[Federal Register Volume 68, Number 166 (Wednesday, August 27, 2003)]
[Notices]
[Pages 51602-51606]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-21938]


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SECURITIES AND EXCHANGE COMMISSION

[Release No. IC-26164; 812-13001]


Merrill Lynch Principal Protected Trust, et al.; Notice of 
Application

August 20, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of application for an order under section 6(c) of the 
Investment Company Act of 1940 (``Act'') for an exemption from section 
12(d)(3) of the Act, under sections 6(c) and 17(b) of the Act for an 
exemption from section 17(a) of the Act, and under section 17(d) of the 
Act and rule 17d-1 under the Act to permit certain joint transactions.

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Applicants: Merrill Lynch Principal Protected Trust (the ``Trust''), 
Merrill Lynch Investment Managers, L.P. (``MLIM''), and Fund Asset 
Management, L.P. (``FAM,'' and together with MLIM, the ``Advisers'').

Summary of Application: Applicants request an order to permit any 
existing and future series of the Trust, any existing and future 
registered investment company or series that has as its investment 
adviser an Adviser or other registered investment adviser that is in 
the control of, controlled by, or under common control with an Adviser 
(collectively with the Trust and its present and future series, the 
``Funds'') to enter into an arrangement with any entity that now or in 
the future is in control of, controlled by, or under common control 
with, an Adviser (a ``Merrill Lynch Affiliate'') to provide principal 
protection to the Fund (``Principal Protection''), or to serve as a 
hedging counterparty (``Hedging Counterparty'') where an unaffiliated 
third party providing Principal Protection to the Fund seeks to enter 
into a derivatives contract or reinsurance contract with a Merrill 
Lynch Affiliate to hedge all or a portion of the risks under the 
Principal Protection arrangement.\1\
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    \1\ All existing entities currently intending to rely on the 
requested order have been named as applicants. Any other existing 
and future entity that relies on the order will comply with the 
terms and conditions of the application.

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Filing Dates: The application was filed on August 13, 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 15, 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: Andrew J. Donohue, Esq., Merrill Lynch 
Investment Managers, L.P., P.O. Box

[[Page 51603]]

9011, Princeton, New Jersey 08543-9011.

FOR FURTHER INFORMATION CONTACT: Jaea F. Hahn, Senior Counsel, at (202) 
942-0614, or Michael W. Mundt, Senior Special Counsel, 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 Trust, a statutory trust organized under the laws of 
Delaware, is registered as an open-end investment company under the 
Act. Each Fund will be registered under the Act as, or be a series of, 
a management investment company. Each Adviser is registered with the 
Commission under the Investment Advisers Act of 1940 and serves as 
investment adviser to the Funds.
    2. Each Fund proposes to provide Principal Protection, pursuant to 
which shareholders who hold their Fund shares for a prescribed period 
of time (the ``Protection Period'')\2\ will be able, at the end of the 
period (the ``Maturity Date''), to redeem their shares and receive no 
less than the amount of their initial investment, subject to certain 
adjustments (the ``Protected Amount''). Applicants state that Principal 
Protection will be achieved primarily through the use of a mathematical 
formula that allocates assets based on the ``Constant Proportion 
Portfolio Insurance'' model (the ``Formula'').\3\ In addition to using 
the Formula, the Fund may also enter into a financial guarantee 
agreement, warranty agreement or other principal protection agreement 
\4\ or may acquire an insurance policy (each a ``Protection 
Agreement''), in order to ensure that the Fund can meet its obligation 
to pay each redeeming shareholder the Protected Amount on the Maturity 
Date.\5\ The entity providing Principal Protection (``Protection 
Provider'') may be a bank, brokerage firm, insurance company or other 
financial institution. In certain cases, the Protection Provider may 
seek to hedge all or a portion of its risks by entering into a 
derivatives contract or reinsurance contract with a Hedging 
Counterparty. Each Fund will pay a fee to the Protection Provider, 
typically equal to a percentage of the Fund's average daily net assets.
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    \2\ The life of a Fund offering Principal Protection will 
generally be divided into three time periods: (a) An initial 
offering period during which the Fund will sell shares to the 
public; (b) the Protection Period during which the Fund will not 
normally offer its shares to the public and the Fund's assets will 
be invested pursuant to the Formula (as defined below); and (c) a 
period after the Maturity Date (the ``Post-Protection Period''), 
during which the Fund will offer its shares on a continuous basis 
and pursue an objective that does not include Principal Protection, 
or alternatively, will wind up and cease operations.
    \3\ The objective of the Formula is to maximize the allocation 
of a Fund's assets that may be invested for purposes other than 
Principal Protection (the ``Portfolio Component''), thus gaining 
exposure to the securities markets, while attempting to minimize the 
risk of a shortfall (as defined below) by investing a portion of the 
Fund's assets in fixed income securities (the ``Protection 
Component'').
    \4\ Other principal protection agreements may take the form of a 
swap agreement or other privately negotiated derivatives contract 
with similar economic characteristics requiring the Protection 
Provider (as defined below) to make payments to the Fund in the 
event of a Shortfall (as defined below).
    \5\ The Protected Amount may be reduced (a) to the extent the 
Fund incurs extraordinary expenses, such as litigation expenses, 
which are not covered by the Protection Agreement, (b) if the 
Adviser is required to make payments to the Protection Provider and/
or the Fund (``Adviser Payment'') under the Protection Agreement as 
a result of its own negligence or certain other disabling conduct 
and there is a dispute regarding such payment, or (c) as otherwise 
described in the Protection Agreement, subject in each case to 
appropriate prospectus disclosure. The Protected Amount will not be 
reduced by the Fund's ordinary fees and expenses, including its 
advisory fees.
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    3. Each Protection Agreement will require the Protection Provider 
to pay the Fund an amount equal to any shortfall between the aggregate 
Protected Amount and the net asset value (``NAV'') of the Fund on the 
Maturity Date (the ``Shortfall''). Under the terms of each Protection 
Agreement, the Fund will be required to manage its assets within 
certain investment parameters, based in large part on the asset 
allocations determined by the Formula. If the Fund fails to comply with 
these allocations (``Trigger Event''), the Protection Provider may 
demand the Fund cure the situation by reallocating Fund assets or, in 
the event the Fund fails to effect the reallocation within a specified 
period of time, by causing the Fund to defease its portfolio and 
allocate all of its assets to the Fund's Protection Component (a 
``Defeasance Event'').
    4. A Protection Agreement and the fee for the Protection Agreement 
will be subject to approval by the Board of Directors or Trustees of 
each Fund (the ``Board''), including a majority of those Directors or 
Trustees who are not interested persons of a Fund or an Adviser, as 
defined in section 2(a)(19) of the Act (the ``Independent Trustees''). 
In the event that a Fund wishes to consider entering into a Protection 
Agreement with a Merrill Lynch Affiliate, or with a Protection Provider 
that is otherwise not an affiliated person of the Fund or its Adviser, 
or an affiliated person of such a person (an ``Unaffiliated 
Provider''), but that wants to use a Merrill Lynch Affiliate as its 
Hedging Counterparty (each, an ``Affiliated Protection Arrangement''), 
the Adviser will be required to conduct a bidding process to select the 
Protection Provider. Applicants state that the Adviser will initially 
solicit at least three other bids in addition to the bid relating to an 
Affiliated Protection Arrangement, then will engage in negotiations 
with all of the bidders. At the end of the negotiation process, all 
bidders who wish to participate will submit final bids. All final bids 
will be due at the same time and no bidder will be permitted to change 
its final bid once submitted. After final bids are submitted, no 
bidder, including a Merrill Lynch Affiliate, will have access to any 
competing bids until after the Protection Agreement is entered into by 
the Fund. In order for the Adviser to recommend the bid relating to an 
Affiliated Protection Arrangement, the Fund must have also received at 
least two bona fide final bids that are not Affiliated Protection 
Arrangements.\6\ The Adviser will evaluate final bids and recommend a 
bid for acceptance by the Board, together with an explanation of the 
basis for this recommendation and a summary of the material terms of 
any bids that were rejected. Applicants state that in addition to cost, 
other factors such as creditworthiness will be significant in the 
Adviser's evaluation of bids, and thus, the Adviser may recommend to 
the Board a Principal Provider who does not submit the bid with the 
lowest fee rate.\7\ A majority of the Board, including a majority of 
the Independent Trustees, must approve the acceptance of a bid 
involving an Affiliated Protection Arrangement, as well as the general 
terms of the proposed Protection Arrangement. Upon the conclusion of 
the Adviser's negotiation of the Affiliated Protection Arrangement, the 
Board must approve the final Protection Agreement, and determine that 
the terms of the Affiliated Protection Arrangement, as so

[[Page 51604]]

finalized, are not materially different from the terms of the accepted 
bid.
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    \6\ If an Unaffiliated Provider submits multiple bids, each with 
a different Hedging Counterparty, each submission will constitute a 
separate bid.
    \7\ If the Protection Provider recommended by the Adviser does 
not propose the lowest fee to provide Principal Protection and the 
Board approves a Protection Agreement with such Protection Provider, 
the Board minutes will reflect the reasons why the Protection 
Provider requiring the higher fee was approved.
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    5. The Board will exercise oversight responsibilities in connection 
with any Protection Agreement and will establish a special committee 
(the ``Committee''), a majority of the members of which will be 
Independent Trustees, if the Fund enters into an Affiliated Protection 
Arrangement. If a Trigger Event or a Defeasance Event occurs under the 
Protection Agreement (each, a ``Protection Event''), the Adviser will 
be required to notify the Committee as soon as practicable, and absent 
special circumstances, before a decision is reached by the Protection 
Provider and the Adviser as to how to effect any necessary cure. On or 
about the Maturity Date, the Board will review information comparing 
the aggregate Protected Amount with the Fund's total NAV on the 
Maturity Date, and will review and approve the amount of any Shortfall 
to be submitted for payment to the Protection Provider under the 
Protection Agreement (including the amount of any required Adviser 
Payment to the Fund) (the ``Approved Shortfall Amount'').

Applicants' Legal Analysis

A. Section 12(d)(3) of the Act

    1. Section 12(d)(3) of the Act generally prohibits a registered 
investment company from acquiring any security issued by any person who 
is a broker, dealer, investment adviser, or engaged in the business of 
underwriting. Rule 12d3-1 under the Act exempts certain transactions 
from the prohibition of section 12(d)(3) if certain conditions are met. 
One of these conditions, set forth in rule 12d3-1(c), provides that the 
exemption provided by the rule is not available when the issuer of the 
securities is the investment adviser, promoter, or principal 
underwriter of the investment company, or any affiliated person of such 
entities. In addition, rule 12d3-1(b) does not permit a registered 
investment company to (i) own more than five percent of a class of 
equity securities of an issuer that is engaged in securities related 
activities; (ii) own more than ten percent of such an issuer's debt 
securities; or (iii) invest more than five percent of the value of its 
total assets in the securities of any such issuer. Section 6(c) of the 
Act authorizes the Commission to exempt any person or transaction from 
any provision of the Act to the extent that such exemption is necessary 
or appropriate in the public interest and consistent with the 
protection of investors and the purposes fairly intended by the 
policies and provisions of the Act.
    2. Applicants state that by virtue of entering into an Affiliated 
Protection Arrangement with a Merrill Lynch Affiliate that is a broker, 
dealer, underwriter or investment adviser to a registered investment 
company or an investment adviser registered under the Investment 
Advisers Act, a Fund may be deemed to have acquired a security from the 
Merrill Lynch Affiliate.\8\ In addition, applicants state that it is 
possible that a Protection Agreement entered into by the Fund (whether 
pursuant to an Affiliated Protection Agreement or otherwise) may 
represent more than ten percent of the debt securities of a Protection 
Provider that is involved in securities related activities or more than 
five percent of the total assets of the Fund. Therefore, applicants 
seek an exemption from section 12(d)(3) to the extent necessary to 
permit the Fund to enter into Affiliated Protection Arrangements with a 
Merrill Lynch Affiliate or a Protection Agreement with another 
Protection Provider that is involved in securities related activities.
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    \8\ Applicants state that depending on the structure of the 
Protection Agreement, while certain types of Protection Agreements 
would not meet the definition of ``security'' contained in section 
2(a)(36) of the Act such as insurance contracts, certain types of 
derivative agreements may be deemed to constitute securities.
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    3. Applicants state that section 12(d)(3) was intended to prevent 
investment companies from exposing their assets to the entrepreneurial 
risks of securities related businesses and to prevent reciprocal 
practices between investment companies and securities related 
businesses. Applicants assert that the proposed transactions are 
consistent with the policy and intent underlying section 12(d)(3). In 
terms of the risk-preventing element of section 12(d)(3), applicants 
state that the Adviser and Board, when evaluating the credentials of a 
prospective Protection Provider, will take into account the Protection 
Provider's creditworthiness, any ratings assigned by a nationally 
recognized statistical ratings organization (``NRSRO''), and the 
availability of audited financial statements. Applicants state that the 
purpose of the Fund's Protection Agreement is to provide Principal 
Protection for the Fund, not to reward a Merrill Lynch Affiliate (or 
any other broker-dealer) for sales of Fund shares. Moreover, applicants 
believe that the conditions set forth in the application will ensure 
that each Fund is operated in the interests of its shareholders and not 
in the interests of a Merrill Lynch Affiliate or any other Protection 
Provider.

B. Section 17(a) of the Act

    1. Section 17(a)(1) and (2) of the Act generally prohibit the 
promoter or principal underwriter, or any affiliated person of the 
promoter or principal underwriter, of a registered investment company, 
acting as principal, knowingly to sell or purchase any security or 
other property to or from such investment company. Section 2(a)(3) of 
the Act defines an ``affiliated person'' of another person to include, 
among other things: (a) Any person directly or indirectly owning, 
controlling, or holding with power to vote 5% or more of the 
outstanding voting securities of the other person; (b) any person 5% or 
more of whose outstanding voting securities are directly or indirectly 
owned; and (c) any person directly or indirectly controlling, 
controlled by, or under common control with, the other person. Section 
17(b) of the Act authorizes the Commission to exempt a proposed 
transaction from the terms of section 17(a) if evidence establishes 
that the terms of the proposed transaction are reasonable and fair and 
do not involve overreaching, and the proposed transaction is consistent 
with the policies of the registered investment company involved and the 
purposes of the Act.
    2. Applicants state that depending on the structure of a Protection 
Agreement, it might be deemed to be a security or other property, and 
the Fund's entering into a Protection Agreement with a Merrill Lynch 
Affiliate might be deemed to be the acquisition of a security or other 
property from a Merrill Lynch Affiliate. In addition, applicants state 
that if a Merrill Lynch Affiliate were to serve as a Hedging 
Counterparty to an Unaffiliated Provider, the Merrill Lynch Affiliate 
might under certain circumstances be deemed to be indirectly involved 
in the sale of a security or other property to the Fund. Applicants 
request an exemption under sections 6(c) and 17(b) to permit the 
proposed transactions.
    3. Applicants submit that the involvement of a Merrill Lynch 
Affiliate in an Affiliated Protection Arrangement will benefit a Fund 
and its shareholders given the expertise of the Merrill Lynch 
Affiliates in structuring and providing credit enhancements for 
Principal Protection arrangements, and the alignment of interests that 
exist between the Merrill Lynch Affiliates and the Funds. Applicants 
argue that the relationship of a Fund and Unaffiliated Provider may be 
more adversarial, with the protection of the Unaffiliated

[[Page 51605]]

Provider's rights and remedies being of paramount importance to the 
Unaffiliated Provider, which could result in the Unaffiliated Provider 
exhibiting a greater willingness to declare a Defeasance Event or to 
rely on a clause permitting it to avoid liability to the Fund than 
would a Merrill Lynch Affiliate in similar circumstances. Applicants 
further argue that a Merrill Lynch Affiliate may assume a greater risk 
to itself by avoiding a Defeasance Event for the same fee charged by an 
Unaffiliated Provider without creating additional risk to the Fund or 
its shareholders by allowing a greater portion of the Fund's assets to 
remain invested in the Portfolio Component. Applicants also argue that 
the use of a Merrill Lynch Affiliate as Protection Provider may lower 
the cost of Principal Protection since there is a limited universe of 
Protection Providers with which a Fund may enter into a Protection 
Agreement. In addition, because a Merrill Lynch Affiliate may have a 
greater comfort level with the Formula and certain investment 
strategies to be used by the Advisers than an Unaffiliated Provider, 
applicants state that this may allow the Merrill Lynch Affiliate to 
enter into a Hedging Transaction with an Unaffiliated Provider for a 
lower fee or spread than would be available through a counterparty 
unaffiliated with the Fund.
    4. Applicants submit that the conditions applicable to each 
Affiliated Protection Arrangement will ensure that such arrangement 
will be reasonable and fair to each Fund and that no Merrill Lynch 
Affiliate will be able to engage in overreaching. Applicants state that 
a Fund will not be able to participate in an Affiliated Protection 
Arrangement until after a bidding process has been completed in which 
the Fund receives at least two bona fide offers for Principal 
Protection from an Unaffiliated Provider not seeking to hedge with a 
Merrill Lynch Affiliate, and that a Merrill Lynch Affiliate will not 
have an unfair advantage over other bidders in winning the bid. A Fund 
may not accept a bid or subsequently enter into an Affiliated 
Protection Arrangement unless it has been approved by the Fund's Board, 
including a majority of Independent Trustees, who must determine that 
entering into the Affiliated Protection Arrangement is in the best 
interests of the Fund and its shareholders and meets the standards 
specified in section 17(b) of the Act. In addition, applicants state 
that if a Fund enters into an Affiliated Protection Arrangement, the 
Fund's Board will establish a Committee to represent the Fund's 
interests if a Protection Event should occur. Lastly, applicants state 
that the Board will approve the Approved Shortfall Amount to be 
submitted for payment to the Affiliated Protection Provider and that 
the Fund will not accept a lesser amount in settlement of its claim 
without a further Commission exemptive order.
    5. Applicants submit that an Affiliated Protection Arrangement will 
be consistent with the policies of each Fund, as recited in its 
registration statement. Applicants further submit that an Affiliated 
Protection Arrangement, subject to the conditions set forth in the 
application, will be consistent with the purposes fairly intended by 
the policy and provisions of the Act and will be in the best interests 
of each Fund and its shareholders.

C. Section 17(d) of the Act

    1. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit any affiliated person of, or principal underwriter for, a 
registered investment company, or any affiliated person of, or 
principal underwriter, acting as principal, from effecting any 
transaction in connection with any joint enterprise or other 
arrangement or profit-sharing plan in which the investment company 
participates, unless an application regarding the joint transaction has 
been filed with the Commission and granted by order. Under rule 17d-1, 
in passing upon such applications, the Commission considers whether the 
participation of the registered investment company in the joint 
transaction is consistent with the provisions, policies and purposes of 
the Act and the extent to which such participation is on a basis 
different or less advantageous than that of other participants.
    2. Applicants state that the fee paid to a Merrill Lynch Affiliate 
pursuant to an Affiliated Protection Arrangement (either by the Fund 
directly under a Protection Agreement or indirectly through a Hedging 
Transaction) may be deemed to involve a joint enterprise or joint 
arrangement or profit sharing plan under section 17(d) and rule 17d-1 
because a Merrill Lynch Affiliate may be in control of, controlled by 
or under common control with the Adviser of a Fund, and the Merrill 
Lynch Affiliate's compensation as the Protection Provider or Hedging 
Counterparty will be based on the Fund's assets. In addition, the 
Merrill Lynch Affiliate might make a profit or suffer a loss depending 
on the performance of the Fund. Applicants also state that an 
Affiliated Protection Arrangement could be deemed to involve a joint 
enterprise or joint arrangement because of the coordination and 
possible ongoing negotiations between a Fund and a Merrill Lynch 
Affiliate in managing the Fund's risk exposure.\9\ Applicants thus 
request an order pursuant to section 17(d) and rule 17d-1.
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    \9\ For example, applicants state that a Merrill Lynch Affiliate 
could seek to request that a Fund's assets be invested not to seek 
to maximize the Fund's return, but in a manner designed to protect 
the Merrill Lynch Affiliate's interest by over-allocating the Fund's 
assets to the Protection Component so as to minimize the risk that a 
Merrill Lynch Affiliate would be called upon to make a payment under 
an Affiliated Protection Arrangement.
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    3. Applicants state that the purpose of section 17(d) is to avoid 
overreaching by and unfair advantage to insiders. Applicants submit 
that the conditions proposed in the application will ensure that a Fund 
and its shareholders are treated fairly and not taken advantage of by a 
Merrill Lynch Affiliate. Applicants submit that a Fund and its 
shareholders will benefit from the participation of a Merrill Lynch 
Affiliate in an Affiliated Protection Arrangement. For these reasons, 
applicants state that the proposed arrangement satisfies the standards 
of section 17(d) and rule 17d-1.

Applicants' Conditions

    Applicants agree that any order granting the requested relief shall 
be subject to the following conditions:
    1. Prior to recommending to the Board that a Fund enter into an 
Affiliated Protection Arrangement, the Adviser will conduct a 
competitive bidding process in which the Adviser solicits bids on at 
least three Protection Agreements that would not constitute Affiliated 
Protection Arrangements. At a reasonable amount of time prior to the 
date bids are to be submitted, the Adviser will solicit bids by 
supplying prospective bidders with a bid invitation letter that 
includes any requirement for a potential Protection Provider to include 
audited financial statements in the Fund's registration statement, a 
copy of the relevant sections of a draft prospectus of the Fund, and a 
draft of the Protection Agreement. Initial bids will be due at the same 
time, and no bidder will have access to any competing bids prior to its 
own submission. After initial bids are received, the Adviser will 
negotiate in good faith with each of the bidders to obtain more 
favorable terms for the Fund. During these negotiations, all bidders 
will have access to equal information about competing bids. At the end 
of this process, all bidders who

[[Page 51606]]

wish to participate will submit final bids. All such final bids will be 
due at the same time, and no bidder will be permitted to change its 
final bid once submitted. After the final bids are submitted, no 
bidder, including a Merrill Lynch Affiliate, will have access to any 
competing bids until after the Protection Agreement is entered into by 
the Fund. A Fund may not enter into an Affiliated Protection 
Arrangement unless two bona fide final bids have been received for 
Protection Agreements that would not constitute Affiliated Protection 
Arrangements.
    2. If the Adviser recommends that the Board approve an Affiliated 
Protection Arrangement, the Adviser must provide the Board with an 
explanation of the basis for its recommendation and a summary of the 
material terms of any bids that were rejected.
    3. The Fund's Board, including a majority of Independent Trustees, 
must approve the acceptance of a bid involving an Affiliated Protection 
Arrangement, as well as the general terms of the proposed Protection 
Agreement. In evaluating the final bids and the recommendations from 
the Adviser, the Board will consider, among other things: (i) The fee 
rate to be charged by a potential Protection Provider; (ii) the 
structure and potential limitations of the proposed Principal 
Protection arrangement and any legal, regulatory or tax implications of 
such arrangement; (iii) the credit rating (if any) and financial 
condition of the potential Protection Provider, including any ratings 
assigned by any NRSRO; and (iv) the experience of the potential 
Protection Provider in providing Principal Protection, including in 
particular to registered investment companies. If the Affiliated 
Protection Arrangement approved by the Board does not reflect the 
lowest fee submitted in a proposal to provide the Principal Protection, 
the Board will reflect in its minutes the reasons why the higher cost 
option was selected.
    4. Upon the conclusion of the Adviser's negotiations of the 
Affiliated Protection Arrangement, including the Protection Agreement, 
the Fund's Board, including a majority of Independent Trustees, must 
approve the final Protection Agreement and determine that the terms of 
the final Affiliated Protection Arrangement, as so finalized, are not 
materially different from the terms of the accepted bid. The Board, 
including a majority of its Independent Trustees, will also determine 
that entering into the Affiliated Protection Arrangement will be in the 
best interests of the Fund and its shareholders and meets the standards 
specified in section 17(b) of the Act. The Board will reflect these 
findings and their basis in its minutes.
    5. If a Merrill Lynch Affiliate is chosen as the Protection 
Provider or Hedging Counterparty, it will not charge a higher fee for 
its Protection Agreement or Hedging Transaction than it would charge 
for similar agreements or transactions for unaffiliated parties that 
are similarly situated to the Fund. Any Merrill Lynch Affiliate acting 
as Hedging Counterparty will not be directly compensated by the Fund 
and the Fund will not be a party to any Hedging Transaction.
    6. In the event the Fund enters into an Affiliated Protection 
Arrangement, the Board will establish a Committee, a majority of whose 
members will be Independent Trustees, to represent the Fund in any 
negotiations relating to a Protection Event. The Adviser will notify 
the Committee of any Protection Event as soon as practicable, and 
absent special circumstances, before a decision is reached by the 
Protection Provider and the Adviser as to how to effect any cure. All 
Protection Events will be brought to the attention of the full Board at 
the next regularly scheduled Board meeting.
    7. The Adviser will present a report to the Board, at least 
quarterly, comparing the actual asset allocation of the Fund's 
portfolio with the allocation required under the Protection Agreement, 
describing any Protection Events, and summarizing any negotiations that 
were the subject of the previous condition.
    8. At the conclusion of the Protection Period, the Adviser of a 
Fund will report to the Fund's Board any Shortfall potentially covered 
under an Affiliated Protection Arrangement (including, for this 
purpose, the amount of any required Adviser Payment). The Board, 
including a majority of Independent Trustees, will evaluate the 
Shortfall and will determine the amount of the claim (previously 
defined as the Approved Shortfall Amount) under the Protection 
Agreement to be submitted to the Protection Provider. The Fund will not 
settle any claim under the Protection Agreement for less than the full 
Approved Shortfall Amount determined by the Board without obtaining a 
further exemptive order from the Commission.
    9. No less than a majority of a Fund's Board will consist of 
Independent Trustees.
    10. The Independent Trustees will be represented by independent 
legal counsel within the meaning of Rule 0-1 under the Act.
    11. The Adviser, under the supervision of the Board, will maintain 
sufficient records to verify compliance with the conditions of the 
order. Such records will include, without limitation: (i) An 
explanation of the basis upon which the Adviser selected prospective 
bidders; (ii) a list of all bidders to whom a bid invitation letter was 
sent and copies of the bid invitation letters and accompanying 
materials; (iii) copies of all initial and final bids received, 
including the winning bid; (iv) records of the negotiations with 
bidders between their initial and final bids; (v) the materials 
provided to the Board in connection with the Adviser's recommendation 
regarding the Protection Agreement; (vi) the final price and terms of 
the Protection Agreement with an explanation of the reason the 
arrangement is considered an Affiliated Protection Arrangement; and 
(vii) records of any negotiations with the Protection Providers related 
to the occurrence of a Protection Event and the satisfaction of any 
obligations under a Protection Agreement. All such records will be 
maintained for a period ending not less than six years after the 
conclusion of the Protection Period, the first two years in an easily 
accessible place, and will be available for inspection by the staff of 
the Commission.


    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-21938 Filed 8-26-03; 8:45 am]
BILLING CODE 8010-01-P