[Federal Register Volume 67, Number 45 (Thursday, March 7, 2002)]
[Notices]
[Pages 10454-10458]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-5388]


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SECURITIES AND EXCHANGE COMMISSION

[Rel. No. IC-25449; 812-12780]


American Century Companies, Inc. et al.; Notice of Application 
March 1, 2002.

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under sections 6(c), 10(f), 17(b), and 
rule 17d-1 of the Investment Company Act of 1940 (the ``Act'') for an 
exemption from sections 10(f), 12(d)(3), and 17(a), and an order 
pursuant to section 17(d) of the Act and rule 17d-1 thereunder.

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    Summary of Application: Applicants request an order that would 
permit certain registered investment companies to engage in securities 
transactions involving a broker-dealer or bank that is an affiliated 
person of an affiliated person of the investment companies 
(``Securities Transactions'').
    Applicants: American Century Mutual Funds, Inc.; American Century 
Capital Portfolios, Inc.; American Century Premium Reserves, Inc.; 
American Century Strategic Asset Allocations, Inc.; American Century 
World Mutual Funds, Inc.; American Century California Tax-Free and 
Municipal Funds; American Century Quantitative Equity Funds; American 
Century Government Income Trust; American Century International Bond 
Funds; American Century Investment Trust; American Century Municipal 
Trust; American Century Target Maturities Trust; American Century 
Variable Portfolios, Inc.; American Century Variable Portfolios II, 
Inc.; Mainstay VP Series Fund, Inc.; and any registered investment 
company in the future advised by the Adviser or by a person 
controlling, controlled by or under common control with the Adviser 
(collectively, the ``Funds''); American Century Investment Management, 
Inc. (``Adviser''); American Century Companies, Inc. (``ACC''); and 
J.P. Morgan Chase & Co. (``JPM''); JPMorgan Chase Bank; J.P. Morgan 
Securities Inc. and J.P. Morgan Securities Ltd.\1\
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    \1\ The term ``JPM'' includes all entities now or in the future 
controlling, controlled by, or under common control (as defined in 
section 2(a)(9) of the Act) with J.P. Morgan Chase & Co., Any 
existing entity or future entity that in the future intends to rely 
on the requested order will do so only in accordance with the terms 
and conditions of the application.
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    Filing Dates: The application was filed on February 15, 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 March 26, 2002, and should be accompanied by proof of 
service on the applicants, in the form of an affidavit or, for lawyers, 
a certificate of service. Hearing requests should state the nature of 
the writer's interest, the reason for the request, and the issues 
contested. Persons 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, DC 
20549-0609; Applicants: ACC, 4500 Main Street, Kansas City, MO 64111, 
Attn: Charles A. Etherington, Esq.; and JPM, 522 Fifth Avenue, New 
York, NY 10036, Attn: Paul Scibetta, Esq.

[[Page 10455]]


FOR FURTHER INFORMATION CONTACT: Janet M. Grossnickle, Branch Chief, or 
Nadya B. Roytblat, Assistant Director, 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. ACC, a Delaware corporation, is the holding company of the 
Adviser. ACC is controlled by its founder, James E. Stowers, Jr., and 
certain of his family members and related entities (collectively, the 
``Stowers Family''), and its stock is not publicly traded. The Adviser, 
a Delaware corporation, is a wholly-owned subsidiary of ACC that is 
registered under the Investment Advisers Act of 1940 (the ``Advisers 
Act''). The Adviser serves as investment adviser to each of the Funds. 
Each existing Fund is an open-end management investment company 
registered under the Act and is organized as a Maryland corporation, a 
California corporation or a Delaware business trust.
    2. JPM, a Delaware corporation, is one of the largest bank holding 
companies in the United States. JPM conducts most of its broker-dealer 
business through J.P. Morgan Securities, Inc., a broker-dealer 
registered under the Securities Exchange Act of 1934, and J.P. Morgan 
Securities, Ltd., a broker-dealer regulated by the Financial Services 
Authority in the United Kingdom. JPMorgan Chase Bank, a New York state-
chartered bank regulated by the New York State Banking Department and 
the Board of Governors of the Federal Reserve System, issues letters of 
credit and money market instruments and trades in corporate and 
government debt securities.\2\
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    \2\ In December 2000, J.P. Morgan & Co. Incorporated consummated 
a merger (the ``Merger'') with and into The Chase Manhattan 
Corporation (``Chase''). Chase and entities it controlled prior to 
the Merger are referred to as the ``Chase Entities.''
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    3. On January 15, 1998, JPM purchased approximately 45% of ACC's 
outstanding common stock (the ``Purchase''). Because ACC has two 
classes of voting stock and JPM purchased the shares of the lower 
voting class, JPM is entitled to 8.71% of the voting power of ACC. 
Under a stockholders agreement, JPM has certain minority stockholder 
contractual rights, including the right to designate one member of 
ACC's board of directors (which currently consists of eleven persons) 
and the right to replace certain members of ACC's management upon the 
occurrence of certain extraordinary events. ACC also agreed not to take 
certain actions without JPM's prior consent.
    4. Applicants state that the Stowers Family continues to own the 
largest block of shares of common stock of ACC, representing 49.35% of 
the outstanding equity interest and at least 70.75% of the voting power 
of ACC. Applicants represent that JPM has no current plan to purchase 
additional voting securities of ACC.
    5. Applicants state that since the Purchase, ACC and JPM have 
continued and will continue to operate independently (other than in 
certain areas, including marketing, distribution, and certain sub-
advisory and joint advisory agreements).\3\ Applicants further 
represent that while JPM and ACC are developing certain aspects of 
their businesses jointly, ACC's management of investments for the Funds 
and other clients is entirely separate from the management of 
investments for clients of JPM. Applicants state that a ``firewall'' 
separates the broker-dealer entities within JPM from the investment 
management operations of both ACC and other entities that are within 
JPM. Applicants state that all decisions by the Funds to enter into 
securities transactions are determined solely by the Adviser in 
accordance with the investment objectives of the relevant Fund. 
Applicants further represent that the personnel responsible for Fund 
investments will be employed solely by the Adviser and their 
compensation would in no instance be affected by the amount of business 
done by the Funds they manage with JPM.
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    \3\ JPM and the Adviser have entered into, and may enter into 
additional, sub-advisory agreements with each other. JPM and the 
Adviser also may enter into agreements to manage jointly one or more 
registered investment companies. The relief requested in the 
application would not apply to any registered investment company for 
which JPM acts as sub-advisory. Further, JPM and ACC will consider 
the existence and nature of such sub-adviser or joint advisory 
arrangements when designing the Firewall Procedures (as defined 
below) and when making the certifications required by condition 6 
below.
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    6. Applicants represent that JPM will not be in a position to cause 
any Securities Transactions between the Funds and JPM and will not act 
in concert with the Adviser in connection with any Securities 
Transactions. Applicants state that there is not, and will not be, any 
express or implied understanding between JPM and ACC or the Adviser 
that the Adviser will cause a Fund to enter into Securities 
Transactions or give preference to JPM in effecting such transactions 
between the Fund and JPM.

Applicants' Legal Analysis

    1. Section 10(f), in relevant part, prohibits a registered 
investment company from purchasing securities from an underwriting 
syndicate in which an affiliated person of the investment company's 
investment adviser acts as a principal underwriter. Section 10(f) also 
authorizes the Commission to exempt any transaction or class of 
transactions from the prohibitions of section 10(f) if the exemption is 
consistent with the protection of investors.
    2. Section 12(d)(3) of the Act generally prohibits a registered 
investment company from acquiring any security issued by any person who 
is a broker, dealer, investment adviser, or engaged in the business of 
underwriting. Rule 12d3-1 under the Act provides an exemption from the 
provisions of section 12(d)(3), but not with respect to a purchase of a 
security issued by an affiliated person of the investment adviser or 
principal underwriter of the registered investment company.
    3. Section 17(a) of the Act prohibits an affiliated person of a 
registered investment company, or an affiliated person of such person 
(``second-tier affiliate''), acting as principal, from knowingly 
selling to or purchasing from the company any security or other 
property. Section 17(b) of the Act authorizes the Commission to exempt 
a transaction from section 17(a) of the Act if evidence establishes 
that: (i) the terms of the proposed transaction are reasonable and fair 
and do not involve overreaching on the part of any person; (ii) the 
proposed transaction is consistent with the policy of each registered 
investment company concerned; and (iii) the proposed transaction is 
consistent with the general purposes of the Act.
    4. 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 second-tier affiliate, 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, unless an application regarding the 
joint transaction has been filed with the Commission and granted by 
order. Rule 17d-1 provides that, in passing upon an application for 
such an order, the Commission will consider whether the participation 
of a registered investment

[[Page 10456]]

company in a joint transaction is consistent with the provisions, 
policies and purposes of the Act and the extent to which such 
participation is on a basis different from or less advantageous than 
that of the other applicants.
    5. Section 6(c) of the Act permits the Commission to exempt any 
person or transaction or any class or classes of persons or 
transactions from any provision or provisions of the Act, if and to the 
extent that such 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.
    6. Section 2(a)(3) of the Act defines an ``affiliated person'' of 
another person to include: (i) 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; (ii) any person 5% 
or more of whose outstanding voting securities are directly or 
indirectly owned; and (iii) any person directly or indirectly 
controlling, controlled by, or under common control with, the other 
person.
    7. Applicants state that the Adviser is a wholly-owned subsidiary 
of ACC, and JPM owns more than 5% of the outstanding voting securities 
of ACC. Applicants state that JPM is an affiliated person of ACC, and 
thus could be deemed to be a second-tier affiliate of each Fund. In 
such event, applicants state that Securities Transactions by the Funds 
involving JPM would be subject to sections 10(f), 12(d)(3), 17(a) and/
or 17(d) of the Act.
    8. Applicants request relief under sections 6(c), 10(f) and 17(b) 
of the Act and pursuant to rule 17d-1 under the Act to permit 
Securities Transactions, entered into in the ordinary course of 
business, by a Fund involving JPM under the circumstances described in 
the application. Applicants state that the requested exemption would 
apply only where JPM is deemed to be a second-tier affiliate of a Fund 
solely because of the JPM's ownership interest in ACC.
    9. Applicants submit that, among other reasons, section 10(f) of 
the Act was enacted to prevent an underwriter from ``dumping'' 
unmarketable securities on a registered investment company by causing 
the company to purchase the securities from the affiliated underwriter 
itself, or by causing or encouraging the company to purchase securities 
from another member of the underwriting syndicate. Applicants further 
submit that section 12(d)(3) and rule 12d3-1 were designed to prevent 
conflicts of interest that may arise when a registered investment 
company purchases securities of an issuer engaged in a securities-
related business. Rule 12d3-1(c) specifically addresses the conflicts 
that arise when the issuer is an investment adviser, promoter or 
principal underwriter (or affiliated person thereof) of the registered 
investment company. Applicants submit that the primary purpose of 
section 17(a) is to prevent persons with the power to control an 
investment company from using that power to such persons' own pecuniary 
advantage (i.e., to prevent self-dealing). Similarly, applicants submit 
that section 17(d) was designed to protect investment companies from 
self-dealing and overreaching by insiders by permitting the Commission 
to set standards for all transactions in which an investment company 
and an affiliate are involved that are susceptible to self-dealing by 
the affiliate to the detriment of the investment company.
    10. Applicants submit that the policies which sections 10(f), 17(a) 
and 17(d), and rule 12d3-1(c) of the Act were meant to further are not 
implicated in the requested relief because JPM is not in a position to 
cause the Fund to enter into a Securities Transaction. As a result, 
applicants submit that JPM is not in a position to dump unmarketable 
securities, engage in self-dealing or otherwise cause the Funds to 
enter into transactions that are not in the best interests of their 
shareholders. Applicants submit that the Adviser would not share any 
benefit that might inure to JPM from the Securities Transactions and 
the compensation of the Adviser's personnel will not be affected in any 
way by the profitability of JPM. Applicants also submit that they will 
comply with all the conditions of rule 12d3-1, except for rule 12d3-
1(c), which bars a registered investment company from purchasing 
securities of an affiliated person of its investment adviser.\4\
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    \4\ With respect to secondary market purchases, the Funds may 
purchase common stock and other securities issued by JPM. With 
respect to primary market purchases, such securities shall be 
limited to (i) bankers acceptances or other money market instruments 
that are Eligible Securities as defined in rule 2a-7 under the Act; 
and (ii) letters of credit or other forms of credit or liquidity 
support issued by JPMorgan Chase Bank with respect to municipal or 
other securities.
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    11. Applicants state that, as a condition to the requested relief, 
JPM will not control (within the meaning of section 2(a)(9) of the 
Act), directly or indirectly, ACC or the Adviser and the requested 
order will remain in effect only so long as the Stowers Family 
primarily controls ACC. Applicants maintain that a ``firewall'' has 
separated the broker-dealer entities within JPM from the investment 
management operations of ACC, facilitated by the fact that JPM and the 
Adviser have and will have separate officers and employees, are 
separately capitalized, maintain separate books and records, and have 
physically separate offices. Further, JPM will not directly or 
indirectly consult with ACC, the Adviser or any portfolio manager 
concerning the selection of portfolio managers or allocation of 
principal or brokerage transactions for any Fund, or otherwise seek to 
influence the choice of broker or dealer for any Fund.
    12. Applicants state that, as a condition to the requested relief, 
the boards of directors/trustees of the Funds (``Boards''), including a 
majority of disinterested directors/trustees, will approve procedures 
governing transactions in which the Adviser knows that both the Fund 
and JPM have an interest. Applicants further submit that procedures 
will be maintained that identify transactions in which the Adviser 
knows that both the Fund and JPM have a Joint Interest \5\ and assure 
that these transactions are conducted on an arms-length basis.
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    \5\ For purposes of this application, JPM and a Fund will be 
considered to have a ``Joint Interest'' in any transaction 
(including, without limitation, the acquisition, disposition or 
restructuring of any interest) in which they both have an interest 
other than (i) a transaction in a security in which the interest of 
one is exclusively as a buyer of the security and the interest of 
the other is exclusively as a seller of the security; (ii) a 
transaction in a security in which the interest of JPM is 
exclusively as a member of an underwriting syndicate in respect of 
the security; (iii) a transaction in which the interest of JPM is 
exclusively as a broker; (iv) a transaction in a security in which 
the interest(s) of JPM is exclusively as the issuer (and seller) of 
the security; or (v) any other transaction involving JPM and a Fund 
that would not be subject to section 17(d) of the Act or rule 17d-1 
thereunder.
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    13. Applicants represent that before any principal transaction is 
entered into between a Fund and JPM, the Adviser will obtain 
competitive quotations for the same securities (or in the case of 
Eligible Debt Securities for which quotations for the same securities 
are not available, competitive quotations for Comparable Debt 
Securities) \6\ from at least two other dealers that are in a position 
to quote favorable prices. For each such transaction, the Adviser will 
make a determination, based upon the information reasonably available 
to the Fund and the Adviser, that the price

[[Page 10457]]

available from JPM is at least as favorable as that available from 
other sources.
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    \6\ The term ``Eligible Debt Securities'' refer to (i) First 
Tier Securities as defined in rule 2a-7 under the Act; or (ii) long-
term debt securities that are rated within the three highest rating 
categories by an NRSRO, as defined in rule 2a-7 under the Act. The 
term ``Comparable Debt Securities'' refers to Eligible Debt 
Securities with substantially identical maturities, credit ratings 
and repayment terms as the Eligible Debt Securities to be purchased 
or sold.
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    14. Applicants further represent that with respect to Securities 
Transactions that would be subject to section 10(f) of the Act, the 
Adviser will make a determination, based upon the information 
reasonably available to the Fund and the Adviser, that (i) the 
securities were purchased at a price that is not more than the price 
paid by each other purchaser of securities in that offering or in any 
concurrent offering of the securities (except in the case of an 
offering conducted under the laws of a country other than the United 
States, for any rights to purchase that are required by law to be 
granted to existing securities holders of the issuer) and (ii) the 
commission, spread or profit received or to be received by the 
principal underwriters is reasonable and fair compared to the 
commission, spread or profit received by other such persons in 
connection with the underwriting of similar securities being sold 
during a comparable period of time.
    15. Applicants submit that the procedures set forth with respect to 
Securities Transactions are structured in a way designed to ensure that 
such transactions will be, in all instances, reasonable and fair, and 
will not involve overreaching on the part of any person concerned, that 
the Securities Transactions will be consistent with the policies of the 
Funds as recited in their registration statements and reports filed 
under the Act, and that such exemption is 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.

Applicants' Conditions

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

General

    1. JPM will not control ACC, the Adviser or the Funds, directly or 
indirectly, within the meaning of section 2(a)(9) of the Act. The 
requested order will remain in effect only so long as the Stowers 
Family primarily controls ACC.
    2. JPM will not directly or indirectly consult with ACC, the 
Adviser or any portfolio manager of the Adviser concerning the 
selection of portfolio managers, securities purchases or sales, the 
allocation of principal or brokerage transactions for any Fund, or 
otherwise seek to influence the choice of broker or dealer for any 
securities transaction by a Fund other than in the normal course of 
sales activities of the same nature that are being carried out during 
the same time period with respect to unaffiliated institutional clients 
of JPM.
    3. The Adviser and JPM will operate as separate entities and 
independent profit centers, with separate capitalization, separate 
books and records, separate officers and employees, and physically 
separate offices. The broker/dealer and investment management entities 
within JPM and the investment management operations of ACC will operate 
on different sides of appropriate ``firewalls'' created pursuant to 
policies, procedures and controls implemented by JPM and ACC 
(``Firewall Procedures''). The Firewall Procedures will include such 
measures as may be considered reasonable and appropriate by JPM and ACC 
to facilitate the factual independence of the broker/dealer and 
investment management operations of JPM from the investment management 
operations of ACC.
    4. Each Fund will comply with rule 12d3-1 under the Act, except 
paragraph (c) of that rule with respect to Securities Transactions 
involving securities issued by JPM.
    5. The legal departments of the Adviser and JPM will prepare 
guidelines for personnel of the Adviser and JPM to make certain that 
transactions effected pursuant to the order comply with its conditions, 
and that the Adviser and JPM generally maintain an arms-length 
relationship. The legal departments of the Adviser and JPM will 
periodically monitor the activities of the Adviser and JPM to make 
certain that the conditions to the order are met.

Principal Transactions and Joint Interest Transactions

    6. Prior to relying on the requested order, each Fund's Board, 
including a majority of its disinterested directors/trustees, shall 
determine that the Firewall Procedures are designed reasonably to (i) 
identify principal transactions or transactions in which the Adviser 
knows that both the Fund and JPM have a Joint Interest; and (ii) assure 
that these transactions are conducted on an arms-length basis. 
Additionally, JPM and ACC shall certify annually to the Board that the 
Firewall Procedures continue to be effective to assure that any 
principal transactions or transactions in which the Adviser knows that 
both the Fund and JPM have a Joint Interest are conducted on an arms-
length basis, or recommend such modifications as JPM and/or ACC deem 
necessary.
    7. Each Fund's Board, including a majority of its disinterested 
directors/trustees, shall approve procedures governing transactions in 
which the Adviser knows that both the Funds and JPM have an interest 
and shall no less frequently than quarterly review all such 
transactions. With respect to principal transactions with JPM and 
Securities Transactions that would be subject to Section 10(f) of the 
Act, this review shall include, among other things, the terms of each 
transaction, and a comparison of the volume of transactions effected 
with JPM with the volume of similar transactions effected with JPM 
prior to the Purchase (or with respect to Chase Entities, prior to the 
Merger).
    8. For each transaction by a Fund in which the Adviser knows that 
JPM has a direct or indirect interest, the Adviser will consider only 
the interests of the Fund and will not take into account the impact of 
the Fund's investment decision on JPM. Before entering into any such 
transaction, the Adviser will make a determination that the transaction 
is consistent with the investment objectives and policies of the Fund 
and is in the best interests of the Fund and its shareholders. This 
determination and the basis for the determination will be documented in 
written reports as soon as practicable and furnished to the Fund's 
Board in connection with the quarterly reviews required by condition 7 
above.
    9. The Funds will (i) maintain and preserve permanently in an 
easily accessible place a written copy of the procedures and conditions 
(and any modifications thereto) that are described herein, and (ii) 
shall maintain and preserve for a period of not less than six years 
from the end of the fiscal year in which any transaction in which the 
Adviser knows that both JPM and a Fund directly or indirectly have an 
interest occurs, the first two years in an easily accessible place, a 
written record of each such transaction setting forth a description of 
the security or other property purchased or sold, a description of 
JPM's interest in the transaction, the terms of the transaction, and 
the information or materials upon which the determination was made that 
each such transaction was made in accordance with the procedures set 
forth above and conditions in this application.

Principal Transactions

    10. Before any principal transaction is entered into between a Fund 
and JPM (other than Securities Transactions that would be subject to 
section 10(f)), the Adviser must obtain competitive

[[Page 10458]]

quotations for the same securities (or in the case of Eligible Debt 
Securities for which quotations for the same securities are not 
available, competitive quotations for Comparable Debt Securities) from 
at least two other dealers that are in a position to quote favorable 
prices. For each such transaction, the Adviser will make a 
determination, based upon the information reasonably available to the 
Fund and the Adviser, that the price available from JPM is at least as 
favorable as that available from other sources. With respect to 
Securities Transactions that would be subject to section 10(f) of the 
Act, the Adviser will make a determination, based upon the information 
reasonably available to the Fund and the Adviser, that (i) the 
securities were purchased at a price that is no more than the price 
paid by each other purchaser of securities in that offering or in any 
concurrent offering of the securities (except in the case of an 
offering conducted under the laws of a country other than the United 
States, for any rights to purchase that are required by law to be 
granted to existing securities holders of the issuer) and (ii) the 
commission, spread or profit received or to be received by the 
principal underwriters is reasonable and fair compared to the 
commission, spread or profit received by other such persons in 
connection with the underwriting of similar securities being sold 
during a comparable period of time.

Joint Interest Transactions

    11. Before entering into any transaction in which the Adviser knows 
that both JPM and a Fund have a Joint Interest and that requires, or 
that, in the judgment of the Adviser, can reasonably be expected to 
require, material negotiations or other discussions involving both JPM 
and the Adviser, a majority of the Fund's disinterested directors/
trustees who have no direct or indirect financial interest in the 
transaction (``Required Majority'') will determine that it is in the 
Fund's best interests to participate and the extent of the Fund's 
participation in such transaction. Before making this decision, the 
Required Majority will review the documentation required by condition 8 
above and such additional information from the Adviser or advice from 
experts as they deem necessary.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-5388 Filed 3-6-02; 8:45 am]
BILLING CODE 8010-01-P