[Federal Register Volume 67, Number 58 (Tuesday, March 26, 2002)]
[Notices]
[Pages 13809-13813]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7167]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25467; 812-12214]


Bear Stearns Funds, et al.; Notice of Application

March 20, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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SUMMARY OF APPLICATION: Applicants request an order to permit (a) 
certain registered investment companies to pay an affiliated lending 
agent a fee based on a share of the revenue derived from securities 
lending activities; (b) the registered investment companies to use 
uninvested cash (``Uninvested Cash'') and cash collateral from 
securities lending transactions (``Cash Collateral'') to purchase 
shares of certain money market funds; and (c) the registered investment 
companies to lend portfolio securities to affiliated broker-dealers.

APPLICANTS: The Bear Stearns Funds (``BSF''), Bear, Stearns & Co. Inc. 
(``Bear Stearns''), Bear Stearns Securities Corp. (``BSSC''), Bear 
Stearns Asset Management Inc. (``BSAM''), Bear Stearns Funds Management 
Inc. (``BSFM''), and Custodial Trust Company (``CTC'').

FILING DATES: The application was filed on August 9, 2000 and amended 
on March 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 applicant 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 15, 2002, and should be accompanied by proof of service 
on applicant, 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: c/o Jay G. Baris, Kramer Levin Naftalis & 
Frankel LLP, 919 Third Avenue, New York, NY 10022.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
942-0614, 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. BSF is a Massachusetts business trust registered under the Act 
as an open-end management investment company. BSF currently consists of 
12 separate portfolios (together with future series, the 
``Portfolios'') with varying investment objectives and management 
policies, one of which is the Prime Money Market Portfolio (``PMMP''), 
a money market fund that complies with the requirements of rule 2a-7 
under the Act. BSAM, a wholly owned subsidiary of The Bear Stearns 
Companies, Inc. (``BSCI''), is registered as an investment adviser 
under the Investment Advisers Act of 1940. BSAM serves as each 
Portfolio's investment adviser. BSFM, a wholly owned subsidiary of 
BSCI, serves as each Portfolio's administrator. Bear Stearns, an 
affiliate of BSAM, serves as each Portfolio's distributor.
    2. CTC, a wholly owned subsidiary of BSCI, serves as custodian of 
each of the existing Portfolios (other than the Emerging Markets Debt 
Portfolio) and as lending agent with BSSC, a wholly owned subsidiary of 
BSCI (each of CTC and BSSC, the ``Lending Agent''). BSSC is a broker-
dealer registered under the Securities Exchange Act of 1934.
    3. Applicants request that any relief granted pursuant to the 
application also apply to (a) any other registered investment company 
or series thereof for which BSAM or any person controlling, controlled 
by or under common control with BSAM (included in the term ``BSAM'') 
now or in the future serves as investment adviser (such investment 
company or series thereof included in the term ``Portfolio''), (b) any 
other broker-dealer now or in the future controlling, controlled by or 
under common control with BSSC (together with BSSC, ``Affiliated 
Broker-Dealers''), and (c) any investment entity excluded from the 
definition of investment company under section 3(c)(1) or section 
3(c)(7) of the Act, advised by BSAM, and established for the purpose of 
investment of Cash Collateral in connection with the securities lending 
program described below (each, a ``PIF'').\1\ Each PIF will comply with 
the requirements of rule 2a-7 under the Act.
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    \1\ All existing entities that currently intend to rely on the 
requested relief have been named as applicants. All existing 
entities currently intending to rely on the requested order have 
been named as applicants.
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    4. CTC currently administers a securities lending program 
(``Lending Program'') pursuant to a securities lending policy with the 
respective Portfolios that participate in the securities lending 
program (the ``Lending Portfolios''). Each Lending Portfolio is 
permitted by its investment policies to lend its portfolio securities, 
and its prospectus or statement of additional information will disclose 
that it may engage in portfolio securities lending. BSF's Board of 
Trustees (the ``Board''), including a majority of the trustees who are 
not interested persons within the meaning of section 2(a)(19) of the 
Act (``Disinterested Trustees''), have approved BSF's participation in 
the Lending Program, and will monitor the Lending Program on an ongoing 
basis.
    5. Under the Lending Program, the Lending Agent will enter into 
agreements (``Securities Loan Agreements'') with certain entities 
(``Borrowers'') that wish to borrow portfolio securities owned by the 
respective Lending Portfolios. The Securities Loan Agreements will 
require that loans be continuously secured by collateral equal at all 
times to at least the market value of the securities loaned. Collateral 
for such loans may include Cash Collateral or other collateral, such as 
U.S. government securities.
    6. Under the Lending Program, the Lending Agent will be responsible 
for soliciting Borrowers for each Lending Portfolio's securities, 
monitoring daily the value of the loaned securities and collateral, and 
requesting Borrowers to add to the collateral when required by the 
Securities Loan Agreements. The Lending Agent may manage Cash 
Collateral only in accordance with specific parameters established by a 
Lending Portfolio. These guidelines include permissible investment of 
Cash

[[Page 13810]]

Collateral as well as a list of eligible types of investments.\2\
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    \2\ The personnel who will provide day-to-day lending agency 
services to the Lending Portfolios do not and will not provide 
investment advisory services to the Lending Portfolios, or 
participate in any way in the selection of the portfolio securities 
or other aspects of the management of the Lending Portfolios.
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    7. With respect to securities loans that are collateralized by 
assets other than cash, the Lending Portfolio involved will receive a 
loan fee paid by the Borrower equal to a percentage of the market value 
as specified in the applicable Securities Loan Agreement. With respect 
to securities loans collateralized by cash, the Borrower will be 
entitled to receive a fixed Cash Collateral fee based on the amount of 
cash held as collateral. The Lending Portfolio in such a case will be 
compensated on the spread between the net amount earned on the 
investment of the Cash Collateral and the Borrower's Cash Collateral 
Fee.
    8. Portfolios may have Uninvested Cash that comes from a variety of 
sources, including dividend or interest payments received on portfolio 
securities, unsettled securities transactions, reserves held for 
investment strategy purposes, scheduled maturity of investments, 
liquidation of portfolio securities to meet anticipated redemptions, as 
well as new monies received from investors.
    9. The applicants request relief to permit: (a) The Lending 
Portfolios to pay the Lending Agent a fee based on a share of the 
revenue derived from securities lending activities; (b) the Portfolios 
to use Cash Collateral and Uninvested Cash (together, ``Cash 
Balances'') to purchase shares of PMMP, PIFs and any future registered 
open-end management investment company that complies with rule 2a-7 
under the Act (together with PMMP, ``Money Market Funds''); and (c) the 
Lending Portfolios to lend portfolio securities to Affiliated Broker-
Dealers.

Applicants' Legal Analysis

A. Payment of Lending Agent Fees

    1. Section 17(d) of the Act and Rule 17d-1 thereunder prohibit any 
affiliated person of or principal underwriter for a registered 
investment company or any affiliated person of such person or principal 
underwriter, acting as principal, from effecting any transaction in 
connection with, any joint enterprise or other joint arrangement or 
profit-sharing plan, in which the investment company participates 
unless the Commission has approved the transaction. Section 2(a)(3) of 
the Act defines an affiliated person of another person to include any 
person directly or indirectly controlling or controlled by, or under 
common control with, such other person. Applicants state that CTC and 
BSAM are wholly owned subsidiaries of BSCI, and therefore CTC may be 
deemed to be an affiliated person of BSAM, the investment adviser for 
each Lending Portfolio. Because a fee arrangement between a Lending 
Agent and a Lending Portfolio, under which compensation is based on a 
percentage of the revenue generated by securities lending transactions, 
may be a joint enterprise or other joint arrangement or profit sharing 
plan within the meaning of section 17(d) and rule 17d-1, applicants 
request an order to permit each Lending Portfolio to pay, and the 
Lending Agent to accept, such fees in connection with services provided 
by the Lending Agent to a Lending Portfolio.
    2. Applicants state that each Lending Portfolio will adopt the 
following procedures to ensure that the proposed fee arrangement and 
the other terms governing the relationship with CTC or BSSC, as Lending 
Agent, will meet the standards of rule 17d-1 under the Act:
    (a) In connection with the approval of CTC or BSSC as Lending Agent 
for a Lending Portfolio and implementation of the proposed fee 
arrangement, a majority of the Board, including a majority of 
Disinterested Trustees, will determine that (i) the contract with the 
Lending Agent is in the best interests of the Lending Portfolio and its 
shareholders, (ii) the services to be performed by the Lending Agent 
are appropriate for the Lending Portfolio, (iii) the nature and quality 
of the services provided by the Lending Agent are at least equal to 
those provided by others offering the same or similar services for 
similar compensation, and (iv) the fees for the Lending Agent's 
services are fair and reasonable in light of the usual and customary 
charges imposed by others for services of the same nature and quality.
    (b) Each Lending Portfolio's contract with CTC or BSSC for lending 
agent services will be reviewed annually and will be approved for 
continuation only if a majority of the Board (including a majority of 
the Disinterested Trustees) makes the findings referred to in paragraph 
(a) above.
    (c) In connection with the initial implementation of the proposed 
fee arrangement whereby CTC or BSSC will be compensated as Lending 
Agent based on a percentage of the revenue generated by a Lending 
Portfolio's participation in the Lending Program, the Board will obtain 
competitive quotes with respect to lending agent fees from at least 
three independent lending agents to assist the Board in making the 
findings referred to paragraph (a) above.
    (d) The Board, including a majority of the Disinterested Trustees, 
will (i) determine at each regular quarterly meeting that the loan 
transactions during the prior quarter were effected in compliance with 
the conditions and procedures set forth in the application and (ii) 
review no less frequently than annually the conditions and procedures 
set forth in the application for continuing appropriateness.
    (e) Each Lending Portfolio will (i) maintain and preserve 
permanently in an easily accessible place a written copy of the 
procedures and conditions (and modifications thereto) described in the 
application and (ii) maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any loan 
transaction pursuant to the Lending Program occurred, the first two 
years in an easily accessible place, a written record of each such loan 
transaction setting forth a description of the security loaned, the 
identity of the person on the other side of the loan transaction, the 
terms of the loan transaction, and the information or materials upon 
which the determination was made that each loan was made in accordance 
with the procedures set forth above and the conditions to the 
application.

B. Investment of Cash Balances in Money Market Funds and PIFs

    1. Section 12(d)(1)(A) of the Act provides that no registered 
investment company may acquire securities of another investment company 
representing more than 3% of the acquired company's outstanding voting 
stock, more than 5% of the acquiring company's total assets, or, 
together with the securities of other investment companies, more than 
10% of the acquiring company's total assets. Section 12(d)(1)(B) of the 
Act provides that no registered open-end investment company may sell 
its securities to another investment company if the sale will cause the 
acquiring company to own more than 3% of the acquired company's voting 
stock, or if the sale will cause more than 10% of the acquired 
company's voting stock to be owned by investment companies. Section 
12(d)(1)(J) of the Act provides that the Commission may exempt any 
person or transaction from any provision of section 12(d)(1) if, and to 
the extent that, the exemption is consistent with the public interest 
and the protection of investors.
    2. Applicants request an exemption under section 12(d)(1)(J) to 
permit each

[[Page 13811]]

Portfolio to use Cash Balances to acquire shares of the Money Market 
Funds in excess of the limits imposed by section 12(d)(1)(A), and the 
Money Market Funds to sell its shares to the Portfolios in excess of 
the percentage limits in section 12(d)(1)(B).
    3. Applicants state that none of the abuses meant to be addressed 
by sections 12(d)(1)(A) and (B) of the Act are created by the proposed 
investment of Cash Balances in PMMP. Applicants state that the 
arrangement will not result in an inappropriate layering of fees 
because PMMP will not charge a sales load, redemption fee, asset-based 
sales charge or service fee (as defined in rule 2830(b)(9) of the 
National Association of Securities Dealers, Inc. Conduct Rules (``NASD 
Conduct Rules'')), or if such shares are subject to any such fees, BSAM 
will waive its advisory fee for each Portfolio in an amount that 
offsets the amount of such fees incurred by the Portfolios. In 
addition, before approving any advisory contract for a Portfolio, the 
Board, including a majority of the Disinterested Trustees, will 
consider the extent to which the advisory fees charged to the Portfolio 
by BSAM should be reduced or waived to account for reduced services 
provided to the Portfolio by BSAM as a result of Uninvested Cash being 
invested in PMMP or PIF. If PMMP offers more than one class of shares, 
each Portfolio will invest its Cash Balances only in the class with the 
lowest expense ratio at the time of investment. Neither PMMP nor any 
PIF whose shares are acquired by a Portfolio will acquire securities of 
any other investment company in excess of the limits contained in 
section 12(d)(1)(A).
    4. Sections 17(a)(1) and (2) of the Act prohibit an affiliated 
person of a registered investment company, or any affiliated person of 
the affiliated person, acting as principal, from selling any security 
to, or purchasing any security from, the registered investment company. 
Section 2(a)(3) of the Act defines an ``affiliated person'' of another 
person to include, among other things, any person 5% or more of whose 
outstanding voting securities are directly or indirectly owned, 
controlled, or held with power to vote, by such other person or any 
person directly or indirectly controlling, controlled by, or under 
common control with, such other person. Applicants state that to the 
extent that a Portfolio owns 5% or more of the voting securities of 
PMMP or PIF, PMMP or PIF could be deemed to be an affiliated person of 
the Portfolio. In addition, to the extent that the Portfolios, PMMP and 
PIF share a common investment adviser and the Portfolios and PMMP share 
a common Board, applicants state that the Portfolios, PMMP and PIF may 
be considered to be under common control and therefore be affiliated 
persons. As a result, section 17(a) may prohibit the sale of shares of 
PMMP or PIF to a Portfolio, and the redemption of such shares by PMMP 
or PIF from the Portfolio.
    5. Section 17(b) of the Act authorizes the Commission to exempt a 
transaction from section 17(a) if the terms of the proposed 
transaction, including the consideration to be paid or received, are 
reasonable and fair and do not involve overreaching on the part of any 
person concerned, and the proposed transaction is consistent with the 
policy of each registered investment company concerned and with the 
general purposes of the Act. Section 6(c) of the Act authorizes the 
Commission to exempt any person or transaction from any provision of 
the Act if the exemption is necessary or appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act.
    6. Applicants request an order under sections 6(c) and 17(b) of the 
Act to permit the Portfolios to use Cash Balances to purchase shares of 
PMMP or PIF and to permit the redemption of the shares. Applicants 
maintain that the terms of the proposed transaction are reasonable and 
fair because the Portfolios will purchase and sell shares of PMMP or 
PIF on the same terms and on the same basis as other shareholders. 
Applicants assert that the proposed transactions comply with each 
Portfolio's investment restrictions and policies. Applicants further 
state that the investment of Cash Collateral in PMMP or a PIF will 
comply with all present and future Commission and staff positions 
concerning securities lending. Applicants also state that the PIFs will 
comply with the major substantive provisions of the Act, including the 
prohibitions against affiliated transactions, leveraging and issuing 
senior securities, and rights of redemption.
    7. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit joint transactions involving registered investment companies 
and their affiliates unless the Commission has approved the 
transaction. Applicants state that the Portfolios, BSAM (by managing 
assets of the Portfolios and PIFs), and PMMP or a PIF (by selling 
shares to and redeeming shares from the Portfolios) may be deemed to be 
participants in a joint enterprise or arrangement within the meaning of 
section 17(d) and rule 17d-1. Applicants request an order pursuant to 
section 17(d) and rule 17d-1 to permit the described transactions 
relating to investments of Cash Balances in PMMP or PIFs. For the 
reasons discussed above, applicants believe that the proposed 
transactions meet the standards of rule 17d-1.

C. Lending to Affiliated Broker-Dealers

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

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[[Page 13812]]

Applicants' Conditions

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

A. General

    1.Each Portfolio, Money Market Fund and PIF that relies on the 
requested order will be advised by BSAM.
    2. The securities lending program of each Lending Portfolio will 
comply with all present and future applicable Commission and staff 
positions regarding securities lending arrangements.
    3. Before a Lending Portfolio may participate in the Lending 
Program, a majority of the Board, including a majority of the 
Disinterested Trustees, will approve the Lending Portfolio's 
participation in the Lending Program. The Board will evaluate the 
Lending Program and its results no less frequently than annually and a 
majority of the Board, including a majority of the Disinterested 
Trustees, will determine that investing Cash Collateral in PMMP or a 
PIF is in the best interests of the shareholders of the Lending 
Portfolio.

B. Investment of Cash Balances in PMMP and PIF

    1. The shares of PMMP or a PIF sold to and redeemed from the 
Portfolios will not be subject to a sales load, redemption fee, asset-
based sales charge, or service fees (as defined in the NASD Conduct 
Rules).
    2. If BSAM collects a fee from PMMP or a PIF for acting as its 
investment adviser with respect to assets invested by a Portfolio, 
before the next meeting of the Board on behalf of the Portfolio is held 
for the purpose of voting on an advisory contract under section 15 of 
the Act, BSAM will provide the Board with specific information 
regarding the approximate cost to BSAM for, or portion of the advisory 
fee under the existing advisory contract attributable to, managing the 
Uninvested Cash of the Portfolio that can be expected to be invested in 
PMMP or the PIF. Before approving any advisory contract under section 
15, the Board, on behalf of the Portfolio, including a majority of the 
Disinterested Trustees, shall consider to what extent, if any, the 
advisory fees charged to the Portfolio by BSAM should be reduced to 
account for the fee indirectly paid by the Portfolio because of the 
advisory fee paid by PMMP or a PIF to BSAM. The minute books of each 
Portfolio will record fully the Board's considerations in approving the 
advisory contract, including the considerations relating to the fees 
referred to above.
    3. Each of the Portfolios will invest Uninvested Cash in, and hold 
shares of, PMMP and PIFs only to the extent that the Portfolio's 
aggregate investment of Uninvested Cash in PMMP and PIF does not exceed 
25% of the Portfolio's total assets. For purposes of this limitation, 
each Portfolio or series thereof will be treated as a separate 
investment company.
    4. Investment in shares of PMMP and PIFs will be in accordance with 
each Portfolio's respective investment restrictions and policies as set 
forth in its prospectus and statement of additional information.
    5. Neither PMMP nor any PIF will acquire securities of any 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act.
    6. A majority of the Board of a Portfolio, including a majority of 
the Disinterested Trustees of such Portfolio, will initially and at 
least annually thereafter, determine that investment of Uninvested Cash 
in shares of PMMP or a PIF is in the best interests of the shareholders 
of the Portfolio.
    7. A Portfolio's Uninvested Cash will be invested in PMMP or a PIF 
only if PMMP or the PIF invests solely in the types of instruments that 
the Portfolio has authorized for the investment of its Uninvested Cash.
    8. Each PIF in which a Portfolio invests will comply with rule 2a-7 
under the Act. Each PIF will value its shares, as of the close of 
business on each business day, using the amortized cost method to 
determine its net asset value per share. BSAM, as the managing member 
of the PIF, will adopt and monitor the procedures described in rule 2a-
7(c)(7) under the Act and BSAM will take such other actions as are 
required to be taken pursuant to such procedures. A Portfolio may 
purchase shares of a PIF only if BSAM determines on an ongoing basis 
that the PIF is operating as a money market fund in compliance with 
rule 2a-7. BSAM will preserve for a period of not less than six years 
from the date of determination, the first two years in an easily 
accessible place, a record of such determination and the basis upon 
which the determination was made. This record will be subject to 
examination by the Commission and the Staff .
    9. Each PIF in which a Portfolio invests will comply with sections 
17(a), (d) and (e) and 18 of the Act as if the PIF were an open-end 
registered investment company. With respect to all redemption requests 
made by a Portfolio, the PIF will comply with section 22(e) of the Act. 
BSAM, as managing member, will adopt procedures designed to ensure that 
the PIF complies with sections 17(a), (d) and (e), 18 and 22(e) of the 
Act. BSAM will also periodically review and update as appropriate such 
procedures and will maintain books and records describing such 
procedures, and maintain the records required by rules 31a-1(b)(1), 
31a-1(b)(2)(ii) and 31a-1(b)(9) under the Act. All books and records 
required to be made pursuant to this condition will be maintained and 
preserved for a period of not less than six years from the end of the 
fiscal year in which any transaction occurred, the first two years in 
an easily accessible place, and will be subject to examination by the 
Commission and the staff.
    10. The net asset value per share of a PIF in which a Portfolio may 
invest will be determined by dividing the value of the assets belonging 
to the PIF, less the liabilities of the PIF, by the number of shares of 
the PIF outstanding.
    11. Each Portfolio will purchase and redeem shares of a PIF on the 
same basis as of the same time and at the same price, and will receive 
dividends and bear its proportionate share of expenses on the same 
basis as other shareholders investing in the same PIF. A separate 
account will be established in the shareholder records of the PIF for 
the account of each applicable Portfolio.

C. Loans to Affiliated Broker-Dealers

    1. The Lending Portfolios, on an aggregate basis, will make at 
least 50% of their portfolio securities loans to unaffiliated 
Borrowers.
    2. The total value of securities loaned to any one broker-dealer on 
the approved list of Borrowers of securities from a Lending Portfolio 
will be in accordance with a schedule to be approved by the Board, but 
in no event will the total value of securities lent to any one 
Affiliated Broker-Dealer exceed 10% of the net assets of the Lending 
Portfolio, computed at market value.
    3. A Lending Portfolio will not make any loan to an Affiliated 
Broker-Dealer unless the income attributable to such loan fully covers 
the transaction costs incurred in making such loan.
    4. (a) All loans will be made with spreads no lower than those set 
forth in a schedule of spreads which will be established and may be 
modified from time to time by the Board and by a majority of the 
Disinterested Trustees (``Schedule of Spreads'').
    (b) The Schedule of Spreads will set forth rates of compensation to 
the Lending Portfolio that are reasonable and fair and that are 
determined in light of those considerations set forth in the 
application.

[[Page 13813]]

    (c) The Schedule of Spreads will be uniformly applied to all 
Borrowers of the Lending Portfolios' portfolio securities, and will 
specify the lowest allowable spread with respect to a loan of 
securities to any Borrower.
    (d) If a security is loaned to an unaffiliated Borrower with a 
spread higher than the minimum set forth in the Schedule of Spreads, 
all comparable loans to an Affiliated Broker-Dealer will be made at no 
less than the higher spread.
    (e) Each Lending Portfolios' portfolio securities lending program 
will be monitored on a daily basis by an officer of the Lending 
Portfolio who is subject to section 36(a) of the Act. This officer will 
review the terms of each loan to an Affiliated Broker-Dealer for 
comparability with loans to unaffiliated Borrowers and conformity with 
the Schedule of Spreads, and will periodically, and at least quarterly, 
report his or her findings to the Board, including a majority of the 
Disinterested Trustees.
    5. The Board, including a majority of the Disinterested Trustees, 
(a) will determine no less frequently than quarterly that all 
transactions with Affiliated Broker-Dealers effected during the 
preceding quarter were effected in compliance with the requirements of 
the procedures adopted by the Board and the conditions of this order if 
granted and that such transactions were conducted on terms which were 
reasonable and fair; and (b) will review no less frequently than 
annually such requirements and conditions for their continuing 
appropriateness.
    6. The Lending Portfolios will maintain and preserve permanently in 
an easily accessible place a written copy of the procedures (and any 
modifications thereto) which are followed in lending securities and 
shall maintain and preserve for a period of not less than six years 
from the end of the fiscal year in which any loan occurs, the first two 
years in an easily accessible place, a written record of each loan 
setting forth the number of shares loaned, the face amount of the 
securities loaned, the fee received (or the rebate rate remitted), the 
identity of the borrower, the terms of the loan and any other 
information or materials upon which the finding was made that each loan 
made to an Affiliated Broker-Dealer was fair and reasonable and that 
the procedures followed in making such loan were in accordance with the 
procedures and the other undertakings set forth herein.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7167 Filed 3-25-02; 8:45 am]
BILLING CODE 8010-01-P