The Alger Funds, et al.; Notice of Application, 36277-36281 [E9-17355]

Agencies

• SECURITIES AND EXCHANGE COMMISSION

[Federal Register Volume 74, Number 139 (Wednesday, July 22, 2009)]
[Notices]
[Pages 36277-36281]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: E9-17355]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28819; File No. 812-13578]


The Alger Funds, et al.; Notice of Application

 July 16, 2009.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order pursuant to (a) section 
6(c) of the Investment Company Act of 1940 (``Act'') granting an 
exemption from sections 18(f) and 21(b) of the Act; (b) section 
12(d)(1)(J) of the Act granting an exemption from section 12(d)(1) of 
the Act; (c) sections 6(c) and 17(b) of the Act granting an exemption 
from sections 17(a)(1), 17(a)(2) 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.

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Summary of the 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: The Alger Funds, The Alger American Fund, The Alger 
Institutional Funds, The Alger Funds II (formerly, The Spectra Funds), 
and Alger China-U.S. Growth Fund (formerly, The China-U.S. Growth Fund) 
(each, a ``Trust'' and collectively, the ``Trusts''), and Fred Alger 
Management, Inc. (``FAM'').
    Filing Dates: The application was filed on September 25, 2008 and 
amended on March 12, 2009, June 24, 2009 and July 14, 2009.
    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 August 10, 2009, 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, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC, 20549-1090. Applicants, 111 Fifth Avenue, 
New York, New York 10003.

FOR FURTHER INFORMATION CONTACT: Jill Ehrlich, Attorney Adviser, at 
(202) 551-6819 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 via the 
Commission's Web site by searching for the file number, or an applicant 
using the Company name box, at https://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. Each Trust is organized as a Massachusetts business trust and is 
registered under the Act as an open-end management investment company. 
Each Trust consists of one or more series (``Funds''). FAM, a New York 
corporation and an indirect wholly-owned subsidiary of Alger 
Associates, Inc., is registered as an investment adviser under the 
Investment Advisers Act of 1940 and serves as the investment adviser 
and administrator of each Fund.\1\
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    \1\ Applicants request that the relief also apply to any other 
registered management investment company that currently, or in the 
future, is part of the same ``group of investment companies'' as the 
Trusts, as defined in section 12(d)(1)(G)(ii) of the Act (included 
in the term ``Trusts''). All entities that currently intend to rely 
on the requested order have been named as applicants. Any other 
entity that relies on the requested order in the future will comply 
with the terms and conditions set forth in the application.
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    2. Some Funds may make short-term loans to banks or other entities 
by purchasing bank time deposits. 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, certain Funds 
have access to uncommitted bank loans from their custodian bank for 
temporary borrowing purposes.
    3. If Funds borrow from their custodian, they pay interest on the 
loan at a rate that is significantly higher than the rate that is 
earned by other (non-borrowing) Funds on investments in bank time 
deposits. Applicants assert that this differential represents the 
profit earned by the lender on loans and is not attributable to any 
material difference in the credit quality or risk of 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. The Trusts seek to enter into master interfund lending 
agreements (``Interfund Lending Agreements'') with each other on behalf 
of the Funds that would permit each Fund to lend money directly to and 
borrow directly from other Funds through a credit facility for 
temporary purposes (an ``Interfund Loan''). Applicants believe that the 
proposed credit facility would both substantially reduce the Funds' 
potential borrowing costs and enhance the ability of the lending Funds 
to earn higher rates of interest on their short-term lendings. Although 
the proposed credit facility would substantially reduce the Funds' need 
to borrow from banks, the Funds would be free to establish and maintain 
committed lines of credit or other borrowing arrangements with 
unaffiliated banks. Alger Money Market Fund, a series of The Alger 
Funds, will not participate as a borrower in the proposed credit 
facility. Additionally, a number of Funds are barred by their 
fundamental policies from participating as lenders in the proposed 
credit facility.\2\
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    \2\ Each of Alger LargeCap Growth Fund, Alger SmallCap Growth 
Institutional Fund, Alger MidCap Growth Institutional Fund, Alger 
LargeCap Growth Institutional Fund and Alger Capital Appreciation 
Institutional Fund is prohibited from ``making loans to others, 
except through purchasing qualified debt obligations, lending 
portfolio securities or entering into repurchase agreements.''
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    5. Applicants anticipate that the proposed credit facility would 
provide a borrowing Fund with significant savings at times when the 
cash position of the borrowing 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). However, redemption

[[Page 36278]]

requests normally are effected immediately. The proposed credit 
facility would provide a source of immediate, short-term liquidity 
pending settlement of the sale of portfolio securities.
    6. Applicants also propose that a Fund could use the proposed 
credit facility when a sale of 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 using the proceeds from securities sold. Alternatively, the 
Fund could ``fail'' on its intended purchase due to lack of funds from 
the previous sale, resulting in additional cost to the Fund, or sell a 
security on a same-day settlement basis, earning a lower return on the 
investment. Use of the proposed credit facility under these 
circumstances would enable the Fund to have access to immediate short-
term liquidity without the Fund incurring custodian overdraft or other 
charges.
    7. While bank borrowings generally could supply needed cash to 
cover unanticipated redemptions and sales fails, under the proposed 
credit facility, a borrowing Fund would pay lower interest rates than 
those that would be payable under short-term loans offered by banks. 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 overnight bank time deposits. Thus, 
applicants believe that the proposed credit facility would benefit both 
borrowing and lending Funds.
    8. The interest rate to be charged to the Funds on any Interfund 
Loan (the ``Interfund Loan Rate'') would be the average of the ``Time 
Deposit Rate'' and the ``Bank Loan Rate,'' both as defined below. The 
Time Deposit Rate for any day would be the highest or best (after 
giving effect to factors such as the credit quality of the issuer) rate 
available to a lending Fund from investment in overnight bank time 
deposits. The Bank Loan Rate for any day would be calculated by FAM 
each day an Interfund Loan is made according to a formula established 
by each Trust's board of trustees (the ``Trustees'') 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 50 basis points) and 
would vary with this rate so as to reflect changing bank loan rates. In 
addition, each Trust's Trustees would periodically review the 
continuing appropriateness of using the formula 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 Trust's Trustees.
    9. The proposed credit facility would be administered by FAM's fund 
administration department and a compliance professional within FAM 
(collectively, the ``Credit Facility Team''). No portfolio manager of 
any Fund will serve as a member of the Credit Facility 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. The Credit Facility Team on each business day would 
collect 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 the portfolio managers of the Funds. Applicants 
anticipate that there typically will be far more available uninvested 
cash each day than borrowing demand. Therefore, 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 the portfolio managers or such remaining 
amounts will be invested directly by the portfolio managers of 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 each Trust's 
Trustees, including a majority of Trustees who are not ``interested 
persons'' of the Trust, as that term is 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. FAM would: (a) Monitor the Interfund Loan Rate 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 Trustees concerning 
any transactions by the Funds under the proposed credit facility and 
the Interfund Loan Rate charged.
    12. FAM, through the Credit Facility Team, would administer the 
proposed credit facility as a disinterested fiduciary as part of its 
duties under the relevant management, advisory or administrative 
contract with each Fund and would receive no additional fee as 
compensation for its services in connection with the administration of 
the proposed credit facility. FAM may collect standard pricing, record 
keeping, bookkeeping and accounting fees associated with the transfer 
of cash and/or securities in connection with bank time deposit and 
lending transactions generally, including transactions effected through 
the proposed credit facility. Such fees would be no higher than those 
applicable for comparable bank loan transactions.
    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 credit facility, applicants request an 
order under section 6(c) of the Act exempting them, to the extent 
described herein, from the provisions of sections 18(f) and 21(b) of 
the Act; under section 12(d)(1)(J) of the Act exempting them from 
section 12(d)(1) of the Act; under sections 6(c) and 17(b) of the Act 
exempting them from sections 17(a)(1), 17(a)(2), 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 and to allow them to participate 
in the proposed credit facility.

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

[[Page 36279]]

from a registered investment company. Section 21(b) of the Act 
generally prohibits any registered management company from lending 
money or other property to any person, directly or indirectly, if that 
person controls or is under common control with that 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, such other person. 
Applicants state that the Funds may be under common control by virtue 
of having FAM as their common investment adviser and/or by having 
common Trustees and officers.
    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) of the Act 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.
    3. Applicants submit that sections 17(a)(3) and 21(b) of the Act 
were intended to prevent a party 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 such party 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) FAM, through the Credit Facility Team, would administer 
the program as a disinterested fiduciary as part of its duties under 
the relevant management, advisory or administrative contract with each 
Fund; (b) all Interfund Loans would consist only of uninvested cash 
reserves that the lending Fund otherwise would invest in bank time 
deposits; (c) the Interfund Loans would not involve a significantly 
greater risk than bank time deposits; (d) the lending Fund would 
receive interest at a rate higher than it could otherwise obtain 
through bank time deposits; 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 
terms and conditions that applicants propose also 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 any affiliated person of 
such a person, from selling securities or other property to the 
investment company. Section 17(a)(2) of the Act generally prohibits an 
affiliated person of a registered investment company, or any affiliated 
person of such a person, from purchasing securities or other property 
from the investment company. Section 12(d)(1) of the Act generally 
prohibits a registered investment company from purchasing or otherwise 
acquiring any security issued by any other investment company except in 
accordance with the limitations set forth in that section.
    5. Applicants state that the obligation of a borrowing Fund to 
repay an Interfund Loan could be deemed to constitute a security for 
the purposes of sections 17(a)(1) and 12(d)(1). Applicants also state 
that any pledge of assets in connection with an Interfund Loan could be 
construed as a purchase of the borrowing Fund's securities or other 
property for purposes of section 17(a)(2) 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 that 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. 
Applicants also state that the requested relief from section 17(a)(2) 
of the Act meets the standards of section 6(c) and 17(b) because any 
collateral pledged to secure an Interfund Loan would be subject to the 
same conditions imposed by any other lender to a Fund that imposes 
conditions on the quality of or access to collateral for a borrowing 
(if the lender is another Fund) or the same or better conditions (in 
any other circumstance).
    6. Applicants state that section 12(d)(1) was intended to prevent 
the pyramiding of investment companies in order to avoid imposing on 
investors additional and duplicative costs and fees attendant upon 
multiple layers of investments. Applicants submit that the proposed 
credit facility does not involve these abuses. Applicants note that 
there will be no duplicative costs or fees to the Funds or 
shareholders, and that FAM will receive no additional compensation for 
its services in administering the credit facility. Applicants also note 
that the entire purpose of the proposed credit facility is to provide 
economic benefits for all the participating Funds and their 
shareholders.
    7. 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 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 under section 6(c) 
from section 18(f)(1) to the limited extent necessary to implement the 
proposed credit facility (because the lending Funds are not banks).
    8. Applicants believe that granting relief under section 6(c) is 
appropriate because the Funds would remain subject to the requirement 
of section 18(f)(1) 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).
    9. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit an affiliated person of a registered investment company, or 
any affiliated person of such a person, when acting as principal, from 
effecting any joint transaction in which the investment company 
participates, unless, upon application, the transaction has been 
approved by the Commission. Rule 17d-1(b) under the Act provides that 
in passing upon an application filed under the rule, the Commission 
will consider whether the participation of the 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 such participation is on a basis different from or less 
advantageous than that of the other participants.

[[Page 36280]]

    10. Applicants submit that the purpose of section 17(d) is to avoid 
overreaching by and unfair advantage to 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 which 
are 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 will be the average of the Time Deposit 
Rate and the Bank Loan Rate.
    2. On each business day, the Credit Facility Team will compare the 
Bank Loan Rate with the Time Deposit 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 Time Deposit Rate; and (b) more 
favorable to the borrowing Fund than the Bank Loan Rate.
    3. If a Fund has outstanding bank borrowings, any Interfund Loans 
to the Fund: (a) Will be at an interest rate equal to or lower than the 
interest rate of 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 by the Fund 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 proposed 
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 proposed credit facility only on a secured basis. A 
Fund may not borrow through the proposed credit facility or from any 
other source if 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% of its total assets, the Fund must first 
secure each outstanding lnterfund 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 exceed 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 lnterfund Loan.
    6. No Fund may lend to another Fund through the proposed credit 
facility if the loan would cause its aggregate outstanding loans 
through the proposed 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 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. A Fund's borrowings through the proposed 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 for the 
preceding seven calendar days or 102% of the Fund's 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 proposed credit facility must be 
consistent with its investment objectives and limitations and 
organizational documents.
    12. The Credit Facility Team will calculate total Fund borrowing 
and lending demand through the proposed credit facility, and allocate 
loans on an equitable basis among the Funds, without the intervention 
of any portfolio manager of the Funds. The Credit Facility Team will 
not solicit cash for the proposed credit facility from any Fund or 
prospectively publish or disseminate loan demand data to portfolio 
managers. The Credit Facility Team will invest any amounts remaining 
after satisfaction of borrowing demand in accordance with the standing 
instructions of the portfolio managers or such remaining amounts will 
be invested directly by the portfolio managers of the Funds.
    13. FAM will monitor the Interfund Loan Rate and the other terms 
and conditions of the Interfund Loans and will make a quarterly report 
to the Trustees of each Trust concerning the participation of the Funds 
in the proposed credit facility and the terms and other conditions of 
any extensions of credit under the credit facility.
    14. The Trustees of each Trust, including a majority of the 
Independent Trustees, will:
    (a) Review, no less frequently than quarterly, each Fund's 
participation in the proposed credit facility during the preceding 
quarter for compliance with the conditions of any order permitting such 
transactions;

[[Page 36281]]

    (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 proposed credit 
facility.
    15. In the event an Interfund Loan is not paid according to its 
terms and such 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, FAM will 
promptly refer such loan for arbitration to an independent arbitrator 
selected by the Trustees of each 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 Trustees 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 the dispute involves Funds with different Trustees, the 
respective Trustees 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 
by it under the proposed 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 transactions, including 
the amount, the maturity and the Interfund Loan Rate, the rate of 
interest available at the time each Interfund Loan is made on overnight 
bank time deposits and such other information presented to the Fund's 
Trustees in connection with the review required by conditions 13 and 
14.
    17. FAM will prepare and submit to the Trustees for review an 
initial report describing the operations of the proposed credit 
facility and the procedures to be implemented to ensure that all Funds 
are treated fairly. After the commencement of the proposed credit 
facility, FAM will report on the operations of the proposed credit 
facility at the Trustees' 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 FAM's assertion that it has established 
procedures reasonably designed to achieve compliance with the terms and 
conditions of the order. The report will 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 Time 
Deposit 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 
Trustees; and
    (e) That the Interfund Loan Rate 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, each Fund's independent auditors, 
in connection with their audit examination of the Funds, will continue 
to review the operation of the proposed 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 NSAR.
    18. No Fund will participate in the proposed credit facility upon 
receipt of requisite regulatory approval unless it has fully disclosed 
in its prospectus and/or statement of additional information all 
material facts about its intended participation.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. E9-17355 Filed 7-21-09; 8:45 am]
BILLING CODE 8010-01-P