[Federal Register Volume 69, Number 125 (Wednesday, June 30, 2004)]
[Notices]
[Pages 39525-39529]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 04-14812]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26487; 812-12458]


Dreyfus Founders Funds, Inc., et al.; Notice of Application

June 24, 2004.
AGENCY: Securities and Exchange Commission (``Commission'').

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

-----------------------------------------------------------------------

SUMMARY: Applicants request an order that would permit certain 
registered open-end management investment companies to participate in a 
joint lending and borrowing facility.
    Applicants: Dreyfus Founders Funds, Inc. (``Company'') and Founders 
Asset Management LLC (``Founders'').

DATES: Filing Dates: The application was filed on March 1, 2001, and 
amended on March 22, 2004, and June 14, 2004. 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 July 19, 2004, 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, Securities and Exchange Commission, 450 Fifth 
Street, NW., Washington, DC 20549-0609. Applicants, 210 University 
Boulevard, Suite 800, Denver, Colorado 80206.

FOR FURTHER INFORMATION CONTACT: Courtney S. Thornton, Senior Counsel, 
at (202) 942-0699, or Annette M. Capretta, 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. The Company is registered under the Act as an open-end 
management investment company and is organized as a Maryland 
corporation. The Company is comprised of ten series (each a ``Fund'', 
and together the ``Funds''). Founders is registered under the 
Investment Advisers Act of 1940. The Company, on behalf of each Fund, 
has entered into an investment advisory agreement with Founders under 
which Founders exercises discretion to purchase and sell securities for 
the Funds. Founders is an indirect wholly-owned subsidiary of Mellon 
Financial Corporation (``MFC'').\1\
---------------------------------------------------------------------------

    \1\ Applicants request that the relief also apply to any other 
existing or future registered open-end management investment 
company, or series thereof, for which Founders, or any person 
controlling, controlled by, or under common control with Founders 
acts or may act in the future as an investment adviser (each a 
``Future Fund'' and, together with the Funds, the ``Funds''). The 
Company is the only investment company that presently intends to 
rely on the requested relief. Any Future Funds that subsequently 
rely on the order will comply with the terms and conditions in the 
application.
---------------------------------------------------------------------------

    2. Some Funds may lend money to banks or other entities by 
purchasing debt instruments. Other Funds may borrow money 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 
committed lines of credit.
    3. If the Funds were to borrow money under the lines 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 other (non-borrowing) 
Funds on investments in repurchase agreements and other short-term 
instruments of the same maturity as the bank loan. In addition, the 
Funds would have to pay commitment fees up front to obtain the bank's 
commitment to lend money.
    4. Applicants request an order that would permit the Funds to enter 
into 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' potential borrowing costs and enhance their ability to earn 
higher rates of interest on short-term lendings. Although the proposed 
credit facility would reduce the Funds' need to borrow from banks, the 
Funds would be free to establish and/or continue committed lines of 
credit or other borrowing arrangements with banks.
    5. Applicants anticipate that the proposed credit facility would 
provide a borrowing Fund with 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 Funds have insufficient cash on hand to satisfy such redemptions. 
When the Funds liquidate portfolio securities to meet redemption 
requests, which normally are paid immediately, they often do 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 beyond a Fund's control, such as 
a delay in the delivery of cash to the Fund's custodian or improper 
delivery instructions by the broker effecting the transaction. Sales 
fails may present a cash shortfall if the Fund has undertaken to 
purchase a security with the proceeds from securities sold. When the 
Fund experiences a cash shortfall due to a sales fail, the Fund 
typically obtains credit to cover the shortfall and the Fund incurs 
charges for such credit. 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 credit facility under these circumstances would

[[Page 39526]]

enable the Fund to have access to immediate short-term liquidity 
without incurring line of credit or other charges.
    7. While borrowing arrangements with banks will continue to be 
available 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 short-term debt investments. Thus, applicants 
believe that the proposed credit facility would benefit both borrowing 
and lending Funds.
    8. The interest rate charged to the Funds on any Interfund Loan 
(the ``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 
investments in overnight repurchase agreements. The Bank Loan Rate for 
any day would be calculated by Founders on each day an Interfund Loan 
is made according to a formula adopted by each Fund's board of 
directors (``Board'') intended 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 periodically would 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 each Fund's Board.
    9. The proposed credit facility would be administered by Founders' 
money market investment professionals (including the portfolio manager 
of a money market Fund (the ``Money Market Manager'')) and Founders' 
fund accounting department (collectively, the ``Cash Management 
Team''). Under the proposed credit facility, the portfolio managers for 
each participating Fund could provide standing instructions to 
participate daily as a borrower or lender. Founders on each business 
day would collect data on the uninvested cash and borrowing 
requirements of all participating Funds from the Funds' custodian. Once 
it had determined the aggregate amount of cash available for loans and 
borrowing demand, the Cash Management Team would allocate loans among 
borrowing Funds without any further communication from portfolio 
managers (other than the Money Market Manager in his or her capacity as 
the Cash Management Team member). Applicants expect far more available 
uninvested cash each day than borrowing demand. All allocations will 
require approval of at least one member of the Cash Management Team who 
is not the Money Market Manager. After allocating cash for Interfund 
Loans, Founders will invest any remaining cash in accordance with the 
standing instructions of portfolio managers or return remaining amounts 
for investment directly by the portfolio manager of the applicable 
Fund. Money market Funds typically would not participate as borrowers 
because they rarely need to borrow cash to meet redemptions.
    10. The Cash Management Team would allocate borrowing demand and 
cash available for lending among the Funds on what the Cash Management 
Team 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 Interfund Loan normally would 
be allocated in a manner intended to minimize the number of 
participants necessary to complete the loan transaction.
    11. Founders 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 each Fund's 
Board concerning any transactions by the Funds under the credit 
facility and the interest rates charged. The method of allocation and 
related administrative procedures would be approved by each Fund's 
Board, including a majority of directors who are not ``interested 
persons'' of the Fund, as defined in section 2(a)(19) of the Act 
(``Independent Directors''), to ensure that both borrowing and lending 
Funds participate on an equitable basis.
    12. Founders would administer the proposed credit facility as part 
of its duties under its advisory contract with each Fund and would 
receive no additional fee as compensation for its services.
    13. No Fund may participate in the proposed credit facility unless 
(a) the Fund has obtained shareholder approval for its participation, 
if such approval is required by law, (b) the Fund has fully disclosed 
all material information concerning the credit facility in its 
prospectus and/or statement of additional information, and (c) the 
Fund's participation in the credit facility is consistent with its 
investment objectives, limitations, and organizational documents.
    14. 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) 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 Founders as their 
common investment adviser, and/or by reason of having common officers 
and/or directors.
    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) 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.

[[Page 39527]]

    3. Applicants submit that sections 17(a)(3) and 21(b) of the Act 
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) Founders would administer the program as a disinterested 
fiduciary; (b) all Interfund Loans would consist only of uninvested 
cash reserves that a 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 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) of the Act generally prohibits an affiliated 
person of a registered investment company, or an affiliated person of 
an affiliated person, from selling any securities or other property to 
the company. Section 12(d)(1) of the Act generally makes it unlawful 
for a registered investment company to purchase or otherwise acquire 
any security issued by any other investment company except in 
accordance with the limitations set forth in that section. Applicants 
state that the obligation of a borrowing Fund to repay an Interfund 
Loan may constitute a security under sections 17(a)(1) and 12(d)(1) of 
the Act. Section 12(d)(1)(J) of the Act provides that the Commission 
may exempt persons or transactions from any provision of section 
12(d)(1) if and to the extent 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) of the Act 
are satisfied for all the reasons set forth above in support of their 
request for relief from sections 17(a)(3) and 21(b) of the Act and for 
the reasons discussed below.
    5. Applicants state that section 12(d) of the Act 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 those abuses. Applicants note that there would be no 
duplicative costs or fees to the Funds or to Fund shareholders, and 
that Founders would 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 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, if immediately after the borrowing, 
there is an asset coverage of at least 300% for all borrowings of the 
company. Under section 18(g) of the Act, the term ``senior security'' 
includes any bond, debenture, note, or similar obligation or instrument 
constituting a security and evidencing indebtedness. Applicants request 
exemptive relief from section 18(f)(1) to the limited extent necessary 
to implement the credit facility (because the lending Funds are not 
banks).
    7. Applicants believe that granting relief under section 6(c) of 
the Act is appropriate because the Funds would remain subject to the 
requirement of section 18(f)(1) of the Act that all borrowings of a 
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) of the 
Act.
    8. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit any affiliated person of a registered investment company, or 
affiliated person of an affiliated person, when acting as principal, 
from effecting any joint transaction 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 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 no 
different from or less advantageous than that of other participating 
Funds.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Interfund Loan Rate to be charged to the Funds under the 
credit facility will be the average of the Repo Rate and the Bank Loan 
Rate.
    2. On each business day Founders 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 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, that event of default will automatically (without 
need for action or notice by the lending Fund) constitute an immediate 
event of default under the Interfund Lending Agreement entitling the 
lending Fund to call the Interfund Loan (and exercise all rights with 
respect to any collateral) and that such call will be made if the 
lending bank exercises its right to call its loan under its agreement 
with the borrowing Fund.
    4. A Fund may make an unsecured borrowing through the credit 
facility if its outstanding borrowings from all sources immediately 
after the interfund

[[Page 39528]]

borrowing total 10% or less of its total assets, provided that if the 
Fund has a secured loan outstanding from any other lender, including 
but not limited to another Fund, the Fund's interfund borrowing will be 
secured on at least an equal priority basis with at least an equivalent 
percentage of collateral to loan value as any outstanding loan that 
requires collateral. If a Fund's total outstanding borrowings 
immediately after an interfund borrowing would be greater than 10% of 
its total assets, the Fund may borrow through the credit facility on a 
secured basis only. A Fund may not borrow through the credit facility 
or from any other source if its total outstanding borrowings 
immediately after the interfund borrowing would be more than 33\1/3\% 
of its total assets.
    5. Before any Fund that has outstanding interfund borrowings may, 
through additional borrowings, cause its outstanding borrowings from 
all sources to exceed 10% of its total assets, the Fund must first 
secure each outstanding Interfund Loan by the pledge of segregated 
collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Fund with outstanding Interfund Loans exceeds 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 its aggregate outstanding loans through the credit 
facility to exceed 15% of its net assets at the time of the loan.
    7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of 
the lending Fund's net assets.
    8. The duration of Interfund Loans will be limited to the time 
required to receive payment for securities sold, but in no event more 
than seven days. Loans effected within seven days of each other will be 
treated as separate loan transactions for purposes of this condition.
    9. Except as set forth in this condition, no Fund may borrow 
through 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 Cash Management Team 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 (other than the Money Market Manager 
acting in his or her capacity as a member of the Cash Management Team). 
All allocations will require approval of at least one member of the 
Cash Management Team who is not the Money Market Manager. The Cash 
Management Team will not solicit cash for the credit facility from any 
Fund or prospectively publish or disseminate loan demand data to 
portfolio managers (except to the extent that the Money Market Manager 
has access to loan demand data in his or her capacity as a member of 
the Cash Management Team). Founders 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 manager of the applicable Fund.
    13. Founders 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 of each Fund concerning the participation of the 
Fund in the credit facility and the terms and other conditions of any 
extensions of credit under the facility.
    14. The Board of each Fund, including a majority of the Independent 
Directors: (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 such 
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, Founders will 
promptly refer such loan for arbitration to an independent arbitrator 
selected by the Board of any Fund involved in the loan who will serve 
as the arbitrator of disputes concerning Interfund Loans.\2\ 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 of each Fund setting 
forth a description of the nature of any dispute and the actions taken 
by the Funds to resolve the dispute.
---------------------------------------------------------------------------

    \2\ If the dispute involves Funds with different Boards, the 
Board of each Fund will select an independent arbitrator that is 
satisfactory to each Fund.
---------------------------------------------------------------------------

    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 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 Fund's 
Board in connection with the review required by conditions 13 and 14.
    17. Founders will prepare and submit to the Board of each Fund for 
review an initial report describing the operations of the credit 
facility and the procedures to be implemented to ensure that all Funds 
are treated fairly. After the commencement of operation of the

[[Page 39529]]

credit facility, Founders will report on the operations of the credit 
facility at the quarterly meetings of each Fund's Board. In addition, 
for two years following the commencement of the credit facility, the 
independent public accountant for each Fund shall prepare an annual 
report that evaluates Founders' 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. 10 and 
it shall be filed pursuant to Item 77Q3 of Form N-SAR as such 
Statements or Form may be revised, amended, or superseded from time to 
time. 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 unless it has 
fully disclosed in its statement of additional information 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. 04-14812 Filed 6-29-04; 8:45 am]
BILLING CODE 8010-01-U