SEI Institutional Managed Trust, et al.; Notice of Application, 9117-9122 [E5-766]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 70, Number 36 (Thursday, February 24, 2005)]
[Notices]
[Pages 9117-9122]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E5-766]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 26762; 812-12823]


SEI Institutional Managed Trust, et al.; Notice of Application

February 17, 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 section 12(d)(1) of 
the Act; (iii) sections 6(c) and 17(b) of the Act granting an exemption 
from sections 17(a)(1) and 17(a)(3) of the Act; and (iv) section 17(d) 
of the Act and rule 17d-1 under the Act to permit certain joint 
transactions.

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Summary of Application: Applicants request an order that would permit 
certain registered management investment companies to participate in a 
joint lending and borrowing facility.

Applicants: SEI Investments Management Corporation (``SIMC'') and any 
person controlling, controlled by or under common control with SIMC 
(together with SIMC, the ``Advisers''); SEI Investments Fund Management 
(``SEI Management,'' and together with SIMC, ``SEI''); SEI 
Institutional Managed Trust, SEI Institutional Investments Trust, SEI 
Institutional International Trust, SEI Index Funds, SEI Asset 
Allocation Trust, SEI Liquid Asset Trust, SEI Daily Income Trust, SEI 
Tax Exempt Trust (each, a ``Trust'' and collectively, the ``Trusts''), 
for and on behalf of each of their series now or hereafter existing 
(collectively, the ``SEI Funds'').

Filing Dates: The application was filed on May 16, 2002, and amended on 
February 2, 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 March 14, 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.

ADDRESSES: Secretary, Commission, 450 Fifth Street, NW., Washington, DC 
20549-0609; Applicants, c/o Timothy D. Barto, Esq., SEI Investments, 
One Freedom Valley Drive, Oaks, PA 19456.

FOR FURTHER INFORMATION CONTACT: Keith A. Gregory, Senior Counsel, at 
(202) 551-6815 or Mary Kay Frech, Branch Chief, at (202) 551-6621 
(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).

[[Page 9118]]

Applicants' Representations

    1. Each Trust is registered under the Act as an open-end management 
investment company and is organized as a Massachusetts business 
trust.\1\ Each Trust offers multiple Funds. The Funds of the Trusts are 
all in the same group of investment companies as defined in section 
12(d)(1)(G)(ii) of the Act. SIMC is registered as an investment adviser 
under the Investment Advisers Act of 1940 and serves as investment 
adviser to certain SEI Funds. SIMC is the owner of all beneficial 
interest in SEI Management, which provides the SEI Funds with overall 
administrative services.
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    \1\ Applicants request that the relief also apply to any other 
existing or future registered management investment company or 
series thereof (i) that is advised by SIMC or its successors or 
another Adviser or (ii) for which SEI Investments Distribution Co. 
(``SIDCo.'') (or its successors) serves as principal underwriter or 
for which SEI Management (or its successors) serves as the 
administrator and which is part of the same group of investment 
companies (as defined in section 12(d)(1)(G)(ii) of the Act) as the 
Trusts (collectively, the ``Future Funds'' and together with the SEI 
Funds, the ``Funds''). ``Successor'' means any entity that results 
from a reorganization into another jurisdiction or a change in the 
type of business organization. All existing Funds that currently 
intend to rely on the requested order are named as applicants. Any 
other existing and Future Funds that may rely on the relief in the 
future will do so only in accordance with the terms and conditions 
of the application. For Funds that are not advised by SIMC, SEI 
Management (as the Funds' administrator), SIDCo. (as the Funds' 
distributor) and/or the Board (as defined below) will be responsible 
for such Funds' compliance with the terms and conditions of the 
application.
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    2. Some Funds may lend money to banks or other entities by entering 
into repurchase agreements or purchasing other short-term instruments. 
Other Funds may need to borrow money from the same or similar banks for 
temporary purposes to satisfy redemption requests, to cover 
unanticipated cash shortfalls such as a trade ``fail'' in which cash 
payment for a security sold by a Fund has been delayed, or for other 
temporary purposes. Currently, the SEI Funds have uncommitted lines of 
credit with various banks and overdraft protection provided by their 
custodian bank.
    3. If a Fund were to borrow money through its line of credit or 
incur an overdraft with its custodian bank, the Fund would pay interest 
on the borrowed cash at a rate that would be higher than the rate that 
other non-borrowing Funds would earn on repurchase agreements and other 
short-term instruments of the same maturity as the bank loan. 
Applicants state that this differential represents the bank's profit 
for serving as a middleman between a borrower and a lender. Other bank 
loan arrangements, such as committed lines of credit, would require the 
Funds to pay substantial commitment fees in addition to the interest 
rate to be paid by the borrowing Fund.
    4. Applicants request an order that would permit the Funds to enter 
into master interfund 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 (an ``Interfund Loan'').\2\ 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 Open-End Funds' need to borrow from banks, the Open-End Funds would 
be free to establish committed lines of credit or other borrowing 
arrangements with banks. The Funds also would continue to maintain 
their existing uncommitted lines of credit and overdraft protection.
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    \2\ Applicants represent that any open-end Fund (an ``Open-End 
Fund'') may participate in the proposed credit facility as either a 
borrower or a lender. Applicants further represent that any closed-
end Fund that participates in the proposed credit facility would 
only participate as a lender.
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    5. Applicants anticipate that the credit facility will provide a 
borrowing Fund with significant cost savings when the cash position of 
the Fund is insufficient to meet temporary cash requirements. This 
situation could arise when redemptions exceed anticipated volumes and 
the Fund has insufficient cash on hand to satisfy such redemptions. 
When a Fund liquidates portfolio securities to meet redemption 
requests, it often does not receive payment in settlement for up to 
three days (or longer for certain foreign transactions). The 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. When the Fund experiences a cash shortfall due to a sales fail, 
the custodian typically extends temporary credit to cover the shortfall 
and the Fund incurs overdraft charges. Alternatively, the Fund could 
fail on its intended purchase due to lack of funds from the previous 
sale, resulting in additional costs to the Fund, or sell a security on 
a same day settlement basis, earning a lower return on the investment. 
Use of the credit facility under these circumstances would enable the 
Fund to have 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. Thus, applicants believe that the credit 
facility would benefit both borrowing and lending Funds.
    8. The interest rate charged to the Funds on any loan (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, either 
directly or through a joint account. The Bank Loan Rate for any day 
would be calculated by the Interfund Lending Team (as defined below) 
each day an Interfund Loan is made according to a formula established 
by a Fund's board of trustees (``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. Each Board 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 Funds. The initial formula and any 
subsequent modifications to the formula would be subject to the 
approval of each Fund's Board.
    9. Employees of SEI (the ``Interfund Lending Team'') would 
administer the credit facility. The Interfund Lending Team may include 
representative employees of SEI Management's Fund Accounting 
Department, a unit of SEI Management responsible for providing 
valuation and fund accounting services to the Funds, as well as SIMC 
investment professionals and other personnel from SEI Management. The

[[Page 9119]]

Interfund Lending Team will not include any portfolio managers of a 
Fund. Under the credit facility, the portfolio managers for each 
participating Fund could provide standing instructions to participate 
as a borrower or lender. On each business day, the Interfund Lending 
Team 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 Interfund Lending Team would allocate loans among 
borrowing Funds without any further communication from portfolio 
managers. It is expected that there typically will be far more 
available uninvested cash each day than borrowing demand. After the 
Interfund Lending Team has allocated cash for Interfund Loans, the 
Interfund Lending Team will invest any remaining cash in accordance 
with the standing instructions of portfolio managers or return 
remaining amounts for investment directly by the Funds.
    10. The Interfund Lending Team would allocate borrowing demand and 
cash available for lending among the Funds on what the Interfund 
Lending 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 each Board, 
including a majority of trustees who are not ``interested persons'' of 
the Fund, as defined in section 2(a)(19) of the Act (``Independent 
Trustees''), to ensure that both borrowing and lending Funds 
participate on an equitable basis.
    11. The Interfund Lending 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 
Boards concerning any transactions by the Funds under the credit 
facility and the interest rates charged.
    12. SEI Management and SIMC would administer the credit facility 
under their existing administration agreement and advisory agreement, 
respectively, with each Fund and would receive no additional fee as 
compensation for their services. SEI Management could, however, collect 
reimbursement for standard pricing, record keeping, bookkeeping, and 
accounting costs applicable to repurchase and lending transactions 
generally, including transactions effected through the credit facility. 
Fees for these services would be no higher than those applicable for 
comparable bank loan transactions. With respect to Funds for which 
SIDCo. serves as principal underwriter and which have no other 
connection to SEI, SEI Management and SIMC will administer the credit 
facility pursuant to a written contract which describes the credit 
facility administration services and requires that such services be 
provided in accordance with the terms and conditions set forth in the 
application. The written contract also will provide that SEI Management 
and SIMC will receive no fee for these services.
    13. Each Fund's participation in the credit facility is consistent 
with its organizational documents and its investment policies and 
limitations. The Statement of Additional Information (``SAI'') of each 
Fund discloses the individual borrowing and lending limitations of the 
Fund. The SAI of each Fund participating in the credit facility will 
disclose all material information about the credit facility.
    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) 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 SIMC as their common investment adviser and/or by virtue of 
SEI's sponsorship and significant involvement with the Funds and due to 
the Funds' common Board.
    2. Section 6(c) of the Act provides that an exemptive order may be 
granted where an exemption is necessary or appropriate in the public 
interest and consistent with the protection of investors and the 
purposes fairly intended by the policy and provisions of the Act. 
Section 17(b) authorizes the Commission to exempt a proposed 
transaction from section 17(a) of the Act provided that the terms of 
the transaction, including the consideration to be paid or received, 
are fair and reasonable and do not involve overreaching on the part of 
any person concerned, and the transaction is consistent with the policy 
of the investment company as recited in its registration statement and 
with the general purposes of the Act. Applicants believe that the 
proposed arrangements satisfy these standards for the reasons discussed 
below.
    3. Applicants submit that sections 17(a)(3) and 21(b) were intended 
to prevent a person with strong potential adverse interests to, and 
some influence over the investment decisions of, a registered 
investment company from causing or inducing the investment company to 
engage in lending transactions that unfairly inure to the benefit of 
that person and that are detrimental to the best interests of the 
investment company and its shareholders. Applicants assert that the 
proposed credit facility transactions do not raise these concerns 
because (a) SIMC would administer the program as a disinterested 
fiduciary with respect to Funds it advises and as a disinterested party 
with respect to Funds it does not advise; (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; (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.

[[Page 9120]]

    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). 
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 the Interfund Lending 
Team would administer the credit facility under SEI Management's and 
SIMC's existing management and advisory agreements, respectively, with 
the Funds, and would receive no additional compensation for its 
services. With respect to Funds for which SIDCo. serves as principal 
underwriter and which have no other connection to SEI, SEI Management 
and SIMC will administer the credit facility pursuant to a written 
contract which describes the credit facility administration services 
and requires that such services be provided in accordance with the 
terms and conditions set forth in the application. The written contract 
also will provide that SEI Management and SIMC will receive no fee for 
these services. 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; 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 for exemptive relief, the Commission will consider 
whether the participation of a registered investment company in a joint 
enterprise on the basis proposed is consistent with the provisions, 
policies and purposes of the Act and the extent to which the company's 
participation is on a basis different from or less advantageous than 
that of other participants.
    9. Applicants submit that the purpose of section 17(d) is to avoid 
overreaching by an 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 
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, the Interfund Lending 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 (b) more favorable to the 
borrowing Fund than the Bank Loan Rate.
    3. If a Fund has outstanding borrowings, any Interfund Loans to the 
Fund (a) will be at an interest rate equal to or lower than any 
outstanding bank loan; (b) will be secured at least on an equal 
priority basis with at least an equivalent percentage of collateral to 
loan value as any outstanding bank loan that requires collateral; (c) 
will have a maturity no longer than any outstanding bank loan (and in 
any event not over seven days); and (d) will provide that, if an event 
of default occurs under any agreement evidencing an outstanding bank 
loan to the Fund, the event of default will automatically (without need 
for action or notice by the lending Fund) constitute an immediate event 
of default under the Interfund Lending Agreement, entitling the lending 
Fund to call the Interfund Loan (and exercise all rights with respect 
to any collateral) and that such call will be made if the lending bank 
exercises its right to call its loan under its agreement with the 
borrowing Fund.
    4. A Fund may make an unsecured borrowing through the 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 if its total 
outstanding borrowings immediately after such borrowing would exceed 
the limits in section 18 of the Act.
    5. Before any Fund that has outstanding interfund borrowings may, 
through additional borrowings, cause its

[[Page 9121]]

outstanding borrowings from all sources to exceed 10% of its total 
assets, the Fund must first secure each outstanding Interfund Loan by 
the pledge of segregated collateral with a market value at least equal 
to 102% of the outstanding principal value of the loan. If the total 
outstanding borrowings of a Fund with outstanding Interfund Loans 
exceed 10% of its total assets for any other reason (such as a decline 
in net asset value or because of shareholder redemptions), the Fund 
will within one business day thereafter (a) repay all of its 
outstanding Interfund Loans, (b) reduce its outstanding indebtedness to 
10% or less of its total assets, or (c) secure each outstanding 
Interfund Loan by the pledge of segregated collateral with a market 
value at least equal to 102% of the outstanding principal value of the 
loan until the Fund's total outstanding borrowings cease to exceed 10% 
of its total assets, at which time the collateral called for by this 
condition 5 shall no longer be required. Until each Interfund Loan that 
is outstanding at any time that a Fund's total outstanding borrowings 
exceeds 10% is repaid, or the Fund's total outstanding borrowings cease 
to exceed 10% of its total assets, the Fund will mark the value of 
collateral to market each day and will pledge such additional 
collateral as is necessary to maintain the market value of the 
collateral that secures each outstanding Interfund Loan at least equal 
to 102% of the outstanding principal value of the Interfund Loan.
    6. No Fund may lend to another Fund through the 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. 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 Interfund Lending 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. The Interfund Lending Team will not 
solicit cash for the credit facility from any Fund or prospectively 
publish or disseminate loan demand data to portfolio managers. The 
Interfund Lending 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 Interfund Lending Team will monitor the interest rates 
charged and the other terms and conditions of the Interfund Loans and 
will report to the Board quarterly concerning the participation of the 
Funds in the credit facility and the terms and other conditions of any 
extensions of credit thereunder.
    14. Each Fund's Board, including a majority of the Independent 
Trustees, 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 Interfund 
Lending Team will promptly refer the loan for arbitration to an 
independent arbitrator, selected by the Board of any Fund involved in 
the loan, who will serve as arbitrator of disputes concerning Interfund 
Loans.\3\ The arbitrator will resolve any problem promptly, and the 
arbitrator's decision will be binding on both Funds. The arbitrator 
will submit at least annually a written report to the Board 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 separate 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 short-term repurchase agreements and 
bank borrowings, and such other information presented to the Board in 
connection with the review required by conditions 13 and 14.
    17. The Interfund Lending Team will prepare and submit to the Board 
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 Interfund Lending Team will report on the 
operations of the credit facility at each Board's quarterly meetings.
    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 Interfund Lending 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, 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

[[Page 9122]]

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 upon receipt of 
requisite regulatory approval unless it has fully disclosed in its SAI 
all material facts about its intended participation.

    For the Commission, by the Division of Investment Management, 
pursuant to delegated authority.
Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E5-766 Filed 2-23-05; 8:45 am]
BILLING CODE 8010-01-P