[Federal Register Volume 66, Number 209 (Monday, October 29, 2001)]
[Notices]
[Pages 54544-54551]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-27078]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25220; 812-11632]


PIMCO Funds, et al.; Notice of Application

October 22, 2001.
AGENCY: Securities and Exchange Commission (``SEC'' or ``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 
section 12(d)(1) of the Act, under sections 6(c) and 17(b) of the Act 
for an exemption from section 17(a) of the Act, under section 6(c) of 
the Act for an exemption from sections 18(f) and 21(b) of the Act, and 
under section 17(d) of the Act and rule 17d-1 under the Act to permit 
certain joint arrangements.

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SUMMARY OF APPLICATION: Applicants request an order that would permit 
certain registered management investment companies to invest uninvested 
cash in affiliated money market funds and to participate in a joint 
lending and borrowing facility. The order would supersede a prior order 
(``Prior Order'').\1\
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    \1\ Cash Accumulation Trust, Investment Company Act Release Nos. 
22894 (Nov. 18, 1997) (notice) and 22842 (Dec. 16, 1997) (order).

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[[Page 54545]]


APPLICANTS: PIMCO Funds (d/b/a PIMCO Funds: Pacific Investment 
Management Series), PIMCO Variable Insurance Trust, and PIMCO Funds: 
Multi-Manager Series (collectively, the ``Existing Funds'') (each 
Existing Fund on its own behalf and behalf of all existing series); 
PIMCO Advisors L.P. (``PIMCO Advisors'') and Pacific Investment 
Management Company LLC (``PIMCO''), and any person controlling, 
controlled by, or under common control with PIMCO Advisors or PIMCO 
that serves as an investment adviser to a Fund (as defined below) 
(individually, ``Adviser'' and collectively, the ``Advisers''); and any 
future open-end registered management investment company and its series 
for which an Adviser serves as an investment adviser (``Future Funds,'' 
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and together with the Existing Funds, the ``Funds'').

FILING DATES: The application was filed on May 28, 1999, and amended on 
October 2, 2000 and July 23, 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 requested 
relief 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 November 
16, 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 
SEC's Secretary.

ADDRESSES: Secretary, SEC, 450 Fifth Street, NW., Washington, DC 20549-
0609. Applicants' 840 Newport Center Drive, Suite 300, Newport Beach, 
California 92660.

FOR FURTHER INFORMATION CONTACT: Nadya B. Roytblat, Assistant Director 
(202) 942-0564 (Office of Investment Company Regulation, Division of 
Investment Management).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
SEC's Public Reference Branch, 450 Fifth Street, NW., Washington, DC 
20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. Each Existing Fund is registered under the Act as an open-end 
management investment company and is organized either as a Delaware or 
Massachusetts business trust.\2\ The Money Market Fund, a series of 
PIMCO Funds, holds itself out to the public as a money market fund and 
is subject to the requirements of rule 2a-7 under the Act. The Money 
Market Fund and any other open-end Fund that in the future is subject 
to the requirements of rule 2a-7 under the Act, holds itself out to the 
public as a money market fund, and relies on the order, are referred to 
in this notice as the ``Money Market Funds''. The Short-Term Fund, a 
series of PIMCO Funds, is a short-term bond fund that invests in money 
market instruments and short maturity fixed income securities. The 
Short-Term Fund and any other open-end Fund that in the future holds 
itself out to the public as a short-term bond fund and relies upon the 
order requested herein, and the Money Market Funds, are referred to in 
this notice collectively as the ``Central Funds''. Any Fund that is not 
a Central Fund is referred to herein individually as a ``Mon-Money 
Market Fund.''
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    \2\ All existing Funds that currently intend to rely on the 
order have been named as applicants, and any other Fund that 
subsequently may rely on the order will comply with the terms and 
conditions in the application.
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    2. The Advisers are registered under the Investment Advisers Act of 
1940 and serve as investments advisers to the Funds. PIMCO is a 
subsidiary of PIMCO Advisors.

A. Investment of Cash Balances in the Central Funds

    1. Each Non-Money Market Fund has, or may be expected to have, cash 
reserves that have not been invested in portfolio securities 
(``Uninvested Cash'') held by its custodian. Uninvested Cash may result 
from a wide variety of sources, including dividends or interest 
received or portfolio securities, unsettled securities transactions, 
reserves held for investment strategy purposes, scheduled maturity of 
investments, liquidation of investment securities to meet anticipated 
redemptions and dividend payments, and new monies received from 
investors.
    2. Applicants request an order to permit: (a) each of the Non-Money 
Market Funds to use their Uninvested Cash to purchase shares of the 
Central Funds (each Non-Money Market Fund that purchases shares of the 
Central Funds, an ``Investing Fund''); (b) each of the Investing Funds 
to utilize cash collateral received from borrowers in connection with 
its securities lending activities (``Cash Collateral'' and, together 
with Uninvested Cash, ``Cash Balances'') to purchase shares of one or 
more Central Fund; and (c) the Central Funds to sell their shares to, 
and redeem their shares from the Investing Funds. The Prior Order 
permits certain of the Non-Money Market Funds to use their Cash 
Balances to purchase shares of the Central Funds (and certain other 
money market fund and/or short-term bond fund series), so long as the 
aggregate investment by a Non-Money Market Fund does not exceed 25% of 
its total net assets. Applicants seek an order that would supersede the 
Prior Order and permit an Investing Fund's aggregate investment of Cash 
Balances in the Central Funds not to exceed the greater of 25% of the 
Investing Fund's total assets or $10 million. Any such investment will 
be in accordance with the Investing Fund's organizational documents and 
investment policies and will be described in its Statement of 
Additional Information (``SAI'') and other appropriate disclosure 
documents.

B. Interfund Lending Program

    1. Under current arrangements, each Central Fund may lend money to 
banks, brokers, or other entities by entering into repurchase 
agreements or purchasing other short-term instruments. In addition, the 
Non-Money Market Funds may borrow money from the same or other banks 
for temporary or emergency purposes to satisfy redemption requests or 
to cover unanticipated cash shortfalls, such as when cash payments for 
a portfolio security sold by a Non-Money Market Fund has been delayed. 
Currently, the Non-Money Market Funds have credit arrangements with 
their custodian under which the custodian may, but is not obligated to, 
lend money to the Non-Money Market Funds to meet the Non-Money Market 
Funds' temporary or emergency cash needs. The Non-Money Market Funds 
may also borrow money from banks, brokers, and other entities by 
entering into reverse repurchase agreements and economically similar 
transactions.
    2. If the Non-Money Market Funds borrow money from any bank under 
their current arrangements or under other credit arrangements, the Non-
Money Market Funds will pay interest on the borrowed cash at a 
significantly higher rate that the rate that would be earned by the 
Central Funds on investments in repurchase agreements and other short-
term instruments of the same maturity as the bank loan. Applicants 
believe this differential

[[Page 54546]]

represents the bank's profit for serving as a middleman between a 
borrower and lender. Other bank loan arrangements, such as committed 
lines of credit, requires the Non-Money Market Funds to pay substantial 
commitment fees in addition to the interest rate to be paid by the Non-
Money Market Funds.
    3. Applicants request an order that would permit the Funds to enter 
into lending agreements (``Interfund Lending Agreements'') under which 
the Non-Money Market Funds would borrow money from the Central Funds 
for temporary and emergency purposes (``Interfund Loans''). Applicants 
believe that the proposed credit facility will substantially reduce the 
Non-Money Market Funds' potential borrowing costs and enhance the 
ability of the Central Funds to earn higher rates of interest on short-
term lendings. The Non-Money Market Funds will be free to maintain any 
existing line of credit or other borrowing arrangement currently 
provided by their custodian or establish committed lines of credit or 
other borrowing arrangements with banks.
    4. Applicants anticipate that the credit facility will provide a 
Non-Money Market Fund with significant savings when the cash position 
of the Non-Money Market Fund is insufficient to meet temporary cash 
requirements. This situation could arise when redemptions exceed 
anticipated volumes and the Non-Money Market Funds have insufficient 
cash on hand to satisfy such redemptions. When the Non-Money Market 
Funds liquidate portfolio securities to meet redemption requests, which 
normally are effected immediately, they often do not receive payment in 
settlement for up to three days (or longer for certain foreign 
transactions). The credit facility will provide a source of immediate, 
short-term liquidity pending settlement of the sale of portfolio 
securities.
    5. Applicants also propose arranging Interfund Loans when a sale of 
securities fails due to circumstances such as a delay in the delivery 
of cash to the Non-Money Market Fund's custodian or improper delivery 
instructions by the broker effecting the transaction (a ``sales 
fail''). In such circumstances, a cash shortfall could result if the 
Non-Money Market Fund has undertaken to purchase a security within the 
proceeds from securities sold. When a Non-Money Market fund experiences 
a cash shortfall, the custodian typically extends temporary credit to 
cover the shortfall and the Non-Money Market Fund incurs overdraft 
charges. Alternatively, the Non-Money Market Fund could fail on its 
intended purchase due to lack of funds from the previous sale, 
resulting in additional cost to the Non-Money Market Fund, or sell a 
security on a same day settlement basis, earning a lower return on the 
investment. Use of the credit facility under these circumstances will 
enable the Non-Money Market Funds to have access to immediate, short-
term liquidity without incurring custodian overdraft or other charges.
    6. While borrowing arrangements with banks will continue to be 
available to cover sales fails and other cash shortfalls, under the 
proposed credit facility a Non-Money Market Fund would pay lower 
interest rates than those offered by banks on short-term loans. In 
addition, by making short-term cash loans directly to Non-Money Market 
Funds, the Central Funds will earn interest at a rate higher than they 
otherwise could obtain from investments on repurchase agreements or 
other short-term instruments. Thus, Applicants assert that the proposed 
credit facility would benefit both the Central Funds and the Non-Money 
Market Funds.
    7. The interest rate charged to the Non-Money Market Funds on any 
Interfund Loan (the ``Interfund Loan Rate'') will be the average of the 
``Repo Rate'' and the ``Bank Loan Rate'' (both as defined below). The 
Repo Rate for any day will be the highest rate available to the Central 
Funds from investments in overnight repurchase agreements. The Bank 
Loan Rate for any day will be calculated by PIMCO each day an Interfund 
Loan is made according to a formula established by each Non-Money 
Market Fund's board of trustees or directors (``Board'') designed to 
approximate the lowest interest rate at which bank short-term loans 
would be available to the Non-Money Market Funds. The formula would be 
based on the publicly available rate and would vary with this rate to 
reflect changing bank loan rates. Each Non-Money Market Fund's Board 
periodically will review the continuing appropriateness of using the 
publicly available rate, as well as the relationship between the Bank 
Loan Rate and current bank loan rates that would be available to the 
Non-Money Market Funds. The initial formula and any subsequent 
modifications will be subject to the approval of each Non-Money Market 
Fund's Board.
    8. The Interfund Loans would be administered by PIMCO. Under the 
Interfund Lending Agreements, the portfolio managers for each 
participating Fund may provide standing instructions to participate 
daily as a borrower or lender. On each business day, PIMCO will collect 
data on the Cash Balances and borrowing requirements of all 
participating Funds from the Fund's customers. Once it determines the 
aggregate amount of cash available for loans and borrowing demand, 
PIMCO will allocate loans from the Central Funds among the Non-Money 
Market Funds without any further communication from portfolio managers. 
Applicants expect that there will be more available Cash Balances each 
day than borrowing demand. After PIMCO has allocated cash for Interfund 
Loans, it will invest any remaining cash in accordance with standing 
instructions from each Central Fund's portfolio manager or return 
remaining amounts for investment directly by the portfolio manager of 
each Central Fund. The Central Funds typically will not participate as 
borrowers because they rarely need to borrow cash to meet redemptions. 
The Central Funds typically will not participate as borrowers because 
they rarely need to borrow cash to meet redemptions.
    9. PIMCO will allocate borrowing demand and cash available for 
lending among the Funds on what PIMCO believes to be an equitable 
basis, subject to certain administrative procedures applicable to all 
Funds, such as the time of filing requests to participate, minimum loan 
lot sizes, and the need to minimize the number of transactions and 
associated administrative costs. To reduce transaction costs, each loan 
normally would be allocated in a manner intended to minimize the number 
of participants necessary to complete the loan transaction. The method 
of allocation and related administrative procedures would be approved 
by each Fund's Board, including a majority of the directors or trustees 
who are not ``interested person'' of the Fund, as defined in section 
2(a)(19) of the Act (``Independent Trustees''), to ensure that both 
Non-Money Market Funds and Central Funds participate in such 
transactions on an equitable basis.
    10. PIMCO will: (a) Monitor the interest rates charged and the 
other terms and conditions of the Interfund Loans, (b) in consultation 
with a Fund's Adviser, limit to borrowings and loans entered into by 
each Fund to ensure that they comply with the Fund's investment 
policies and limitations, (c) ensure equitable treatment of each Fund, 
and (d) prepare quarterly reports to each Fund's Board concerning any 
Interfund Loans in which the Funds participate and the interest rates 
charged.
    11. PIMCO will administer the Interfund Loans as part of its duties 
under its existing management or

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advisory and service contract arrangements with each Fund and will 
receive no additional fee as compensation for its services.
    12. Each Fund's participation in the proposed Interfund Loans will 
be consistent with its organizational documents and its investment 
policies and limitations, as disclosed in its registration statement. 
If required by law, each of the Non-Money Market Funds and the Central 
Funds will obtain shareholder approval to amend its fundamental 
investment policies to permit it to engage in Interfund Loans. If the 
requested order is granted, each Fund will disclose all material facts 
about its intended participation in Interfund Loans in its SAI and any 
other appropriate disclosure document.
    13. In connection with the Interfund Loans, applicants request an 
order of exemption pursuant to Sections 12(d)(1)(J), 6(c), and 17(b) of 
the Act, and an order pursuant to Rule 17d-1 thereunder, subject to 
certain conditions and limitations, permitting: (a) Each of the 
Investing Funds to purchase and redeem shares of the Central Funds; (b) 
the Central Funds to sell their shares to, and to redeem their shares 
from, each of the Investing Funds; and (c) the Central Funds to lend 
money to the Non-Money Market Funds.

Applicants' Legal Analysis

A. Investment of Cash Balances in the Central Funds

    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.
    2. Section 12(d)(1)(J) of the Act provides that the SEC may exempt 
any person, security, or transaction, or class or classes of persons, 
securities or transactions 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.
    3. Applicants request relief under section 12(d)(1)(J) to permit 
each Investing Fund to use Cash Balances to acquire shares of the 
Central Funds in excess of the percentage limits in section 12(d)(1)(A) 
of the Act. Applicants state that each Investing Fund's aggregate 
investment of Cash Balances in shares of the Central Funds will not 
exceed the greater of 25% of the Investing Fund's total assets or $10 
million. Applicants' proposal also would permit the Central Funds to 
sell their securities to the Investing Funds in excess of the 
percentage limitations in section 12(d)(1)(B) of the Act. Applicants 
represent that, other than to effect the Interfund Lending Agreements, 
the Central Funds will not acquire shares of any other investment 
company in excess of the limitations contained in section 12(d)(1)(A) 
of the Act.
    4. Applicants state that none of the abuses meant to be addressed 
by section 12(d)(1)(A) is created by the proposed investment of Cash 
Balances in the Central Funds. Applicants state that the proposed 
arrangement will not result in an inappropriate layering of either 
sales charges or investment advisory fees. Shares of the Central Funds 
sold to the Investing Funds 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 Conduct Rules of the National Association of 
Securities Dealers, Inc. (``NASD'')). In addition, in connection with 
approving any advisory contract, the Board of each Investing Fund, 
including a majority of the Independent Trustees, will 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 Cash Balances being 
invested in the Central Funds.
    5. Applicants also state that there is no threat of redemption to 
gain undue influence over the Investing funds. The Advisers will serve 
as investment advisers to each of the Investing Funds and the Central 
Funds. Applicants also state that due to the highly liquid nature of 
the Central Funds' portfolios, there will be no need to maintain any 
special reserve or balances to meet redemptions by the Investing Funds.
    6. Sections 17(a)(1) and 17(a)(2) of the Act make it unlawful for 
an affiliated person of a registered investment company, or any 
affiliated person of the affiliated person (``Second Tier Affiliate''), 
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'' to 
include any person directly or indirectly owning, controlling, or 
holding with power to vote 5% or more of the outstanding voting 
securities of the other person; any person directly or indirectly 
controlling, controlled by, or under common control with the other 
person; and in the case of an investment company, its investment 
adviser.
    7. Applicants state that, as members of the same complex of funds, 
with a common investment adviser or advisers that are under common 
control, the Funds may be deemed to be under common control and, thus, 
the Funds may be deemed to be affiliated persons. Applicants also state 
that because an Investing Fund may own more than 5% of a Central Fund's 
outstanding voting securities, the Investing Fund and the Central Fund 
may be deemed to be affiliated persons and the Investing Fund a Second 
Tier Affiliate of other Investing Funds that own more than 5% of the 
Central Fund's shares. As a result, the sale of shares of the Central 
Funds to the Investing Funds and the redemption of the shares would be 
prohibited under section 17(a) of the Act.
    8. Section 17(b) of the Act authorizes the SEC 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, and the proposed transaction is consistent with the 
policy of each registered investment company concerned and with the 
general purposes of the Act.
    9. Section 6(c) of the Act authorizes the SEC 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 provision of the Act.
    10. Applicants maintain that their request for relief to permit the 
purchase and redemption of shares of the Central Funds by the Investing 
Funds satisfies the standards in sections 6(c) and 17(b). Applicants 
note that shares of the Central Funds will be purchased and redeemed at 
their net asset value, the same consideration paid and received for 
these shares by any other shareholder. In addition, applicants state 
that the Investing Funds will retain their ability to invest Cash 
Balances directly in money market instruments as authorized by their 
respective investment objectives and policies if

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they believe they can obtain a higher rate of return or for any other 
reason. Each Central Fund reserves the right to discontinue selling 
shares to any of the Investing Funds if its Board determines that the 
sale will adversely affect its portfolio management and operations.
    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 in or effecting any transaction in connection with 
any joint enterprise or joint arrangement in which the investment 
company participates. Applicants state that each Investing Funds, by 
purchasing shares of the Central Funds, each Adviser, by managing the 
assets of the Investing Funds invested in the Central Funds, and the 
Central Funds, by selling shares to and redeeming shares from the 
Investing Funds, could be deemed to be participants in a joint 
arrangement within the meaning of section 17(d) and rule 17d-1.
    12. Rule 17d-1 under the Act permits the SEC to approve a joint 
transaction covered by the terms of section 17(d). In determining 
whether to approve a transaction, the SEC considers whether the 
investment company's participation in the joint enterprise is 
consistent with the provisions, policies, and purposes of the Act, and 
the extent to which the participation is on a basis different from or 
less advantageous than that of other participants. Applicants submit 
that the Funds will participate in the proposed transactions on the 
same basis and will be indistinguishable from any other shareholder 
account maintained by the Central Funds and that the transactions will 
be consistent with the Act. Thus, Applicants submit that the proposed 
transactions meet the standards for relief under rule 17d-1.

B. Interfund Lending Program

    1. Section 17(a)(3) of the act generally prohibits any affiliated 
person or Second Tier Affiliate of a registered investment company from 
borrowing money or other property from the company. Section 21(b) of 
the Act generally prohibits any registered management investment 
company from lending money or other property to any person if that 
person controls or is under common control with the company. As noted 
above, applicants state that the Funds may be under common control by 
virtue of having the Advisers as their common investment advisers, and 
may be affiliated persons also because the Non-Money Market Funds may 
hold more than 5% of the shares of the Central Funds. As a result, the 
Central Funds would be prohibited from lending to the Non-Money Market 
Funds under sections 17(a)(3) and 21(b) of the Act. Applicants request 
relief under sections 6(c) and 17(b) of the Act from sections 17(a)(3) 
and 21(b).
    2. Applicants submit that sections 17(a)(3) and 21(b) of the Act 
were intended to prevent a person with potential adverse interests to 
and influence over the investment decisions of a registered investment 
company form causing or inducing the investment company to engage in 
lending transactions that unfairly inure to the benefit of that person 
and that are detrimental to the best interests of the investment 
company and its shareholders. Applicants assert that the proposed 
Interfund Loans do not raise these concerns because: (a) PIMCO will 
administer the program as a disinterested fiduciary; (b) all Interfund 
Loans will consist only of uninvested cash reserves that the Central 
Funds otherwise would invest in short-term instruments consistent with 
their investment objectives and policies; (c) the Interfund Loans would 
not expose the Non-Money Market Funds or the Central Funds to greater 
risk than other similar investments; (d) the Central Funds will receive 
interest at a rate higher than they could obtain through other similar 
investments; and (e) the Non-Money Market Funds would pay interest at a 
rate lower than otherwise available to them and avoid the up-front 
commitment fees associated with committed lines of credit. Moreover, 
applicants submit that the other conditions in the application would 
effectively preclude the possibility of any Fund obtaining an undue 
advantage over any other Fund.
    3. As noted above, section 17(a)(1) generally prohibits an 
affiliated person or a Second their Affiliate of a registered 
investment company from selling any securities or other property to the 
company. Also as discussed above, section 12(d)(1)(A) of the Act 
generally makes it unlawful for a registered investment company except 
in accordance with the limitations set forth in that section. 
Applicants state that the obligation of a Non-Money Market Fund to 
repay an Interfund Loan may constitute a security under sections 
17(a)(1) and 12(d)(1). Section 12(d)(1)(J) provides that the SEC may 
exempt persons or transactions from any provision of section 12(d)(1) 
if and to the extent such exception is consistent with the public 
interest and the protection of investors. Applicants contend that the 
standards under sections 6(c), 17(b) and 12(d)(1)(J) are satisfied for 
all the reasons set forth above in support of their request for relief 
from sections 17(a)(3) and 21(b) and for the reasons discussed below.
    4. Applicants state that section 12(d)(1)(A) was intended to 
prevent the pyramiding of investment companies in order to avoid 
duplicative costs and fees attendant upon multiple layers of investment 
companies. Applicants note that there would be no duplicative costs or 
fees to the Funds or their shareholders, and that PIMCO would receive 
no additional compensation for its services in administering the credit 
facility. Applicants also note that the purpose of the credit facility 
is to same money for all participating Funds by reducing the costs paid 
by Non-Money Market Funds and increasing returns for the Central Funds.
    5. Section 18(f)(1) prohibits registered open-end investment 
companies from issuing any senior security, except that a company is 
permitted to borrow from any bank, if immediately after the borrowing, 
there is an asset coverage of at least 300% for all borrowings of the 
company. Under section 18(g) of the Act, the term ``senior security'' 
includes any bond, debenture, note, or similar obligation or instrument 
constituting a security and evidencing indebtedness. Applicants request 
exemptive relief from section 18(f)(1) of the Act to the limited extent 
necessary to implement the Interfund Loans (because the Central Funds 
are not banks).
    6. Applicants submit that granting relief under section 6(c) is 
appropriate because the Non-Money Market Funds will remain subject to 
the requirement of section 18(f)(1) that all borrowings of each Non-
Money Market Fund, including combined interfund and bank borrowings, 
have at least 300% asset coverage. Based on the conditions and 
safeguards described in the application, applicants also submit that to 
allow the Non-Money Market Funds to borrow from the Central Funds 
pursuant to the proposed credit facility is consistent with the 
purposes and policies of section 18(f)(1).
    7. As noted above, section 17(d) of the Act and rule 17d-1 
thereunder generally prohibit any affiliated person or Second Tier 
Affiliate of a registered investment company, when acting as principal, 
from effecting any joint transaction in which the company participates 
unless the transaction is approved by the SEC. Rule 17d-1 provides that 
in passing upon applications for exemptive relief from section 17(d), 
the SEC will consider whether the participation of a registered 
investment company in a joint enterprise on the basis proposed is 
consistent with the provisions, policies, and purposes of the Act and 
the extent to which the company's participation is

[[Page 54549]]

on a basis different from or less advantageous than that of other 
participants. Applicants request an order under rule 17d-1 with respect 
to the proposed credit facility. Applicants submit that the proposed 
transactions meet these standards for the reasons discussed below.
    8. Applicants maintain that the Interfund Loans are consistent with 
the provisions, policies and purposes of the Act in that they offer 
both reduced borrowing costs and enhanced returns on loaned funds to 
all participating Funds and their shareholders. Applicants note that 
each Fund would have an equal opportunity to borrow and lend on equal 
terms consistent with its investment policies and fundamental 
investment limitations. Applicants therefore believe that each Fund's 
participation in the Interfund Loans will be on terms which are no 
different from or less advantageous than that of other participating 
Funds.

Applicants' Conditions

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

Investment of Cash Balances in the Central Funds

    1. The shares of the Central Funds sold to and redeemed by the 
Investing Funds 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 
National Association of Securities Dealers' Conduct Rules).
    2. No Central Fund will acquire securities of any other investment 
company in excess of the limits contained in Section 12(d)(1)(A) of the 
Act, except as permitted by an SEC order governing interfund loans.
    3. Before the next meeting of the Board of an Investing Fund that 
invests in the Central Funds is held for the purpose of reviewing, 
voting on, and renewing an investment advisory contract of the 
Investing Fund, the Adviser of the Investing Fund, as part of its 
presentation to the Board pursuant to Section 15(c) of the Act, will 
provide the Board with specific information regarding the approximate 
cost to the Adviser of, or the portion of the investment advisory fee 
under the existing investment advisory agreement attributable to, 
managing the Uninvested Cash of the Investing Fund that may be invested 
in the Central Funds. Before approving any investment advisory contract 
for an Investing Fund, the Board of the Investing Fund, including a 
majority of the Independent Trustees, shall consider to what extent, if 
any, the investment 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 Uninvested Cash being 
invested in the Central Funds. The minute books of the Investing Fund 
will record fully the Board's consideration in approving the investment 
advisory contract, including the consideration relating to the fees 
referred to above.
    4. An Investing Fund may invest Uninvested Cash in, and hold shares 
of, the Central Funds only to the extent that the Investing Fund's 
aggregate investment of Uninvested Cash in the Central Funds does not 
exceed the greater of 25% of the Investing Fund's total assets or $10 
million. For purposes of this limitation, each Investing Fund will be 
treated as a separate investment company.
    5. Each Investing Fund and Central Fund shall be advised by an 
Adviser.
    6. Investment of Cash Balances by an Investing Fund in shares of 
the Central Funds will be consistent with each Investing Fund's 
respective investment restrictions and policies as set forth in its 
prospectus and SAI.
    7. Before an Investing Fund may participate in a securities lending 
program, a majority of the Board, including a majority of the 
Independent Trustees, will approve the Investing Fund's participation 
in the securities lending program. Such Trustees also will evaluate the 
securities lending program and its results no less frequently than 
annually and determine that any investment of Cash Collateral in the 
Central Funds is in the best interest of the shareholders of the 
Investing Fund.

Interfund Lending Agreements

    1. The interest rate to be charged to the Non-Money Market Funds 
under the Interfund Lending Agreements will be the average of the Repo 
Rate and the Bank Loan Rate.
    2. On each business day, PIMCO will compare the Interfund Loan Rate 
with the Bank Loan Rate and the Repo Rate and will make cash available 
for Interfund Loans only if the Interfund Loan Rate is more favorable 
to the Central Funds than the Repo Rate and more favorable to the Non-
Money Market Fund than the Bank Loan Rate.
    3. If a Non-Money Market Fund has outstanding borrowings, any 
Interfund Loans to the Non-Money Market (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 values as any outstanding bank loan 
that requires collateral, (c) will have a maturity no longer than any 
outstanding bank loan (and in any event not over seven days), and (d) 
will provide that, if an event of default occurs under any agreement 
evidencing an outstanding bank loan to the Non-Money Market Fund, that 
event of default will automatically (without need for action or notice 
by the lending Central Funds) constitute an immediate event of default 
under the Interfund Lending Agreement entitling the lending Central 
Funds 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 Non-
Money Market Fund.
    4. A Non-Money Market Fund may make an unsecured borrowing through 
an Interfund Lending Agreement if its outstanding borrowings from all 
sources immediately after the interfund borrowing total 10% or less of 
its total assets; provided that if the Non-Money Market Fund has a 
secured loan outstanding from any other lender, including but not 
limited to the Central Funds, the Non-Money Market 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 Non-Money Market Fund's 
total outstanding borrowings immediately after the interfund borrowing 
will be greater than 10% of its total assets, the Fund may borrow on a 
secured basis only. A Non-Money Market Fund may not borrow through the 
credit facility or from any other source if its total outstanding 
borrowings immediately after the interfund borrowing would exceed the 
limits imposed by Section 18 of the Act.
    5. Before any Non-Money Market 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 Non-
Money Market Fund much first secure each outstanding Interfund Loan by 
the pledge of segregated collateral with a market value equal to at 
least 102% of the outstanding principal value of the loan. If the total 
outstanding borrowings of a Non-Money Market Fund with outstanding 
Interfund Loans exceed 10% of its assets for any other reason (such as 
decline in net asset value or because of shareholder redemptions), the 
Non-Money Market Fund will within one business day thereafter: (a) 
Repay all its outstanding Interfund

[[Page 54550]]

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 equal to at least 
102% of the outstanding principal value of the loan until the Non-Money 
Market Fund's total outstanding borrowings cease to exceed 10% of its 
total assets, at which time the collateral called for by this condition 
shall no longer be required. Until each Interfund Loan that is 
outstanding at any time that a Non-Money Market Fund's total 
outstanding borrowings exceeds 10% is repaid or the Non-Money Market 
Fund's total outstanding borrowings exceed 10% of its total assets, 
Non-Money Market 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 to at least 102% of the outstanding 
principal value of the loan.
    6. A Central Fund may not lend to a Non-Money Market Fund if the 
loan will cause the Central Fund's aggregate outstanding loans through 
the credit facility to exceed 15% of its net assets at the time of the 
loan.
    7. A Central Fund's Interfund Loans to any one Non-Money Market 
Fund shall not exceed 5% of the Central Fund's net assets.
    8. The duration of Interfund Loans will be limited to the time 
required to receive payment for securities sold to cover either 
shareholder redemptions or ``sales fails,'' 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 Non-Money Market Fund's borrowings through Interfund Loans, as 
measured on the day the most recent loan was made, will not exceed the 
greater of 125% of the Non-Money Market Fund's total net cash 
redemptions and 102% of sales fails for the preceding seven calendar 
days.
    10. Each Interfund Loan may be called on one business day's notice 
by the Central Fund and may be repair on any day by the Non-Money 
Market Fund.
    11. A Fund's participation in the Interfund Loans must be 
consistent with its investment policies and limitations and 
organizational documents.
    12. PIMCO will calculate total Fund borrowing and lending demand, 
and allocate loans on an equitable basis among the Non-Money Market 
Funds without intervention of the portfolio manager of the Funds. PIMCO 
will not solicit cash for Interfund Loans from the Central Funds or 
prospectively publish or disseminate loan demand data to portfolio 
managers. PIMCO will invest any amounts remaining after satisfaction of 
borrowing demand in accordance with the standing instructions from the 
Central Funds' portfolio managers or return remaining amounts for 
investment directly by the portfolio manager of each Central Fund.
    13. PIMCO will monitor the interest rates charged and the other 
terms and conditions of the Interfund Loans and will make a quarterly 
report to each Fund's Board concerning the participation of the Fund in 
the Interfund Loans and the terms and other conditions of any 
extensions of credit thereunder.
    14. The Board of each Fund, including a majority of the Independent 
Trustees: (a) Will review no less frequently than quarterly the Fund's 
participation in the Interfund Loans during the preceding quarter for 
compliance with the conditions of any order permitting such 
transactions; (b) will establish the formula used to determine the 
interest rate on Interfund Loans and review no less frequently than 
annually the continuing appropriateness of the formula; and (c) will 
review no less frequently than annually the continuing appropriateness 
of the Fund's participation in the Interfund Loans.
    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 Central Fund makes a demand for payment 
under the provisions of the Interfund Lending Agreement, PIMCO will 
promptly refer such loan for arbitration to an independent arbitrator 
selected by the Board of any Fund involved in the loan, who will serve 
as arbitrator of any disputes concerning Interfund Loans. The 
arbitrator will resolve any problem promptly, and the abritrator's 
decision will be binding on both Funds. The arbitrator will submit, at 
least annually, a written report to the Board setting forth a 
description of the nature of any dispute and the actions taken by the 
Funds to resolve the dispute. If the dispute involves Funds with 
separate Boards, the Board of each Fund will select an independent 
arbitrator that is satisfactory to each Fund.
    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 Interfund 
Loans 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 on the loan, the rate of interest available at the 
time on short-term repurchase agreements and bank borrowings, and such 
other information presented to the Fund's Board in connection with the 
review required by conditions 13 and 14.
    17. PIMCO will prepare and submit to each Fund's Board for review 
an initial report describing the operations of the Interfund Loans and 
the procedures to be implemented to ensure that all Funds are treated 
fairly. After the Interfund Loans commence, PIMCO will report on the 
operations of the Interfund Loans at the Board's quarterly meetings.
    In addition, for two years following the commencement of the 
Interfund Loans, the independent public accountant for each Fund shall 
prepare an annual report that evaluates PIMCO's assertion that it has 
established procedures reasonably designed to achieve compliance with 
the conditions of the order. The report shall be prepared in accordance 
with the Statement on Standards for Attestation Engagements No. 3 and 
it shall be filed pursuant to Item 77Q3 of Form N-SAR. In particular, 
the report shall address procedures designed to achieve the following 
objectives: (a) That the Interfund Loan Rate will be higher than the 
Repo Rate but lower than the Bank Loan Rate; (b) compliance with the 
collateral requirements as set forth in the application; (c) compliance 
with the percentage limitations on interfund borrowing and lending; (d) 
allocation of interfund borrowing and lending demand in an equitable 
manner and in accordance with procedures established by the Board of 
each Fund; and (e) that the interest rate on any Interfund Loan does 
not exceed the interest rate available on any third party borrowings of 
the Fund at the time of the Interfund Loan.
    After the final report is filed, the Funds' external auditors, in 
connection with their Fund audit examinations, will continue to review 
the Interfund Loans for compliance with the conditions of the 
application and their review will form the basis, in part, of the 
auditor's report on internal accounting controls in Form N-SAR.
    18. No Fund will participate in the Interfund Loans unless it has 
fully disclosed in its SAI and any other appropriate disclosure 
document all material facts about its intended participation.


[[Page 54551]]


    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-27078 Filed 10-26-01; 8:45 am]
BILLING CODE 8010-01-M