[Federal Register Volume 70, Number 178 (Thursday, September 15, 2005)]
[Notices]
[Pages 54590-54595]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 05-18311]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27060; 812-13134]


Marshall Funds, Inc., et al.; Notice of Application

September 8, 2005.
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 sections 12(d)(1)(A) 
and (B) 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 open-end management investment companies to 
participate in a joint lending and borrowing facility.
    Applicants: Marshall Funds, Inc., M&I Investment Management Corp. 
(``M&I Investment Management''), and Marshall & Ilsley Trust Company, 
N.A. (``M&I Trust'').
    Filing Dates: The application was filed on November 3, 2004, and 
amended on September 8, 2005.
    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 4, 2005, 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.

[[Page 54591]]


ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC 20549-9303; Applicants, c/o Pamela M. 
Krill, Esq., Godfrey & Kahn, S.C., One East Main Street, Madison, WI 
53703.

FOR FURTHER INFORMATION CONTACT: Marc R. Ponchione, Senior Counsel, at 
(202) 551-6874 or Mary Kay Frech, Branch Chief, at (202) 551-6821 
(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, 100 F Street, NE., Washington, DC 
20549-0102 (tel. 202-551-5850).

Applicants' Representations

    1. Marshall Funds, Inc. is registered under the Act as an open-end 
management investment company and is organized as a Wisconsin 
corporation. Marshall Funds, Inc. currently consists of thirteen series 
(each, a ``Fund'' and together, the ``Funds''), three of which comply 
with rule 2a-7 under the Act and hold themselves out as money market 
funds (the ``Money Market Funds''). M&I Investment Management, a 
wholly-owned subsidiary of Marshall and Ilsley Corporation, is 
registered as an investment adviser under the Investment Advisers Act 
of 1940 and serves as investment adviser to the Funds.\1\ M&I Trust, a 
wholly-owned subsidiary of Marshall and Ilsley Corporation, serves as 
custodian and administrator to the Funds.
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    \1\ Applicants request that the relief also apply to any other 
existing or future registered open-end management investment company 
or series thereof that is advised by M&I Investment Management or 
any person controlling, controlled by, or under common control with 
M&I Investment Management or its successors (``Future Funds,'' 
included in the term ``Funds''). ``Successor'' is limited to any 
entity or entities that result from a reorganization into another 
jurisdiction or a change in the type of business organization. All 
entities that currently intend to rely on the requested order have 
been named as applicants. Any future entity that relies on the 
requested relief will do so only in accordance with the terms and 
conditions of the application.
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    2. Some Funds may enter into repurchase agreements or purchase 
other short-term instruments issued by banks or other entities. Other 
funds may need to borrow money from the same or similar banks 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, Marshall Funds, Inc. has a $25 million 
standby line of credit with State Street Bank.
    3. If the funds were to borrow money through their line of credit, 
the Funds would pay interest on the borrowed cash at a rate which would 
be significantly higher than the rate that would be earned by other 
(non-borrowing) Funds on investments in repurchase agreements and other 
short-term instruments of the same maturity as the bank loan. 
Applicants state that this differential represents the profit the bank 
would earn for serving as a middleman between a borrower and a lender 
and is not attributable to any material difference in the credit 
quality or risk in such transactions. In addition, while bank 
borrowings generally could supply needed cash to cover unanticipated 
redemptions and sales fails, the borrowing Funds would incur commitment 
fees and/or other charges involved in obtaining a bank loan.
    4. Applicants request an order that would permit the funds to enter 
into master interfund lending agreements (``Interfund Lending 
Agreements'') that would permit each Fund to lend money directly to and 
borrow directly from other funds for temporary purposes (an ``Interfund 
Loan''). Applicants believe that the proposed credit facility would 
both reduce the Funds' potential borrowing costs and enhance the 
ability of the lending Funds to earn higher rates of interest on their 
short-term loans. Although the proposed credit facility would reduce 
the Funds' need to borrow from banks, the Funds would be free to 
establish and/or continue standby lines of credit or other borrowing 
arrangements with banks.
    5. Applicants anticipate that the credit facility will provide a 
borrowing Fund with significant savings when the cash position of the 
Fund is insufficient to meet temporary cash requirements. This 
situation could arise when shareholder redemptions exceed anticipated 
volumes and certain Funds have insufficient cash on hand to satisfy 
such redemptions. When the Funds liquidate portfolio securities to meet 
redemption requests, 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 
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. Under such circumstances, 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 give the Fund access to 
immediate short-term liquidity without incurring custodian overdraft or 
other charges.
    7. While bank borrowings could generally supply needed cash to 
cover unanticipated redemptions and sales fails, under the credit 
facility, a borrowing Fund would pay lower interest rates than those 
offered by banks on short-term loans. In addition, Funds making short-
term cash loans directly to other Funds would earn interest at a rate 
higher than they otherwise could obtain from investing their cash in 
repurchase agreements or purchasing shares of a Money Market Fund.\2\ 
Thus, applicants believe that the credit facility would benefit both 
borrowing and lending Funds.
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    \2\ Marshall Funds, Inc. has received an order that permits the 
Funds to purchase shares of Money Market Funds for cash management 
purposes. Investment Company Act Release Nos. 22313 (November 4, 
1996) (notice) and 22362 (December 2, 1996) (order).
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    8. The interest rate charged to the Funds on any loans (the 
``Interfund Loan 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 rate available to the 
Funds from investments in overnight repurchase agreements. The Bank 
Loan Rate for any day would be calculated by the Credit Facility Team, 
as defined below, each day an Interfund Loan is made according to a 
formula established by each Fund's board of directors (``Board'') 
designed 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. The Board of each Fund periodically would review the 
continuing appropriateness of using the publicly available rate 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 Fund. The initial formula and any subsequent modifications to the 
formula would be

[[Page 54592]]

subject to the approval of each Fund's Board.
    9. The Fund's president, treasurer, and compliance officer and an 
investment professional within M&I Investment Management (who is also 
an employee of M&I Trust) who serves as a portfolio manager for the 
Money Market Funds (the ``Money Market Manager'') (collectively, the 
``Credit Facility Team'') would administer the credit facility. Under 
the credit facility, the portfolio managers for each participating Fund 
could provide standing instructions to participate daily as a borrower 
or lender. On each business day, M&I Trust, as the Fund's custodian, 
would prove the Credit Facility Team with data on the uninvested cash 
and borrowing requirements of all participating Funds. Once it had 
determined the aggregate amount of cash available for loans and 
borrowing demand, the Credit Facility 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 Credit Facility Team member). It is expected that there typically 
will be far more available uninvested cash each day than borrowing 
demand. After the Credit Facility Team has allocated cash for Interfund 
Loans, the Credit Facility Team will invest any remaining cash in 
accordance with the standing instructions of portfolio managers or 
return remaining amounts to the Funds.
    10. The Credit Facility Team would allocate borrowing demand and 
cash available for lending among the Funds on what the Credit Facility 
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 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 the Board of 
each Fund, including a majority of the members of the Board 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.
    11. The Credit Facility Team 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 
Board of each fund concerning any transactions by the Fund under the 
credit facility and the interest rates charged.
    12. M&I Investment Management and M&I Trust, through the Credit 
Facility Team, would administer the credit facility as a disinterested 
fiduciary and a disinterested party, respectively. Neither M&I 
Investment Management nor M&I Trust would receive any compensation in 
connection with the administration of the proposed credit facility.
    13. No Fund may participate in the credit facility unless: (a) The 
Fund has obtained shareholder approval for its participation, if such 
approval is required by law, or provides notice to shareholders of its 
intention to participate in the proposed credit facility; (b) the Fund 
has fully disclosed all material information concerning the credit 
facility in its prospectus and/or SAI; and (c) the Fund's participation 
in the credit facility is consistent with its investment objectives, 
limitation, 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 sections 12(d)(1)(A) and 12(d)(1)(B) 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 12d-1 under the Act permit certain joint arrangements.

Applicants' Legal Analysis

    1. Section 17(a)(3) of the Act generally prohibits any affiliated 
person, or affiliated person of a 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 M&I Investment Management as their common investment adviser 
and/or reason of having common officers, directors, and/or 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 party with strong potential adverse interests 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) 
M&I Investment Management and M&I Trust, through the Credit Facility 
Team, would administer the program as a disinterested fiduciary and 
disinterested party, respectively; (b) all Interfund Loans would 
consist only of uninvested cash reserves that the Funds otherwise would 
invest in short-term repurchase agreements or other short-term 
instruments either directly or through a Money Market Fund; (c) the 
Interfund Loans would not involve a greater risk than such other 
investments; (d) a lending Fund would receive interest at a rate higher 
than it could obtain through such other investments; and (e) a 
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

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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). 
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 M&I Investment 
Management and M&I Trust, through the Credit Facility Team, would 
administer the credit facility as a disinterested fiduciary and a 
disinterested party, respectively, and would not receive any 
compensation for its services. Applicants also note that the purpose of 
the proposed credit facility is to provide economic benefits for all 
the participating Funds and their shareholders.
    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 borrowing 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 joint transaction unless the transaction is approved 
by the Commission. Rule 17d-1(b) under the Act provides that in passing 
upon applications from 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 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 limitations. Applicants 
therefore believe that each Fund's participation in the 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 
request 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, the Credit Facility Team 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, if applicable, the yield 
of the highest yielding Money Market Fund in which the lending Fund 
could otherwise invest; 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 (an 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 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 credit facility on a secured basis only. A Fund may not borrow 
through the credit facility or from any other source it 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% or its total assets, the Fund must first 
secure each outstanding Interfund Loan by the pledge of segregated 
collateral with a market value at least equal to 102% of the 
outstanding principal value of the loan. If the total outstanding 
borrowings of a Fund with outstanding Interfund Loans exceed 10% of its 
total assets for any other reason (such as a decline in net asset value 
or because of shareholder redemptions), the Fund will within one 
business day thereafter: (a) Repay all of its outstanding Interfund 
Loans; (b)

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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 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 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 credit facility, as measured on 
the day when the most recent loan was made, will not exceed the greater 
of 125% of the Fund's total net cash redemptions or 102% of sales fails 
for the preceding seven calendar days.
    10. Each Interfund Loan may be called on one business day's notice 
by a lending Fund and may be repaid on any day by a borrowing Fund.
    11. A Fund's participation in the credit facility must be 
consistent with its investment policies and limitations and 
organizational documents.
    12. The Credit Facility 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 Credit Facility Team). 
All allocations will require approval of at least one member of the 
Credit Facility Team who is not the Money Market Manager. The Credit 
Facility 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). The Credit Facility Team 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 Funds.
    13. The Credit Facility Team 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, will: (a) Review no less frequently than quarterly each 
Fund's participation in the 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, 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 each Fund's participation in the credit 
facility.
    15. In the event an Interfund Loan is not paid according to its 
terms and the default is not cured within two business days from its 
maturity or from the time the lending Fund makes a demand for payment 
under the provisions of the Interfund Lending Agreement, the Credit 
Facility Team will promptly refer the loan for arbitration to an 
independent arbitrator, selected by the Board of each Fund involved in 
the loan, who will serve as arbitrator of disputes concerning Interfund 
Loans.\3\ The arbitrator will resolved 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.
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    \3\ If a dispute involves Funds with different Boards, the Board 
of each Fund will select an independent arbitrator that is 
satisfactory to each Fund.
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    16. Each Fund will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any transaction 
under the credit facility occurred, the first two years in an easily 
accessible place, written records of all such transactions, setting 
forth a description of the terms of the transaction, including the 
amount, the maturity and the rate of interest on the loan, the rate of 
interest available at the time on overnight repurchase agreements and 
bank borrowings, the yield of any Money Market Fund in which the 
lending Fund could otherwise invest and such other information 
presented to the Fund's Board in connection with the review required by 
conditions 13 and 14.
    17. The Credit Facility Team 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 the Funds are treated fairly. After the commencement of the 
operations of the credit facility, the Credit Facility Team 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 the Credit Facility Team'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. 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 and, if 
applicable, the yield of the highest yielding Money Market Funds, 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 of 
each Fund; 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

[[Page 54595]]

the conditions of the application and their review will form the basis, 
in part, of the auditor's report on internal accounting controls in 
Form N-SAR.
    18. No Fund will participate in the credit facility upon receipt of 
requisite regulatory approval unless it has fully disclosed in its SAI 
all material facts about its intended participation.
    19. Each Fund will satisfy the fund governance standards set forth 
in rule 0-1(a)(7) under the Act by the compliance date for the rule.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 05-18311 Filed 9-14-05; 8:45 am]
BILLING CODE 8010-01-M