[Federal Register Volume 68, Number 188 (Monday, September 29, 2003)]
[Notices]
[Pages 56024-56026]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-24453]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26181; 812-12952]


Franklin Floating Rate Trust, et al.; Notice of Application

September 23, 2003.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application under section 6(c) of the Investment 
Company Act of 1940 (the ``Act'') for an exemption from sections 18(c) 
and 18(i) of the Act, under sections 6(c) and 23(c)(3) of the Act for 
an exemption from rule 23c-3 under the Act, and pursuant to section 
17(d) of the Act and rule 17d-1 under the Act.

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SUMMARY OF APPLICATION: Applicants request an order to permit certain 
registered closed-end management companies to issue multiple classes of 
shares and to impose asset-based distribution fees and early withdrawal 
charges. The order would supercede a prior order (``Prior Order'').\1\
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    \1\ Franklin Floating Rate Trust et al., Investment Company Act 
Release Nos. 23033 (Feb. 20, 1998) (notice) and 23068 (Mar. 17, 
1998) (order). The Prior Order permits certain registered closed-end 
investment companies to impose an early withdrawal charge.

APPLICANTS: Franklin Floating Rate Trust (``FR Fund''), Franklin Mutual 
Recovery Fund (``FMR Fund,'' together with FR Fund, the ``Funds''), 
Franklin Advisers, Inc. (``Franklin Advisers''), Franklin Mutual 
Advisers, LLC (``Mutual Advisers,'' together with Franklin Advisers, 
the ``Advisers''), Franklin/Templeton Distributors, Inc. (the 
``Distributor''), Franklin Templeton Services, LLC (the 
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``Administrator'').

FILING DATES: The application was filed on March 26, 2003, and amended 
on September 9, 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 October 17, 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 
20549-0609; Applicants, One Franklin Parkway, San Mateo, CA 94403-1906.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 942-0527 or Todd Kuehl, Branch Chief, at (202) 942-0564 (Division 
of Investment Management, Office of Investment Company Regulation).

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

Applicants' Representations

    1. The Funds are closed-end management investment companies 
registered under the Act and organized as Delaware statutory trusts. 
Franklin Advisers, a California corporation, and Mutual Advisers, a 
Delaware limited liability company, are registered as investment 
advisers under the Investment Advisers Act of 1940 and serve as 
investment manager to the FR Fund and FMR Fund, respectively. The 
Distributor, a broker-dealer registered under the Securities Exchange 
Act of 1934 (``1934 Act''), serves as principal underwriter to the 
Funds. The Administrator is the administrator of the Funds and is 
responsible for managing the Funds' business affairs. The Advisers, the 
Distributor and the Administrator are wholly-owned subsidiaries of 
Franklin Resources, Inc.
    2. Applicants request that the order also apply to any other 
registered closed-end management investment company that may be 
organized in the future for which either of the Advisers, the 
Distributor or the Administrator or any entity controlling, controlled 
by, or under common control with the Adviser, the Distributor or the 
Administrator acts as investment adviser, principal underwriter or 
administrator and which operates as an interval fund pursuant to rule 
23c-3 under the Act (included in the term ``Funds'').\2\
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    \2\ Any Fund relying on this relief in the future will do so in 
a manner consistent with the terms and conditions of the 
application. Applicants represent that each entity presently 
intending to rely on the requested relief is listed as an applicant.
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    3. The investment objective of the FR Fund is to provide as high a 
level of current income and preservation of capital as is consistent 
with investment primarily in senior secured corporate loans and senior 
secured debt securities with floating or variable rates. The investment 
objective of the FMR Fund is capital appreciation. The FMR Fund invests 
in equity and debt instruments in the categories of bankruptcy and 
distressed companies, risk arbitrage, and undervalued stocks.
    4. The Funds continuously offer their shares to the public at net 
asset value. The Funds' shares are not offered or traded in the 
secondary market and are not listed on any exchange or quoted on any 
quotation medium. The Funds intend to operate as ``interval funds'' 
pursuant to rule 23c-3 under the Act and to make periodic repurchase 
offers to their respective shareholders.

[[Page 56025]]

    5. The Funds seek the flexibility to be structured as multiple-
class funds. The FMR Fund currently intends to, and the FR Fund may in 
the future, offer four or more different classes of shares. The FMR 
Fund will offer Class B shares at net asset value without a front-end 
sales charge, but subject to an early withdrawal charge (``EWC'') on 
shares that are repurchased by a Fund within seven years of the date of 
purchase (``Class B Shares''). The FMR Fund will offer Class A shares 
at net asset value with a front-end sales charge and also subject to an 
EWC in certain circumstances (``Class A Shares''). The FMR Fund will 
also offer Class C shares at net asset value with a front-end sales 
charge and also subject to an EWC on shares that are repurchased by a 
Fund within eighteen months of the date of purchase (``Class C 
Shares''). The FMR Fund will also offer Advisor Class shares at net 
asset value without a front-end sales charge or EWC (``Advisor Class 
Shares''). Class A Shares will be subject to an annual distribution fee 
and/or service fee of up to 0.25% of average daily net assets. Class B 
and Class C Shares will be subject to an annual distribution fee of up 
to 0.75% of average daily net assets and an annual service fee of up to 
0.25% of average daily net assets. Advisor Class Shares will be subject 
to an annual distribution fee and/or service fee of up to 0.50% of 
average daily net assets. Class B Shares will automatically convert to 
Class A Shares after a set period of time. The Funds may in the future 
offer additional classes of shares with a front-end sales charge, an 
EWC and/or asset-based service or distribution fees.
    6. Applicants represent that any asset-based service and 
distribution fees will comply with the provisions of rule 2830(d) of 
the Conduct Rules of the National Association of Securities Dealers, 
Inc. (``NASD Conduct Rule''). Applicants also represent that each Fund 
will disclose in its prospectus, the fees, expenses and other 
characteristics of each class of shares offered for sale by the 
prospectus, as is required for open-end multiple class funds under Form 
N-1A.
    7. Each Fund will allocate all expenses incurred by it among the 
various classes of shares based on the net assets of the Fund 
attributable to each class, except that the net asset value and 
expenses of each class will reflect distribution fees, service fees, 
and any other incremental expenses of that class. Expenses of a Fund 
allocated to a particular class of shares will be borne on a pro rata 
basis by each outstanding share of that class. Each Fund may create 
additional classes of shares in the future that may have different 
terms from Class A, Class B, Class C or Advisor Class Shares. 
Applicants state that each Fund will comply with the provisions of rule 
18f-3 under the Act as if it were an open-end investment company.
    8. Each Fund may waive the EWC for certain categories of 
shareholders or transactions to be established from time to time. With 
respect to any waiver of, scheduled variation in, or elimination of the 
EWC, each Fund will comply with rule 22d-1 under the Act as if the Fund 
were an open-end investment company.
    9. Each Fund may offer its shareholders an exchange feature under 
which shareholders of the Fund may, during the Fund's periodic 
repurchase periods, exchange their shares for shares of the same class 
of other registered open-end investment companies or registered closed-
end investment companies that comply with rule 23c-3 under the Act and 
continuously offer their shares at net asset value, and that are in the 
Franklin Templeton Investments group of investment companies. Fund 
shares so exchanged will count as part of the repurchase offer amount 
as specified in rule 23c-3 under the Act. Any exchange option will 
comply with rule 11a-3 under the Act as if the Fund were an open-end 
investment company subject to that rule. In complying with rule 11a-3, 
each Fund will treat the EWCs as if they were a contingent deferred 
sales charge (``CDSC'').

Applicants' Legal Analysis

Multiple Classes of Shares

    1. Section 18(c) of the Act provides, in relevant part, that a 
closed-end investment company may not issue or sell any senior security 
if, immediately thereafter, the company has outstanding more than one 
class of senior security. Applicants state that the creation of 
multiple classes of shares of the Funds may be prohibited by section 
18(c).
    2. Section 18(i) of the Act provides that each share of stock 
issued by a registered management investment company will be a voting 
stock and have equal voting rights with every other outstanding voting 
stock. Applicants state that multiple classes of shares of the Funds 
may violate section 18(i) of the Act because each class would be 
entitled to exclusive voting rights with respect to matters solely 
related to that class.
    3. Section 6(c) of the Act provides that the Commission may exempt 
any person, security or transaction or any class or classes of persons, 
securities or transactions from any provision of the Act, or from any 
rule thereunder, if and to the extent such 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. Applicants request an exemption under section 
6(c) from sections (18(c) and 18(i) to permit the Funds to issue 
multiple classes of shares.
    4. Applicants submit that the proposed allocation of expenses and 
voting rights among multiple classes of the Funds is equitable and will 
not discriminate against any group or class of shareholders. Applicants 
submit that the proposed arrangements would permit the Funds to 
facilitate the distribution of their securities and provide investors 
with a broader choice of shareholders services. Applicants assert that 
their proposal does not raise the concerns underlying section 18 of the 
Act to any greater degree than open-end investment companies' multiple 
class structures that are permitted by rule 18f-3 under the Act. 
Applicants state that each Fund will comply with the provisions of rule 
18f-3.

Early Withdrawal Charges

    1. Section 23(c) of the Act provides, in relevant part, that no 
registered closed-end investment company will purchase securities of 
which it is the issuer, except: (a) On a securities exchange or other 
open market; (b) pursuant to tenders, after reasonable opportunity to 
submit tenders given to all holders of securities of the class to be 
purchased; or (c) under other circumstances as the Commission may 
permit by rules and regulations or orders for the protection of 
investors.
    2. Rule 23c-3 under the Act permits a registered closed-end 
investment company (an ``interval fund'') to make repurchase offers of 
between five and twenty-five percent of its outstanding shares at net 
asset value at periodic intervals pursuant to a fundamental policy of 
the interval fund. Rule 23c-3(b)(1) under the Act provides that an 
interval fund may deduct from repurchase proceeds only a repurchase 
fee, not to exceed two percent of the proceeds, that is reasonably 
intended to compensate the fund for expenses directly related to the 
repurchase.
    3. Section 23(c)(3) provides that the Commission may issue an order 
that would permit a closed-end investment company to repurchase its 
shares in circumstances in which the repurchase is made in a manner or 
on a basis that does not unfairly discriminate against any holders of 
the class or classes of

[[Page 56026]]

securities to be purchased. As noted above, section 6(c) provides that 
the Commission may exempt any person, security or transaction from any 
provision of the Act, if and to the extent that the 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. Because the Funds operate pursuant to rule 
23c-3 under the Act, Applicants request relief under sections 6(c) and 
23(c) from rule 23c-3 to permit them to impose EWCs on shares of the 
Funds submitted for repurchase that have been held for less than a 
specified period.
    4. Applicants believe that the requested relief meets the standards 
of sections 6(c) and 23(c)(3). Rule 6c-10 under the Act permit open-end 
investment companies to impose CDSCs, subject to certain conditions. 
Applicants state that EWCs are functionally similar to CDSCs imposed by 
open-end investment companies under rule 6c-10. Applicants state that 
EWCs may be necessary for the Distributor to recover distribution 
costs. Applicants will comply with rule 6c-10 as if that rule applied 
to closed-end investment companies. The Funds also will disclose EWCs 
in accordance with the requirements of Form N-1A concerning CDSCs. 
Applicants further state that the Funds will apply the EWC (and any 
waivers or scheduled variations of the EWC) uniformly to all 
shareholders in a given class and consistently with the requirements of 
rule 22d-1 under the Act.

Asset-Based Distribution Fees

    1. Section 17(d) of the Act and rule 17d-1 under the Act prohibit 
an affiliated person of a registered investment company or an 
affiliated person of such person, acting as principal, from 
participating in or effecting any transaction in connection with any 
joint enterprise or joint arrangement in which the investment company 
participates unless the Commission issues an order permitting the 
transaction. In reviewing applications submitted under section 17(d) 
and rule 17d-1, the Commission considers whether the participation of 
the investment company in a joint enterprise or joint arrangement is 
consistent with the provisions, policies and purposes of the Act, and 
the extent to which the participation is on a basis different from or 
less advantageous than that of other participants.
    2. Rule 17d-3, under the Act provides an exemption from section 
17(d) and rule 17d-1 to permit open-end investment companies to enter 
into distribution arrangements pursuant to rule 12b-1 under the Act. 
Applicants request an order under section 17(d) and rule 17d-1 under 
the Act to permit the Funds to impose asset-based distribution fees. 
Applicants have agreed to comply with rules 12b-1 and 17d-3 as if those 
rules applied to closed-end investment companies.

Applicants' Condition

    Applicants agree that any order granting the requested relief will 
be subject to the following condition:
    Applicants will comply with the provisions of rules 6c-10, 11a-3, 
12b-1, 17d-3, 18f-3, and 22d-1 under the Act, as amended from time to 
time, as if those rules applied to closed-end management investment 
companies, and will comply with the NASD Conduct Rule, as amended from 
time to time.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Margaret H. McFarland
Deputy Secretary.
[FR Doc. 03-24453 Filed 9-26-03; 8:45 am]
BILLING CODE 8010-01-M