[Federal Register Volume 67, Number 7 (Thursday, January 10, 2002)]
[Notices]
[Pages 1369-1373]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-600]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25355, 812-12102]


The Charles Schwab Family of Funds, et. al; Notice of Application

January 4, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') granting an exemption from 
sections 18(f) and 21(b) of the Act, under section 12(d)(1)(J) of the 
Act granting an exemption from section 12(d)(1) of the Act; under 
sections 6(c) and 17(b) of the Act granting 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 THE APPLICATION: Applicants request an order that would 
permit certain registered open-end management investment companies to 
participate in a joint lending and borrowing facility. The requested 
order also would amend a condition of a prior order (``Order'').\1\
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    \1\ The Charles Schwab Family of Funds, et al., Investment 
Company Act Release Nos. 24067 (October 1, 1999) (notice) and 24113 
(October 27, 1999) (order).

APPLICANTS: The Charles Schwab Family of Funds, Schwab Investments, 
Schwab Capital Trust, Schwab Annuity Portfolios (each a ``Trust'' and 
together the ``Trusts'') for and on behalf of each of their series now 
or hereafter existing (the ``Schwab Funds''), Charles Schwab Investment 
Management, Inc. (``CSIM''), and any other existing or future 
registered open-end management investment company or series thereof 
that is advised or sub-advised by CSIM or a person controlling, 
controlled by, or under common control with CSIM and that is part of 
the ``same group of investment companies'' as the Schwab Funds 
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(together with the Schwab Funds, the ``Funds'').

FILING DATES: The application was filed on May 17, 2000 and amended on 
January 3, 2002.

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 January 29, 2002, 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, NW., Washington, 
D.C. 20549-0609. Applicants, 101 Montgomery Street, 101KNY-14, San 
Francisco, California 94104.

FOR FURTHER INFORMATION CONTACT: Janet M. Grossnickle, Branch Chief, at 
(202) 942-0564 (Division of Investment Management, Office of Investment 
Company Regulation).

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

Applicants' Representations

    1. Each of the Trusts is registered under the Act as an open-end 
management investment company and organized as a Massachusetts business 
trust.\2\ CSIM is registered under the Investment Advisers Act of 1940 
and serves as investment adviser for each of the Funds.
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    \2\ Each existing Fund that currently intends to rely on the 
requested order is named as an applicant. Any Fund that relies on 
the requested relief in the future will do so only in compliance 
with the terms and conditions of the application.
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    2. Some Funds may lend money to banks or other entities by entering 
into repurchase agreements or purchasing other short-term investments. 
Under a prior order, the Funds can pool their uninvested daily cash 
balances into joint accounts (``Joint Accounts'') that invest in 
repurchase agreements and other money market instruments.\3\ Other 
Funds may borrow money from the same or other banks for temporary 
purposes to satisfy redemption requests or to cover unanticipated cash 
shortfalls such as a trade ``fail,'' in which cash payment for a 
security a Fund has sold has been delayed.
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    \3\ The Charles Schwab Family of Funds, et al., Investment 
Company Act Release No. 23679 (February 4, 1999) (notice) and 23723 
(March 3, 1999) (order).
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    3. If a Fund were to draw down on its line of credit or incur an 
overdraft with its custodian bank, the Fund would pay interest on the 
borrowed cash at a rate which would be significantly higher than the 
rate that other non-borrowing Funds would earn on investments in 
repurchase agreements and other short-term instruments of the same 
maturity as the bank loan. Applicants believe this differential 
represents the bank's profit. Other bank loan arrangements, such as 
committed lines of credit, would require the Funds to pay substantial 
commitment fees in addition to the interest rate to be paid by the 
borrowing Fund.
    4. Applicants request an order that would permit the Funds to enter 
into interfund lending agreements (``Interfund Lending Agreements'') 
under which the Funds would lend and borrow money for temporary 
purposes directly to and from each other through a credit facility 
(``Interfund Loan''). Applicants state that the proposed credit 
facility would reduce the Funds' borrowing costs and enhance their 
ability to earn higher rates of interest on investment of their short-
term cash balances. Although the proposed credit facility would reduce 
the Funds' need to borrow from banks, the Funds would be free to 
establish committed lines of credit or other borrowing arrangements 
with banks. The Funds also would continue to maintain any overdraft 
protection currently provided by the custodian bank and their 
uncommitted lines of credit with various banks.
    5. Applicants anticipate that the credit facility would provide a 
borrowing Fund with significant savings when the cash position of the 
Fund is insufficient to meet temporary cash requirements. This 
situation could arise when redemptions exceed expected volumes and the 
Fund has insufficient

[[Page 1370]]

cash to satisfy redemptions. When the 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 would provide a source of immediate, short-term liquidity 
pending settlement of the sale of portfolio securities.
    6. Applicants also propose using the credit facility when a sale of 
securities ``fails'' due to circumstances such as a delay in the 
delivery of cash to the Fund's custodian or improper delivery 
instructions by the broker effecting the transaction. ``Sales fails'' 
may present a cash shortfall if the Fund has purchased securities using 
the proceeds from the securities sold. When the Fund experiences a cash 
shortfall due to a sales fail, the custodian typically extends 
temporary credit to cover the shortfall and the Fund incurs overdraft 
charges. Alternatively, the Fund could fail on its intended purchase 
due to lack of funds from the previous sale, resulting in additional 
cost to the 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 would enable the Fund to have access to 
immediate short-term liquidity without incurring custodian overdraft or 
other charges.
    7. While borrowing arrangements with banks will continue to be 
available to cover unanticipated redemptions and sales fails, under the 
proposed credit facility a borrowing Fund would pay lower interest 
rates than those offered by banks on short-term loans. In addition, 
Funds making short-term cash loans directly to other Funds would earn 
interest at a rate higher than they otherwise could obtain from 
investing their cash in repurchase agreements. Thus, applicants believe 
that the proposed credit facility would benefit both borrowing and 
lending Funds.
    8. The interest rate charged to the Funds on any Interfund Loan 
(``Interfund Loan Rate'') would be the average of the ``Repo Rate'' and 
the ``Bank Loan Rate,'' both as defined below. The Repo Rate for any 
day would be the highest rate available to the Funds from investing in 
overnight repurchase agreements, either directly or through a Joint 
Account (``Repo Rate''). The Bank Loan Rate for any day would be 
calculated by CSIM each day an interfund loan is made according to a 
formula established by the Board of Trustees of each Trust (``Board'') 
designed to approximate the lowest interest rate at which bank short-
term loans would be available to the Funds. The formula would be based 
upon a publicly available rate (e.g., Federal Funds plus 25 basis 
points) and would vary with this rate so as to reflect changing bank 
loan rates. Each Fund's Board periodically would 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 Funds. The initial formula and any 
subsequent modifications to the formula would be subject to the 
approval of each Fund's Board.
    9. The credit facility would be administered by employees of CSIM, 
including representatives of the Fund Administration and Financial 
Analysis Department and/or representatives of the Portfolio Management 
and Research Department, who are not portfolio managers (``Interfund 
Lending Team''). Under the proposed credit facility, the portfolio 
managers for each participating Fund may provide standing instructions 
to participate daily as a borrower or lender. The Interfund Lending 
Team on each business day would collect data on the uninvested cash and 
borrowing requirements of all participating Funds from the Funds' 
custodians. Applicants expect far more available uninvested cash each 
day than borrowing demand. Once it determines the aggregate amount of 
cash available for loans and borrowing demand, the Interfund Lending 
Team would allocate loans among borrowing Funds without any further 
communication from portfolio managers. After allocating cash for 
Interfund Loans, CSIM would invest any remaining cash in accordance 
with the standing instructions of portfolio managers or return 
remaining amounts for investment to the Funds. Any money market Funds 
typically would not participate as borrowers because they rarely need 
to borrow cash to meet redemptions.
    10. The Interfund Lending Team would allocate borrowing demand and 
cash available for lending among the Funds on what the Interfund 
Lending Team 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 Funds 
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 trustees who are not ``interested 
persons'' of the Fund, as defined in section 2(a)(19) of the Act 
(``Independent Trustees''), to ensure both borrowing and lending Funds 
participate on an equitable basis.
    11. CSIM would (i) monitor the interest rates charged and other 
terms and conditions of the Interfund Loans, (ii) ensure compliance 
with each Fund's investment policies and limitations, (iii) ensure 
equitable treatment of each Fund, and (iv) make quarterly reports to 
the Board concerning any transactions by the Funds under the credit 
facility and the Interfund Loan Rates.
    12. CSIM would administer the credit facility as part of its duties 
under its existing advisory contract with each Fund and would receive 
no additional fee as compensation for its services. CSIM may, however, 
collect reimbursement for standard pricing, recordkeeping, bookkeeping 
and accounting fees applicable to repurchase and lending transactions 
generally, including transactions effected through the credit facility. 
Fees would be no higher than those applicable for comparable bank loan 
transactions.
    13. A Fund's participation in the credit facility must be 
consistent with its investment policies and limitations and 
organizational documents. The statement of additional information of 
each Fund discloses the individual borrowing and lending limitations of 
the Fund. Each Fund will notify shareholders of its intended 
participation in the proposed credit facility prior to relying on any 
relief granted pursuant to the application. The statement of additional 
information of each Fund participating in the interfund lending 
arrangements will disclose all material information about the credit 
facility.
    14. In connection with the credit facility, applicants request an 
order under section 6(c) of the Act granting an exemption from sections 
18(f) and 21(b) of the Act, under section 12(d)(1)(J) of the Act 
granting an exemption from section 12(d)(1) of the Act; under sections 
6(c) and 17(b) of the Act granting an exemption from section 17(a) of 
the Act; and under section 17(d) and rule 17d-1 under the Act to permit 
certain joint arrangements.
    15. Applicants state that certain Funds and other registered open-
end investment companies operate in reliance on the Order. Applicants 
state that one of the conditions of the Order is that Underlying Funds, 
as defined in the Order, cannot acquire securities of any other 
investment company in excess

[[Page 1371]]

of the limits contained in section 12(d)(1) of the Act. Applicants 
request that if the requested relief is granted, this condition be 
amended to permit the Underlying Funds to engage in interfund borrowing 
and lending transactions.

Applicants' Legal Analysis

    1. Section 17(a)(3) generally prohibits any affiliated person, or 
affiliated person of an affiliated person, from borrowing money or 
other property from a registered investment company. Section 21(b) 
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. Section 2(a)(3)(C) of the 
Act defines an ``affiliated person'' of another person, in part, to be 
any person directly or indirectly controlling, controlled by, or under 
common control with, the other person. Applicants state that the Funds 
may be under common control by virtue of having CSIM as their common 
investment advisor.
    2. Section 6(c) provides that an exemptive order may be granted 
where an 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. Section 17(b) 
authorizes the Commission to exempt a proposed transaction from section 
17(a) provided that the terms of the transaction, including the 
consideration to be paid or received, are fair and reasonable and do 
not involve overreaching on the part of any person concerned, and the 
transaction is consistent with the policy of the investment company as 
recited in its registration statement and with the general purposes of 
the Act. Applicants believe that the proposed arrangements satisfy 
these standards for the reasons discussed below.
    3. Applicants submit that sections 17(a)(3) and 21(b) of the Act 
were intended to prevent a party with strong potential adverse 
interests to and some influence over the investment decisions of a 
registered investment company from causing or inducing the investment 
company to engage in lending transactions that unfairly inure to the 
benefit of such party and that are detrimental to the best interests of 
the investment company and its shareholders. Applicants assert that the 
proposed credit facility transactions do not raise these concerns 
because: (a) CSIM would administer the program as a disinterested 
fiduciary; (b) all Interfund Loans would consist only of uninvested 
cash reserves that the Funds otherwise would invest in short-term 
repurchase agreements or other short-term instruments either directly 
or through a Joint Account; (c) the Interfund Loans would not involve a 
greater risk than such other investments; (d) the lending Funds would 
receive interest at a rate higher than they could obtain through such 
other investments; and (e) the borrowing Funds would pay interest at a 
rate lower than otherwise available to them under their bank loan 
agreements and avoid the up-front commitment fees associated with 
committed lines of credit. Moreover, applicants believe that the other 
conditions in the application would effectively preclude the 
possibility of any Fund obtaining an undue advantage over any other 
Fund.
    4. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company, or an affiliated person of an affiliated 
person, from selling any securities or other property to the company. 
Section 12(d)(1) of the Act generally makes it unlawful for a 
registered investment company to purchase or otherwise acquire any 
security issued by any other investment company except in accordance 
with the limitations set forth in that section. Applicants believe that 
the obligation of a borrowing 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 Commission 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) 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.
    5. Applicants state that section 12(d)(1) was intended to prevent 
the pyramiding of investment companies in order to avoid imposing on 
investors additional and duplicative costs and fees attendant upon 
multiple layers of investment companies. Applicants submit that the 
credit facility does not involve these abuses. Applicants note that 
there will be no duplicative costs or fees to any Fund or its 
shareholders, and that CSIM will receive no additional compensation for 
its services in administering the credit facility. Applicants also note 
that the purpose of the proposed credit facility is to provide economic 
benefits for all the participating Funds.
    6. Section 18(f)(1) prohibits open-end investment companies from 
issuing any senior security except that a company is permitted to 
borrow from any bank; provided, that immediately after any such 
borrowing, there is an asset coverage of at least 300 per cent 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 relief from section 18(f)(1) to the 
limited extent necessary to implement the credit facility (because the 
lending Funds are not banks).
    7. Applicants believe that granting relief under section 6(c) is 
appropriate because the Funds would remain subject to the requirement 
of section 18(f)(1) that all borrowings of the 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 Funds to borrow from other 
Funds pursuant to the proposed credit facility is consistent with the 
purposes and policies of section 18(f)(1).
    8. Section 17(d) and rule 17d-1 generally prohibit any affiliated 
person of a registered investment company, or affiliated person of an 
affiliated person, when acting as principal, from effecting any joint 
transactions in which the company participates unless the transaction 
is approved by the Commission. Rule 17d-1 provides that in passing upon 
applications for relief under section 17(d), the Commission 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 on a basis different from or less 
advantageous than that of other participants.
    9. Applicants submit that the purpose of section 17(d) is to avoid 
overreaching by and unfair advantage to the insiders. Applicants 
believe that the credit facility is consistent with the provisions, 
policies and purposes of the Act in that it offers 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 limitations. Applicants 
therefore believe that each Fund's participation in the credit facility 
will be on terms that are no different from or less advantageous than 
that of other participating Funds.
    10. Applicants also request relief under section 12(d)(1)(J) of the 
Act for

[[Page 1372]]

an exemption from sections 12(d)(1)(A) and (B) of the Act, and under 
sections 6(c) and 17(b) of the Act for an exemption from section 17(a) 
of the Act to the extent necessary to amend the Order. Applicants 
submit that the Order should be modified solely to the extent necessary 
to allow an Underlying Fund to engage in interfund borrowing and 
lending transactions. Applicants believe that the proposed relief 
satisfies the standards of sections 12(d)(1)(J), 6(c) and 17(b). 
Applicants state that there will be no duplicative costs or fees to any 
of the Funds or their shareholders, and that such participation will 
not create any of the abuses to which section 12(d)(1)(A) is addressed.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The interest rates to be charged to the Funds under the credit 
facility will be the average of the Repo Rate and the Bank Loan Rate.
    2. On each business day, CSIM will compare the Bank Loan Rate with 
the Repo Rate and will make cash available for Interfund Loans only if 
the Interfund Loan Rate is (a) more favorable to the lending Fund than 
the Repo Rate, and (b) more favorable to the borrowing Fund than the 
Bank Loan Rate.
    3. If a Fund has outstanding borrowings, any Interfund Loans to the 
Fund (a) will be at an interest rate equal to or lower than any 
outstanding bank loan, (b) will be secured at least on an equal 
priority basis with at least an equivalent percentage of collateral to 
loan value as any outstanding bank loan that requires collateral, (c) 
will have a maturity no longer than any outstanding bank loan (and in 
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 Fund, that event of default will automatically (without 
need for action or notice by the lending Fund) constitute an immediate 
event of default under the Interfund Lending Agreement entitling the 
lending Fund to call the Interfund Loan (and exercise all rights with 
respect to collateral, if any) and that such call will be made if the 
lending bank exercises its right to call its loan under its agreement 
with the borrowing Fund.
    4. A Fund may make an unsecured borrowing through the credit 
facility if its outstanding borrowing from all sources immediately 
after the interfund borrowing total less than 10% its total assets, 
provided that if the Fund has a secured loan outstanding from any other 
lender, including but not limited to another Fund, the Fund's interfund 
borrowing will be secured on at least an equal priority basis with at 
least an equivalent percentage of collateral to loan value as any 
outstanding loan that requires collateral. If a Fund's total 
outstanding borrowings immediately after an interfund borrowing would 
be 10% or greater of its total assets, the Fund may borrow through the 
credit facility on a secured basis only. A Fund may not borrow through 
the credit facility or from any other source if its total borrowings 
immediately after the interfund borrowing would exceed the limits in 
section 18 of the Act.
    5. Before any Fund that has outstanding interfund borrowings may, 
through additional borrowings, cause its outstanding borrowings from 
all sources to equal or exceed 10% of its total assets, the Fund must 
first secure each outstanding Interfund Loan by the pledge of 
segregated collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Fund with outstanding Interfund Loans equals or exceeds 
10% of its total assets for any other reason (such as a decline in net 
asset value or because of shareholder redemptions), the Fund will 
within one business day thereafter (a) repay all its outstanding 
Interfund Loans, (b) reduce its outstanding indebtedness to less than 
10% of its total assets, or (c) secure each outstanding Interfund Loan 
by the pledge of segregated collateral with a market value at least 
equal to 102% of the outstanding principal value of the loan until the 
Fund's total outstanding borrowings cease to equal or exceed 10% of its 
total assets, at which time the collateral called for by this condition 
(5) shall no longer be required. Until each Interfund Loan that is 
outstanding at any time that a Fund's total outstanding borrowings 
equal or exceed 10% is repaid, or the Fund's total outstanding 
borrowings cease to equal or exceed 10% of its total assets, the Fund 
will mark the value of the collateral to market each day and will 
pledge additional collateral as necessary to maintain the market value 
of the collateral that secures each outstanding Interfund Loan at least 
equal to 102% of the outstanding principal value of the loan.
    6. No Fund may lend to another Fund through the credit facility if 
the loan would cause its aggregate outstanding loans through the credit 
facility to exceed 15% of the lending Fund's current net assets at the 
time of the loan.
    7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of 
the lending Fund's net assets.
    8. The duration of Interfund Loans will be limited to the time 
required to receive payment for securities sold, but in no event more 
than seven days. Loans effected within seven days of each other will be 
treated as separate loan transactions for purposes of this condition.
    9. Except as set forth in this condition, no Fund may borrow 
through the credit facility unless the Fund has a policy that prevents 
the Fund from borrowing for other than temporary or emergency purposes. 
In the case of a Fund that does not have such a policy, the Fund's 
borrowings through the credit facility, as measured on the day when the 
most recent loan was made, will not exceed the greater of 125% of the 
Fund's total net cash redemptions or 102% of sales fails for the 
preceding seven calendar days.
    10. Each Interfund Loan may be called on one business day's notice 
by a lending Fund and may be repaid on any day by a borrowing Fund.
    11. A Fund's participation in the credit facility must be 
consistent with its investment policies and limitations and 
organizational documents.
    12. The Interfund Lending Team will calculate total Fund borrowing 
and lending demand through the credit facility, and allocate loans on 
an equitable basis among the Funds without the intervention of any 
portfolio manager of the Funds. The Interfund Lending Team will not 
solicit cash for the credit facility from any Fund or prospectively 
publish or disseminate loan demand data to portfolio managers. CSIM 
will invest any amounts remaining after satisfaction of borrowing 
demand in accordance with the standing instructions from portfolio 
managers or return remaining amounts for investment directly by the 
Funds.
    13. CSIM will monitor the interest rates charged and the other 
terms and conditions of the Interfund Loans and will report to the 
Boards quarterly concerning the participation of the Funds in the 
credit facility and the terms and other conditions of any extensions of 
credit thereunder.
    14. Each Trust's Board, including a majority of the Independent 
Trustees: (a) will review no less frequently than quarterly each Fund's 
participation in the credit facility during the preceding quarter for 
compliance with the conditions of any order permitting the 
transactions; (b) will establish the Bank Loan Rate formula used to 
determine the interest rate on Interfund Loans, approve any 
modifications thereto, and review no less frequently than annually the 
continuing appropriateness of the Bank Loan Rate formula; and (c) will

[[Page 1373]]

review no less frequently than annually the continuing appropriateness 
of each Fund's participation in the credit facility.
    15. In the event an Interfund Loan is not paid according to its 
terms and the default is not cured within two business days from its 
maturity or from the time the lending Fund makes a demand of payment 
under the provisions of the Interfund Lending Agreement, CSIM will 
promptly refer the loan for arbitration to an independent arbitrator 
selected by the Boards of the Funds involved in the loan who will serve 
as arbitrator of disputes concerning Interfund Loans.\4\ The arbitrator 
will resolve any problems promptly, and the arbitrator's decision will 
be binding on both Funds. The arbitrator will submit at least annually 
a written report to the Boards setting forth a description of the 
nature of any dispute and the actions taken by the Funds to resolve the 
dispute.
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    \4\ If the dispute involves Funds with separate Boards, the 
Trustees of each Fund will select an independent arbitrator that is 
satisfactory to each Fund.
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    16. Each Fund will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any transaction 
under the credit facility occurred, the first two years in an easily 
accessible place, written records of all such transactions setting 
forth a description of the terms of the transaction, including the 
amount, the maturity and rate of interest on the loan, the rate of 
interest available at the time on short-term repurchase agreements and 
bank borrowings, and other information presented to the Boards in 
connection with the review required by conditions 13 and 14.
    17. CSIM will prepare and submit to the Boards for review, an 
initial report describing the operations of the credit facility and the 
procedures to be implemented to ensure that all Funds are treated 
fairly. After the commencement of operations of the credit facility, 
CSIM will report on the operations of the credit facility at each 
Board's quarterly meetings.
    In addition, for two years following the commencement of the credit 
facility, the independent public accountant for each Fund shall prepare 
an annual report that evaluates CSIM's assertions 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 Statements on Standards for Attestation Engagements No. 3 and 
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 Boards; and 
(e) that the interest rate on any Interfund Loan does not exceed the 
interest rate on any third party borrowings of a borrowing Fund at the 
time of the Interfund Loan.
    After the final report is filed, the Fund's external auditors, in 
connection with their Fund audit examinations, will continue to review 
the operation of the credit facility 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 credit facility upon receipt of 
requisite regulatory approval unless it has fully disclosed in its 
statement of additional information all material facts about its 
intended participation.
    Applicants also agree that condition number 12 to the Order will be 
modified to read as follows:
    No Underlying Fund will acquire securities of any other investment 
company in excess of the limits set forth in Section 12(d)(1)(A) of the 
1940 Act, except to the extent that the Underlying Fund has obtained 
exemptive relief from the Commission permitting it to (a) purchase 
shares of an affiliated money market fund for short-term cash 
management purposes; or (b) engage in interfund borrowing and lending 
transactions.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-600 Filed 1-9-02; 8:45 am]
BILLING CODE 8010-01-P