[Federal Register Volume 68, Number 140 (Tuesday, July 22, 2003)]
[Notices]
[Pages 43403-43407]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-18526]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26100; 812-12833]


PBHG Funds, et al.; Notice of Application

July 15, 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'') granting an exemption from 
sections 18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act 
granting an exemption from section 12(d)(1) of the Act; (c) sections 
6(c) and 17(b) of the Act granting an exemption from section 17(a) 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 the Application: Applicants request an order that would 
permit certain registered open-end management investment companies to 
participate in a joint lending and borrowing facility.

Applicants: PBHG Funds, PBHG Insurance Series Fund (collectively, the 
``Trusts''), and Pilgrim Baxter & Associates, Ltd. (``PBA'').

Filing Dates: The application was filed on April 16, 2002, and amended 
on July 10, 2003. 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 August 11, 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

[[Page 43404]]

notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609. Applicants, 1400 Liberty Ridge Drive, Wayne, PA 19087-5593.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel at 
(202) 942-0634 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 (tel. (202) 942-8090).

Applicants' Representations

    1. The Trusts are registered under the Act as open-end management 
investment companies and are organized as Delaware business trusts. The 
Trusts are comprised of multiple series (the ``Funds''); each series 
has separate investment objectives, policies and assets.\1\ PBA is 
registered under the Investment Advisers Act of 1940. Each Fund has 
entered into an investment advisory agreement with PBA.
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    \1\ Applicants request that the relief apply to any future 
series of the Trusts and to any other registered open-end management 
investment company and series thereof that are advised by PBA or a 
person controlling, controlled by, or under common control with PBA 
(included in the term ``Funds''). All existing Funds that currently 
intend to rely on the requested order have been named as applicants. 
Any Fund that relies on the order in the future will comply with the 
terms and conditions of the application.
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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 investments. 
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 a trade ``fail'' in which cash payment for a 
security sold by a Fund has been delayed. Currently, the Funds have a 
credit arrangement with their custodian banks (i.e., overdraft 
protection) under which the custodian may, but is not obligated to lend 
money to the Funds to meet the Funds' temporary cash needs. The Funds 
also have also entered into committed lines of credit with various 
banks.
    3. If the Funds were to borrow money from any bank under their line 
of credit or under other credit arrangements, the Funds would pay 
interest on the borrowed cash at a rate which would be 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. Other bank loan arrangements, such as 
committed lines of credit, require the Funds to pay 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 interfund 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 believe that the proposed credit 
facility would reduce the Funds' borrowing costs and enhance their 
ability to earn higher interest rates on short-term investments. 
Although the proposed credit facility would reduce the Funds' need to 
borrow from banks, the Funds would be free to continue committed lines 
of credit or other borrowing arrangements with banks.
    5. Applicants anticipate that the credit facility would provide a 
borrowing Fund with significant savings when the cash position of the 
Fund is insufficient to meet temporary cash requirements. This 
situation could arise when redemptions exceed expected volumes and 
certain Funds have insufficient cash to satisfy such redemptions. When 
a Fund liquidates portfolio securities to meet redemption requests, it 
often does not receive payment in settlement for up to three days (or 
longer for certain foreign transactions). The credit facility would 
provide a source of immediate, short-term liquidity pending settlement 
of the sale of portfolio securities.
    6. Applicants also propose using the credit facility when a sale of 
securities fails due to circumstances such as a delay in the delivery 
of cash to a Fund's custodian or improper delivery instructions by the 
broker effecting the transaction. Sales fails may present a cash 
shortfall if a Fund has purchased securities using the proceeds from 
the securities sold. When a 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. 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 under these 
circumstances would enable the Fund to have access to immediate short-
term liquidity without incurring custodian overdraft or other charges.
    7. While bank borrowings could generally 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 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. Thus, applicants believe that the proposed 
credit facility would benefit both borrowing and lending Funds.
    8. The interest rate charged to a Fund on any Interfund Loan 
(``Interfund Loan Rate'') would be the average of the ``Repo Rate'' and 
the ``Bank Loan Rate,'' both as defined below. The Repo Rate for any 
day would be the highest rate available to the Funds from investing in 
overnight repurchase agreements. The Bank Loan Rate for any day would 
be calculated by the Credit Facility Committee (as defined below) each 
day an interfund loan is made according to a formula established by a 
Fund's board of trustees (``Board'') designed to approximate the lowest 
interest rate at which bank short-term loans would be available to the 
Funds. The formula would be based upon a publicly available rate (e.g., 
Federal Funds plus 25 basis points) and would vary with this rate so as 
to reflect changing bank loan rates. The Board of each Fund would 
periodically review the continuing appropriateness of using the 
publicly available rate, as well as the relationship between the Bank 
Loan Rate and current bank loan rates that would be available to the 
Funds. The initial formula and any subsequent modifications to the 
formula would be subject to the approval of the Board.
    9. The credit facility would be administered by PBA's fund 
accounting and legal departments (collectively, the ``Credit Facility 
Committee''). Under the proposed credit facility, the portfolio 
managers for each participating Fund could provide standing 
instructions to participate daily as a borrower or lender. The Credit 
Facility Committee on each business day would collect data on the 
uninvested cash and borrowing requirements of all participating Funds 
from the Funds' custodians. Once it determined the aggregate amount of 
cash available for loans and borrowing demand, the Credit Facility 
Committee would allocate loans among borrowing Funds without any 
further communication from portfolio

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managers. Applicants expect far more available uninvested cash each day 
than borrowing demand. After the Credit Facility Committee has 
allocated cash for Interfund Loans, the Credit Facility Committee would 
invest any remaining cash in accordance with the standing instructions 
of portfolio managers or return remaining amounts to the Funds.
    10. The Credit Facility Committee would allocate borrowing demand 
and cash available for lending among the Funds on what the Credit 
Facility Committee believes to be an equitable basis, subject to 
certain administrative procedures applicable to all Funds, such as the 
time of filing requests to participate, minimum loan lot sizes, and the 
need to minimize the number of transactions and associated 
administrative costs. To reduce transaction costs, each loan normally 
would be allocated in a manner intended to minimize the number of 
participants necessary to complete the loan transaction. The method of 
allocation and related administrative procedures would be approved by 
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 both borrowing and 
lending Funds participate on an equitable basis.
    11. PBA and the Credit Facility Committee would (a) Monitor the 
interest rates charged and other terms and conditions of the Interfund 
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 concerning any transactions by the Funds 
under the credit facility and the interest rates charged.
    12. PBA, through the Credit Facility Committee, would administer 
the credit facility under its existing management or advisory agreement 
with each Fund and would receive no additional fee for its services. 
PBA or companies affiliated with it may collect fees in connection with 
repurchase and lending transactions generally, including transactions 
through the credit facility, for pricing and record keeping, 
bookkeeping and accounting services. Fees would be no higher than those 
applicable for comparable loan transactions.
    13. Each Fund's participation in the credit facility is consistent 
with its organizational documents and its investment policies and 
limitations. The prospectus or statement of additional information 
(``SAI'') of each Fund discloses the extent to which the respective 
Fund is able to mortgage or pledge securities to secure permitted 
borrowings. If the requested order is granted, the SAI for each Fund 
participating in the credit facility will disclose the existence of the 
interfund lending arrangements.
    14. In connection with the credit facility, applicants request an 
order under (a) Section 6(c) of the Act granting relief from sections 
18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act granting 
relief from section 12(d)(1) of the Act; (c) sections 6(c) and 17(b) of 
the Act granting relief from sections 17(a)(1) and 17(a)(3) of the Act; 
and (d) under section 17(d) 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 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 PBA as their common 
investment advisor.
    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 strong potential adverse 
interests to, and some influence over the investment decisions of, a 
registered investment company from causing or inducing the investment 
company to engage in lending transactions that unfairly inure to the 
benefit of such party 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) PBA would administer the program as a disinterested 
fiduciary; (b) all Interfund Loans would consist only of uninvested 
cash reserves that the Funds otherwise would invest in short-term 
repurchase agreements or other short-term instruments; (c) the 
Interfund Loans would not involve a greater risk than such other 
investments; (d) the lending Fund would receive interest at a rate 
higher than they could obtain through such other investments; and (e) 
the borrowing Fund would pay interest at a rate lower than otherwise 
available to them under their bank loan agreements and avoid the up-
front commitment fees associated with committed lines of credit. 
Moreover, applicants believe that the other conditions in the 
application would effectively preclude the possibility of any Fund 
obtaining an undue advantage over any other Fund.
    4. Section 17(a)(1) generally prohibits an affiliated person of a 
registered investment company, or an affiliated person of an affiliated 
person, from selling any securities or other property to the company. 
Section 12(d)(1) 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 under sections 17(a)(1) and 12(d)(1). Section 
12(d)(1)(J) provides that the Commission may exempt persons or 
transactions from any provision of section 12(d)(1) if and to the 
extent such 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 imposing on 
investors additional and 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 will be no

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duplicative costs or fees to the Funds or shareholders, and that PBA 
will receive no additional compensation for its services in 
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 and their shareholders.
    6. Section 18(f)(1) prohibits open-end investment companies from 
issuing any senior security except that a company is permitted to 
borrow from any bank; if immediately after the borrowing, there is 
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 
interfund and bank borrowings, have at least 300% asset coverage. Based 
on the conditions and safeguards described in the application, 
applicants also submit that to allow the Funds to borrow from other 
Funds pursuant to the proposed credit facility is consistent with the 
purposes and policies of section 18(f)(1).
    8. Section 17(d) and rule 17d-1 generally prohibit any affiliated 
person of a registered investment company, or affiliated persons of an 
affiliated person, when acting as principal, from effecting any joint 
transactions in which the company participates unless the transaction 
is approved by the Commission. Rule 17d-1 provides that in passing upon 
applications filed under the rule, 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 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 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 Committee will compare 
the Bank Loan Rate with the Repo Rate and will make cash available for 
Interfund Loans only if the Interfund Loan Rate is (a) More favorable 
to the lending Fund than the Repo Rate, and (b) more favorable to the 
borrowing Fund than the Bank Loan Rate.
    3. If a Fund has outstanding borrowings, any Interfund Loans made 
to the Fund (a) Will be made 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 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 borrowing from all sources immediately 
after the interfund borrowing total 10% or less than 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 
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 a market value at least equal to 102% of the 
outstanding principal value of the loan until the Fund's total 
outstanding borrowings cease to exceed 10% of its total assets, at 
which time the collateral called for by this condition (5) shall no 
longer be required. Until each Interfund Loan that is outstanding at 
any time that a Fund's total outstanding borrowings exceeds 10% is 
repaid or the Fund's total outstanding borrowings cease to exceed 10% 
of its total assets, the 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 another Fund through the credit facility if 
the loan would cause the lending Fund's 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. Except as set forth in this condition, no Fund may borrow 
through

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the credit facility unless the Fund has a policy that prevents the Fund 
from borrowing for other than temporary or emergency purposes. In the 
case of a Fund that does not have such a policy, the 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 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 Credit Facility Committee will calculate total Fund 
borrowing and lending demand through the credit facility, and allocate 
loans on an equitable basis among the Funds without the intervention of 
any portfolio manager of the Funds. The Credit Facility Committee will 
not solicit cash for the credit facility from any Fund or prospectively 
publish or disseminate loan demand data to portfolio managers. PBA 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 Committee 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 facility and the terms and other conditions of any 
extensions of credit under the credit facility.
    14. The Board of each Fund, including a majority of the Independent 
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 Committee will promptly refer the loan for arbitration to an 
independent arbitrator selected by the Board of the Funds involved in 
the loan who will serve as arbitrator of disputes concerning Interfund 
Loans.\2\ The arbitrator will resolve any problems promptly, and the 
arbitrator's decision will be binding on both Funds. The arbitrator 
will submit at least annually a written report to the Boards setting 
forth a description of the nature of any dispute and the actions taken 
by the 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 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 rate of interest on the loan, the rate of 
interest available at the time on short-term repurchase agreements and 
bank borrowings, the rate of return available from investments in 
overnight repurchase agreements and such other information presented to 
the Board in connection with the review required by conditions 13 and 
14.
    17. PBA will prepare and submit to the Board for review an initial 
report describing the operations of the credit facility and the 
procedures to be implemented to ensure that all Funds are treated 
fairly. After the commencement of operations of the credit facility, 
the Credit Facility Committee will report on the operations of the 
credit facility to the Board quarterly. In addition, for two years 
following the commencement of the credit facility, the independent 
public accountants for each Fund shall prepare an annual report that 
evaluates PBA'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 filed pursuant to Item 77Q3 of 
Form N-SAR. In particular, the report shall address procedures designed 
to achieve the following objectives: (a) That the Interfund Loan Rate 
will be higher than the Repo Rate, but lower than the Bank Loan Rate; 
(b) compliance with the collateral requirements as set forth in the 
Application; (c) compliance with the percentage limitations on 
interfund borrowing and lending; (d) allocation of interfund borrowing 
and lending demand in an equitable manner and in accordance with 
procedures established by the Board; and (e) that the 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, the Fund's external auditors, in connection 
with their Fund audit examinations, will continue to review the 
operation of the credit facility for compliance with the conditions of 
the application and their review will form the basis, in part, of the 
auditor's report on internal accounting controls in Form N-SAR.
    18. No Fund will participate in the credit facility upon receipt of 
requisite regulatory approval unless it has fully disclosed in its 
prospectus or 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. 03-18526 Filed 7-21-03; 8:45 am]
BILLING CODE 8010-01-P