advisory contract attributable to, managing the 
Uninvested Cash of the Investing Fund that can be expected to be 
invested in the Money Market Fund. The minute books of the Investing 
Fund will record fully the Board's considerations in approving the 
advisory contract, including the consideration relating to the fees 
referred to above.
    3. Investment of Cash Balances in shares of the Money Market Funds 
will be in accordance with each Investing Fund's respective investment 
restrictions, if any, and will be consistent with each Investing Fund's 
policies as set forth in its prospectuses and statements of additional 
information. Money Market Funds will not acquire shares of any 
investment company that does not comply with the requirements of rule 
2a-7.
    4. No Money Market Fund whose shares are acquired by an Investing 
Fund shall acquire securities of any investment company in excess of 
the limits contained in section 12(d)(1)(A) of the Act.

D. The Lending Exemption

    1. The Lending Funds, on an aggregate basis, will make at least 50% 
of their portfolio securities loans to unaffiliated borrowers.
    2. A Lending Fund will not make any loan to an Affiliated Broker-
Dealer unless the income attributable to such loan fully covers the 
transaction costs incurred in making such loan.
    3. (a) All loans will be made with spreads no lower than those set 
forth in a schedule of spreads which will be established and may be 
modified from time to time by each Lending Fund's Board and by a 
majority of the Disinterested Directors (``Schedule of Spreads'').
    (b) The Schedule of Spreads will set forth rates of compensation to 
the Lending Fund that are reasonable and fair and that are determined 
in light of those considerations set forth in the application.
    (c) The Schedule of Spreads will be uniformly applied to all 
borrowers of the Lending Fund's portfolio securities, and will specify 
the lowest allowable spread with respect to a loan of securities to any 
borrower.
    (d) If a security is loaned to an unaffiliated borrower with a 
spread higher than the minimum set forth in the Schedule of Spreads, 
all comparable loans to an Affiliated Broker-Dealer will be made at no 
less than the higher spread.

[[Page 37507]]

    (e) The Lending Fund's Lending Program will be monitored on a daily 
basis by an officer of the Lending Fund who is subject to section 36(a) 
of the Act. This officer will review the terms of each loan to an 
Affiliated Broker-Dealer for comparability with loans to unaffiliated 
borrowers and conformity with the Schedule of Spreads, and will 
periodically, and at least quarterly, report his or her findings to the 
Lending Fund's Board, including a majority of the Disinterested 
Directors.
    4. The total value of the securities loaned to any one broker-
dealer on the approved list of borrowers of securities from a Lending 
Fund will be in accordance with a schedule to be approved by the Board 
of each Lending Fund, but in no event will the total value of the 
securities loaned to any one Affiliated Broker-Dealer exceed 10% of the 
net assets of such Lending Fund, computed at market value.
    5. The Boards of the Lending Funds, including a majority of the 
Disinterested Directors, (a) will determine no less frequently than 
quarterly that all transactions with Affiliated Broker-Dealers effected 
during the preceding quarter were effected in compliance with the 
requirements of the procedures adopted by the Board and the conditions 
of this order if granted and that such transactions were conducted on 
terms which were reasonable and fair; and (b) will review no less 
frequently than annually such requirements and conditions for their 
continuing appropriateness.
    6. The Lending Funds will maintain and preserve permanently in an 
easily accessible place a written copy of the procedures (and any 
modifications thereto) which are followed in lending securities and 
shall maintain and preserve for a period of not less than six years 
from the end of the fiscal years in which any loan occurs, the first 
two years in an easily accessible place, a written record of each loan 
setting forth the number of securities loaned, the face amount of the 
securities loaned, the fee received (or the rebate rate remitted), the 
identity of the borrower, the terms of the loan and any other 
information or materials upon which the finding was made that each loan 
made to an Affiliated Broker-Dealer was fair and reasonable, and that 
the procedures followed in making such loan were in accordance with the 
procedures and other undertakings set forth herein.

E. Interfund Transactions

    1. To engage in Interfund Transactions, the Funds will comply with 
rule 17a-7 under the Act in all respects other than the requirement 
that the parties to the transaction be affiliated persons (or second-
tier affiliates) of each other solely by reason of having a common 
investment adviser, or investment advisers that are affiliated persons 
of each other, common officers, and/or common directors, solely because 
the Funds might become affiliated persons within the meaning of section 
2(a)(3)(A) and (B) of the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-17928 Filed 7-17-01; 8:45 am]
BILLING CODE 8010-01-M