[Federal Register Volume 67, Number 53 (Tuesday, March 19, 2002)]
[Notices]
[Pages 12623-12628]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-6509]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25461; 812-10806]


Putnam American Government Income Fund, et al.; Notice of 
Application

March 13, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under section 6(c) of the Investment 
Company Act of 1940 (``Act'') for an exemption from sections 18(f) and 
21(b) of the Act, under section 12(d)(1)(J) of the Act for an exemption 
from section 12(d)(1) of the Act, under sections 6(c) and 17(b) for an 
exemption from sections 17(a)(1) and 17(a)(3) 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 investment companies to participate in a 
joint lending and borrowing facility.
    Applicants: Putnam American Government Income Fund, Putnam Arizona 
Tax Exempt Income Fund, Putnam Asia Pacific Growth Fund, Putnam Asset 
Allocation Funds (on behalf of its portfolio series: Putnam Asset 
Allocation: Growth Portfolio, Putnam Asset Allocation: Balanced 
Portfolio and Putnam Asset Allocation: Conservative Portfolio), Putnam 
Balanced Retirement Fund, Putnam California Tax Exempt Income Fund, 
Putnam California Tax Exempt Money Market Fund, Putnam Capital 
Appreciation Fund, Putnam Classic Equity Fund, Putnam Convertible 
Income-Growth Trust, Putnam Diversified Income Trust, Putnam Equity 
Income Fund, Putnam Europe Growth Fund, Putnam Florida Tax Exempt 
Income Fund, The Putnam Fund for Growth and Income, Putnam Funds Trust 
(on behalf of is portfolio series: Putnam Asia Pacific Fund II, Putnam 
Equity Fund 98, Putnam Equity Fund 2000, Putnam Financial Services 
Fund, Putnam Growth Fund, Putnam High Yield Trust II, Putnam 
International Fund 2000, Putnam International Growth and Income Fund, 
Putnam International Core Fund, Putnam Mid Cap Fund 2000, Putnam New 
Century Growth Fund, Putnam Technology Fund and Putnam U.S. Core Fund), 
The George Putnam Fund of Boston, Putnam Global Equity Fund, Putnam 
Global Governmental Income Trust, Putnam Global Growth Fund, Putnam 
Global Natural Resources Fund, Putnam Health Sciences Trust, Putnam 
High Yield Advantage Fund, Putnam High Yield Trust, Putnam Income Fund, 
Putnam Intermediate U.S. Government Income Fund, Putnam International 
Growth Fund, Putnam Investment Funds (on behalf of its portfolio 
series: Putnam Balanced Fund, Putnam Capital Opportunities Fund, Putnam 
Emerging Markets Fund, Putnam Global Aggressive Growth Fund, Putnam 
Global Growth and Income Fund, Putnam Growth Opportunities Fund, Putnam 
International Fund, Putnam International Blend Fund, Putnam 
International Large Cap Growth Fund, Putnam International New 
Opportunities Fund, Putnam International Voyager Fund, Putnam Mid-Cap 
Value Fund, Putnam New Value Fund, Putnam Research Fund and Putnam 
Small Cap Value Fund), Putnam Investors Fund, Putnam Massachusetts Tax 
Exempt Income Fund, Putnam Michigan Tax Exempt Income Fund, Putnam 
Minnesota Tax Exempt Income Fund, Putnam Money Market Fund, Putnam 
Municipal Income Fund, Putnam New Jersey Tax Exempt Income Fund, Putnam 
New Opportunities Fund, Putnam New York Tax Exempt Income Fund, Putnam 
New York Tax Exempt Money Market Fund, Putnam New York Tax Exempt 
Opportunities Fund, Putnam Ohio Tax Exempt Income Fund, Putnam OTC & 
Emerging Growth Fund, Putnam Pennsylvania Tax Exempt Income Fund, 
Putnam Preferred Income Fund, Putnam Strategic Income Fund, Putnam Tax 
Exempt Income Fund, Putnam Tax Exempt Money Market Fund, Putnam Tax-
Free Income Trust (on behalf of its portfolio series: Putnam Tax-Free 
High Yield Fund and Putnam Tax-Free Insured Fund), Putnam Tax Smart 
Funds Trust (on behalf of its portfolio series: Putnam Tax Smart Equity 
Fund), Putnam U.S. Government Income Trust, Putnam Utilities Growth and 
Income Fund, Putnam Variable Trust (on behalf of its portfolio series: 
Putnam VT American Government Income Fund, Putnam VT Asia Pacific 
Growth Fund, Putnam VT Capital

[[Page 12624]]

Appreciation Fund, Putnam VT Diversified Income Fund, Putnam VT The 
George Putnam Fund of Boston, Putnam VT Global Asset Allocation Fund, 
Putnam VT Global Growth Fund, Putnam VT Growth and Income Fund, Putnam 
VT Growth Opportunities Fund, Putnam VT Health Sciences Fund, Putnam VT 
High Yield Fund, Putnam VT Income Fund, Putnam VT International Growth 
Fund, Putnam VT International Growth and Income Fund, Putnam VT 
International New Opportunities Fund, Putnam VT Investors Fund, Putnam 
VT Money Market Fund, Putnam VT New Opportunities Fund, Putnam VT New 
Value Fund, Putnam VT OTC & Emerging Growth Fund, Putnam VT Research 
Fund, Putnam VT Small Cap Value Fund, Putnam VT Technology Fund, Putnam 
VT Utilities Growth and Income Fund, Putnam VT Vista Fund, Putnam VT 
Voyager Fund and Putnam VT Voyager Fund II), Putnam Vista Fund, Putnam 
Voyager Fund, Putnam Voyager Fund II, Putnam California Investment 
Grade Municipal Trust, Putnam Convertible Opportunities and Income 
Trust, Putnam High Income Convertible and Bond Fund, Putnam High Yield 
Municipal Trust, Putnam Investment Grade Municipal Trust, Putnam 
Managed High Yield Trust, Putnam Managed Municipal Income Trust, Putnam 
Master Income Trust, Putnam Master Intermediate Income Trust, Putnam 
Municipal Bond Fund, Putnam Municipal Opportunities Trust, Putnam New 
York Investment Grade Municipal Trust, Putnam Premier Income Trust, 
Putnam Tax-Free Health Care Fund (collectively, the ``Funds''), and 
Putnam Investment Management, LLC (the ``Adviser'').
    Filing Dates: The application was filed on October 6, 1997 and 
amended on February 26, 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 April 8, 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, Securities and Exchange Commission, 450 Fifth 
Street, NW, Washington, DC 20549-0609. Applicants, c/o John R. Verani, 
Putnam Investment Management, LLC, One Post Office Square, Boston, MA 
02109.

FOR FURTHER INFORMATION CONTACT: Karen L. Goldstein, Senior Counsel, at 
(202) 942-0646, 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 (tel. 202-942-8090).

Applicants' Representations

    1. The Funds, each a Massachusetts business trust, are registered 
under the Act as open-end or closed-end management investment companies 
(referred to as ``Open-end Funds'' and ``Closed-end Funds,'' 
respectively). The Adviser, registered under the Investment Advisers 
Act of 1940, serves as the investment adviser for each Fund. The 
Adviser is a wholly-owned subsidiary of Putnam Investments, LLC, which 
is owned by Putnam Investments Trust, a subsidiary of Marsh & McLennan 
Companies, Inc. Applicants request that any relief granted pursuant to 
the application also apply to any other existing or future registered 
management investment companies, or series thereof, for which the 
Adviser or a company controlling, controlled by, or under common 
control with the Adviser, acts as investment adviser (``Future 
Funds'').\1\
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    \1\ All existing investment companies that presently intend to 
rely on the order are named as applicants. Any Future Funds that 
subsequently rely on the order will comply with the terms and 
conditions in the application.
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    2. Certain of the Open-end Funds have entered into a line of credit 
with a syndicate of banks (the ``Banks'') under which the Banks are 
obligated to lend money to the Open-end Funds for temporary or 
emergency purposes. In addition, certain of the Funds may lend money to 
the Banks or other parties by entering into repurchase agreements or 
purchasing other short-term instruments. When Open-end Funds borrow 
from the Banks, they pay a rate of interest significantly higher than 
the rate of interest earned by the Funds that have entered into 
repurchase agreements. The interest rate difference represents the 
Bank's profit for serving as ``middleman'' between borrowers and 
lenders.
    3. The Funds seek to reduce the middleman function of the Banks by 
entering into a master loan agreement with each other (the ``Credit 
Facility'') that would permit the Funds to lend money directly to, and 
borrow from, each other to meet the temporary or emergency borrowing 
needs of the borrowing Open-end Funds (``Interfund Loans'').
    4. Applicants state that the Credit Facility would reduce 
substantially an Open-end Fund's borrowing costs and to enhance a 
Fund's ability to earn higher rates of interest on its short-term 
lending. Although the Credit Facility would substantially reduce the 
Funds' reliance on bank credit arrangements, the Funds may continue to 
maintain bank loan facilities.
    5. Applicants anticipate that the Credit Facility would provide a 
borrowing Open-end Fund with savings when the cash position of the Fund 
is insufficient to meet cash requirements. This situation typically 
arises when shareholder redemptions exceed anticipated volumes and the 
Open-end Fund has insufficient cash on hand to satisfy the redemptions. 
Although all transactions are required to be settled within three 
business days, the Open-end Fund may require a source of immediate, 
short-term liquidity to meet redemption requests pending settlement of 
the sale of portfolio securities.
    6. Although bank borrowings are available to provide liquidity, the 
rate charged under the Credit Facility will be below that charged by 
commercial lenders for short-term loans. Likewise, a Fund making a cash 
loan directly to another Fund would earn interest at a rate higher than 
it otherwise could obtain from investing its cash in short-term 
repurchase agreements. Thus, applicants believe that the Credit 
Facility would benefit both those Funds that are borrowers and those 
that are lenders.
    7. The interest rate to be charged on Interfund Loans (the 
``Interfund Rate'') would be determined daily and would generally be 
the average of (i) the higher of the ``OTD Rate'' and the ``Repo Rate'' 
and (ii) the ``Bank Loan Rate'' (each as defined below). The OTD Rate 
on any day would be the highest interest rate available to the Funds 
from investment in overnight time deposits. The Repo Rate on any day 
would be the highest interest rate available to the Funds from 
investment in overnight repurchase agreements. The Bank Loan Rate for 
any day would be calculated according to a formula, established by the 
board of trustees of each Fund (``Board''),

[[Page 12625]]

intended to approximate the lowest interest rate at which short-term 
bank loans are available to the Funds. The formula would be based upon 
a publicly available rate (e.g., Federal Funds rate plus 25 basis 
points) and would vary with that rate to reflect changing bank loan 
rates. The initial formula and any subsequent modifications would be 
subject to the approval of the Board of each Fund. In addition, each 
Fund's Board periodically would review the continuing appropriateness 
of reliance on the publicly available rate used to determine the Bank 
Loan Rate, as well as the relationship between the Bank Loan Rate and 
current bank loan rates available to the Funds.
    8. The Adviser would administer the Credit Facility as part of its 
duties under its investment management agreement with each Fund and 
would receive no additional fee as compensation for its services. The 
Adviser will make an Interfund Loan available to a borrowing Fund only 
if the Interfund Rate is more favorable to the lending Fund than both 
the Repo Rate and the OTD Rate and more favorable to the borrowing Fund 
than the Bank Loan Rate. Closed-end Funds and money market Funds will 
participate in the Credit Facility only as lending Funds.
    9. On each business day the Adviser would collect data on the 
uninvested cash balances and borrowing requirements of all 
participating Funds. The Adviser would allocate borrowing demand and 
cash available for lending among the Funds on a basis believed by it to 
be equitable, subject to certain administrative procedures applicable 
to all Funds, such as the time a decision is made that a particular 
Fund would participate, minimum loan sizes, and the need to minimize 
the number of transactions and associated administrative costs. To 
reduce transaction costs, each single Interfund Loan may be allocated 
to minimize the number of participants necessary to complete that 
Interfund Loan transaction. No Fund would be able to direct that its 
cash balance be loaned to any particular Fund or otherwise intervene in 
the Adviser's allocation of Interfund Loans. After allocating cash for 
Interfund Loans, the Adviser would invest any remaining cash in 
accordance with the investment guidelines of the Funds. The method of 
allocation and related administrative procedures would be established 
by each Fund's Board, including a majority of independent trustees who 
are not interested persons of the Fund, as defined in section 2(a)(19) 
of the Act (``Independent Trustees''), to ensure that both borrowing 
and lending Funds participate on an equitable basis.
    10. The Adviser would (i) monitor the interest rates charged and 
the 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.
    11. No Fund would be permitted to participate in the Credit 
Facility unless (i) it had fully disclosed all material information 
concerning the Credit Facility in its prospectus or statement of 
additional information, (ii) it had obtained necessary shareholder 
approval, and (iii) the Fund's participation in the Credit Facility was 
consistent with its investment policies and restrictions and its 
Agreement and Declaration of Trust.
    12. In connection with the Credit Facility, applicants request an 
order under (i) section 6(c) of the Act granting relief from sections 
18(f) and 21(b) of the Act; (ii) section 12(d)(1)(J) of the Act 
granting relief from section 12(d)(1) of the Act; (iii) sections 6(c) 
and 17(b) of the Act granting relief from sections 17(a)(1) and 
17(a)(3) of the Act; and (iv) section 17(d) of the Act and rule 17d-1 
under the Act to permit certain joint 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. Funds that are advised by the 
same entity are ``affiliated persons'' of each other under section 
2(a)(3)(C) of the Act by reason of being under common control. 
Applicants state that the Funds may be under common control by virtue 
of having the same Adviser and substantially the same Board and 
officers and therefore, under sections 17(a)(3) and 21(b), would be 
prohibited from participating in the Credit Facility.
    2. Section 6(c) of the Act provides that the Commission may 
conditionally or unconditionally exempt any person, security, or 
transaction, or any class or classes of persons, securities, or 
transactions, from any provisions of the Act, if and to the extent the 
exemption is necessary or appropriate in the public interest and 
consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act. Section 17(b) of the 
Act provides that the Commission may exempt a transaction from the 
prohibitions of section 17(a) provided that the terms of the 
transaction, including the consideration to be paid, are reasonable and 
fair and do not involve overreaching on the part of any person 
concerned and that the proposed transaction is consistent with the 
policy of each registered investment company concerned and with the 
general purposes of the Act. Applicants believe that the proposed 
arrangements satisfy these standards for the reasons discussed below.
    3. Applicants contend that the Credit Facility is consistent with 
the overall purposes of sections 17(a)(3) and 21(b). These sections are 
intended to prevent a party with 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 benefit that party and 
that are detrimental to the best interests of the investment company 
and its shareholders. Applicants assert that the proposed transactions 
do not raise such concerns because (i) the Adviser would administer the 
program as a disinterested fiduciary, (ii) the Interfund Loans would 
not involve a degree of risk greater than that of short-term repurchase 
agreements or comparable short-term instruments, (iii) the lending Fund 
would earn interest at a rate higher than it could obtain through 
similar other investments, and (iv) the borrowing Fund would pay 
interest at a rate no greater than otherwise available to it under its 
bank loan agreements, if any. Moreover, the proposed conditions would 
effectively preclude the possibility of any undue advantage.
    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 state that 
the Credit Facility may be deemed to involve transactions

[[Page 12626]]

by affiliated persons of the Funds. Applicants also state 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) of the Act permits the Commission to conditionally or 
unconditionally exempt any person, security, or transaction, or any 
class or classes of persons, securities, or transactions from the 
provisions of section 12(d)(1), if and to the extent that the exemption 
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 set forth below.
    5. Applicants submit that the Credit Facility does not involve the 
type of abuse at which section 12(d)(1) was directed. That section was 
intended to prevent the pyramiding of investment companies in order to 
avoid imposing on investors additional and duplicative costs and fees 
that are generated by multiple layers of investments. Applicants state 
that the entire purpose of the Credit Facility is to provide economic 
benefits for all participating Funds. Applicants state that there would 
be no duplicative costs or fees to the Funds or their shareholders, and 
that the Adviser would administer the Credit Facility under its 
existing agreements with the Funds and would not receive additional 
compensation for its services.
    6. Section 18(f)(1) prohibits open-end investment companies from 
issuing any senior security except that a registered company may borrow 
from any bank so long as immediately after the borrowing there is 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) 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 under the 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 
transaction in which the company participates unless the transaction is 
approved by the Commission. Rule 17d-1 provides that in passing upon 
applications for exemptive relief from 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 participating Funds.
    9. Applicants submit that the purpose of section 17(d) is to avoid 
self-dealing between investment companies and 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 fundamental investment 
limitations. Applicants therefore state that each Fund's participation 
in the Credit Facility will be on terms that are no different from or 
less advantageous than those of other participating Funds.

Applicants' Conditions

    Applicants agree that the 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 (i) the higher of the OTD Rate and the 
Repo Rate and (ii) the Bank Loan Rate.
    2. The Adviser on each business day will compare the Bank Loan Rate 
with the Repo Rate and the OTD Rate and will make cash available for 
Interfund Loans only if the Interfund Rate is (i) more favorable to the 
lending Fund than both the Repo Rate and the OTD Rate and (ii) more 
favorable to the borrowing Fund than the Bank Loan Rate.
    3. If a Fund has outstanding borrowings from any bank, then any 
Interfund Loans to the Fund (i) will be at an interest rate equal to or 
lower than any outstanding bank loan, (ii) 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 required 
collateral, (iii) will have a maturity no longer than any outstanding 
bank loan (and in no event more than seven days) and (iv) will provide 
that if an event of default by the Fund 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 
Loan. This event of default will entitle the lending Fund to call the 
Interfund Loan and exercise all rights with respect to the collateral, 
if any. Such call will be made if the lending bank or banks exercise 
their rights to call their loan under an agreement with the Fund.
    4. A Fund may make an unsecured borrowing through the Credit 
Facility if its outstanding borrowings from all sources immediately 
after the borrowing total 10% or less of 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 required collateral. If a Fund's total 
outstanding borrowings immediately after an interfund borrowing would 
be greater than 10% of its total assets, the Fund may borrow through 
the Credit Facility only on a secured basis. A Fund could not borrow 
through the Credit Facility or from any other source if its total 
outstanding borrowings immediately after the interfund borrowing would 
be more than 33\1/3\% of its total assets.
    5. Before any 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 Fund must 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 Fund with outstanding Interfund Loans exceed 10% of its 
total assets for any other reason (such as a decline in net asset value 
or shareholder redemptions), the Fund will within one business day 
thereafter (i) repay all of its outstanding Interfund Loans, (ii) 
reduce its outstanding indebtedness to 10% or less of its total assets 
or (iii) secure each outstanding Interfund Loan by a pledge of 
segregated collateral with a market value equal to at least 102% of the 
outstanding principal value of the loan until the Fund's total 
outstanding

[[Page 12627]]

borrowings cease to exceed 10% of its total assets, at which time the 
collateral called for by this condition (5) will no longer be required. 
Until each Interfund Loan that is outstanding at a time that a Fund's 
total outstanding borrowings exceed 10% is repaid, or until the Fund's 
total outstanding borrowings cease to 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 is necessary to maintain the 
market value of the collateral that secures each outstanding Interfund 
Loan at a level equal to at least 102% of the outstanding principal 
value of the Interfund Loan.
    6. No Fund may loan funds through the Credit Facility if the loan 
would cause its aggregate outstanding loans through the Credit Facility 
to exceed 15% of its 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 the 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 
(8).
    9. Unless the Fund has a policy that prevents it from borrowing for 
other than temporary or emergency purposes, the Fund's borrowings 
through the Credit Facility, as measured on the day the most recent 
Interfund Loan was made to that Fund, will not exceed the greater of 
125% of the Fund's total net cash redemptions or 102% of sales fails, 
in each case, for the preceding seven calendar days.
    10. Each Interfund Loan may be called on one business day's notice 
by the lending Fund and may be repaid on any day by the borrowing Fund.
    11. A Fund's participation in the Credit Facility must be 
consistent with its investment policies and limitations and the Fund's 
Agreement and Declaration of Trust.
    12. The Adviser will calculate total Fund borrowing and lending 
demand through the Credit Facility, and allocate Interfund Loans on an 
equitable basis among Funds, without the intervention of the portfolio 
manager of any Fund. The Adviser will not solicit cash for the Credit 
Facility from any Fund or prospectively publish or disseminate loan 
demand data to portfolio managers. The Adviser will invest amounts 
remaining after satisfaction of borrowing demand in accordance with the 
investment guidelines of the Funds.
    13. The Adviser will monitor the interest rates charged and the 
other terms and conditions of the Interfund Loans and will make a 
quarterly report to the Board of the Funds concerning the Funds' 
participation in the Credit Facility and the terms and other conditions 
of any extensions of credit under the Credit Facility.
    14. Each Fund's Board, including a majority of the Independent 
Trustees: (i) Will review no less frequently than quarterly the Fund's 
participation in the Credit Facility during the preceding quarter for 
compliance with the conditions of any order permitting such 
transactions; (ii) will establish the Bank Loan Rate formula used to 
determine the interest rate on Interfund Loans, and review no less 
frequently than annually the continuing appropriateness of such Bank 
Loan Rate formula; and (iii) will review no less frequently than 
annually the continuing appropriateness of the Fund's participation in 
the Credit Facility.
    15. If 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 lending Fund makes a demand for payment under the 
provisions of the Interfund Loan Agreement, the Adviser promptly will 
refer such loan for arbitration to an independent arbitrator who has 
been selected by the Board of any Fund involved in the loan and who 
will serve as arbitrator of disputes concerning Interfund Loans.\2\ The 
arbitrator will resolve any problem promptly, and the arbitrator's 
decision will be binding on both Funds. The arbitrator will submit, at 
least annually, a written report to the Board of the Funds 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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    \2\ If the dispute involves Funds with separate Boards, the 
Board 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 written records of all 
transactions under the Credit Facility, 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 commercial bank 
borrowings, and such other information presented to the Fund's Board in 
connection with the review required by conditions (13) and (14). These 
records will be maintained and preserved for a period of not less than 
six years from the end of the fiscal year in which any transaction 
involving the Fund occurred under the Credit Facility. For the first 
two years of this six-year period, the maintenance and preservation of 
these records will be in an easily accessible place.
    17. The Adviser will prepare and submit to the Board 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 Credit Facility commences operations, the Adviser 
will report to the Board quarterly on the operations of the Credit 
Facility. In addition, for two years following the commencement of the 
Credit Facility, the independent public accountant for each Fund that 
is a registered investment company shall prepare an annual report that 
evaluates the Adviser'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 Statements 
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: (i) 
That the Interfund Rate will be higher than both the Repo Rate and the 
OTD Rate but lower than the Bank Loan Rate; (ii) compliance with the 
collateral requirements described in the application; (iii) compliance 
with the percentage limitations on interfund borrowing and lending; 
(iv) allocation of interfund borrowing and lending demand in an 
equitable manner and in accordance with procedures established by the 
Board; and (v) 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.


[[Page 12628]]


    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-6509 Filed 3-18-02; 8:45 am]
BILLING CODE 8010-01-P