[Federal Register Volume 67, Number 97 (Monday, May 20, 2002)]
[Notices]
[Pages 35598-35602]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-12641]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25574; 812-12578]


J.P. Morgan Fleming Asset Management (USA), Inc., et al.; Notice 
of Application

May 15, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application under sections 6(c) and 17(b) of the 
Investment Company Act of 1940 (the ``Act'') for an exemption from 
section 17(a).

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APPLICANTS: J.P. Morgan Fleming Asset Management (USA), Inc. 
(``JPMFAM''), J.P. Morgan Fleming Asset Management (London), Ltd. 
(``JPMFAML''), any other existing or future registered investment 
adviser which acts as investment adviser or subadviser to a Portfolio 
(defined below) and which controls, is controlled by, or is under 
common control (as defined in section 2(a)(9) of the Act) with J.P. 
Morgan Chase & Co. (``JPM'') (``Future Advisers''),\1\ J.P. Morgan 
Securities, Inc. (``JPMSI''), Mutual Fund Group (``MFG''), Mutual Fund 
Trust (``MFT''), Mutual Fund Select Group (``MFSG''), Mutual Fund 
Select Trust (``MFST''), Mutual Fund Variable Annuity Trust 
(``MFVAT''), Mutual Fund Investment Trust (``MFIT''), Growth and Income 
Portfolio (``GIP'' together with MFG, MFT, MFSG, MFVAT, and MFIT, the 
``Trusts''), all existing and future series of the Trusts, and any 
existing or future registered investment companies and their series, 
that are advised or subadvised by the Advisers.\2\
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    \1\ JPMFAM, JPMFAML and the Future Advisers are referred to 
collectively in this notice as the Advisers. Any Adviser that 
currently intends to rely on the requested order is named as an 
applicant in this application. Any other Adviser that relies on the 
order in the future will comply with the terms and conditions of 
this application.
    \2\ The Trusts, all existing or future series of the Trusts, and 
any existing or future registered investment companies and their 
series that are advised or subadvised by the Advisers are referred 
to collectively in this notice as the ``Portfolios''. Any Portfolio 
that currently intends to rely on the requested order is named as an 
applicant in this application. Any other Portfolio that relies on 
the order in the future will comply with the terms and conditions of 
this application.

Summary of Application: Applicants request an order to permit the 
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Portfolio to engage in certain principal transactions with JPMSI.

Filing Dates: The application was filed on July 13, 2001, and amended 
on April 22, 2002. Applicants have agreed to file an amendment to the 
application, the substance of which is reflected in this notice, during 
the notice period.

Hearing on 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 June 10, 2002, and should be accompanied by proof of service on 
the applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC 
20549-0609. Applicants: c/o Philip von Turk, Esq., JP Morgan Chase 
Bank, Legal Department, 345 Park Avenue, 5th Floor, New York, NY 10154-
1002; and Robert B. Adams, Esq. and Merrill B. Stone, Esq., Kelley Drye 
& Warren LLP, 101 Park Avenue, New York, NY 10178.

FOR FURTHER INFORMATION CONTACT: Janet M. Grossnickle, Branch Chief, or 
Nadya B. Roytblat, Assistant Director, (202) 942-0564 (Office of 
Investment Company Regulation, Division of Investment Management).

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

Applicants' Representations

    1. Each Trust is an open end management investment company 
registered under the Act, MFG, MFT, MFSG, MFST, MFVAT, MFIT and MFMIT 
are organized as business trusts under the laws of the Commonwealth of 
Massachusetts. GIP is organized as a trust under the laws of the State 
of New York. Each Trust, consistent with its stated investment 
objectives and policies, may invest in high quality short-term taxable 
money market instruments and repurchase agreements.
    2. JPMFAM, a Delaware corporation, is a wholly-owned subsidiary of 
JP Morgan Chase Bank (``Chase''), a New York banking corporation and 
wholly-owned subsidiary of JPM, a Delaware corporation. JPMFAML is a 
United Kingdom corporation and a wholly owned subsidiary of Chase. 
JPMFAM and JPMFAML are each registered as investment advisers under the 
Investment Advisers Act of 1940 (the ``Advisers Act''). Currently, each 
Portfolio has an investment advisory agreement with JPMFAM under which 
JPMFAM provides investment advisory and management services. JPMFAM, in 
turn, has entered into subadvisory agreements with JPMFAML for certain 
of the Portfolios.
    3. JPMSI is a wholly owned subsidiary of JPM and is registered as a 
broker-dealer under the Securities Exchange Act of 1934 (the ``1934 
Act''). JPMSI, a primary dealer in U.S. Government securities, is one 
of the largest dealers in commercial paper, repurchase agreements and 
other money market instruments in the United States.
    4. Applicants state that the Advisers and JPMSI are functionally 
independent of each other. JPMSI and the Advises operate as completely 
separate entities under the umbrella of JPM, the parent holding 
company. While JPMSI and the Advisers are under common control, each 
entity has its own separate directors, officers and employees, is 
separately capitalized, maintains its

[[Page 35599]]

own separate books and records and operates on different sides of walls 
of separate with respect to the Portfolios and Eligible Securities.\3\ 
The Advisers maintain offices physically separate from JPMSI.
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    \3\ Italicized terms are defined as set forth in paragraph (a) 
of rule 2a-7, unless otherwise indicated.
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    5. Investment decisions for the Portfolios are determined solely by 
the Advisers. The portfolio managers and other employees that are 
responsible for the investment of the Portfolios are employed solely by 
one of the Advisers (and not JPMSI), and have lines of reporting 
responsibility solely within the Advisers. The compensation of 
personnel assigned to an Adviser will not depend on the volume or 
nature of trades with JPMSI, except to the extent that such trades may 
affect the profits and losses of JPM and its subsidiaries as a whole.
    6. The portfolio securities in which the Portfolios invest that are 
the subject of this application include taxable money market 
instruments and repurchase agreements. Practically all trading in money 
market instruments takes place in over-the-counter markets consisting 
of groups of dealers who are primarily major securities firms or large 
commercial banks. Money market securities generally are traded in lots 
of $1,000,000 or more on a net basis and normally do not involve 
payment of either brokerage commissions or transfer taxes. The cost of 
portfolio transactions to the Portfolios consistent primarily of dealer 
or underwriter spreads. Spreads vary somewhat among money market 
instruments, but generally spread level for short-term investment grade 
products are in the range of 5 to 10 basis points (.05% to .10%). In 
the Portfolios' experience, there is not a great deal of variation in 
the spreads on money market instruments quoted by the various dealers, 
except perhaps during turbulent market conditions.
    7. The money market consists of an elaborate telephonic and 
electronic communications network among dealer firms, principal issuers 
of money market instruments and principal institutional buyers of such 
instruments. Because the money market is a dealer market, there is not 
a single obtainable price for a given instrument that generally 
prevails at any given time. A dealer acts either as ``agent'' on behalf 
of issuer clients or as ``principal'' for its own account. In either 
capacity, a dealer posts rates throughout its internal, private 
distribution network that are intended to reflect ``market clearing 
price levels,'' as determined by the dealer. Only customers of the 
dealer seeking to purchase money market instruments have access to 
these postings.
    8. Because of the variety of types of money market instruments and 
other factors, the money markets tends to be somewhat segmented. The 
markets for various types of instruments will vary in terms of price, 
volatility, liquidity and availability. Although the rates for the 
different types of instruments tend to fluctuate closely together, 
there may be significant differences in yield among the various types 
of instruments, and even within a particular instrument category, 
depending upon the maturity of the instrument and the credit quality of 
the issuer. Moreover, from time to time, segmenting exists within money 
market securities with the same maturity date and rating. The 
segmenting is based on such factors as whether the issuer is an 
industrial or financial company, whether the issuer is domestic or 
foreign and whether the securities are asset-backed or unsecured. 
Because dealers tend to specialize in certain types of money market 
instruments, the particular needs of a potential buyer or seller with 
respect to certain type of security, maturity or credit quality may 
limit the number of dealers who can provide optimum pricing and 
execution. Hence, with respect to any given type of instrument, there 
may be only a few dealers who can be expected to have the instrument 
available and be in a position to quote an acceptable price.
    9. JPMSI is among the largest major dealers in the taxable money 
market instruments and repurchase agreements, ranking among the top 
firms in each of the major markets and product areas.\4\ As of April 
2001; JPMSI had become the third largest dealer in terms of number of 
U.S. commercial paper programs. When it conducted an informal survey in 
September 1999, CSI was recognized as the most active secondary trading 
firm in the bankers acceptance market. JPMSI also is one of the leading 
participants in the medium-term note (``MTNs'') market. MTNs are 
offered continuously in public or private offerings, with maturities 
beginning at nine months. Because commercial paper is not issued for a 
maturity longer than nine months and bankers acceptances are not issued 
for a maturity of longer than six months, there are fewer longer term 
investment alternatives than shorter term investment alternatives for 
the Portfolios. Thus, MTNs represent a significant portion of the 
longer-term money market investment alternatives. In 2000, JPMSI ranked 
as the third largest manager or co-manager of MTN programs in the 
United States in terms of proceeds ($37.9 billion) and market share 
(15.1%). Applicants further believe that JPMSI plays a relatively 
significant role in the repurchase agreement market with average 
outstandings from $35 billion to $45 billion in 2001. Applicant 
believes that it is one of the top ten leading dealers in repurchase 
agreements and estimates that the ten leading dealers control 
approximately 80% of the market for repurchase agreements.
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    \4\ Applicants state that JPM was formed by the merger of The 
Chase Manhattan Corporation (``CMC'') and J.P. Morgan & Co. Inc. 
(``JPM&CO.'') on December 2000. At the time of the merger, J.P. 
Morgan Securities Inc. (``Old JPMSI'') was a broker-dealer 
subsidiary of JPM&Co. and Chase Securities Inc. (``CSI'') was a 
broker-dealer subsidiary of CMC. The money market operations of Old 
JPMSI and CSI were combined in January 2001 (``Combination'') and 
Old JPMSI merged into CSI (which became the current JPMSI) in May 
2001. The rankings and market share figures discussed in this notice 
generally reflect the current money market operations of JPMSI, the 
combined money market operations of Old JPMSI and CSI beginning in 
January 2001, and, prior to the Combination, the combined operations 
of Old JPMSI and CSI on a pro forma basis.
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    10. Applicants state that because of substantial consolidation in 
the money market industry, there are fewer major dealers who are active 
in the market than was the case only a few years ago. In light of this 
consolidation, applicants believe that it has become very important for 
investors to have access to as many dealers who are actively engaged in 
the money market as possible. Applicants state that there are far fewer 
sources of information available to investors. Applicants also contend 
that the decline in the number of active money market dealers has 
affected the competition in the pricing of investment opportunities.
    11. Subject to the general supervision of the trustees of each of 
the Trusts (collectively, the ``Trustees''), the Advisers are 
responsible for making investment decisions and for the placement of 
portfolio transactions. The Portfolios have no obligation to deal with 
any dealer or group of dealers in the execution of their portfolio 
transactions. When placing orders, an Adviser must attempt to obtain 
the best net price and the most favorable execution of its orders. In 
doing so, it takes into account such factors as price, the size, type 
and difficulty of the transaction involved in the dealer's general 
execution and operational facilities.

Applicants' Legal Analysis

    1. Applicants request an order pursuant to sections 6(c) and 17(b) 
of the Act exempting certain transactions from the provisions of 
section 17(a) of

[[Page 35600]]

the Act to permit JPMSI, acting as principal, to sell to or purchase 
from the Portfolios certain money market instruments and to enter into 
repurchase agreements, subject to the conditions set forth below.
    2. Section 17(a) of the Act generally prohibits an affiliated 
person or principal underwriter of a registered investment company, or 
any affiliated person of that person, acting as principal, from selling 
to or purchasing from the registered company, or any company controlled 
by the registered company, any security or other property. Because an 
Adviser is an affiliated person of the Portfolios it advises and JPMSI 
and the Advisers are under common control, the Portfolios are currently 
prohibited from conducting portfolio transactions with JPMSI in 
transactions in which JPMSI acts as principal.
    3. Section 17(b) of the Act provides that the Commission, upon 
application, may exempt a transaction from the provisions of section 
17(a) if evidence establishes that the terms of the proposed 
transactions, 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 the registered investment company concerned and with the 
general purposes of the Act. Section 6(c) 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 of any rule or regulation 
thereunder, if and to the extent that such exemption is necessary or 
appropriate in the public interest and consistent with the protection 
of investors and the purposes fairly intended by the policy and 
provisions of the Act.
    4. Applicants contend that the rationale for the proposed order is 
based upon the decreased liquidity in the money market, the major and 
growing role played in the money market by JPMSI and the special 
requirements of the Portfolios with respect to their portfolio 
transactions. In particular applicants note the following.
    (a) With over 53 billion invested in short term money market 
instruments and repurchase agreements as of January 31, 2002, the 
Portfolios are major buyers and sellers in the money market with a 
strong need for a constant flow of large quantities of high quality 
money market instruments and repurchase agreements. The applicants 
believe that access to such a significant dealer as JPMSI in these 
markets increases the Portfolios' abilities to manager their portfolios 
effectively.
    (b) The fact that the Portfolios regularly invest in securities 
with short maturities and repurchase agreements, combined with the 
active portfolio management techniques employed by the Advisers, often 
results in high portfolio activity and the need to make numerous 
purchases and sales of securities and instruments. Such high portfolio 
activity makes the need to obtain suitable portfolio securities and 
best price and execution especially compelling.
    (c) JPMSI is such a significant factor in the money market, 
including the market for repurchase agreements, that being unable to 
deal directly with JPMSI may, upon occasion, deprive the Portfolios of 
obtaining best price and execution.
    (d) The money market, including the market for repurchase 
agreements, is highly competitive, and removing a competitive factor as 
important as JPMSI from the dealers with which the Portfolios may 
conduct principal transactions may indirectly deprive the Portfolios of 
obtaining best price and execution even when the Portfolios trade with 
other dealers.
    5. Applicants believe that the requested order will provide the 
Portfolios with broader and more complete access to the money market, 
which is necessary to carry out the policies and objectives of each of 
the Portfolios in obtaining the best price, execution and quality in 
all portfolio transactions, and will provide the Portfolios with 
important new information sources in the money market, to the direct 
benefit of investors in the Portfolios. Applicants submit that these 
reasons apply equally to Portfolios that are not money market funds 
even though they invest in money market instruments to a lesser extent. 
Applicants believe that the transactions contemplated by the 
application are identical to those in which they currently are engaged 
except for the proposed participation of JPMSI, and that such 
transactions are consistent with the policies of the Portfolios as 
recited in their registration statements and reports filed under the 
Act.
    6. Applicants believe that the procedures set forth with respect to 
transactions with JPMSI are structured in such a way as to insure that 
the transactions will be, in all instances, reasonable and fair, and 
will not involve overreaching on the part of any person concerned, and 
that the requested exemption is appropriate in the public interest and 
consistent with the protection of investors and the purpose fairly 
intended by the policy and provisions of the Act.

Applicants' Conditions

    1. Transactions Subject to the Exemption--The exemption shall be 
applicable to principal transactions in the secondary market and 
primary or secondary fixed price dealer offerings not made pursuant to 
underwriting syndicates. The principal transactions which may be 
conducted pursuant to the exemption will be limited to transactions in 
Eligible Securities. To the extent a Portfolio is subject to rule 2a-7, 
such Eligible Securities must meet the portfolio maturity and quality 
requirements of paragraphs (c)(2) and (c)(3) of rule 2a-7. To the 
extent a Portfolio is not subject to rule 2a-7, such Eligible 
Securities must meet the requirements of clauses (i), (iii) and (iv) of 
paragraph (c)(3) of Rule 2a-7. Additionally:
    (a) No Portfolio shall make portfolio purchases pursuant to the 
exemption that would result directly or indirectly in a Portfolio 
investing pursuant to the exemption more than 2% of its Total Assets 
(or, in the case of a Portfolio that is not subject to Rule 2a-7, more 
than 2% of the total of its cash, cash items and Eligible Securities) 
in securities which, when acquired by the Portfolio (either initially 
or upon any subsequent roll over) were Second Tier Securities; provided 
that any Portfolio may make portfolio sales of Second Tier Securities 
pursuant to the exemption without regard to this limitation.
    (b) The exemption shall not apply to an Unrated Security other than 
a Government Security.
    (c) The exemption shall not apply to any security, other than a 
repurchase agreement, issued by JPM or any affiliated person thereof, 
or to any security subject to a Demand Feature or Guarantee issued by 
JPM or any affiliated person thereof.
    2. Repurchase Agreement Requirements--The Portfolios may engage in 
repurchase agreements with JPMSI only if JPMSI has: (a) net capital, as 
defined in rule 15c3-1 under the 1934 Act, of at least $100 million and 
(b) a record (including the record of predecessors) of at least five 
years continuous operations as a dealer during which time it engaged in 
repurchase agreements relating to the kind of security subject to the 
repurchase agreement. JPMSI will furnish the Advisers with financial 
statements for its most recent fiscal year and the most recent semi-
annual financial statements made available to customers. The Advisers 
shall

[[Page 35601]]

determine that JPMSI complies with the above requirements and with 
other repurchase agreement guidelines adopted by the Trustees. Each 
repurchase agreement will be Collateralized Fully.
    3. Volume Limitations on Transactions--Transactions other than 
repurchase agreements conducted pursuant to the exemption shall be 
limited to no more than 25% of (a) the direct or indirect purchases or 
sales, as the case may be, by each Portfolio of Eligible Securities 
other than repurchase agreements; and (b) the purchases or sales, as 
the case may be, by JPMSI of Eligible Securities other than repurchase 
agreements. Transactions comprising repurchase agreements conducted 
pursuant to the exemption shall be limited to no more than 10% of (a) 
the repurchase agreements directly or indirectly entered into by the 
relevant Portfolio and (b) the repurchase agreements transacted by 
JPMSI. These calculations shall be measured on an annual basis (the 
fiscal year of each Portfolio and of JPMSI) and shall be computed with 
respect to the dollar volume thereof.
    4. Information Required to Document Compliance with Price Tests--
Before any transaction may be conducted pursuant to the exemption, the 
relevant Portfolio or the Advisers must obtain such information as they 
deem necessary to determine that the price test (as defined in 
condition (5) below) applicable to such transaction has been satisfied. 
In the case of purchase or sale transactions, the Portfolios or the 
Advisers must make and document a good faith determination with respect 
to compliance with the price test based upon current price information 
obtained through the contemporaneous solicitation of bona fide offers 
in connection with the type of security involved (the same instrument 
type, credit rating, maturity and segment, if any, but not necessarily 
the identical security or issuer). With respect to prospective 
purchases of securities, these dealers must be those who have in their 
inventories or otherwise have access to money market securities of the 
categories and the types desired and who, in the experience of the 
Portfolios and the Advisers, are in a position to quote favorable 
prices with respect thereto. With respect to the prospective 
disposition of securities, these dealers must be those who, in the 
experience of the Portfolios and the Advisers, are in a position to 
quote favorable prices. Before any repurchase agreements are entered 
into pursuant to the exemption, the Portfolios or the Advisers must 
obtain and document competitive quotations from at least two other 
dealers with respect to repurchase agreements comparable to the type of 
repurchase agreement involved, except that if quotations are 
unavailable from two such dealers only one other competitive quotation 
is required.
    5. Price Tests--In the case of purchase and sale transactions, a 
determination will be required in each instance, based upon the 
information available to the Portfolios and the Advisers, that the 
price available from JPMSI is at least as favorable as that available 
from other sources. In the case of ``swaps'' involving trades of one 
security for another, the price test will be based upon the transaction 
viewed as a whole, and not upon the two components thereof 
individually. With respect to transactions involving repurchase 
agreements, a determination will be required in each instance, based on 
the information available to the Portfolios and the Advisers, that the 
income to be earned from the repurchase agreement is at least equal to 
that available from other sources.
    6. Permissible Spread--JPMSI's spreads in regard to any transaction 
with the Portfolios will be no greater than its customary dealer 
spreads which in turn will be consistent with the average or standard 
spread charged by dealers in money market securities for the type of 
security and the size of transaction involved.
    7. Parties Must Be Factually Independent--The Adivsers, on the one 
hand, and JPMSI, on the other, will operate on different sides of 
appropriate walls of separation with respect to the Portfolios and 
Eligible Securities. The walls of separation will include all of the 
following characteristics, and such others as may from time to time be 
considered reasonable by JPMSI and the Advisers to facilitate the 
factual independence of the Advisers from JPMSI.
    (a) Each of the Advisers will maintain offices physically separate 
from those of JPMSI.
    (b) The compensation of persons assigned to any of the Advisers 
(i.e., executive, administrative or investment personnel) will not 
depend on the volume or nature of trades effected by the advisers for 
the Portfolios with JPMSI under this exemption, except to the extent 
that such trades may affect the profits and losses of JPM and its 
subsidiaries as a whole.
    (c) JPMSI will not share any of its respective profits or losses on 
such transactions with any of the Advisers, except to the extent that 
such profits and losses affect the general firmwide compensation of JPM 
and its subsidiaries as a whole.
    (d) Personnel assigned to the Advisers' investment advisory 
operations on behalf of the Portfolios will be exclusively devoted to 
the business and affairs of one or more of the Advisers.
    (e) Personnel assigned to JPMSI will not participate in the 
decision-making process for the Advisers or otherwise seek to influence 
the Advisers other than in the normal course of sales and dealer 
activities of the same nature as are simultaneously being carried out 
with respect to nonaffiliated institutional clients. Each Adviser, on 
the one hand, and JMPSI, on the other, may nonetheless maintain 
affiliations other than with respect to the Portfolios, and in addition 
with respect to the Portfolios as follows:
    (i) Adviser personnel may rely on research, including credit 
analysis and reports prepared internally by various subsidiaries and 
divisions of JPMSI.
    (ii) Certain senior executives of JPM with responsibility for 
overseeing operations of various divisions, subsidiaries and affiliates 
of JPM are not precluded from exercising those functions over the 
Advisers because they oversee JPMSI as well, provided that such persons 
shall not have any involvement with respect to proposed transactions 
pursuant to the exemption and will not in any way attempt to influence 
or control the placing by the Portfolios or the Advisers of Orders in 
respect of Eligible Securities with JPMSI.
    8. Record-Keeping Requirements--The Portfolios and the Advisers 
will maintain such records with respect to those transactions conducted 
pursuant to the exemption as may be necessary to confirm compliance 
with the conditions to the requested relief. In this regard:
    (a) Each Portfolio shall maintain an itemized daily record of all 
purchases and sales of securities pursuant to the exemption showing for 
each transaction: the name and quantity of securities; the unit 
purchase or sale price; the time and date of the transaction; and 
whether the security was a First Tier Security or a Second Tier 
Security. The records also shall, for each transaction, document two 
quotations received from other dealers for comparable securities, 
including: The names of the dealers; the names of the securities; the 
prices quoted; the times and dates the quotations were received; and 
whether such securities were First Tier Securities or Second Tier 
Securities.
    (b) Each Portfolio shall maintain a ledger or other record showing, 
on a daily basis, the percentage of the

[[Page 35602]]

Portfolio's Total Assets (or, in the case of a Portfolio that is not 
subject to rule 2a-7, the percentage of the total of its cash, cash 
items and Eligible Securities) represented by Second Tier Securities 
acquired from JPMSI.
    (c) Each Portfolio will maintain records sufficient to verify 
compliance with the volume limitations contained in condition (3), 
above. JMPSI will provide the Portfolios with all records and 
information necessary to implement this requirement.
    (d) Each Portfolio will maintain records sufficient to verify 
compliance with the repurchase agreement requirements contained in 
condition (2), above.
    The records required by this condition (8) will be maintained and 
preserved in the same manner as records required under rule 31a-
1(b)(1).
    9. Guidelines--Each of the compliance departments of the Advisers 
and of JPMSI (the ``Compliance Departments'') will prepare and, as 
necessary update guidelines for personnel of the Advisers or JPMSI, as 
the case may be, to make certain that transactions conducted pursuant 
to the exemption comply with the conditions of the exemption, and that 
the parties generally maintain arm's length relationships. In training 
personnel of JPMSI, particular emphasis will be given to the fact that 
the Portfolios are to receive rates as favorable as other institutional 
purchasers buying the same quantities. The Compliance Departments will 
periodically monitor the activities of JPMSI and the Advisers to make 
certain that the conditions set forth in the exemption are adhered to.
    10. Audit Committee Review--The Audit Committees, consisting of 
Trustees who are not ``interested persons'' as defined in section 
2(a)(19) of the Act (``Independent Trustees''), will prepare, 
periodically review and update the guidelines for the Advisers and 
JPMSI to ensure that transactions conducted pursuant to the exemption 
comply with the conditions set forth therein and that the above 
procedures are followed in all respects. The respective Audit 
Committees will periodically monitor the activities of the Portfolios, 
the Advisers and JPMSI in this regard to ensure that these matters are 
being accomplished.
    11. Scope of Exemption--Applicants expressly acknowledge that any 
order issued on the application would grant relief from section 17(a) 
of the Act only, and would not grant relief from any other section of, 
or rule under, the Act including, without limitation, rule 2a-7.
    12. Board Review--The Trustees, including a majority of the 
Independent Trustees, have approved the Portfolio's participation in 
transactions conducted pursuant to the exemption and have determined 
that such participation by the Portfolios is in the best interests of 
the Portfolios and their investors. The minutes of the meetings of the 
Trustees at which this approval was given reflect in detail the reasons 
for the Trustees' determinations. The Trustees will review no less 
frequently than annually the Portfolios' participation in transactions 
conducted pursuant to the exemption during the prior year and determine 
whether the Portfolios' participation in such transactions continues to 
be in the best interests of the Portfolios and their investors. Such 
review will include (but not be limited to) (a) a comparison of the 
volume of transactions in each type of security conducted pursuant to 
the exemption to the market presence of JPMSI in the market for that 
type of security, and (b) a determination that the Portfolios are 
maintaining appropriate trading relationships with other sources for 
each type of security to ensure that there are appropriate sources for 
the quotations required by condition (4) above. The minutes of the 
meetings of the Trustees at which such determinations are made will 
reflect in detail the reasons for the Trustees' determinations.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-12641 Filed 5-17-02; 8:45 am]
BILLING CODE 8010-01-M