[Federal Register Volume 67, Number 127 (Tuesday, July 2, 2002)]
[Notices]
[Pages 44481-44486]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-16659]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 25640; 812-11986]


Eaton Vance Income Fund of Boston, et al.; Notice of Application

June 26, 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 (``Act'') for an exemption from 
sections 18(f) and 21(b) of the Act, (ii) section 12(d)(1)(J) of the 
Act for an exemption from section 12(d)(1) of the Act, (iii) 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 (iv) section 17(d) of the Act and rule 17d-1 
under the Act to permit certain joint arrangements.

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Summary of Application: Applicants request an order that would permit 
certain registered investment companies to participate in a joint 
lending and borrowing facility.

APPLICANTS: Eaton Vance Income Fund of Boston, Eaton Vance Senior 
Income Trust, Eaton Vance Advisers Senior Floating Rate Fund, Eaton 
Vance Prime Rate Reserves, EV Classic Senior Floating-Rate Fund, Eaton 
Vance Institutional Senior Floating-Rate Fund, Eaton Vance Growth 
Trust, Eaton Vance Investment Trust, Eaton Vance Municipals Trust, 
Eaton Vance Municipals Trust II, Eaton Vance Mutual Funds Trust, Eaton 
Vance Series Trust, Eaton Vance Special Investment Trust, Eaton Vance 
Variable Trust, Asian Small Companies Portfolio, Growth Portfolio, 
Greater China Growth Portfolio, Information Age Portfolio, Worldwide 
Health Sciences Portfolio, California Limited Maturity Municipals 
Portfolio, Florida Limited Maturity Municipals Portfolio, Massachusetts 
Limited Maturity Municipals Portfolio, National Limited Maturity 
Municipals Portfolio, New Jersey Limited Maturity Municipals Portfolio, 
New York Limited Maturity Municipals Portfolio, Ohio Limited Maturity 
Municipals Portfolio, Pennsylvania Limited Maturity Municipals 
Portfolio, Alabama Municipals Portfolio, Arizona Municipals Portfolio, 
Arkansas Municipals Portfolio, California Municipals Portfolio, 
Colorado Municipals Portfolio, Connecticut Municipals Portfolio, 
Florida Municipals Portfolio, Georgia Municipals Portfolio, Kentucky 
Municipals Portfolio, Louisiana Municipals Portfolio, Maryland 
Municipals Portfolio, Massachusetts Municipals Portfolio, Michigan 
Municipals Portfolio, Minnesota Municipals Portfolio, Mississippi 
Municipals Portfolio, Missouri Municipals Portfolio, National 
Municipals Portfolio, New Jersey Municipals Portfolio, New York 
Municipals Portfolio, North Carolina Municipals Portfolio, Ohio 
Municipals Portfolio, Oregon Municipals Portfolio, Pennsylvania 
Municipals Portfolio, Rhode Island Municipals Portfolio, South Carolina 
Municipals Portfolio, Tennessee Municipals Portfolio, Virginia 
Municipals Portfolio, West Virginia Municipals Portfolio, Florida 
Insured Municipals Portfolio, Hawaii Municipals Portfolio, High Yield 
Municipals Portfolio, Kansas Municipals Portfolio, Cash Management 
Portfolio, Government Obligations Portfolio, High Income Portfolio, 
Tax-Managed Growth Portfolio, Strategic Income Portfolio, Emerging 
Markets Portfolio, South Asia Portfolio, Growth & Income Portfolio, 
Special Equities Portfolio, Utilities Portfolio, Senior Debt Portfolio, 
Floating Rate Portfolio, Tax-Managed Emerging Growth Portfolio, Tax-
Managed International Growth Portfolio, Tax-Managed Value Portfolio, 
Boston Income Portfolio, Capital Appreciation Portfolio, Investment 
Grade Income Portfolio, Small-Cap Portfolio, Large-Cap Growth 
Portfolio, Small Company Growth Portfolio, Tax-Managed Mid-Cap Stock 
Portfolio, Tax-Managed Small-Cap Value Portfolio, Capital Growth 
Portfolio, Small Cap Value Portfolio, Tax-Managed Mid-Cap Core 
Portfolio, U.S. Core Growth Portfolio, Investor Portfolio, or series 
thereof (collectively, the ``Eaton Vance Funds''), Eaton Vance 
Management, Lloyd George Investment Management (Bermuda) Limited, Lloyd 
George Management (Hong Kong) Limited, and Boston Management & 
Research, and any entity controlling, controlled by, or under common 
control with Eaton Vance Management (collectively, the ``Adviser''), 
and any other registered management investment company that is part of 
the same group of investment companies as the Eaton Vance Funds that is 
advised by the Adviser, now or in the future (together with the Eaton 
Vance Funds, the ``Funds'').\1\
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    \1\ All investment companies that currently intend to rely on 
the order are named as applicants. Any other existing or future Fund 
that will rely on the order will comply with the terms and 
conditions of the application.

FILING DATES: The application was filed on February 18, 2000, and 
amended on June 24, 2002.

[[Page 44482]]


HEARING OR NOTIFICATION OF HEARING: An order granting the requested 
relief will be issued unless the Commission orders a hearing. 
Interested persons may request a hearing by writing to the Commission's 
Secretary and serving applicants with a copy of the request, personally 
or by mail. Hearing requests should be received by the Commission by 
5:30 p.m. on July 22, 2002, and should be accompanied by proof of 
service on applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons may request notification of a hearing by writing to 
the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 5th Street, NW, Washington, DC 
20549-0609. Applicants, 225 State Street, Boston, MA 02109.

FOR FURTHER INFORMATION CONTACT: Karen L. Goldstein, Senior Counsel, at 
(202) 942-0646, or Janet M. Grossnickle, Branch Chief, at (202) 942-
0564 (Division of Investment Management, Office of Investment Company 
Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Branch, 450 5th Street, NW, Washington, 
DC 20549-0102 (tel. 202-942-8090).

Applicants' Representations

    1. Each Eaton Vance Fund, except Eaton Vance Senior Income Trust 
and Senior Debt Portfolio, is registered under the Act as an open-end 
management investment company (``Open-End Funds''). Eaton Vance Senior 
Income Trust and Senior Debt Portfolio are registered under the Act as 
closed-end management investment companies (``Closed-End Funds''). Each 
Eaton Vance Fund is organized as a Massachusetts or a New York business 
trust. Each Eaton Vance Adviser is registered under the Investment 
Advisers Act of 1940 and serves as investment adviser to the Funds.
    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 banks for temporary purposes to 
satisfy redemption requests, cover unanticipated cash shortfalls such 
as a ``trade fail'' in which cash payment for a security sold by a Fund 
has been delayed, or to cover cash short falls resulting from delays in 
trade settlement. Currently, the Funds have credit arrangements with 
their custodian (i.e., overdraft protection), as well as committed 
lines of credit with a bank syndicate for temporary cash needs.
    3. If the Funds were to borrow money under their current 
arrangements or under other credit arrangements with a bank, 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. Other bank loan 
arrangements, such as committed lines of credit, would require 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 directly to and borrow money directly from 
each other through a credit facility for temporary purposes 
(``Interfund Loan''). Applicants believe that the proposed credit 
facility would substantially reduce the Open-End Funds' potential 
borrowing costs and enhance the Funds' ability to earn higher rates of 
interest on short-term lendings. Although the proposed credit facility 
would substantially reduce the Open-End Funds' need to borrow from 
banks, the Funds would retain committed lines of credit or other 
borrowing arrangements with banks. The Funds also would continue to 
maintain overdraft protection currently provided by their custodian. 
Applicants state that Closed-End Funds will participate in the credit 
facility exclusively as lenders.
    5. Applicants anticipate that the credit facility would provide a 
borrowing Open-End 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 Open-End Funds liquidate portfolio securities to meet 
redemption requests, which normally are effected within one to three 
days, 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 fail on its intended purchase 
due to lack of funds from the previous sale, resulting in additional 
cost to the Fund, or sell a security on a same day settlement basis, 
earning a lower return on the 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 
other charges.
    7. While borrowing arrangements with banks will continue to be 
available to cover unanticipated redemptions, sales fails and delayed 
settlements, under the proposed credit facility a borrowing Open-End 
Fund would pay lower interest rates than those offered by banks on 
short-term loans. In addition, Funds making short-term cash loans 
directly to other Funds would earn interest at a rate higher than they 
otherwise could obtain from investing their cash in short-term reserves 
or repurchase agreements. Thus, applicants believe that the proposed 
credit facility would benefit 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'', each as defined below. The Repo Rate for 
any day would be the highest rate available from investments in 
overnight repurchase agreements. The Bank Loan Rate for any day would 
be calculated by the Cash Management Team (defined below) each day an 
Interfund Loan is made according to a formula established by the Fund's 
Board of Trustees (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. Each Fund's Board periodically 
would review the continuing appropriateness of using the publicly 
available rate, as well as the relationship between the Bank Loan

[[Page 44483]]

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 each Fund's Board.
    9. The credit facility would be administered by money market 
investment professionals employed by the Global Treasury Group at 
Investors Bank & Trust Company (``IBT'') and supervised by members of 
the Funds'' treasurer's office (collectively, the ``Cash Management 
Team''). IBT also serves as custodian for each Fund. 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 Cash Management 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 Cash Management 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 Cash Management Team has allocated cash for Interfund 
Loans, the Adviser will invest any remaining cash in accordance with 
the standing instructions from portfolio managers or return remaining 
amounts for investment to the Funds. Money market Funds typically would 
not participate as borrowers because they rarely need to borrow cash to 
meet redemptions.
    10. The Cash Management Team would allocate borrowing demand and 
cash available for lending among the Funds on what the Cash Management 
Team believed 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 each Fund's 
Board including a majority of trustees who are not ``interested 
persons'' of the Fund, 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. Through information provided by IBT, the Adviser would (i) 
monitor the interest rates charged and the other terms and conditions 
of the loans, (ii) limit the borrowings and loans entered into by each 
Fund to ensure that they comply with the Fund's investment policies and 
limitations, (iii) ensure equitable treatment of each Fund, and (iv) 
make quarterly reports to the Board concerning any transactions by the 
Funds under the credit facility and the interest rates charged.
    12. The Adviser would supervise the credit facility as part of its 
duties under existing advisory contracts with each Fund and would 
receive no additional fee as compensation for its services. IBT would 
administer the day-to-day operations of the credit facility and receive 
no additional compensation for its services. IBT may collect standard 
pricing, recordkeeping, bookkeeping and accounting fees applicable to 
lending transactions, including transactions effected through the 
credit facility. Fees would be no higher than those applicable for 
comparable bank transactions.
    13. Applicants state that IBT will be performing a ministerial role 
under the daily supervision of the Adviser. Applicants further state 
that in conjunction with establishment of the credit facility, IBT will 
also provide certain cash management services and instruments to 
address liquidity needs the Funds may encounter from time to time. 
Applicants state that cash management services provided by IBT will 
only be employed after any interfund lending needs have been satisfied. 
Applicants believe that any financial benefits received by IBT for its 
provision of the cash management alternatives to the Funds will be 
quantifiable and transparent both to the Adviser and to the Boards. The 
Adviser will provide information on any such financial benefits 
received by IBT to the Boards in connection with their annual review of 
the Funds' participation in the credit facility. Applicants represent 
that IBT will administer the credit facility solely in the best 
interests of the Funds.
    14. Each Fund's participation in the proposed credit facility will 
be consistent with its organizational documents and its investment 
polices and limitations. The registration of each Fund discloses the 
individual borrowing and lending limitations of the Fund. Each Fund 
will notify shareholders of its intended participation in the proposed 
credit facility prior to relying upon any relief granted pursuant to 
the application. The statement of additional information of each Open-
End Fund will disclose all material facts about the Fund's intended 
participation in the credit facility.
    15. In connection with the credit facility, applicants request an 
order under (i) section 6(c) of the Act granting relief from sections 
18(f) and 21(b) of the Act; (ii) section 12(d)(1)(J) of the Act 
granting relief from section 12(d)(1) of the Act; (iii) sections 6(c) 
and 17(b) of the Act granting relief from sections 17(a)(1) and 
17(a)(3) of the Act; (iv) 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 Funds 
may be under common control by virtue of having a common investment 
adviser and by having a common Board.
    2. Section 6(c) provides that an exemptive order may be granted 
where an exemption is necessary or appropriate in the public interest 
and consistent with the protection of investors and the purposes fairly 
intended by the policy and provisions of the Act. Section 17(b) 
authorizes the Commission to exempt a proposed transaction from section 
17(a) provided that the terms of the transaction, including the 
consideration to be paid or received, are fair and reasonable and do 
not involve overreaching on the part of any person concerned, and the 
transaction is consistent with the policy of the investment company as 
recited in its registration statement and with the general purposes of 
the Act. Applicants believe that the proposed arrangements satisfy 
these standards for the reasons discussed below.
    3. Applicants submit that sections 17(a)(3) and 21(b) of the Act 
were intended to prevent a party with potential adverse interests to 
and 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 such party 
and that are detrimental to the best interests of the

[[Page 44484]]

investment company and its shareholders. Applicants assert that the 
proposed credit facility transactions do not raise these concerns 
because (i) the Adviser supervises the program as a disinterested 
fiduciary; (ii) IBT administers the program as a disinterested service 
provider; (iii) 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; (iv) the 
Interfund Loans would not involve a greater risk than other similar 
investments; (v) the lending Fund would receive interest at a rate 
higher than it could obtain through other similar investments; and (vi) 
the borrowing Fund would pay interest at a rate lower than otherwise 
available to it under its bank loan agreements and avoid the 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 for purposes of 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 exemption 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 neither the Adviser nor 
IBT would receive any additional compensation for their services in 
administering the credit facility. Applicants also note that the 
purpose of the 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 any such 
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 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 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 Open-End 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 person of an 
affiliated person, when acting as principal, from effecting any joint 
transaction in which the company participates unless the transaction is 
approved by the Commission. Rule 17d-1 provides that in passing upon 
applications for exemptive relief, 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 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 interest rates to be charged to the Funds under the credit 
facility will be the average of the Repo Rate and the Bank Loan Rate.
    2. On each business day the Cash Management Team will compare the 
Repo Rate with the Bank Loan Rate and will make cash available for 
Interfund Loans only if the Interfund Loan Rate is more favorable to 
the lending Fund than the Repo Rate and more favorable to the borrowing 
Fund than the Bank Loan Rate.
    3. If a Fund has outstanding borrowings, any Interfund Loans to the 
Fund (i) will be at an interest rate equal to or lower than any 
outstanding bank loan, (ii) 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, (iii) 
will have a maturity no longer than any outstanding bank loan (and in 
no event over seven days), and (iv) will provide that, if an event of 
default occurs under any agreement evidencing an outstanding bank loan 
to the Fund, that event of default will automatically (without need for 
action or notice by the lending Fund) constitute an immediate event of 
default under the Interfund Lending Agreement entitling the lending 
Fund to call the 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

[[Page 44485]]

facility only on a secured basis. 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 be more than 
33 1/3% of its total assets.
    5. Before any Fund that has outstanding interfund borrowings may, 
through additional borrowings, cause its outstanding borrowings from 
all sources to exceed 10% of its total assets, the Fund must first 
secure each outstanding Interfund Loan by the pledge of segregated 
collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Fund with outstanding Interfund Loans 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 (i) repay all its outstanding Interfund Loans, 
(ii) reduce its outstanding indebtedness to 10% or less of its total 
assets, or (iii) secure each outstanding Interfund Loan by the pledge 
of segregated collateral with a market value at least equal to 102% of 
the outstanding principal value of the loan until the Fund's total 
outstanding borrowings cease to exceed 10% of its total assets, at 
which time the collateral called for by this condition 5 shall no 
longer be required. Until each Interfund Loan that is outstanding at 
any time that a Fund's total outstanding borrowings exceed 10% is 
repaid or the Fund's total outstanding borrowings cease to exceed 10% 
of its total assets, the Fund will mark the value of the collateral to 
market each day and will pledge such additional collateral as is 
necessary to maintain the market value of the collateral that secures 
each outstanding Interfund Loan at least equal to 102% of the 
outstanding principal value of the loan.
    6. No Fund may lend to a Fund through the credit facility if the 
loan would cause its aggregate outstanding loans through the credit 
facility to exceed 15% of its net assets at the time of the loan.
    7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of 
the lending Fund's net assets.
    8. The duration of Interfund Loans will be limited to the time 
required to receive payment for securities sold, but in no event more 
than seven days. Loans effected within seven days of each other will be 
treated as separate loan transactions for purposes of this condition.
    9. Unless the Fund has a policy that prevents it from borrowing for 
other than temporary or emergency purposes, the Fund's borrowings 
through the Credit Facility, as measured on the day the most recent 
Interfund Loan was made to that Fund, will not exceed the greater of 
125% of the Fund's total net cash redemptions or 102% of sales fails 
for the preceding seven calendar days.
    10. 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.
    11. A Fund's participation in the credit facility must be 
consistent with its investment policies and limitations and 
organizational documents.
    12. The Cash Management Team will calculate total Fund borrowing 
and lending demand through the credit facility, and allocate loans on 
an equitable basis among Funds, without the intervention of the 
portfolio manager of any Fund. The Cash Management Team will not 
solicit cash for the credit facility from any Fund or prospectively 
publish or disseminate loan demand data to portfolio managers. The 
Adviser will invest any amounts remaining after satisfaction of 
borrowing demand in accordance with standing instructions from 
portfolio managers or return remaining amounts for investment to the 
Funds.
    13. The Adviser will monitor the interest rates charged and the 
other terms and conditions of the Interfund Loans and will make a 
quarterly report to the Boards of the Funds concerning their 
participation in the credit facility and the terms and conditions of 
any extensions of credit thereunder.
    14. The Board of each Fund, including a majority of the Independent 
Trustees, (i) will review, no less frequently than quarterly, the 
Fund's participation in the credit facility during the preceding 
quarter for compliance with the conditions of any order permitting such 
transactions, (ii) will establish the Bank Loan Rate formula used to 
determine the interest rate on Interfund Loans and review, no less 
frequently than annually, the continuing appropriateness of the Bank 
Loan Rate formula, and (iii) will review, no less frequently than 
annually, the continuing appropriateness of the Fund's participation in 
the credit facility.
    15. In the event an Interfund Loan is not paid according to its 
terms and such 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 Adviser 
will promptly refer such 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.
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    \2\ If the dispute involves Funds with separate Boards, the 
Board of each Fund will select an independent arbitrator that is 
satisfactory to each party.
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    16. Each Fund will maintain and preserve, for a period of not less 
than six years from the end of the fiscal year in which any transaction 
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 13 and 14.
    17. The Adviser 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 Adviser 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, the independent public accountant 
for each Fund shall prepare an annual report that evaluates the 
Adviser'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: (i) That the 
Interfund Rate will be higher than the Repo Rate, but lower than the 
Bank Loan Rate; (ii) compliance with the collateral requirements as set 
forth in this application; (iii) compliance with the percentage 
limitations on interfund borrowing and lending; (iv) allocation of 
interfund borrowing and lending demand in an equitable manner and in 
accordance with procedures established by the Trustees; and (v) that 
the interest rate on any Interfund Loan does not exceed the interest 
rate on any third

[[Page 44486]]

party borrowings of a borrowing Fund at the time of the Interfund Loan. 
After the final report is filed, each 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.
    18. No Fund will participate in the credit facility unless the Fund 
has fully disclosed in its registration statement 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. 02-16659 Filed 7-1-02; 8:45 am]
BILLING CODE 8010-01-P