[Federal Register Volume 67, Number 59 (Wednesday, March 27, 2002)]
[Notices]
[Pages 14739-14743]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-7326]


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SECURITIES AND EXCHANGE COMMISSION

[Rel No. IC-25493; 812-12650]


First American Investment Funds, Inc., et al.; Notice of 
Application

March 21, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``Act'') under (i) section 6(c) of the Act granting an 
exemption from sections 18(f) and 21(b) of the Act, (ii) section 
12(d)(1)(J) of the Act granting an exemption from section 12(d)(1) of 
the Act, (iii) sections 6(c) and 17(b) of the Act granting an exemption 
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 
arrangements.

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SUMMARY OF APPLICATION: Applicants request an order that would permit 
certain registered open-end management investment companies to 
participate in a joint lending and borrowing facility. The requested 
order would also amend a condition of a prior order (``Order'').\1\
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    \1\ First American Strategy Funds, Inc., Investment Company Act 
Rel. Nos. 22173 (Aug. 26, 1996) (notice) and 22241 (Sept. 23, 1996) 
(order), amendment by First American Funds, Inc., Investment Company 
Act Rel. Nos. 22910 (Nov. 25, 1997) (notice) and 22950 (Dec. 23, 
1997) (order).

Applicants: First American Investment Funds, Inc. (``FAIF''), First 
American Funds, Inc. (``FAF''), First American Strategy Funds, Inc. 
(``FASF''), First American Insurance Portfolios, Inc. (collectively, 
the ``Investment Companies''), U.S. Bancorp Asset Management, Inc. 
(``USBAM'') and all other open-end registered management investment 
companies and their series that now or in the future are advised by 
USBAM or a person controlling, controlled by, or under common control 
with USBAM (together with the Investment Companies, the ``Funds'').\2\
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    \2\ Each Fund that currently intends to rely on the requested 
order is named as an applicant. Any Fund that relies on the order in 
the future will do so in accordance with representations and 
conditions of application.

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Filing Dates: On September 28, 2001 and amended on March 19, 2002.


Hearing or Notification of Hearing: An order granting the requested 
relief 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 15, 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 James D. Alt, 
Esq., 601 Second Avenue South, Minneapolis, Minnesota 55402.

FOR FURTHER INFORMATION CONTACT: Julia Kim Gilmer, Senior Counsel, at 
(202) 942-0528, or Janet M. Grossnickle, Branch Chief, at (202) 942-
0564 (Division of Investment Management, Office of Investment Company 
Regulation).

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

Applicants' Representations

    1. Each Investment Company is registered under the Act as an open-
end management investment company and is organized as a Maryland or a 
Minnesota corporation. USBAM is registered under the Investment 
Advisers Act of 1940 and serves as investment adviser to the Funds.
    2. The Funds have obtained an order permitting each Fund to use its 
uninvested cash to purchase shares of one or more affiliated money 
market funds that comply with rule 2a-7 of the Act (the ``Money Market 
Funds.'').\3\ The Funds have also obtained an order permitting the 
Funds to invest cash on a joint basis through joint accounts (``Joint 
Accounts'').\4\
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    \3\ First American Funds, Inc., Investment Company Act Rel. Nos. 
22910 (Nov. 25, 1997) (notice) and 22950 (Dec. 23, 1997) (order) 
(``Cash Sweep Order'').
    \4\ First American Investment Funds, Inc., Investment Company 
Act Rel. Nos. 22537 (March 3, 1997) (notice) and 22589 (March 28, 
1997) (order).
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    3. Some Funds may lend money to banks or other entities by entering 
into repurchase agreements or by investing in other short-term 
instruments either directly or through Joint Accounts. Other Funds may 
borrow money from the same or other banks for temporary purposes to 
satisfy redemption requests or to cover unanticipated cash shortfalls 
such as a trade ``fail'' in which cash payment for a security sold by a 
fund has been delayed. Currently, the Funds have credit arrangements 
with their custodian (i.e., overdraft protection).
    4. If the Funds were to borrow money from their custodian under 
their current arrangements or from another bank, the Funds would pay a 
significantly higher interest rate than the rate that would be earned 
by other Funds on repurchase agreements and other short-term 
instruments. Applicants state that this differential represents the 
bank's profit for serving as middleman between a borrower and a lender.
    5. Applicants request an order that would permit the Funds to enter 
into lending agreements under which the Funds would lend and borrow 
money for temporary purposes directly to and from each other through a 
credit facility (``Proposed Credit Facility''). Applicants believe that 
the Proposed Credit Facility would substantially reduce the Funds' 
potential borrowing costs and enable the Funds to earn higher rates of 
interest on cash balances they currently invest in Money Market Funds 
or repurchase agreements. Although the Proposed Credit Facility would 
substantially reduce the Funds' need to borrow from banks, the Funds 
would be free to establish a committed line of credit or other 
borrowing arrangements with banks. The Funds would also continue to 
maintain overdraft protection with their custodian.
    6. Applicants anticipate that the Proposed Credit Facility would 
enable the Funds to borrow for temporary purposes at a substantially 
reduced cost in the event of unexpected cash needs due to ``failed'' 
sales of securities or an unanticipated volume of redemption requests 
or for other reasons. Sales fails

[[Page 14740]]

may present a cash shortfall if the Fund has undertaken to purchase a 
security with the proceeds from the securities sold. In the event the 
Funds are unable to liquidate portfolio securities for immediate 
settlement to meet redemption requests, which normally are effected 
immediately, they will not receive payment in settlement for up to 
three days. The Proposed Credit Facility would provide a source of 
immediate, short-term liquidity pending settlement of the sale of 
portfolio securities.
    7. While borrowing arrangements with banks will continue to be 
available to cover unexpected cash needs, under the Proposed Credit 
Facility a borrowing Fund would pay lower interest rates than those 
offered by banks on short-term loans and for overdraft protection with 
its custodian bank. In addition, Funds lending through the Proposed 
Credit Facility would earn interest at a rate higher than they 
otherwise could obtain from investing their cash balances in repurchase 
agreements or the Money Market Funds. Thus, applicants believe that the 
Proposed Credit Facility will benefit both borrowing and lending Funds.
    8. The interest rate to be charged to the Funds on any loan made 
pursuant to the Proposed Credit Facility (the ``Interfund Loan Rate'') 
will be the average of the current overnight repurchase agreement rate 
available either directly or through the Joint Accounts (the ``Repo 
Rate'') and a single benchmark rate set for all Funds (the ``Bank Loan 
Rate''). The Bank Loan Rate will be calculated by USBAM each day 
according to a formula established by each Fund's board of directors 
(``Board'') to approximate the lowest interest rate at which bank loans 
would be available to the Funds. The formula will be based upon a 
publicly available rate (e.g., Federal Funds plus 25 basis points) and 
will vary with this rate so as to reflect changing bank loan rates. The 
initial Bank Loan Rate formula and any subsequent modifications to the 
formula will be subject to the approval of each Fund's Board. Each 
Fund's Board periodically will review the continuing appropriateness of 
reliance on the formula to determine the Bank Loan Rate, as well as the 
relationship between the Bank Loan Rate and current bank loan rates.
    9. The Proposed Credit Facility will be administered by the Cash 
Sweep and Interfund Borrowing Committee of USBAM (the ``Committee'') 
and is composed of USBAM's chief executive officer, chief investment 
officer, chief operating officer, corporate counsel and head of 
compliance operations. The Proposed Credit Facility will be available 
to Funds as lenders if the Fund would otherwise invest on any given day 
in the Money Market Funds pursuant to the Cash Sweep Order, or, in the 
case of Money Market Funds, if that Fund would otherwise invest in 
overnight repurchase agreements or other high quality short-term 
investments. Under the Proposed Credit Facility, the portfolio managers 
for each participating Fund, other than the Money Market Funds, may 
provide the Committee with instructions to participate as a borrower or 
lender. On each business day, the Committee will collect data on the 
uninvested cash balances and borrowing requirements of all 
participating Funds, other than the Money Market Funds, from the Funds' 
custodian. With respect to the Money Market Funds, the portfolio 
managers will inform the Committee of the amount of cash, if any, they 
wish to make available under the Proposed Credit Facility as a lender. 
The Money Market Funds typically would not participate as borrowers 
because they rarely need to borrow cash to meet redemptions. Once it 
determines the aggregate amount of cash available for loans and 
borrowing demand, the Committee will allocate loans among borrowing 
Funds. Applicants expect that there typically would be far more 
available uninvested cash for borrowing than borrowing demand. After 
the Committee has allocated cash for interfund loans, it will inform 
the Money Market Fund managers of the amount of loans, if any, made for 
the account of each Money Market Fund, so that the Fund managers may 
invest any remaining cash in other available short-term instruments. 
With respect to other participating Funds, the Committee will follow 
standing instructions from the portfolio managers to invest the 
remaining amounts daily in the Money Market Funds pursuant to the Cash 
Sweep Order.
    10. The Committee will allocate borrowing demand and cash available 
for lending among the Funds on an equitable basis, subject to certain 
administrative procedures applicable to all Funds, such as the time of 
filing requests to participate, minimum loan lot sizes, and the need to 
keep the number of transactions and associated administrative costs to 
a minimum. To reduce transaction costs, each single loan normally will 
be allocated to minimize the number of participants necessary to 
complete the loan transaction. The method of allocation and related 
administrative procedures will be established by each Fund's Board, 
including a majority of directors who are not ``interested persons'' of 
the Funds, as defined in section 2(a)(19) of the Act (``Independent 
Directors''), to ensure that both borrowing and lending Funds 
participate on an equitable basis.
    11. USBAM will (a) monitor the interest rates charged and the other 
terms and conditions of the loans, (b) limit the borrowings and loans 
entered into by each Fund to ensure that they comply with the Fund's 
investment policies and restrictions, (c) ensure equitable treatment of 
each Fund, and (d) make quarterly reports to the Boards of the Funds 
concerning any transactions by the Funds under the Proposed Credit 
Facility and the interest rates charged. USBAM will administer the 
Proposed Credit Facility as part of its duties under its existing 
management agreement with each Fund and would receive no additional fee 
as compensation for its services.
    12. Each Fund's participation in the Proposed Credit Facility will 
be governed by and be consistent with its organizational documents and 
fundamental investment restrictions. Each Fund currently has a non-
fundamental investment restriction limiting borrowings to 10% of total 
assets and barring the Funds from borrowing for leverage purposes. In 
the event a Fund does not have an investment restriction that prohibits 
the Fund from borrowing for other than temporary or emergency purposes, 
that Fund's borrowings through the Proposed Credit Facility, as 
measured on the day when the most recent loan was made, will not exceed 
the greater of 125% of the Fund's total net cash redemptions or 102% of 
sales fails for the preceding seven calendar days. No Fund will be 
permitted to participate in the Proposed Credit Facility unless the 
Fund has fully disclosed all material information concerning the 
Proposed Credit Facility in its statement of additional information.
    13. Applicants state that certain Funds operate in reliance on the 
Order. Applicants state that condition 2 of the Order provides that 
Underlying Portfolios, as defined in the Order, will not acquire 
securities of other investment companies in excess of the limits 
contained in section 12(d)(1)(A) of the Act. Applicants request that 
condition 2 of the Order be amended solely to the extent necessary to 
permit the Underlying Portfolios to engage in interfund borrowing and 
lending transactions through the Proposed Credit Facility.
    14. Applicants seek an order pursuant to section 6(c) of the Act 
exempting them from sections 18(f) and 21(b) of the Act, pursuant to 
section 12(d)(1)(J) of

[[Page 14741]]

the Act exempting them from section 12(d)(1) of the Act, pursuant to 
sections 6(c) and 17(b) of the Act exempting them from sections 
17(a)(1) and 17(a)(3) of the Act, and pursuant to section 17(d) of the 
Act and rule 17d-1 under the Act to permit certain joint arrangements. 
Applicants also seek an exemption under section 12(d)(1)(J) of the Act 
from sections 12(d)(1)(A) and (B) of the Act and under sections 6(c) 
and 17(b) of the Act from section 17(a) of the Act solely to the extent 
necessary to amend the Order.

Applicants' Legal Analysis

    1. Section 17(a)(3) generally prohibits any affiliated person, or 
affiliated person of an affiliated person, from borrowing money or 
other property from a registered investment company. Section 21(b) 
generally prohibits any registered management investment company from 
lending money or other property to any person if that person controls 
or is under common control with the company. Section 2(a)(3)(C) of the 
Act defines an ``affiliated person'' of another person, in part, to be 
any person directly or indirectly controlling, controlled by, or under 
common control with, the other person. Applicants state that the Funds 
may be under common control by virtue of having USBAM as their common 
investment adviser and having the same Board.
    2. Section 6(c) provides that an exemptive order may be granted 
where an exemption is necessary or appropriate in the public interest 
and consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act. Section 17(b) 
authorizes the Commission to exempt a proposed transaction from section 
17(a) provided that the terms of the transaction, including the 
consideration to be paid or received, are fair and reasonable and do 
not involve overreaching on the part of any person concerned, and the 
transaction is consistent with the policy of the investment company as 
recited in its registration statement and with the general purposes of 
the Act. Applicants believe that the proposed arrangements satisfy 
these standards for the reasons discussed below.
    3. Applicants submit that sections 17(a)(3) and 21(b) of the Act 
were intended to prevent a person with strong potential adverse 
interests and some influence over the investment decisions of a 
registered investment company from causing or inducing the investment 
company to engage in lending transactions that unfairly inure to the 
benefit of that person and that are detrimental to the best interests 
of the investment company and its shareholders. Applicants assert that 
the Proposed Credit Facility transactions do not raise these concerns 
because (a) USBAM will administer the program as a disinterested 
fiduciary, (b) all interfund loans will consist only of uninvested cash 
balances the lending Fund would have invested in short-term repurchase 
agreements or other short-term instruments either directly or through a 
Money Market Fund, (c) the interfund loans will not involve a greater 
risk than other similar investments, (d) the lending Funds will receive 
interest at a rate higher than it could otherwise receive for similar 
short-term investments, and (e) the borrowing Funds will pay interest 
at a rate lower than otherwise available to them under bank loan 
agreements. Moreover, applicants believe that the other conditions in 
the application will effectively preclude the possibility of any Fund 
obtaining an undue advantage over any other Fund. For the same reasons, 
applicants believe that the proposed amendment of the Order satisfies 
the standards of section 17(b) of the Act.
    4. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company, or an affiliated person of an affiliated 
person, from selling any securities or other property to the company. 
Section 12(d)(1) of the Act generally makes it unlawful for a 
registered investment company to purchase or otherwise acquire any 
security issued by any other investment company except in accordance 
with the limitations set forth in that section. Applicants believe that 
the obligation of a borrowing Fund to repay an Interfund Loan may 
constitute a security under sections 17(a)(1) and 12(d)(1). Section 
12(d)(1)(J) provides that the Commission may exempt persons or 
transactions from any provision of section 12(d)(1) if and to the 
extent such exception is consistent with the public interest and the 
protection of investors. Applicants contend that the standards under 
sections 6(c), 17(b) and 12(d)(1) are satisfied for all the reasons set 
forth above in support of their request for relief from sections 
17(a)(3) and 21(b), and from 17(a) to amend the Order, and for the 
reasons discussed below.
    5. Applicants state that section 12(d) was intended to prevent the 
pyramiding of investment companies in order to avoid duplicative costs 
and fees attendant upon multiple layers of investment companies. 
Applicants submit that the Proposed Credit Facility does not involve 
these abuses. Applicants note that there would be no duplicative costs 
or fees to the Funds or shareholders, and that USBAM would receive no 
additional compensation for its services in administering the Proposed 
Credit Facility. Applicants also note that the purpose of the Proposed 
Credit Facility is to provide economic benefits for all the 
participating Funds. Applicants further state that for all of the above 
reasons, the requested amendment of the Order does not implicate any of 
the concerns behind section 12(d)(1) of the Act.
    6. Section 18(f)(1) prohibits open-end investment companies from 
issuing any senior security except that a company is permitted to 
borrow from any bank, if immediately after the borrowing, there is an 
asset coverage of at least 300 percent 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 Proposed 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 Proposed Credit Facility is consistent with the 
purposes and policies of section 18(f)(1).
    8. Section 17(d) and rule 17d-1 generally prohibit any affiliated 
person of a registered investment company, or affiliated person of an 
affiliated person, when acting as principal, from effecting any joint 
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 participants.
    9. Applicants submit that the purpose of section 17(d) is to avoid 
overreaching by and unfair advantage to investment company insiders. 
Applicants believe that the Proposed Credit Facility is consistent with 
the provisions, policies

[[Page 14742]]

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 restrictions. Applicants believe that each 
Fund's participation in the Proposed Credit Facility will be on terms 
which are no different from or less advantageous than that of other 
participating Funds.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The interest rate to be charged to the Funds under the Proposed 
Credit Facility will be the average of the Repo Rate and the Bank Loan 
Rate.
    2. On each business day, the Committee will compare the Bank Loan 
Rate with the Repo Rate and will make cash available for interfund 
loans only if the Interfund Loan Rate is (a) more favorable to the 
lending Fund than both the Repo Rate and the then-current yield on the 
highest-yielding Money Market Fund in which the lending Fund could 
invest under the Cash Sweep Order, and its investment policies and 
restrictions, and (b) more favorable to the borrowing Fund than the 
Bank Loan Rate.
    3. If a Fund has outstanding borrowings, any interfund loans to the 
Fund (a) will be at an interest rate equal to or lower than any 
outstanding bank loan of the Fund, (b) will be secured at least on an 
equal priority basis with at least an equivalent percentage of 
collateral to loan value as any outstanding bank loan that requires 
collateral, (c) will have a maturity no longer than any outstanding 
bank loan (and in no event over seven days), and (d) 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 
agreement entitling the lending Fund to call the interfund loan (and 
exercise all rights with respect to any collateral) and that such call 
will be made if the lending bank exercises its right to call its loan 
under its agreement with the borrowing Fund.
    4. A Fund may make an unsecured borrowing through the Proposed 
Credit Facility if its outstanding borrowings from all sources 
immediately after the interfund borrowing total less than 10% of its 
total assets, provided that if the Fund has a secured loan outstanding 
from any lender, including but not limited to another Fund, the Fund's 
interfund borrowing will be secured on at least an equal priority basis 
with at least an equivalent percentage of collateral to loan value as 
any outstanding loan that requires collateral. If a Fund's total 
outstanding borrowings immediately after interfund borrowing would be 
greater than 10% of its total assets, the Fund may borrow through the 
Proposed Credit Facility only on a secured basis. A Fund may not borrow 
through the Proposed 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 at least equal to 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Fund with outstanding interfund loans exceeds 10% of 
its total assets for any other reason (such as a decline in net asset 
value or because of shareholder redemptions), the Fund will within one 
business day thereafter: (a) Repay all its outstanding interfund loans, 
(b) reduce its outstanding indebtedness to 10% or less of its total 
assets, or (c) secure each outstanding interfund loan by the pledge of 
segregated collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan until the Fund's total 
outstanding borrowings cease to exceed 10% of its total assets, at 
which time the collateral called for by this condition (5) shall no 
longer be required. Until each interfund loan that is outstanding at 
any time that a Fund's total outstanding borrowings exceed 10% is 
repaid or 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 such additional collateral as is 
necessary to maintain the market value of the collateral that secures 
each outstanding interfund loan at least equal to 102% of the 
outstanding principal value of the interfund loan.
    6. No Fund may lend to another Fund through the Proposed Credit 
Facility if the loan would cause its aggregate outstanding loans 
through the Proposed Credit Facility to exceed 15% of its net assets at 
the time of the loan.
    7. A Fund's interfund loans to any one Fund shall not exceed 5% of 
the lending Fund's net assets.
    8. The duration of interfund loans will be limited to the time 
required to receive payment for securities sold, but in no event more 
than seven days. Loans effected within seven days of each other will be 
treated as separate loan transactions for purposes of this condition.
    9. 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.
    10. A Fund's participation in the Proposed Credit Facility must be 
consistent with its investment policies and limitations and its 
organizational documents.
    11. Except as set forth in this condition, no Fund may borrow 
through the Proposed Credit Facility unless the Fund has a policy that 
prevents the Fund from borrowing for other than temporary or emergency 
purposes. In the case of a Fund that does not have such a policy, the 
Fund's borrowings through the Proposed Credit Facility, as measured on 
the day when the most recent loan was made, will not exceed the greater 
of 125% of the Fund's total net cash redemptions or 102% of sales fails 
for the preceding seven calendar days.
    12. The Committee will calculate total Fund borrowing and lending 
demand through the Proposed Credit Facility, and allocate interfund 
loans on an equitable basis among the Funds. The Committee will not 
solicit cash for the Proposed Credit Facility from any Fund or 
prospectively publish or disseminate loan demand data to portfolio 
managers. The Committee will invest amounts remaining after 
satisfaction of borrowing demand in accordance with standing 
instructions from portfolio managers or return remaining amounts for 
investment directly by the portfolio managers of the Money Market 
Funds.
    13. USBAM will monitor the interest rates charged and the other 
terms and conditions of the interfund loans and will make a quarterly 
report to the Boards of the Funds concerning the participation of the 
Funds in the Proposed Credit Facility and the terms and other 
conditions of any extensions of credit thereunder.
    14. Each Fund's Board, including a majority of the Independent 
Directors: (a) Will review no less frequently than quarterly the Fund's 
participation in the Proposed Credit Facility during the preceding 
quarter for compliance with the conditions of any order permitting the 
transactions, (b) will establish the Bank Loan Rate formula used to

[[Page 14743]]

determine the interest rate on interfund loans and review no less 
frequently than annually the continuing appropriateness of the Bank 
Loan Rate formula, and (c) will review no less frequently than annually 
the continuing appropriateness of the Fund's participation in the 
Proposed Credit Facility.
    15. In the event an interfund loan is not paid according to its 
terms and the default is not cured within two business days from its 
maturity or from the time the lending Fund makes a demand for payment 
under the provisions of the interfund loan agreement, USBAM will 
promptly refer the loan for arbitration to an independent arbitrator 
selected by the Board of each Fund involved in the loan who will serve 
as arbitrator of disputes concerning the interfund loans.\5\ The 
arbitrator will resolve any problem promptly, and the arbitrator's 
decision will be binding on all Funds involved. The arbitrator will 
submit, at least annually, a written report to the Boards setting forth 
a description of the nature of any dispute and the actions taken by the 
Funds to resolve the dispute.
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    \5\ If the dispute involves Funds with separate Boards, the 
directors of each Fund will select an independent arbitrator that is 
satisfactory to each Fund.
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    16. Each Fund will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any transaction 
by it under the Proposed Credit Facility occurred, the first two years 
in an easily accessible place, written records of all such transactions 
setting forth a description of the terms of the transaction, including 
the amount, the maturity, and the rate of interest on the loan, the 
rate of interest available at the time on short-term repurchase 
agreements and bank borrowings, the yield on the Money Market Funds and 
such other information presented to the Fund's Board in connection with 
the review required by conditions 13 and 14.
    17. USBAM will prepare and submit to the Funds' Boards for review 
an initial report describing the operations of the Proposed Credit 
Facility and the procedures to be implemented to ensure that all Funds 
are treated fairly. After commencement of operations of the Proposed 
Credit Facility, USBAM will report on the operations of the Proposed 
Credit Facility at the Boards' quarterly meetings. In addition, for two 
years following the commencement of the Proposed Credit Facility, the 
independent public accountant for each Fund shall prepare an annual 
report that evaluates USBAM'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: (a) That the Interfund Loan Rate will be higher than the 
Repo Rate and, if applicable, the yield on the highest yielding Money 
Market Fund in which a lending Fund is permitted to invest, but lower 
than the Bank Loan Rate; (b) compliance with the collateral 
requirements as set forth in the application; (c) compliance with the 
percentage limitations on interfund borrowing and lending; (d) 
allocation of interfund borrowing and lending demand in an equitable 
manner and in accordance with procedures established by the Boards; and 
(e) that the interest rate on any interfund loan does not exceed the 
interest rate on any third party borrowings of a borrowing Fund at the 
time of the interfund loan.
    After the final report is filed, the Funds' external auditors, in 
connection with their Fund audit examinations, will continue to review 
the operation of the Proposed 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 Proposed Credit Facility upon 
receipt of requisite regulatory approval unless it has fully disclosed 
in its statement of additional information all material facts about its 
intended participation.
    Applicants also agree that condition number 2 to the Order will be 
modified as follows:
    No Underlying Portfolio will acquire securities of any other 
investment company in excess of the limits contained in section 
12(d)(1)(A) of the Act, except to the extent that an Underlying 
Portfolio has obtained exemptive relief from the Commission permitting 
it to (i) purchase securities of an affiliated money market fund for 
short-term cash management purposes, or (ii) engage in interfund 
borrowing and lending transactions.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-7326 Filed 3-26-02; 8:45 am]
BILLING CODE 8010-01-P