[Federal Register Volume 68, Number 158 (Friday, August 15, 2003)]
[Notices]
[Pages 48964-48969]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-20904]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26146; 812-12784]


Nations Fund Trust, et al.; Notice of Application

August 11, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under the Investment Company 
Act of 1940 (the ``Act'') under (i) section 6(c) of the Act granting an 
exemption from sections 18(f) and 21(b) of the Act; (ii) section 
12(d)(1)(J) of the Act granting an exemption from section 12(d)(1) of 
the Act; (iii) sections 6(c) and 17(b) of the Act granting an exemption 
from sections 17(a)(1) and 17(a)(3) of the Act; and (iv) section 17(d) 
of the Act and rule 17d-1 under the Act to permit certain joint 
transactions.

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SUMMARY OF APPLICATION: Applicants request an order that would permit 
certain registered investment companies to participate in a joint 
lending and borrowing facility.

APPLICANTS: Nations Funds Trust, Nations Separate Account Trust, 
Nations Master Investment Trust (collectively, the ``Trusts''), and 
Banc of America Capital Management, LLC (``BACAP'').

FILING DATES: The application was filed on February 26, 2002, and 
amended on August 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 September 4, 2003 and should be accompanied by proof of service 
on the applicants, in the form of an affidavit or, for lawyers, a 
certificate of service. Hearing requests should state the nature of the 
writer's interest, the reason for the request, and the issues 
contested. Persons who wish to be notified of a hearing may request 
notification by writing to the Commission's Secretary.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC

[[Page 48965]]

20549-0609; Applicants, c/o Marco Adelfio, Esq., Morrison & Foerster 
LLP, 2000 Pennsylvania Avenue, NW., Suite 5500, Washington, DC 20006.

FOR FURTHER INFORMATION CONTACT: John L. Sullivan, Senior Counsel, at 
(202) 942-0681 or Todd F. 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 (tel. (202) 942-8090).

Applicants' Representations

    1. Each Trust is organized as a Delaware statutory trust and 
registered under the Act as an open-end management investment 
company.\1\ Responsibility for the overall management of the Trusts 
rests with each Trust's respective board of trustees (each, a 
``Board'').
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    \1\ Applicants ask that the requested relief apply to (i) The 
Trusts and their existing and future investment portfolios 
(``Funds''), (ii) BACAP and any successor entity to BACAP, and (iii) 
any other registered management investment company and its series 
advised by BACAP or a person controlling, controlled by or under 
common control with, BACAP in the future (included in the term 
``Funds''). The term ``successor'' is limited to entities that 
result from a reorganization into another jurisdiction or a change 
in the type of business organization or other type of restructuring 
within the group of entities controlled by Bank of America 
Corporation. All existing investment companies that currently intend 
to rely on the requested relief are named as applicants. Any other 
existing or future investment companies that subsequently rely on 
the requested order will comply with the terms and conditions in the 
application. Applicants represent that any registered open-end Fund 
(an ``Open-End Fund'') may participate in the proposed credit 
facility (``Proposed Credit Facility'') as either a borrower or 
lender. Applicants further represent that any registered closed-end 
Fund (``Closed-End Fund'') that participates in the Proposed Credit 
Facility would only participate as a lender (the Closed-End Funds 
together with the Open-End Funds are referred to as the ``Funds'').
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    2. BACAP is registered as an investment adviser under the 
Investment Advisers Act of 1940. BACAP serves as investment adviser to 
each Fund. BACAP is a wholly owned subsidiary of Bank of America, N.A., 
which in turn is a wholly owned subsidiary of Bank of America 
Corporation, a bank holding company organized as a Delaware 
corporation.
    3. Some Funds may lend money to banks or other entities by entering 
into repurchase agreements or purchasing other short-term instruments. 
Other Funds may need to borrow money from the same or similar banks or 
other entities for temporary purposes to satisfy redemption requests, 
to cover unanticipated cash shortfalls such as a trade ``fail'' in 
which cash payment for a security sold by a Fund has been delayed, or 
for other temporary purposes. Currently, the Funds have an uncommitted 
line of credit and overdraft protection with their custodian, which is 
designed to cover reasonably anticipated borrowing needs.
    4. If the Funds were to borrow money under this line of credit, the 
Funds would pay interest on the borrowed cash at a rate that would be 
higher than the rate that would be earned by them on repurchase 
agreements and other short-term instruments of the same maturity as the 
bank loan.
    5. Applicants request an order that would permit the Funds to enter 
into a master interfund lending agreement (``Interfund Lending 
Agreements'') that would permit each Fund to lend money directly to, 
and each Open-End Fund to borrow directly from, other Funds for 
temporary purposes (an ``Interfund Loan''). Applicants believe that the 
Proposed Credit Facility would substantially reduce the Funds' 
potential borrowing costs and enhance their ability to earn higher 
rates of interest on short-term lendings. Although the Proposed Credit 
Facility would substantially reduce the Funds' need to borrow from 
banks, it would not necessarily eliminate the need to maintain lines of 
credit or other borrowing arrangements with banks. The Funds also would 
continue to maintain their existing uncommitted line of credit and 
overdraft protection.
    6. Applicants anticipate that the Proposed Credit Facility will 
provide a borrowing Fund with significant cost savings when the cash 
position of the Fund is insufficient to meet temporary cash 
requirements. This situation could arise when redemptions exceed 
anticipated volumes and the Fund has insufficient cash on hand 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 Proposed Credit Facility would provide a source of 
immediate, short-term liquidity pending settlement of the sale of 
portfolio securities.
    7. Applicants also propose using the Proposed Credit Facility when 
a sale of portfolio securities fails due to circumstances beyond the 
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 with the proceeds from securities 
sold. When the Fund experiences a cash shortfall due to a sales fail, 
the custodian typically extends temporary credit to cover the shortfall 
and the Fund incurs overdraft charges. Alternatively, the Fund could 
fail on its intended purchase due to lack of funds from the previous 
sale, resulting in additional costs to the Fund, or sell a security on 
a same day settlement basis, earning a lower return on the investment. 
Use of the Proposed Credit Facility under these circumstances would 
enable the Fund to have access to immediate short-term liquidity 
without incurring custodian overdraft, line of credit or other costs.
    8. 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 
would be payable under the Fund's line of credit arrangements or the 
overdraft provisions of the custody contract. In addition, Funds making 
loans to other Funds would earn interest at a rate higher than they 
otherwise could obtain from investing their cash in repurchase 
agreements or other short-term investments. Thus, applicants believe 
that the Proposed Credit Facility would benefit both borrowing and 
lending Funds.
    9. The interest rate charged to the Funds on any loan under the 
Proposed Credit Facility (the ``Interfund Rate'') would be determined 
daily and 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 
current rate available to the Funds from investments in overnight 
repurchase agreements. The Bank Loan Rate would be calculated by the 
Cash Management Group (as defined below) on each day an Interfund Loan 
is made according to a formula approved by the Boards intended to 
approximate the lowest interest rate at which short-term bank loans 
would be available to the Funds. The formula would be based upon a 
publicly available rate (e.g., Federal funds plus 25 basis points) and 
would vary with this rate so as to reflect changing bank loan rates. 
Each Board periodically would review the continuing appropriateness of 
using the formula 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. The initial formula and any 
subsequent modifications to the formula would be subject to the 
approval of each Fund's Board.

[[Page 48966]]

    10. The Proposed Credit Facility would be administered by 
investment professionals and administrative personnel from BACAP, 
including a portfolio manager of the Nations Money Market Funds (``Cash 
Management Group'').\2\ Under the Proposed Credit Facility, the 
portfolio managers for each Fund could provide standing instructions to 
participate as a borrower or lender. The Cash Management Group would 
collect data on the uninvested cash and borrowing requirements of all 
participating Funds from the Funds' custodians. The Cash Management 
Group will determine the aggregate amount of cash available for loans 
and borrowing demand at least once and possibly twice a day. Then, the 
Cash Management Group will allocate loans among borrowing Funds without 
any further communication from portfolio managers (other than the 
Nations Money Market Funds portfolio manager acting in his or her 
capacity as a member of the Cash Management Group). It is expected that 
there typically will be far more available uninvested cash each day 
than borrowing demand. All allocations will require approval of at 
least one member of the Cash Management Group who is not a portfolio 
manager of a Nations Money Market Fund. After allocating cash for 
Interfund Loans, the Cash Management Group will invest any remaining 
cash in accordance with the standing instructions of the relevant 
portfolio managers or return remaining amounts for investment directly 
by such portfolio managers.
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    \2\ For purposes of the requested order, ``Nations Money Market 
Funds'' refers to money market Funds, each of which operates under 
rule 2a-7 under the Act.
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    11. The Cash Management Group would allocate borrowing demand and 
cash available for lending among participating Funds on what the Cash 
Management Group 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, maximum or preferable loan 
sizes; and efforts to minimize the number of transactions and 
associated administrative costs. To reduce administrative and custody 
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 Board, including a majority of 
trustees who are not ``interested persons,'' as defined in section 
2(a)(19) of the Act (``Independent Trustees''), to ensure that both 
borrowing and lending Funds participate on an equitable basis.
    12. The Cash Management Group 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 
Boards concerning any transactions by the Funds under the Proposed 
Credit Facility and the interest rates charged.
    13. BACAP, through the members of the Cash Management Group, would 
administer the Proposed Credit Facility under its existing investment 
advisory agreement with each Fund and would receive no additional fees 
as compensation for these services. BACAP could, however, collect 
reimbursement for record keeping, book keeping, accounting, 
administrative and transactions fees or charges incurred in connection 
with any credit facilities. Fees for these services would be no higher 
than those applicable for comparable bank loan transactions.
    14. No Fund will participate in the Proposed Credit Facility except 
to the extent such participation is consistent with its organizational 
documents and its investment policies and limitations. Also, no Fund 
will participate in the Proposed Credit Facility unless it has 
disclosed in its prospectus or statement of additional information 
(``SAI'') all material facts about its intended participation.
    15. In connection with the Proposed Credit Facility, applicants 
request an order under (a) section 6(c) of the Act granting relief from 
sections 18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act 
granting relief from section 12(d)(1) of the Act; (c) sections 6(c) and 
17(b) of the Act granting relief from sections 17(a)(1) and 17(a)(3) of 
the Act; and (d) section 17(d) of the Act and rule 17d-1 under the Act 
to permit certain joint arrangements.

Applicants' Legal Analysis

    1. Section 17(a)(3) of the Act 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) of the Act generally prohibits any registered management 
investment company from lending money or other property to any person 
if that person controls or is under common control with the company. 
Section 2(a)(3)(C) of the Act defines ``affiliated person'' of another 
person, in part, to be any person directly or indirectly controlling, 
controlled by, or under common control with, such other person. 
Applicants state that the Funds may be under common control by virtue 
of having BACAP as their common investment adviser, and/or by virtue of 
having common officers and 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) authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act 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) were intended 
to prevent a person with strong potential adverse interests to, and 
some influence over the investment decisions of, a registered 
investment company from causing or inducing the investment company to 
engage in lending transactions that unfairly inure to the benefit of 
that person and that are detrimental to the best interests of the 
investment company and its shareholders. Applicants assert that the 
Proposed Credit Facility transactions do not raise these concerns 
because (a) BACAP would administer the program as a disinterested 
fiduciary; (b) all Interfund Loans would consist only of uninvested 
cash reserves that the Fund otherwise would invest in short-term 
repurchase agreements or other short-term instruments; (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 it could obtain through such other investments; and (e) the 
borrowing Fund would pay interest at a rate lower than otherwise 
available to it under its bank loan agreements, and any charges 
incurred would be no higher than those associated with comparable bank 
loan arrangements. 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.

[[Page 48967]]

    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 a credit 
facility loan may constitute a security under sections 17(a)(1) and 
12(d)(1). Section 12(d)(1)(J) provides that an exemptive order may be 
granted by the Commission from any provision of section 12(d)(1) if and 
to the extent such exemption is consistent with the public interest and 
the protection of investors. Applicants contend that the standards 
under sections 6(c), 17(b) and 12(d)(1)(J) are satisfied for all the 
reasons set forth above in support of their request for relief from 
sections 17(a)(3) and 21(b) and for the reasons discussed below.
    5. Applicants state that section 12(d)(1) was intended to prevent 
the pyramiding of investment companies in order to avoid duplicative 
costs and fees attendant upon multiple layers of investment companies. 
Applicants submit that the Proposed Credit Facility does not involve 
these abuses. Applicants note that there would be no duplicative costs 
or fees to the Funds or shareholders, and that BACAP would administer 
the Proposed Credit Facility under its existing advisory agreements 
with the Funds, and other than the administrative and transactional 
charges described above, BACAP would receive no additional compensation 
for its services. Applicants also note that the purpose of Proposed 
Credit Facility is to provide economic benefits for all the 
participating Funds.
    6. Section 18(f)(1) of the Act prohibits open-end investment 
companies from issuing any senior security except that a company is 
permitted to borrow from any bank; provided that, immediately after the 
borrowing, there is an asset coverage of at least 300 per centum for 
all borrowings of the company. Under section 18(g) of the Act, the term 
``senior security'' includes any bond, debenture, note, or similar 
obligation or instrument constituting a security and evidencing 
indebtedness. Applicants request exemptive relief from section 18(f)(1) 
to the limited extent necessary to implement the credit facility 
(because the lending Funds are not banks).
    7. Applicants believe that granting the relief under section 6(c) 
is appropriate because the Funds would remain subject to the 
requirement of section 18(f)(1) that all borrowings of the Fund, 
including combined 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) of the Act and rule 17d-1 thereunder generally 
prohibit any affiliated person of a registered investment company, or 
affiliated persons of an affiliated person, when acting as principal, 
from effecting any transaction in which the company is a joint or a 
joint and several participant unless permitted by Commission order upon 
application. Rule 17d-1(b) under the Act provides that in passing upon 
applications for exemptive relief, the Commission will consider whether 
the participation of a registered investment company in a joint 
enterprise on the basis proposed is consistent with the provisions, 
policies and purposes of the Act and the extent to which the company's 
participation is on a basis different from or less advantageous than 
that of other participants.
    9. Applicants submit that the purpose of section 17(d) is to avoid 
overreaching by and unfair advantage to investment company insiders. 
Applicants believe that the Proposed 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 would be on terms which 
are no different from or less advantageous than that of other 
participating Funds.

Applicants' Conditions

    Applicants agree that any order of the Commission granting the 
requested relief will be subject to the following conditions:
    1. The interest rates to be charged to the Funds under the Proposed 
Credit Facility will be the average of the Repo Rate and the Bank Loan 
Rate.
    2. On each business day, the Cash Management Group will compare the 
Bank Loan Rate with the Repo Rate and will make cash available for 
Interfund Loans only if the Interfund Rate is (a) More favorable to the 
lending Fund than the Repo Rate and (b) more favorable to the borrowing 
Fund than the Bank Loan Rate.
    3. If a Fund has outstanding borrowings, any Interfund Loans to the 
Fund (a) Will be at an interest rate equal to or lower than any 
outstanding bank loan; (b) will be secured at least on an equal 
priority basis with at least an equivalent percentage of collateral to 
loan value as any outstanding bank loan that requires collateral; (c) 
will have a maturity no longer than any outstanding bank loan (and in 
any event not over seven days); and (d) will provide that, if an event 
of default occurs under any agreement evidencing an outstanding bank 
loan to the Fund, the event of default will automatically (without need 
for action or notice by the lending Fund) constitute an immediate event 
of default under the Interfund Lending Agreement entitling the lending 
Fund to call the Interfund Loan (and exercise all rights with respect 
to any collateral) and that such call will be made if the lending bank 
exercises its right to call its loan under its agreement with the 
borrowing Fund.
    4. A Fund may make an unsecured borrowing through the Proposed 
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 Proposed Credit Facility on a secured basis only. A 
Fund may not borrow through the Proposed Credit Facility or from any 
other source if its total outstanding borrowings immediately after such 
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

[[Page 48968]]

asset value or because of shareholder redemptions), the Fund will 
within one business day thereafter (a) repay all of 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 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 Interfund Loan.
    6. No Fund may lend to another Fund through the Proposed Credit 
Facility if the loan would cause its aggregate outstanding loans 
through the Proposed Credit Facility to exceed 15% of the lending 
Fund's current net assets at the time of the loan.
    7. A Fund's Interfund Loans to any one Fund will 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 Proposed 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 Proposed Credit Facility must be 
consistent with its investment policies and limitations and 
organizational documents.
    12. The Cash Management Group will calculate total Fund borrowing 
and lending demand through the Proposed Credit Facility, and allocate 
loans on an equitable basis among the Funds without the intervention of 
any portfolio managers of the Funds (other than the Nations Money 
Market Funds portfolio manager acting in his or her capacity as a 
member of the Cash Management Group). All allocations will require 
approval of at least one member of the Cash Management Group who is not 
a portfolio manager of a Nations Money Market Fund. The Cash Management 
Group will not solicit cash for the Proposed Credit Facility from any 
Fund or prospectively publish or disseminate loan demand data to 
portfolio managers. The Cash Management Group will invest any amounts 
remaining after satisfaction of borrowing demand in accordance with the 
standing instructions from portfolio managers or return remaining 
amounts for investment directly by the portfolio managers.
    13. The Cash Management Group will monitor the interest rates 
charged and the other terms and conditions of the Interfund Loans and 
will make a quarterly report to the Boards concerning the participation 
of the Funds in the Proposed Credit Facility and the terms and other 
conditions of any extensions of credit under the facility.
    14. The Boards of the Trusts, including a majority of the 
Independent Trustees, will (a) review no less frequently than quarterly 
each Fund's participation in the Proposed Credit Facility during the 
preceding quarter for compliance with the conditions of any order 
permitting the transactions; (b) establish the Bank Loan Rate formula 
used to determine the interest rate on Interfund Loans, approve any 
modifications thereto, and review no less frequently than annually the 
continuing appropriateness of the Bank Loan Rate formula; and (c) 
review no less frequently than annually the continuing appropriateness 
of the Fund's participation in the Proposed 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 
maturity or from the time the lending Fund makes a demand for payment 
under the provisions of the Interfund Lending Agreement, the Cash 
Management Group will promptly refer the loan for arbitration to an 
independent arbitrator, selected by the Board(s) whose Funds are 
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(s) 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 a dispute involves Funds with separate Boards, the 
respective Boards will agree on an independent arbitrator that is 
satisfactory to them.
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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 Proposed Credit Facility occurred, the first two years in an 
easily accessible place, written records of all such transactions, 
setting forth a description of the terms of the transaction, including 
the amount, the maturity and the rate of interest on the loan, the rate 
of interest available at the time on short-term repurchase agreements 
and bank borrowings, and such other information presented to the Board 
in connection with the review required by conditions 13 and 14.
    17. The Cash Management Group will prepare and submit to the Boards 
for review an initial report describing the operations of the Proposed 
Credit Facility and the procedures to be implemented to ensure that all 
the Funds are treated fairly. After the commencement of the operations 
of the Proposed Credit Facility, the Cash Management Group will report 
on the operations of the Proposed Credit Facility at each Board's 
quarterly meetings.
    In addition, for two years following the commencement of the 
Proposed Credit Facility, the independent public accountant for each 
Trust shall prepare an annual report that evaluates the Cash Management 
Group'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 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 each 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 independent public accountant 
for the Trusts in connection with Fund audit

[[Page 48969]]

examinations, will continue to review the operation of the Proposed 
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 Proposed Credit Facility unless 
it has fully disclosed in its prospectus or SAI all material facts 
about its intended participation.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 03-20904 Filed 8-14-03; 8:45 am]
BILLING CODE 8010-01-P