[Federal Register Volume 68, Number 111 (Tuesday, June 10, 2003)]
[Notices]
[Pages 34680-34685]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-14562]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26067; 812-12792]


AB Funds Trust, et al.; Notice of Application

June 4, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

[[Page 34681]]


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: AB Funds Trust (the ``Trust'') and SBC Financial 
Services, Inc. (``SBC Financial'').
    Filing Dates: The application was filed on March 4, 2002, and 
amended on June 4, 2003.
    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 June 30, 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 Donald W. Smith, Esq., Kirkpatrick & 
Lockhart LLP, 1800 Massachusetts Avenue, NW., Washington, DC 20036.

FOR FURTHER INFORMATION CONTACT: Deepak T. Pai, Senior Counsel, or Todd 
Kuehl, Branch Chief, at 202-942-0564 (Division of Investment 
Management, Office of Investment Company Regulation).

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

Applicants' Representations

    1. The Trust is registered under the Act as an open-end management 
investment company and is organized as a Delaware business trust. The 
Trust is composed of thirteen series; each series has separate 
investment objectives, policies, and assets (the ``Funds''). \1\ SBC 
Financial, an investment adviser registered under the Investment 
Advisers Act of 1940, serves as investment adviser for each Fund. An 
existing Commission order permits the non-money market Funds to invest 
uninvested cash balances in certain money market Funds that comply with 
rule 2a-7 under the Act (``Money Market Funds''). \2\
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    \1\ Applicants request that the relief also apply to any future 
series of the Trust and to any other registered open-end management 
investment company or series thereof that is advised by SBC 
Financial or any person controlling, controlled by, or under common 
control with SBC Financial (``Future Funds,'' included in the term 
``Funds''). 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\ AB Funds Trust, ICA Rel. Nos. 24999 (June 7, 2001) (notice) 
and 25054 (June 29, 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 banks for temporary purposes to 
satisfy redemption requests or to cover unanticipated cash shortfalls 
such as a trade ``fail'' in which cash payment for a security sold by a 
Fund has been delayed.
    3. If the Funds were to borrow money from a bank, under their 
current credit arrangement 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 bank 
would earn for serving as a middleman between a borrower and a lender. 
The borrowing Funds also pay commitment and facility fees to the bank.
    4. Applicants request an order that would permit the Funds to enter 
into master interfund lending agreements (``Interfund Lending 
Agreements'') with each other that would permit the Funds to 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 their short-term lendings. Although the proposed credit 
facility would reduce the Funds' need to borrow from banks, the Funds 
would be free to continue the existing lines of credit or establish new 
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, they often do not receive payment in settlement for up to 
three days (or longer for certain foreign transactions). However, 
redemption requests normally are satisfied immediately. 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 
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 using the proceeds from securities sold. Under such 
circumstances, the Fund could (i) fail on its intended purchase due to 
lack of funds from the previous sale, resulting in additional cost to 
the Fund, or (ii) sell a security on a same day settlement basis, 
earning a lower return on the investment. Use of the credit facility 
would give the Funds access to immediate short-term liquidity without 
incurring custodian overdraft or other charges.
    7. While bank borrowings generally could supply needed cash to 
cover unanticipated redemptions and sales fails, under the proposed 
credit facility, a borrowing Fund would pay lower interest rates than 
those that would be payable under short-term loans offered by banks. 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 loan made pursuant 
to the proposed credit facility (the ``Interfund Loan Rate'') would be 
determined daily

[[Page 34682]]

and would be the average of (i) the ``Repo Rate'' and (ii) 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 SBC Financial according to a formula established by each 
Fund's board of trustees (``Board''), intended to approximate the 
lowest interest rate at which a bank short-term loan would be available 
to the Funds. The formula would be based upon a publicly available rate 
(e.g., Federal funds plus 25 basis points) which rate would vary so as 
to reflect changing bank loan rates. The initial formula and any 
subsequent modifications to the formula would be subject to the 
approval of the Fund's Board. The Board of each Fund periodically would 
review the continuing appropriateness of reliance on the publicly 
available rate used to determine the Bank Loan Rate, as well as the 
relationship between the Bank Loan Rate and current bank loan rates 
that would be available to the Funds.
    9. The credit facility would be administered by staff members of 
SBC Financial who are not portfolio mangers (the ``Administrative 
Staff''). Under the credit facility, the portfolio managers for each 
participating Fund, or the staff of SBC Financial responsible for 
coordinating the portfolio managers and overseeing their management of 
each Fund, (who are not the Administrative Staff) could provide 
standing instructions to participate in the credit facility daily as a 
borrower or lender. On each business day, the Administrative Staff 
would collect data on the uninvested cash and borrowing requirements of 
all participating Funds from the Fund's custodian. Once it had 
determined the aggregate amount of cash available for loans and 
borrowing demand, the Administrative Staff would allocate loans among 
borrowing Funds without any further communication from portfolio 
managers. After the Administrative Staff has allocated cash for 
Interfund Loans, the Administrative Staff will invest any remaining 
cash in accordance with the standing instructions of portfolio managers 
or return remaining amounts to the Funds.
    10. The Administrative Staff would allocate borrowing demand and 
cash available for lending among the Funds on what the Administrative 
Staff believes to be an equitable basis, subject to certain 
administrative procedures applicable to all Funds, such as (i) the time 
of filing requests to participate, (ii) minimum loan lot sizes, and 
(iii) 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 loan transaction.
    11. SBC Financial 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 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, 
including a majority of the Board members who are not ``interested 
persons'' of the Funds as that term is defined in section 2(a)(19) of 
the Act (``Independent Trustees''), to ensure that both borrowing and 
lending Funds participate on an equitable basis.
    12. SBC Financial would administer the credit facility as part of 
its duties under its existing advisory contract with each Fund and 
would receive no additional fee as compensation for its services. SBC 
Financial may collect standard pricing and record keeping, bookkeeping, 
and accounting fees associated with repurchase and lending transactions 
generally, including transactions effected through the credit facility. 
Fees paid to SBC Financial in connection with an Interfund Loan would 
be no higher than those associated with comparable bank loan 
transactions.
    13. No Fund may participate in the credit facility unless: (i) The 
Fund has obtained shareholder approval for its participation, if such 
approval is required by law; (ii) the Fund has fully disclosed all 
material information concerning the credit facility in its prospectus 
and/or SAI; and (iii) 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 (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 sections 12(d)(1)(A) and (B) 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; and (iv) 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 SBC Financial 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: (i) SBC Financial would administer the program as a 
disinterested fiduciary in the best interests of the Funds' 
shareholders; (ii) all Interfund Loans would consist only of uninvested 
cash reserves that a Fund otherwise would invest in short-term

[[Page 34683]]

repurchase agreements or other short-term instruments either directly 
or through a Money Market Fund; (iii) the Interfund Loans would not 
involve a greater risk than such other investments; (iv) a lending Fund 
would receive interest at a rate higher than it could obtain through 
such other investments; and (v) 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 that 
applicants propose 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. SBC Financial would administer 
the credit facility under its existing advisory agreements with the 
Funds, and would receive no additional compensation for its services. 
Applicants also note that the purpose of the proposed credit facility 
is to provide economic benefits for all of the participating Funds and 
their shareholders.
    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 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 proposed 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 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.
    2. On each business day, SBC Financial 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 (i) 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 
(ii) 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 
any event not 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 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

[[Page 34684]]

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. 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.
    11. The Administrative Staff 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 manger of the Funds. The Administrative Staff will not 
solicit cash for the credit facility from any Fund or prospectively 
publish or disseminate loan demand data to portfolio managers. The 
Administrative Staff will invest any amount remaining after 
satisfaction of borrowing demand in accordance with the standing 
instructions from portfolio managers or return remaining amounts to the 
Funds.
    12. SBC Financial 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 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 Fund's Board, 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.
    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, SBC Financial 
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. The 
arbitrator will resolve any problem promptly, and the arbitrator's 
decision will be binding on both Funds.\3\ 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 Fund with different Boards, the 
Board of each Fund will select an independent arbitrator that is 
satisfactory to each Fund.
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    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 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 Fund's Board in connection with the review required by 
conditions 12 and 13.
    16. SBC Financial 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, SBC Financial will report on the operations of the credit 
facility at the quarterly Board 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 SBC Financial'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

[[Page 34685]]

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.
    18. 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 03-14562 Filed 6-9-03; 8:45 am]
BILLING CODE 8010-01-P