[Federal Register Volume 68, Number 26 (Friday, February 7, 2003)]
[Notices]
[Pages 6520-6524]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-3004]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-25923; 812-12736]


ARK Funds, et al.; Notice of Application

February 3, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

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

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    Summary of Application: Applicants request an order that would 
permit certain registered open-end investment companies to participate 
in a joint lending and borrowing facility.
    Applicants: Allied Investment Advisers, Inc. (``AIA''); Allfirst 
Trust Company N.A. (``Allfirst Trust''); ARK Funds.
    Filing Dates: The application was filed on December 28, 2001, and 
amended on December 19, 2002. Applicants have agreed to file an 
amendment during the notice period, the substance of which is reflected 
in this notice.
    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 February 28, 2003, and should be accompanied by proof of 
service on applicants, in the form of an affidavit, or for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, c/o Alan C. Porter, Esq., Kirkpatrick & 
Lockhart LLP, 1800 Massachusetts Avenue, NW., Washington, DC 20036.

FOR FURTHER INFORMATION CONTACT: Stacy L. Fuller, Senior Counsel, or 
Nadya B. Roytblat, Assistant Director, 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. ARK Funds is registered under the Act as an open-end management 
investment company and is organized as a Massachusetts business 
trust.\1\ AIA, an investment adviser registered under the Investment 
Advisers Act of 1940, serves as investment adviser for each series of 
ARK Funds. AIA is a wholly owned subsidiary of Allfirst Bank, a Federal 
Reserve member bank. Allfirst Trust, a wholly owned subsidiary of 
Allfirst Bank, serves as custodian, transfer agent and administrator 
for ARK Funds. An existing Commission order permits certain series of 
ARK Funds that are not money market funds to invest uninvested cash 
balances in one or more series of ARK Funds that are money market funds 
that comply with rule 2a-

[[Page 6521]]

7 under the Act (``Money Market Funds'').\2\
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    \1\ Applicants request that the relief also apply to any other 
existing or future registered open-end management investment company 
or series thereof that is advised by AIA or any person controlling, 
controlled by, or under common control with AIA or its successors 
(together with the series of ARK Funds, the ``Funds''). 
``Successors'' are limited to any entities that result from AIA's 
reorganization into another jurisdiction or a change in the type of 
business organization. All Funds that currently intend to rely on 
the order have been named as applicants, and any other existing or 
future Fund that subsequently may rely on the order will comply with 
the terms and conditions in the application.
    \2\ ARK Funds, et al. ICA Rel. Nos. 25136 (Aug. 24, 2001) 
(notice) and 25163 (Sept. 19, 2001) (order).
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    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 other banks for temporary 
purposes to satisfy redemption requests or to cover unanticipated cash 
shortfalls such as trade ``fails'' in which cash payment for a 
portfolio security sold by a Fund has been delayed.
    3. If the Funds were to borrow money from a bank, the Funds would 
pay interest on the borrowed cash at a rate that would be significantly 
higher than the rate that would be earned by other (non-borrowing) 
Funds on repurchase agreements and other short-term instruments of the 
same maturity as the bank loan. Applicants state that this differential 
represents the profit the banks would earn for serving as a middleman 
between a borrower and a lender. In addition, while bank borrowings 
generally could supply needed cash to cover unanticipated redemptions 
and sales fails, the borrowing Funds would incur commitment fees and/or 
other charges involved in obtaining a bank loan.
    4. Applicants request an order that would permit the Funds to enter 
into lending agreements (``Interfund Lending Agreements'') under which 
the Funds would lend and borrow money for temporary purposes directly 
to and from each other through a credit facility (``Interfund Loan''). 
Applicants state that the proposed credit facility would reduce 
potential borrowing Funds' costs and enhance lending Funds' ability to 
earn higher rates of interest on short-term loans. Although the 
proposed credit facility would reduce the Funds' need to borrow from 
banks, the Funds would be free to establish lines of credit or other 
borrowing arrangements with banks.
    5. Applicants anticipate that the credit facility would provide 
borrowing Funds with significant savings when the cash position of the 
Funds 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 are normally effected promptly upon receipt, they often 
do not receive payment in settlement of the liquidation 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 beyond a Fund's control, such as 
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. Under such 
circumstances, 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 would enable 
the Funds to have access to immediate short-term liquidity without 
incurring custodian overdraft or other charges or lower investment 
returns.
    7. While borrowing arrangements with banks may 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 cash 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 purchasing shares of a Money Market Fund. 
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'', both as defined below. The Repo Rate on any 
day would be the highest rate available to a lending Fund from 
investments in overnight repurchase agreements. The Bank Loan Rate on 
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 each Fund's board of trustees (each, a ``Board''), 
intended to approximate the lowest interest rate at which a bank short-
term loan would be available to the Fund. The formula would be based on 
a publicly available rate (e.g., Federal funds plus 25 basis points) 
that would vary so as to reflect changing bank loan rates. The Board of 
each Fund 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 
it would be subject to the approval of the Board of each Fund.
    9. The credit facility would be administered by an AIA investment 
professional (namely, a portfolio manager for the Money Market Funds), 
representatives of Allfirst Trust and of ARK Funds' accounting group 
(collectively, the ``Credit Facility Team''). Under the proposed credit 
facility, the portfolio managers for each participating Fund could 
provide standing instructions to participate daily as a borrower or 
lender. On each business day Allfirst Trust, as the Funds' custodian, 
would provide the Credit Facility Team with data on the uninvested cash 
and borrowing requirements of all participating Funds. Applicants 
expect far more available uninvested cash each day than borrowing 
demand. Once the Credit Facility Team 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 (other than the portfolio manager 
on the Credit Facility Team). All allocations would require approval of 
at least one member of the Credit Facility Team other than the Money 
Market Fund portfolio manager. After allocating cash for Interfund 
Loans, the Credit Facility Team would invest any remaining cash in 
accordance with the standing instructions from portfolio managers or 
return remaining amounts to the Funds. The Money Market Funds would not 
participate as borrowers.
    10. The Credit Facility Team would allocate borrowing demand and 
cash available for lending among the Funds on what the Credit Facility 
Teams 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 Interfund Loan normally would 
be allocated in a manner intended to minimize the number of 
participants necessary to complete the transaction.
    11. The Credit Facility Team would (a) monitor the interest rates 
charged and the other terms and conditions of the loans, (b) limit the 
borrowings and loans entered into by each Fund to ensure that they 
comply with the Fund's investment policies and limitations, (c) ensure 
equitable treatment of each Fund, and (d) make quarterly reports to

[[Page 6522]]

the Board of each Fund concerning any transactions by the Fund under 
the credit facility and the interest rates charged. The method of 
allocation and related administrative procedures would be approved by 
the Board of each Fund, including a majority of the trustees who are 
not ``interested persons,'' as defined in section 2(a)(19) of the Act 
(``Independent Trustees''), of the Fund, to ensure that both borrowing 
and lending Funds participate on an equitable basis.
    12. AIA, through the Credit Facility Team, would administer the 
credit facility as a disinterested fiduciary in the best interests of 
the Funds' shareholders. Neither AIA nor Allfirst Trust would receive 
any additional fee in connection with the administration of the 
proposed credit facility. AIA and Allfirst Trust, however, may collect 
standard pricing and recordkeeping, bookkeeping, and accounting fees 
associated with repurchase and lending transactions generally, 
including transactions effected through the credit facility. Fees paid 
to AIA or Allfirst Trust in connection with an Interfund Loan would be 
no higher than those applicable for comparable bank loan transactions.
    13. No Fund may participate in the credit facility unless: (a) The 
Fund has obtained shareholder approval for its participation, if such 
approval is required by law; (b) the Fund has fully disclosed all 
material information concerning the credit facility in its prospectus 
and/or SAI; and (c) the Fund's participation in the credit facility is 
consistent with its investment objectives, limitations, and 
organizational documents.
    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 sections 12(d)(1)(A) and (B) of the Act; (c) 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, (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) of the Act generally prohibits an affiliated 
person, or an affiliated person of an affiliated person, from borrowing 
money or other property from a registered investment company. Section 
21(b) of the Act generally prohibits any registered management company 
from lending money or other property to any person if that person 
controls or is under common control with that company. Section 2(a)(3) 
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 AIA as their 
common investment adviser, and/or by reason of having common officers, 
directors and/or trustees.
    2. Section 6(c) of the Act 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) of the Act 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 companies involved, as recited in their registration 
statements, 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 
proposed credit facility transactions do not raise these concerns 
because: (a) AIA, through the Credit Facility Team, would administer 
the program as a disinterested fiduciary in the best interests of the 
Funds' shareholders; (b) all Interfund Loans would consist only of 
uninvested cash reserves that a Fund otherwise would invest in short-
term repurchase agreements or other short-term instruments either 
directly or through a Money Market Fund; (c) the Interfund Loans would 
not involve a greater risk than such other investments; (d) a lending 
Fund would receive interest at a rate higher than it could obtain 
through such other investments; and (e) a borrowing Fund would pay 
interest at a rate lower than otherwise available to it under 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) of the Act 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 
state 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) of the Act. Section 12(d)(1)(J) of the Act provides that the 
Commission may exempt persons or transactions from any provision of 
section 12(d)(1) if and to the extent that 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) 
of the Act 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 AIA nor Allfirst 
Trust would receive any additional compensation for services provided 
in connection with administering the credit facility. Applicants also 
note that the purpose of the proposed credit facility is to provide 
economic benefits for all of the participating Funds.
    6. Section 18(f)(1) of the Act prohibits open-end investment 
companies from issuing any senior security, except that a company is 
permitted to borrow from any bank, if immediately after the borrowing 
there is an asset coverage of at least 300 percent for all borrowings 
of the company. Under section 18(g) of the Act, the term ``senior 
security'' includes any bond, debenture, note, or similar obligation or 
instrument constituting a security and evidencing indebtedness. 
Applicants request exemptive relief from section 18(f)(1) to the 
limited

[[Page 6523]]

extent necessary to implement the credit facility (because the lending 
Funds are not banks).
    7. Applicants believe that granting relief under section 6(c) of 
the Act 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) of the Act and rule 17d-1 under the Act generally 
prohibit an affiliated person of a registered investment company, or an 
affiliated person of such a person, when acting as principal, from 
effecting any joint transaction unless the transaction is approved by 
the Commission. Rule 17d-1(b) under the Act provides that in passing 
upon applications for exemptive relief from section 17(d), the 
Commission will consider whether the participation of a registered 
investment company in a joint enterprise on the basis proposed is 
consistent with the provisions, policies, and purposes of the Act and 
the extent to which the company's participation is on a basis different 
from, or less advantageous than, that of other participants.
    9. Applicants submit that the purpose of section 17(d) is to avoid 
overreaching by, and unfair advantage to, investment company insiders. 
Applicants believe that the 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 no different 
from, or less advantageous than, that of other participating Funds.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The interest 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 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, if applicable, the yield of 
any Money Market Fund in which the lending Fund could otherwise invest 
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, 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 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 
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 (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 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 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 funds 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. 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.
    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 Credit Facility Team will calculate total Fund borrowing 
and lending demand through the credit facility, and allocate loans on 
an

[[Page 6524]]

equitable basis among the Funds without the intervention of any 
portfolio manager of the Funds (other than the Money Market Fund 
portfolio manager acting in his or her capacity as a member of the 
Credit Facility Team). All allocations will require approval of at 
least one member of the Credit Facility Team who is not the Money 
Market Fund portfolio manager. 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 (except 
to the extent that the portfolio manager of the Money Market Fund has 
access to loan demand data). The Credit Facility Team 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 Funds.
    13. The Credit Facility Team will monitor the interest rates 
charged and the other terms and conditions of the Interfund Loans and 
will make a quarterly report to the Board of each Fund concerning the 
participation of the Fund in the credit facility and the terms and 
other conditions of any extensions of credit under the facility.
    14. The Board of each Fund, including a majority of the Independent 
Trustees: (a) 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 the 
transactions; (b) 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 (c) 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 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.\3\ 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 of each 
Fund 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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    \3\ If the dispute involves Funds with different Boards, the 
Board of each Fund will select an independent arbitrator that is 
satisfactory to each Fund.
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    16. Each Fund will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any transaction 
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 overnight repurchase agreements and 
bank borrowings, the yield of any Money Market Fund in which the 
lending Fund could otherwise invest and such other information 
presented to the Board in connection with the review required by 
conditions 13 and 14.
    17. The Credit Facility Team will prepare and submit to the Board 
of each Fund 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 quarterly meetings of each 
Fund's Board.
    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 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, and if applicable, the yield of the Money 
Market Funds, 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 interest rate on any Interfund Loan does not 
exceed the interest rate on any third-party borrowings of a borrowing 
Fund at the time of the Interfund Loan.
    After the final report is filed, a 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 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. 03-3004 Filed 2-6-03; 8:45 am]
BILLING CODE 8010-01-P