[Federal Register Volume 67, Number 119 (Thursday, June 20, 2002)]
[Notices]
[Pages 42082-42086]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15426]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25612; 812-12262]


SunAmerica Asset Management Corp., et al.; Notice of Application

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

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (``Act'') for an exemption from sections 18(f) and 
21(b) of the Act, under section 12(d)(1)(J) of the Act for an exemption 
from section 12(d)(1) of the Act, under sections 6(c) and 17(b) of the 
Act for an exemption from sections 17(a)(1) and 17(a)(3) of the Act, 
and under section 17(d) of the Act and rule 17d-1 under the Act to 
permit certain joint arrangements.

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    Applicants: SunAmerica Series Trust, Anchor Series Trust, Seasons 
Series Trust, SunAmerica Style Select Series, Inc., SunAmerica Equity 
Funds, SunAmerica Income Funds, SunAmerica Money Market Funds, Inc., 
SunAmerica Strategic Investment Series, Inc. (collectively, the 
``SunAmerica Funds''); VALIC Company I and VALIC Company II (together, 
the ``VALIC Funds''); and Brazos Mutual Funds and all existing and 
future series (the ``Portfolios'') of the SunAmerica Funds, the VALIC 
Funds and the Brazos Mutual Funds (collectively, the ``Funds'') \1\ and 
SunAmerica Asset Management Corp. (``SAAMCo''), John McStay Investment 
Counsel, LP (``JMIC''), and The Variable Annuity Life Insurance Company 
(``VALIC'') (each an ``Adviser'' and together, the ``Advisers'') and 
any other open-end management investment company and its series 
registered under the Act for which SAAMCo, JMIC or VALIC or a person 
controlling, controlled by or under common control with SAAMCo, JMIC or 
VALIC serves as investment adviser (together with the Funds, the 
``Funds'').
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    \1\ All existing Funds that currently intend to rely on the 
requested order are named as applicants, and any Fund that relies on 
the order in the future will comply with the terms and conditions of 
the application.
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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.
    Filing Dates: The application was filed on September 20, 2000 and 
amended on June 6, 2002.
    Hearing or Notification of Hearing: An order granting the 
application will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on July 8, 2002, and should be accompanied by proof of 
service on the applicants, in the form of an affidavit, or, for 
lawyers, a certificate of service. Hearing requests should state the 
nature of the writer's interest, the reason for the request, and the 
issues contested. Persons who wish to be notified of a hearing may 
request notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW, Washington, DC 
20549-0609; Applicants, 733 Third Avenue, New York, New York, 10017-
3204.

FOR FURTHER INFORMATION CONTACT: Jean E. Minarick, Senior Counsel, at 
(202) 942-0527 or Mary Kay Frech, 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 (telephone (202) 942-8090).

Applicants' Representations

    1. Each of the Funds is registered under the Act as an open-end 
management investment company and is organized as a Maryland 
corporation, Massachusetts business trust or Delaware business trust 
and consists of multiple Portfolios. Certain of the Portfolios are 
money market funds that rely on rule 2a-7 under the Act (``Money Market 
Portfolios''). Each Adviser is registered under the Investment Advisers 
Act of 1940. Each Portfolio has entered into an investment advisory 
agreement with an Adviser. SAAMCo, VALIC and JMIC are under common 
control because each is a direct or indirect, majority or wholly owned 
subsidiary of American International Group, Inc.
    2. Some Portfolios may lend money to banks or other entities by 
entering into repurchase agreements (including through a joint account 
(``Joint Account'')). Other Porfolios 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 portfolio security sold by a Portfolio has been 
delayed. The VALIC Funds

[[Page 42083]]

Portfolios currently have credit arrangements with their custodian 
(i.e., overdraft protection) under which the custodian may, but is not 
obligated to, lend money to the VALIC Funds Portfolios to meet the 
VALIC Funds Portfolios' temporary cash needs. Currently, some 
Portfolios participate in an uncommitted line of credit (the 
``Uncommitted Line'') and the Portfolios participate in a committed 
line of credit (the ``Committed Line,'' and collectively with the 
Uncommitted Line, the ``Lines of Credit'') with their custodian banks.
    3. If the Portfolios were to borrow money from their custodian 
banks under their current arrangements or under other credit 
arrangements with a bank, the Portfolios would pay interest on the 
borrowed cash at a rate which would be significantly higher than the 
rate that would be earned by other (non-borrowing) Portfolios on 
investments in repurchase agreements entered into by the Portfolios 
(including through the Joint Account). Applicants believe that this 
differential represents the bank's profit. Under the Committed Lines, 
the Portfolios pay commitment fees in addition to interest.
    4. Applicants request an order that would permit the Funds to enter 
into an interfund lending facility (``Credit Facility'') by entering 
into master interfund lending agreements (``Interfund Lending 
Agreements'') under which the Portfolios would lend and borrow money 
for temporary purposes directly to and from each other through the 
Credit Facility (``Interfund Loans''). Applicants believe that the 
Credit Facility would substantially reduce the Portfolios' potential 
borrowing costs and enhance their ability to earn higher rates of 
interest on short-term loans. Although the Credit Facility potentially 
could reduce the Portfolios' need to borrow from banks, the Portfolios 
would continue to use their Lines of Credit or would be free to 
establish other borrowing arrangements with banks.
    5. Applicants anticipate that the Credit Facility would provide a 
borrowing Portfolio with significant savings when the cash position of 
the Portfolio is insufficient to meet temporary cash requirements. This 
situation could arise when redemptions exceed anticipated volumes and 
the Portfolios have insufficient cash on hand to satisfy such 
redemptions. When a Portfolio liquidates portfolio securities to meet 
redemption requests, it often does not receive payment in settlement 
for up to three days (or longer for certain foreign transactions). The 
Credit Facility would provide a source of immediate, short-term 
liquidity pending settlement of the sale of portfolio securities.
    6. Applicants also propose using the Credit Facility when a sale of 
securities fails due to circumstances such as a delay in the delivery 
of cash to the Portfolio's custodian or improper delivery instructions 
by the broker effecting the transaction. Sales fails may present a cash 
shortfall if the Portfolio has undertaken to purchase a security with 
the proceeds from securities sold. When the Portfolio experiences a 
cash shortfall due to a sales fail, the Portfolio could (a) fail on its 
intended purchase due to lack of funds from the previous sale, 
resulting in additional cost to the Portfolio, or (b) sell a security 
on a same day settlement basis, earning a lower return on the 
investment, or (c) borrow to meet the short-term cash shortfall. Use of 
the Credit Facility under these circumstances would enable the 
Portfolio to have access to immediate short-term liquidity at a reduced 
cost.
    7. While borrowing arrangements with banks will continue to be 
available to cover unanticipated redemptions and sales fails, under the 
Credit Facility a borrowing Portfolio would pay lower interest rates 
than those offered by banks on short-term loans. In addition, 
Portfolios making short-term cash loans directly to other Portfolios 
would earn interest at a rate higher than they otherwise could obtain 
from investing their cash in short-term loans. Thus, applicants believe 
that the Credit Facility would benefit both borrowing and lending 
Portfolios.
    8. The interest rate charged to the Portfolios on any Interfund 
Loan (the ``Interfund Loan Rate'') would be determined daily and would 
be the average of the ``Repo Rate'' and the ``Bank Loan Rate,'' both as 
defined below. The Repo Rate for any day would be the highest rate 
available to the Portfolios from investments in overnight repurchase 
agreements. The Bank Loan Rate for any day would by calculated by 
SAAMCo each day according to a formula established by each Fund's Board 
of Directors (``Board'') designed to approximate the lowest interest 
rate at which short-term bank loans would be available to the 
Portfolios. The formula would be based upon a publicly available rate 
(e.g., Federal Funds plus 25 basis points) and would vary with this 
rate so as to reflect changing bank loan rates. Each Fund's Board 
periodically would review the continuing appropriateness of using the 
formula to determine the Bank Loan Rate, as well as the relationship 
between the Bank Loan Rate and short-term bank loan rates that would be 
available to the Portfolios, including, without limitation, the rates 
available through the Portfolios' Lines of Credit (``Lines of Credit 
Rates''). The initial formula and any subsequent modification to the 
formula would be subject to the approval of each Fund's Board.
    9. The Credit Facility would be administered by SAAMCo's mutual 
fund accounting, legal and treasury departments (the ``Credit Facility 
Committee''). Under the Credit Facility, the portfolio managers for 
each participating Portfolio may provide standing instructions to 
participate daily as a borrower or lender. The Credit Facility 
Committee on each business day would collect data on the uninvested 
cash and borrowing requirements of all participating Portfolios from 
the Portfolios' custodians. Once it had determined the aggregate amount 
of cash available for loans and borrowing demand, the Credit Facility 
Committee would allocate loans among borrowing Portfolios without any 
further communication from portfolio managers. If there is more 
available uninvested cash than borrowing demand, the Credit Facility 
Committee will invest any remaining cash in accordance with the 
standing instructions of portfolio managers (e.g., in repurchase 
agreements including through the Joint Account) or return remaining 
amounts to investment in the Portfolios. The Money Market Portfolios 
typically would not participate as borrowers because they rarely need 
to borrow cash to meet redemptions.
    10. The Credit Facility Committee would allocate borrowing demand 
and cash available for lending among the Portfolios on what the 
Committee believes to be an equitable basis, subject to certain 
administrative procedures applicable to all Portfolios, such as the 
time of filing requests to participate, minimum loan lot sizes, and the 
need to minimize the number of transactions and associated 
administrative costs. To reduce transaction costs, each loan normally 
would be allocated in a manner intended to minimize the number of 
participants necessary to complete the loan transaction.
    11. The Credit Facility Committee and the Advisers would (a) 
monitor the interest rates charged and the other terms and conditions 
of the Interfund Loans, (b) limit the borrowings and loans entered into 
by each Portfolio to ensure that they comply with the Portfolio's 
investment policies and limitations, (c) ensure equitable treatment of 
each Portfolio, and (d) make quarterly reports to the Boards concerning 
any transactions by the Portfolios under the Credit Facility and the 
interest rates charged. The method

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of allocation and related administrative procedures would be approved 
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 Portfolios participate in the Credit Facility on an equitable 
basis.
    12. SAAMCo, through the Credit Facility Committee, would administer 
the Credit Facility and would receive no additional compensation for 
its services. Neither SAAMCo nor companies affiliated with it will 
collect any fees in connection with the Interfund Loans.
    13. Each Portfolio's participation in the Credit Facility will be 
consistent with its organizational documents and its investment 
policies and limitations. The statement of additional information 
(``SAI'') of each Portfolio discloses the extent to which the 
respective Portfolio may borrow money for temporary purposes and the 
extent to which the respective Portfolio is able to mortgage or pledge 
securities to secure permitted borrowing. If the requested order is 
granted, the SAI for each Portfolio participating in the Credit 
Facility will disclose the Portfolio's participation in the Credit 
Facility.
    14. In connection with the Credit Facility, applicants request an 
order under (a) section 6(c) of the Act granting relief from sections 
18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act granting 
relief from section 12(d)(1) of the Act; (c) sections 6(c) and 17(b) of 
the Act granting relief from sections 17(a)(1) and 17(a)(3) of the Act; 
and (d) section 17(d) of the Act and rule 17d-1 under the Act to permit 
certain joint arrangements.

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 
Portfolios may be under common control by virtue of having a common 
investment adviser or investment advisers who are under common control.
    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 
transactions 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 potential adverse interests to 
and some influence over the investment decisions of a registered 
investment company from causing or inducing the investment company to 
engage in lending transactions that unfairly 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 
Credit Facility transactions do not raise these concerns because (a) 
SAAMCo, through the Credit Facility Committee, will administer the 
Credit Facility as a disinterested fiduciary; (b) all Interfund Loans 
will consist only of uninvested cash reserves that the Portfolio 
otherwise would invest in short-term repurchase agreements or other 
short-term instruments either directly or through a Joint Account; (c) 
the Interfund Loans will not involve a greater risk than other similar 
investments; (d) the lending Portfolio will receive interest at a rate 
higher than it could obtain through other similar investments; and (e) 
the borrowing Portfolio will pay interest at a rate lower than the Bank 
Loan Rate. Moreover, applicants believe that the other conditions in 
the application would effectively preclude the possibility of any 
Portfolio obtaining an undue advantage over any other Portfolios.
    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 another investment company except in accordance with 
the limitations set forth in that section. Applicants believe that the 
obligation of a borrowing Portfolio 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)(J) are satisfied for all the reasons 
set forth above in support of their request for relief from sections 
17(a)(3) and 21(b) and for the reasons discussed below.
    5. Applicants state that section 12(d)(1) 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 Credit Facility does not involve these 
abuses. Applicants note that there would be no duplicative costs or 
fees to the Portfolios or shareholders, and that SAAMCo would receive 
no additional compensation for its services in administering the Credit 
Facility. Applicants also note that the purpose of the Credit Facility 
is to provide economic benefits for all the participating Portfolios.
    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 per cent 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 an evidence of indebtedness. Applicants request exemptive 
relief from section 18(f)(1) to the limited extent necessary to 
implement the Credit Facility (because the lending Portfolios are not 
banks).
    7. 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, 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

[[Page 42085]]

different from or less advantageous than that of other participants.
    8. 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 Credit Facility is consistent with the 
provisions, policies and purposes of the Act in that it offers both 
reduced borrowing costs and enhanced returns on loaned funds to all 
participating Portfolios and their shareholders. Applicants note that 
each Portfolio would have an equal opportunity to borrow and lend on 
equal terms consistent with its investment policies and fundamental 
investment limitations. Applicants therefore believe that each 
Portfolio's participation in the Credit Facility will be on terms which 
are no different from or less advantageous than that of other 
participating Portfolios.

Applicants' Conditions

    Applicants agree that the order granting the requested relief will 
be subject to the following conditions:
    1. The Interfund Loan Rate to be charged to the Portfolios under 
the Credit Facility will be the average of the Repo Rate and the Bank 
Loan Rate.
    2. On each business day, the Credit Facility 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 Portfolio than the Repo Rate and (b) more favorable to 
the borrowing Portfolio than the Bank Loan Rate and, if applicable, the 
Lines of Credit Rates.
    3. If a Portfolio has outstanding borrowings, any Interfund Loans 
to the Portfolio (a) will be at an interest rate equal to or lower than 
any outstanding bank loan, (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 
any event not over seven days), and (d) will provide that, if an event 
of default occurs under any agreement evidencing an outstanding bank 
loan to the Portfolio, that event of default will automatically 
(without need for action or notice by the lending Portfolio) constitute 
an immediate event of default under the Interfund Lending Agreement 
entitling the lending Portfolio 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 Portfolio.
    4. A Portfolio may make an unsecured borrowing through the Credit 
Facility if its outstanding borrowings from all sources immediately 
after the interfund borrowing total 10% or less of its total assets, 
provided that if the Portfolio has a secured loan outstanding from any 
other lender, including but not limited to another Portfolio, the 
Portfolio'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 
Portfolio's total outstanding borrowings immediately after an interfund 
borrowing would be greater than 10% of its total assets, the Portfolio 
may borrow through the Credit Facility on a secured basis only. A 
Portfolio may not borrow through the Credit Facility or from any other 
source if its total outstanding borrowings, immediately after the 
interfund borrowing, would be more than 33\1/3\% of its total assets or 
its maximum borrowing limit set forth in the Portfolio's fundamental 
investment restrictions, whichever is lesser.
    5. Before any Portfolio that has outstanding interfund borrowings 
may, through additional borrowings, cause its outstanding borrowings 
from all sources to exceed 10% of its total assets, the Portfolio must 
first secure each outstanding Interfund Loan by the pledge of 
segregated collateral with a market value equal to at least 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Portfolio with outstanding Interfund Loans exceed 10% 
of its total assets for any other reason (such as a decline in net 
asset value or because of shareholder redemptions), the Portfolio 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 equal to at 
least 102% of the outstanding principal value of the loan until the 
Portfolio'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 Portfolio's total outstanding borrowings 
exceeds 10% is repaid or the Portfolio's total outstanding borrowings 
cease to exceed 10% of its total assets, the Portfolio 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 equal to at 
least 102% of the outstanding principal value of the loan.
    6. No Portfolio may lend to another Portfolio through the Credit 
Facility if the loan would cause its aggregate outstanding loans though 
the Credit Facility to exceed 15% of its net assets at the time of the 
loan.
    7. A Portfolio's Interfund Loans to any one Portfolio shall not 
exceed 5% of the lending Portfolio's current 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. A Portfolio's participation in the Credit Facility must be 
consistent with its investment policies and limitations and 
organizational documents.
    10. Except as set forth in this condition, no Portfolio may borrow 
through the Credit Facility unless the Portfolio has a policy that 
prevents the Portfolio from borrowing for other than temporary or 
emergency purposes, except that certain Portfolios may engage in 
reverse repurchase agreements for any purpose. In the case of a 
Portfolio that does not have such a policy, the Portfolio may borrow 
through the Credit Facility only if such borrowings, as measured on the 
day when the most recent loan was made, will not exceed the greater of 
125% of the Portfolio's total net cash redemptions and 102% of sales 
fails for the preceding seven calendar days.
    11. Each Interfund Loan may be called on one business day's notice 
by a lending Portfolio and may be repaid on any day by a borrowing 
Portfolio.
    12. The Credit Facility Committee will calculate total Portfolio 
borrowing and lending demand through the Credit Facility, and allocate 
Interfund Loans on an equitable basis among the Portfolios, without the 
intervention of any portfolio manager of the Portfolios. The Credit 
Facility Committee will not solicit cash for the Credit Facility from 
any Portfolio or prospectively publish or disseminate loan demand data 
to portfolio managers. The Credit Facility Committee will invest any 
amounts remaining after satisfaction of borrowing demand in accordance 
with the standing instructions from portfolio managers or return 
remaining amounts to the Portfolios.
    13. The Credit Facility Committee and the Advisers will monitor the 
Interfund Loan Rate charged and the other terms and conditions of the 
Interfund Loans and will make a quarterly report to the

[[Page 42086]]

Boards concerning the participation of the Portfolios in the Credit 
Facility and the terms and other conditions of any extensions of credit 
under the Credit Facility.
    14. The Board of each Fund, including a majority of the Independent 
Directors, will (a) review no less frequently than quarterly the 
participation by the Fund's Portfolios in the Credit Facility during 
the preceding quarter for compliance with the conditions of any order 
permitting the transactions; (b) establish the Bank Loan Rate formula 
used to determine the Interfund Loan Rate on Interfund Loans and review 
no less frequently than annually the continuing appropriateness of the 
Bank Loan Rate formula; and (c) review no less frequently than annually 
the continuing appropriateness of the Portfolios' participation in the 
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 Portfolio makes a demand for 
payment under the provisions of the Interfund Lending Agreement, the 
Adviser to the lending Portfolio promptly will refer the loan for 
arbitration to an independent arbitrator selected by the Boards of the 
Funds whose Portfolios are involved in the loan who will serve as 
arbitrator of disputes concerning Interfund Loans. If the dispute 
involves Portfolios with separate Boards, the Board of each Portfolio 
will select an independent arbitrator that is satisfactory to those 
Boards. The arbitrator will resolve any problem promptly and the 
arbitrator's decision will be binding on both Portfolios. 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 Portfolios to resolve the dispute.
    16. Each Fund, on behalf of its Portfolios, will maintain and 
preserve for a period of not less than six years from the end of the 
fiscal year in which any transaction under the 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 
Interfund Loan Rate, the rate of interest available at the time on 
short-term repurchase agreements and commercial bank borrowings, and 
such other information presented to the Fund's Board in connection with 
the review required by conditions 13 and 14.
    17. The Credit Facility Committee and the Advisers will prepare and 
submit to the Boards of the Funds for review an initial report 
describing the operations of the Credit Facility and the procedures to 
be implemented to ensure that all Portfolios are treated fairly. After 
the commencement of operation of the Credit Facility, the Credit 
Facility Committee and the Advisers will report on the operations of 
the Credit Facility at the quarterly meetings of the Boards of the 
Funds.
    In addition, for two years following the commencement of the Credit 
Facility, the independent public accountants for each Portfolio shall 
prepare an annual report that evaluates the respective Adviser's 
assertion that the Credit Facility Committee and the Adviser have 
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 Attesting Engagements No. 3 and it 
shall be filed pursuant to Sub-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, but lower than the Bank Loan Rate, and if applicable, the 
Lines of Credit Rates; (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 establish by the Boards; and (e) that the 
Interfund Loan Rate does not exceed the interest rate on any third 
party borrowings of a borrowing Portfolio at the time of the Interfund 
Loan.
    After the final report is filed, the Portfolio's independent public 
accountants in connection with their Portfolio audit examinations, will 
continue to review the operation of the Credit Facility for compliance 
with the conditions of the application and their review will form the 
basis, in part, of the auditor's report on internal accounting controls 
in Form N-SAR.
    18. No Portfolio will participate in the Credit Facility upon 
receipt of requisite regulatory approval unless it has fully disclosed 
in its SAI all material facts about its intended participation.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-15426 Filed 6-19-02; 8:45 am]
BILLING CODE 8010-01-P