[Federal Register Volume 67, Number 120 (Friday, June 21, 2002)]
[Notices]
[Pages 42300-42304]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-15707]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25613; 812-12490]


One Group Mutual Funds, et al.; Notice of Application

June 14, 2002.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under (i) section 6(c) of 
the Investment Company Act of 1940 (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 transactions.

-----------------------------------------------------------------------

    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.
    Applicants: One Group Mutual Funds (the ``Trust''), Banc One 
Investment Advisors Corporation (the ``Investment Manager''), One Group 
Administrative Services, Inc. (the ``Administrator''), and all other 
registered open-end investment companies and series thereof that are 
part of the same group of investment companies (as defined in section 
12(d)(1)(G) of the Act) as the Trust and that are advised by the 
Investment Manager or a person controlling, controlled by, or under 
common control with the Investment Manager (together with the Trust and 
its series, the ``Funds'').\1\
---------------------------------------------------------------------------

    \1\ All existing investment companies that currently intend to 
rely on the order are named as applicants, and any other existing or 
future investment companies that subsequently rely on the order will 
comply with the terms and conditions of the application.

FILING DATES: The application was filed on March 23, 2001, and amended 
on June 4, 2002, and June 10, 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 9, 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 5th Street, NW., Washington, DC 
20549-0609; Applicants: c/o Bank One Corporation, 1111 Polaris Parkway, 
Suite 4P, Columbus, OH 43271-0152, Attn: Michael V. Wible, Esq.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
942-0582, 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 5th Street, NW., Washington, 
DC 20549-0102 (tel. (202) 942-8090).

Applicants' Representations

    1. The Trust is registered under the Act as an open-end management 
investment company and is organized as a Massachusetts business trust. 
Currently, the Trust is comprised of forty-eight Funds. The Investment 
Manager is registered as an investment adviser under the Investment 
Advisers Act of 1940 (the ``Advisers Act''). Each Fund has entered into 
an investment advisory agreement with the Investment Manager. The 
Administrator serves as administrator for the Funds. Both the 
Investment Manager and the Administrator are wholly owned indirect 
subsidiaries of Bank One Corporation, a bank holding company 
incorporated in the state of Delaware.
    2. Some Funds may lend money to banks or other entities by entering 
into repurchase agreements or purchasing other short-term instruments. 
Other Funds may borrow money from the same or similar banks for 
temporary

[[Page 42301]]

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 a 
credit arrangement with their custodian bank (i.e., overdraft 
protection) and have established a committed line of credit with a 
banking syndicate under which the banks lend money to the Funds to meet 
the Funds' temporary cash needs.
    3. If the Funds were to borrow money from any bank under their 
current arrangements or under other credit facility arrangements, the 
Funds 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) Funds on investments in repurchase agreements and other 
short-term instruments of the same maturity as the bank loan. 
Applicants believe this differential represents the bank's profit for 
serving as a middleman between a borrower and lender. In addition, the 
committed line of credit requires the Funds to pay substantial 
commitment fees in addition to the interest rate to be paid by the 
borrowing Fund.
    4. Applicants request an order that would permit the Funds to enter 
into lending agreements (``Interfund Lending Agreements'') under which 
the Funds would lend money and borrow money for temporary purposes 
directly to and from each other through a credit facility (``Interfund 
Loan''). Applicants believe that the proposed credit facility would 
substantially reduce the Funds' potential borrowing costs and enhance 
their ability to earn higher rates of interest on short-term lendings. 
Although the proposed credit facility would substantially reduce the 
Funds' need to borrow from banks, the Funds would continue to maintain 
overdraft protection with their custodian and would also obtain an 
uncommitted line of credit with their custodian. They would terminate 
their committed line of credit.
    5. Applicants anticipate that the credit facility would provide a 
borrowing Fund with significant savings when the cash position of the 
Fund is insufficient to meet temporary cash requirements. This 
situation could arise when redemptions exceed anticipated volumes and 
the Funds have insufficient cash on hand to satisfy such redemptions. 
When the Funds liquidate portfolio securities to meet redemption 
requests, which normally are effected immediately, they often do 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 Fund's custodian or improper delivery instructions by 
the broker effecting the transaction. Sales fails may present a cash 
shortfall if the Fund has undertaken to purchase a security with the 
proceeds from securities sold. When the Fund experiences a cash 
shortfall due to a sales fail, the custodian typically extends 
temporary credit to cover the shortfall and the Fund incurs overdraft 
charges. Alternatively, the Fund could sell a security on a same day 
settlement basis, earning a lower return on investment. Use of the 
credit facility under these circumstances would enable the Fund to have 
access to immediate short-term liquidity without incurring custodian 
overdraft or lower investment returns.
    7. While borrowing arrangements with banks will continue to be 
available to cover unanticipated redemptions and sales fails, under the 
proposed credit facility, a borrowing Fund would pay lower interest 
rates than those offered by banks on short-term loans. In addition, 
Funds making short-term loans directly to other Funds would earn 
interest at a rate higher than they otherwise could obtain from 
investing their cash in repurchase agreements or other short-term 
instruments. Thus, applicants believe that the proposed credit facility 
would benfit both borrowing and lending Funds.
    8. The interest rate charged to the Funds on any Interfund Loan 
(the ``Interfund Loan Rate'') 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 from investments in overnight 
repurchase agreements that is available to a lending Fund or to a joint 
account in which a lending Fund may participate. The Bank Loan Rate for 
any day would be calculated by the Credit Facility Team (as defined 
below) each day an Interfund Loan is made according to a formula 
established by the board of trustees for the Funds (the ``Board'') 
designed to approximate the lowest interest rate at which bank short-
term loans would be available to the Funds. 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. The Board periodically would review the continuing 
appropriateness of using the publicly available rate, as well as the 
relationship between the Bank Loan Rate and current bank loan rates 
that would be available to the Funds. The initial formula and any 
subsequent modifications to the formula would be subject to the 
approval of the Board.
    9. The Treasury unit of the Administrator (the ``Credit Facility 
Team'') would administer the credit facility. Under the proposed credit 
facility, the portfolio managers for each participating Fund may 
provide standing instructions to participate daily as a borrower or 
lender. The Credit Facility Team on each business day would collect 
data on the uninvested cash and borrowing requirements of all 
participating Funds from the Funds' custodian. Once it had determined 
the aggregate amount of cash available for loans and borrowing demand, 
the Credit Facility Team would allocate loans among borrowing Funds 
without any further communication from portfolio managers. Applicants 
expect far more available uninvested cash each day than borrowing 
demand. After the Credit Facility Team has allocated cash for Interfund 
Loans, the Investment Manager will invest any remaining cash in 
accordance with each Fund's normal practice.
    10. The Credit Facility Team will allocate borrowing demand and 
cash available for lending among the Funds on what the Credit Facility 
Team believes to be 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 
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. The method of allocation 
and related administrative procedures would be approved by the Board on 
behalf of each Fund, including a majority of trustees who are not 
``interested persons'' of the Funds, as defined in section 2(a)(19) of 
the Act (``Independent Trustees''), to ensure that both borrowing and 
lending Funds participate on an equitable basis.
    11. The Credit Facility Team would (a) monitor the Interfund Loan 
Rate and the other terms and conditions of the loans, (b) ensure 
compliance with each Fund's investment policies and limitations, (c) 
ensure equitable treatment of each Fund, and (d) make quarterly reports 
to the Board concerning any transactions by the Funds under the credit 
facility and the Interfund Loan Rate charged in the transactions.

[[Page 42302]]

    12. The Credit Facility Team would administer the credit facility 
as part of its duties under its existing administrative services 
agreement with each Fund and would receive no additional fee as 
compensation for its services. The Investment Manager would monitor the 
Credit Facility Team's administration of the credit facility and would 
receive no additional fee as compensation for its services.
    13. Each Fund's participation in the proposed credit facility will 
be consistent with its organizational documents and its investment 
policies and limitations. The Statement of Additional Information 
(``SAI'') of each Fund will disclose all material facts concerning the 
Fund's participation in Interfund Lending Agreements prior to the 
commencement of such arrangement and at all times during the term of 
the Interfund Loans. No Fund would borrow more than the lesser of the 
amount permitted by section 18 of the Act or the amount permitted by 
its investment limitations.
    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 transactions.

Applicants' Legal Analysis

    1. Section 17(a)(3) generally prohibits any affiliated person, or 
affiliated person of an affiliated person, from borrowing money or 
other property from a registered investment company. Section 21(b) 
generally prohibits any registered management investment company from 
lending money or other property to any person if that person controls 
or is under common control with the company. Section 2(a)(3)(C) of the 
Act defines ``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 the Investment Manager 
as their common investment adviser.
    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 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 proposed credit facility transactions do not raise these concerns 
because (a) the Credit Facility Team would administer the program as a 
disinterested party; (b) the Investment Manager would monitor the 
Credit Facility Team's administration of the credit facility as a 
disinterested fiduciary; (c) all Interfund Loans would consist only of 
uninvested cash reserves that the Fund otherwise would invest in short-
term repurchase agreements or other short-term instruments; (d) the 
Interfund Loans would not involve a greater risk than other similar 
investments; (e) the lending Fund would receive interest at a rate 
higher than it could obtain through other similar investments; and (f) 
the borrowing Fund would pay interest at a rate lower than otherwise 
available to it under its bank loan agreements and avoid the up-front 
commitment fees associated with committed lines of credit. Moreover, 
applicants believe that the other conditions in the application would 
effectively preclude the possibility of any Fund obtaining an undue 
advantage over any other Fund.
    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)(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 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 the Credit Facility Team 
would receive no additional compensation for its services in 
administering the credit facility. Applicants also note that the 
purpose of proposed credit facility is to provide economic benefits for 
all the participating Funds.
    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; provided that, immediately after the borrowing, 
there is an asset coverage of at least 300 per centum for all 
borrowings of the company. Under section 18(g) of the Act, the term 
``senior security'' includes any bond, debenture, note, or similar 
obligation or instrument constituting a security and evidencing 
indebtedness. Applicants request exemptive relief from section 18(f)(1) 
to the limited extent necessary to implement the credit facility 
(because the lending Funds are not banks).
    7. Applicants believe that granting the 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 credit facility 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 pursuant to 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 persons of an 
affiliated person, when acting as principal, from effecting

[[Page 42303]]

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

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 Funds under the 
credit facility will be the average of the Repo Rate and the Bank Loan 
Rate, adjusted daily.
    2. On each business day, the Credit Facility Team 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 the Repo Rate, 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, (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 Fund, the event of default will automatically (without need 
for action or notice by the lending Fund) constitute an immediate event 
of default under the Interfund Lending 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 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 Fund has a secured loan outstanding from any 
other lender, including but not limited to another Fund, the Fund's 
interfund borrowing will be secured on at least an equal priority basis 
with at least an equivalent percentage of collateral to loan value as 
any outstanding loan that requires collateral. If a Fund's total 
outstanding borrowings immediately after an interfund borrowing would 
be greater than 10% of its total assets, the Fund may borrow through 
the credit facility on a secured basis only. A Fund may not borrow 
through the credit facility or from any other source if its total 
outstanding borrowings immediately after the interfund borrowing would 
exceed the limits imposed by section 18 of the Act.
    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 exceed 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 exceeds 10% is 
repaid or the Fund's total outstanding borrowings cease to exceed 10% 
of its total assets, the Credit Facility Team will mark the value of 
the collateral to market each day and the Fund 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 loan.
    6. No Fund may lend to another Fund through the credit facility if 
the loan would cause its aggregate outstanding loans through the credit 
facility to exceed 15% of the lending Fund's 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 a lending Fund and may be repaid on any day by a borrowing Fund.
    10. A Fund's participation in the credit facility must be 
consistent with its investment policies and limitations and 
organizational documents. A Fund's borrowings through the 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 and 102% of sales fails for the preceding seven calendar 
days.
    11. The Credit Facility Team will calculate total Fund borrowing 
and lending demand through the credit facility, and allocate loans on 
an equitable basis among the Funds without the intervention of any 
portfolio manager of the Funds. The Credit Facility Team will not 
solicit cash for the credit facility from any Fund or prospectively 
publish or disseminate loan demand data to portfolio managers. The 
Investment Manager will invest any amounts remaining after satisfaction 
of borrowing demand in accordance with its normal practice.
    12. The Credit Facility Team will monitor the Interfund Loan Rates 
charged and the other terms and conditions of the Interfund Loans and 
will make a quarterly report to the Board concerning the participation 
of the Funds in the credit facility and the terms and other conditions 
of any extensions of credit under the facility.
    13. The Board of each Fund, including a majority of the Independent 
Trustees: (a) Will review no less frequently than quarterly the Fund's

[[Page 42304]]

participation in the 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 
determine the Interfund Loan Rate 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 credit facility.
    14. 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 Lending Agreement, the Credit 
Facility Team will promptly refer the loan for arbitration to an 
independent arbitrator selected by the Board of any Fund involved in 
the loan who will serve as arbitrator of disputes concerning Interfund 
Loans.\2\ The arbitrator will resolve any problem promptly, and the 
arbitrator's decision will be binding on both Funds. The arbitrator 
will submit at least annually a written report to the Board setting 
forth a description of the nature of any dispute and the actions taken 
by the Funds to resolve the dispute.
---------------------------------------------------------------------------

    \2\ If the dispute involves Funds with separate Boards, the 
Board of each Fund will select an independent arbitrator that is 
satisfactory to each Fund.
---------------------------------------------------------------------------

    15. 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 
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 rate of interest on the loan, the rate of 
interest available at the time on short-term repurchase agreements and 
bank borrowings, and such other information presented to the Fund's 
Board in connection with the review required by conditions 12 and 13.
    16. The Credit Facility Team will prepare and submit to the Board 
for review an initial report describing the operations of the credit 
facility and the procedures to be implemented to ensure that all Funds 
are treated fairly. After the commencement of operations of the credit 
facility, the Credit Facility Team will report on the operations of the 
credit facility at the Board's quarterly meetings.
    In addition, for two years following the commencement of the credit 
facility, an independent public accountant for each Fund shall prepare 
an annual report that evaluates the Credit Facility Team'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, 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 Board; and (e) that the Interfund Loan 
Rate does not exceed the interest rate on any third party borrowings of 
a borrowing Fund at the time of the Interfund Loan.
    After the final report is filed, the Fund's external auditors, in 
connection with their Fund audit examinations, will continue to review 
the operation of the credit facility for compliance with the conditions 
of the application and their review will form the basis, in part, of 
the auditor's report on internal accounting controls in Form N-SAR.
    17. No Fund 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.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-15707 Filed 6-20-02; 8:45 am]
BILLING CODE 8010-01-P