[Federal Register Volume 64, Number 204 (Friday, October 22, 1999)]
[Notices]
[Pages 57162-57166]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27643]
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SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 24087, 812-11728]
Federated Investors, Inc., et al.; Notice of Application
October 18, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of an application under section 6(c) of the Investment
Company Act of 1940 (the ``Act'') for an exemption from sections 18(f)
and 21(b) of the Act, under section 12(d)(1)(J) of the Act for an
exemption from section 12(d)(1) of the Act, under sections 6(c) and
17(b) of the Act for an exemption from sections 17(a)(1) and 17(a)(3)
of the Act, and under section 17(d) of the Act and rule 17d-1 under the
Act to permit certain joint arrangements.
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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: Federated Investors, Inc. (``Federated''), for itself and
on behalf of Federated investment Management Company, Federated Global
investment Management Corp., Federated Investment Counseling, and
Passport Research Limited (collectively, with Federated, the
``Advisers''); Automated Government Money Trust, Cash Trust Series II,
Edward D. Jones & Co. Daily Passport Cash Trust, Federated ARMs Fund,
Federated Core Trust, Federated Equity Funds, Federated GNMA Trust,
Federated Government Trust, Federated High Yield Trust, Federated
Income Securities Trust, Federated Income Trust, Federated Index Trust,
Federated Institutional Trust, Federated Insurance Series, Federated
Master Trust, Federated Municipal Trust, Federated Short-Term Municipal
Trust, Federated Short-Term U.S. Government Trust, Federated Stock
Trust, Federated Tax-Free Trust, Federated U.S. Government Bond Fund,
Federated U.S. Government Securities Fund: 1-3 Years, Federated U.S.
Government Securities Fund: 2-5 Years, Federated U.S. Government
Securities Fund: 5-10 Years, Intermediate Municipal Trust, Managed
Series Trust, Money Market Obligations Trust, Money Market Obligations
Trust II, Money Market Trust, Municipal Securities Income Trust, Cash
Trust Series, Inc., Federated Adjustable Rate U.S. Government Fund,
Inc., Federated American Leaders Fund, Inc., Federated Equity Income
Fund, Inc., Federated Fund for U.S. Government Securities, Inc.,
Federated Government Income Securities, Inc., Federated High Income
Bond Fund, Inc., Federated Municipal Opportunities Fund, Inc.,
Federated Municipal Securities Fund, Inc., Federated Stock and Bond
Fund, Inc., Federated Total Return Series, Inc., Federated Utility
Fund, Inc., Fixed Income Securities, Inc., International Series, Inc.,
Investment Series Funds, Inc., Liberty U.S. Government Money Market
Trust, Liquid Cash Trust, Money Market Management, Inc., Tax-Free
Instruments Trust, Trust for Government Cash Reserves, Trust for Short-
Term U.S. Government Securities, Trust for U.S. Treasury Obligations
and World Investment Series, Inc., and all other registered open-end
management investment companies and series thereof that are advised or
subadvised by Federated or a person controlling, controlled by, or
under common control with Federated, and all other registered open-end
management investment companies and series thereof for which the
Advisers in the future act as investment adviser or subadviser other
than funds which are not sponsored by Federated (collectively, the
``Funds'').
FILING DATES: The application was filed on July 29, 1999. Applicants
have agreed to file an amendment, the substance of which is reflected
in this notice, during the notice period.
HEARING OR NOTIFICATION OF HEARING: An order granting the application
will be issued unless the SEC orders a hearing. Interested persons may
request a hearing by writing to the SEC's Secretary and serving
applicant with a copy of the request, personally or by mail. Hearing
requests should be received by the SEC by 5:30 p.m. on November 8,
1999, and should be accompanied by proof of service on applicants, in
the form of an affidavit or, for lawyers, a certificate of service.
[[Page 57163]]
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
SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, NW, Washington, DC 20549-
0609. Applicants, 5800 Corporate Drive, Pittsburgh, PA 15237.
FOR FURTHER INFORMATION CONTACT: Susan K. Pascocello, Senior Counsel,
at (202) 942-0654, or Michael W. Mundt, Branch Chief, at (202) 942-
0564, (Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTARY INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee at the
SEC's Public Reference Branch, 450 Fifth Street, NW, Washington, DC
20549-0102 (tel. 202-942-8090).
Applicants' Representations
1. Each Fund is registered under the Act as an open-end management
investment company and is organized either as a Maryland corporation or
a Massachusetts business trust. Additional Funds may be added in the
future.\1\ The Advisers are registered under the Investment Advisers
Act of 1940 and serve as investment advisers to the Funds. Each Fund
has entered into an investment advisory agreement with its Adviser
under which the Adviser exercises discretionary authority to purchase
and sell securities for the Funds.
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\1\ All existing Funds that currently intend to rely on the
order have been named as applicants, and any other existing or
future Fund that may rely on the order will comply with the terms
and conditions in 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 borrow money from the same or other banks for temporary
purposes to satisfy redemption requests or to cover unanticipated cash
shortfalls such as a trade ``fail'' in which cash payment for a
portfolio security sold by a Fund has been delayed. Currently, certain
Funds have credit arrangements with their custodian (i.e., overdraft
protection), and certain Funds are establishing lines of credit with a
bank under which the bank may, but is not obligated to, lend money to
the Funds to meet the Funds' temporary cash needs.
3. If the Funds were to borrow money from any bank under their
current arrangements or under other credit arrangements, 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 believe this differential represents the bank's profit for
serving as a middleman between a borrower and 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 lending agreements (``Interfund Lending Agreements'') under which
the Funds would lend and borrow money for temporary purposes directly
to and from each other through a credit facility (``Interfund Loan'').
Applicants believe that the proposed credit facility would
substantially reduce the Funds' potential borrowing costs and enhance
their ability to earn higher rates of interest on short-term loans.
Although the proposed credit facility would substantially reduce the
Funds' needs to borrow from banks, the Funds would be free to establish
committed lines of credit or other borrowing arrangements with banks.
Certain Funds also would continue to maintain overdraft protection
currently provided by their custodian.
5. Applicants anticipate that the credit facility would provide a
borrowing Fund with significant savings when the cash position of the
Fund is insufficient to meet temporary cash requirements. This
situation would arise when 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, which normally are affected immediately, they
often do not receive payment in settlement for up to three days (or
longer for certain foreign transactions). The credit facility would
provide a source of immediate, short-term liquidity pending settlement
of the sale of portfolio securities.
6. Applicants also propose using the credit facility when a sale of
securities fails due to circumstances 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 cost
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 borrowing arrangements with banks will continue to be
available to cover unanticipated redemptions and sales fails, under the
proposed credit facility a borrowing Fund would pay lower interest
rates than those offered by banks on short-term loans. In addition,
Funds making short-term cash loans directly to other Funds would earn
interest at a rate higher than they otherwise could obtain from
investing their cash in repurchase agreements. Thus applicants believe
that the proposed credit facility would benefit both borrowing and
lending Funds.
8. The interest rate charged to the Funds on any Interfund Loan
(the ``Interfund Loan Rate'') would be the average of the ``Repo Rate''
and the ``Bank Loan Rate,'' both as defined below. The Repo Rate for
any day would be the highest rate available to the Funds from
investments in overnight repurchase agreements. The Bank Loan Rate for
any day would be calculated by Federated on each day an Interfund Loan
is made according to a formula established by the directors or trustees
of each Fund (the ``Directors'') designed 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. Each Fund's Directors periodically
would review the continuing appropriateness of using the publicly
available rate, as well as the relationship between the Bank Loan Rate
and current bank loan rates that would be available to the Funds. The
initial formula and any subsequent modifications to the formula would
be subject to the approval of each Fund's Directors.
9. The credit facility would be administered by Federated's fund
treasury department (the ``Credit Facility Team''). Under the proposed
credit facility, the portfolio managers for each participating Fund
could provide standing instructions to participate
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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 from the Funds' custodian. Once
it has 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. Applicants expect far more available uninvested cash each day
than borrowing demand. After the Credit Facility Team has allocated
cash for Interfund Loans, the Advisers will invest any remaining cash
in accordance with their normal practice. The money market Funds
typically would not participate as borrowers because they rarely need
to borrow cash to meet redemptions.
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.
11. Federated would (i) monitor the interest rates charged and the
other terms and conditions of the loans, (ii) limit the borrowings and
loans entered into by each Fund to ensure that they comply with the
Fund's investment policies and limitations, (iii) ensure equitable
treatment of each Fund, and (iv) make quarterly reports to the
Directors concerning any transactions by the Fund under the credit
facility and the interest rates charged. The method of allocation and
related administrative procedures would be approved by each Fund's
Directors, including a majority of Directors who are not ``interested
persons'' of the Fund, as defined in section 2(a)(19) of the Act
(``Independent Directors''), to ensure that both borrowing and lending
Funds participate on an equitable basis.
12. Federated would administer the credit facility as part of its
duties under the existing management or advisory or service contract
with each Fund and would receive no additional fee as compensation for
its services. Federated or companies affiliated with it may collect
standard pricing, recordkeeping, bookkeeping, and accounting fees
applicable to repurchase and lending transactions generally, including
transactions effected through the credit facility. Fees would be no
higher than those applicable for comparable bank loan transactions.
13. Each Fund's participation in the proposed credit facility will
be consistent with its organizational documents and its investment
policies and limitations. All Interfund Loans will be consistent with
each Fund's participation in Interfund Lending Agreements will be
disclosed in the Fund's prospectus or statement of additional
information prior to the commencement of the arrangement and at all
times during the pendency of Interfund Loans. No Fund may participate
in the credit facility unless: (i) The Fund has obtained shareholder
approval for its participation, or, if such approval is not required by
law, upon receipt of requisite regulatory approval, the Fund's
prospectus and/or statement of additional information have disclosed at
all times following the issuance of the requested order the possibility
of the Fund's participation in the credit facility; and (ii) the Fund
has fully disclosed all material information concerning the credit
facility in its prospectus and/or statement of additional information.
No Fund will borrow more than the lesser of the amount permitted by
section 18 of the Act or the amount permitted by its investment
limitations. No Fund may lend to another Fund through the credit
facility if the loan would cause its aggregate loans through the credit
facility to exceed 15% of its net assets at the time of the loan, and a
Fund's Interfund Loans to any one Fund's may not exceed 5% of the
lending Fund's net assets.
14. In connection with the credit facility, applicants request an
order under (i) section 6(c) of the Act granting relief from sections
18(f) and 21(b) of the Act; (ii) section 12(d)(1(J) of the Act granting
relief from section 12(d)(1) of the Act; (iii) sections 6(c) and 17(b)
of the Act granting relief 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 arrangements.
Applicants' Legal Analysis
1. Section 17(a)(3) generally prohibits any affiliated person, or
affiliated person of an affiliated person, from borrowing money or
other property from a registered investment company. Section 21(b)
generally prohibits any registered management 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 an ``affiliated person'' of another person, in part, to be
any person directly or indirectly controlling, controlled by, or under
common control with, the other person. Applicants state that the Funds
may be under common control by virtue of having a common investment
adviser and because of the overlap of Directors and officers of the
Funds.
2. Section 6(c) 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 SEC 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.
3. Applicants submit that sections 17(a)(3) and 21(b) of the Act
were intended to prevent a person with strong potential adverse
interests to and some influence over the investment decisions of a
registered investment company from causing or inducing the investment
company to engage in lending transactions that unfairly inure to the
benefit of that person and that are detrimental to the best interests
of the investment company and its shareholders. Applicants assert that
the proposed credit facility transactions do not raise these concerns
because (i) Federated would administer the program as a disinterested
fiduciary; (ii) all Interfund Loans would consist only of uninvested
cash reserves that the Fund otherwise would invest in short-term
repurchase agreements or other stock-term instruments; (iii) the
Interfund Loans would not involve a greater risk than other similar
investments; (iv) the lending Fund would receive interest at a rate
higher than it could obtain through other similar investments; and (v)
the borrowing Fund would pay interest at a rate lower than otherwise
available to it under its bank loan agreements and avoid the up-front
commitment fees associated with committed lines of credit. Moreover,
applicants believe that the other conditions in the application would
effectively preclude the
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possibility of any Fund obtaining an undue advantage over any other
Fund.
4. Section 17(a)(1) 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 believe 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 the SEC may exempt persons or transactions
from any provision of section 12(d)(1) if and to the extend such
exception 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) 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 Federated would receive
no additional compensation for its services in administering the credit
facility. Applicants also note that the purpose of the proposed credit
facility is to provide economic benefits for all the participating
Funds.
6. Section 18(f)(1) prohibits open-end investment companies from
issuing any senior security except that a company is permitted to
borrow from any bank, if immediately after the borrowing, there is an
asset coverage of at least 300 per cent for all borrowings of the
company. Under section 18(g) of the Act, the term ``senior security''
includes any bond, debenture, note, or similar obligation or instrument
constituting a security and evidencing indebtedness. Applicants request
exemptive relief from section 18(f)(1) to the limited extent necessary
to implement the credit facility (because the lending Funds are not
banks).
7. Applicants believe that granting relief under section 6(c) is
appropriate because the Funds would remain subject to the requirement
of section 18(f)(1) that all borrowings of the Fund, including combined
credit facility 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) and rule 17d-1 generally prohibit any affiliated
person of a registered investment company, or affiliated person of an
affiliated person, when acting as principal, from effecting any joint
transaction in which the company participates unless the transaction is
approved by the SEC. Rule 17d-1 provides that in passing upon
applications for exemptive relief from section 17(d), the SEC 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 fundamental investment
limitations. Applicants therefore believe that each Fund's
participation in the credit facility will 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 interest rates to be charged to the Funds under the credit
facility will be the average of the Repo Rate and the Bank Loan Rate,
adjusted daily.
2. On each business day, Federated will compare the Bank Loan Rate
with the Repo Rate and will make cash available for Interfund Loans
only if the Interfund Loan Rate is (a) more favorable to the lending
Fund than the Repo Rate, and (b) more favorable to the borrowing Fund
than the Bank Loan Rate.
3. If a Fund has outstanding borrowings, any Interfund Loans to the
Fund (a) will be at an interest rate equal to or lower than any
outstanding bank loan, (b) will be secured at least on an equal
priority basis with at least an equivalent percentage of collateral to
loan value as any outstanding bank loan that requires collateral, (c)
will have a maturity no longer than any outstanding bank loan (and in
any event not over seven days), and (d) will provide that, if an event
of default occurs under any agreement evidencing an outstanding bank
loan to the Fund, that event of default will automatically (without
need for action or notice by the lending Fund) constitute an immediate
event of default under the Interfund Lending Agreement entitling the
lending Fund to call the Interfund Loan (and exercise all rights with
respect to any collateral) and that such call will be made if the
lending bank exercises its right to call its loan under its agreement
with the borrowing Fund.
4. A Fund may make an unsecured borrowing through the credit
facility if its outstanding borrowings from all sources immediately
after the interfund borrowing total 10% or less of its total assets,
provided that if the Fund has a secured loan outstanding from any other
lender, including but not limited to another Fund, the Fund's interfund
borrowing will be secured on at least an equal priority basis with at
least an equivalent percentage of collateral to loan value as any
outstanding loan that requires collateral. If a Fund's total
outstanding borrowings immediately after an interfund borrowing would
be greater than 10% of its total assets, the Fund may borrow through
the credit facility on a secured basis only. A Fund may not borrow
through the credit facility or from any other source if its total
outstanding borrowings immediately after the interfund borrowing would
be more than 33\1/3\% of its total assets.
5. Before any Fund that has outstanding interfund borrowings may,
through additional borrowings, cause its outstanding borrowings from
all sources to exceed 10% of its total assets, the Fund must first
secure each outstanding Interfund Loan by the pledge of segregated
collateral with a market value at least equal to 102% of the
outstanding principal value of the loan. If the total outstanding
borrowings of a Fund with outstanding Interfund Loans exceeds 10% of
its total assets for any other reason (such as decline in net asset
value or because of shareholder redemptions), the Fund will within one
business day thereafter: (a) Repay all its outstanding Interfund Loans,
(b) reduce its outstanding indebtedness to 10% or less of its total
assets, or (c) secure each outstanding Interfund Loan by the
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pledge of segregated collateral with a market value at least equal to
102% of the outstanding principal value of the loan until the Fund's
total outstanding borrowings cease to exceed 10% of its total assets,
at which time the collateral called for by this condition (5) shall no
longer be required. Until each Interfund Loan that is outstanding at
any time that a Fund's total outstanding borrowings exceeds 10% is
repaid or the Fund's total outstanding borrowings cease to exceed 10%
of its total assets, the Fund will mark the value of the collateral to
market each day and will pledge such additional collateral as is
necessary to maintain the market value of the collateral that secures
each outstanding Interfund Loan at least equal to 102% of the
outstanding principal value of the loan.
6. No Fund may lend to another Fund through the credit facility if
the loan would cause its aggregate outstanding loans through the credit
facility to exceed 15% of its net assets at the time of the loan.
7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of
the lending Fund's net assets.
8. The duration of Interfund Loans will be limited to the time
required to receive payment for securities sold, but in no event more
than seven days. Loans effected within seven days of each other will be
treated as separate loan transactions for purposes of this condition.
9. 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.
10. A Fund's participation in the credit facility must be
consistent with its investment policies and limitations and
organizational documents. 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 and 102% of sales fails for the preceding seven calendar
days.
11. Federated's 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. 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. The
Advisers will invest any amounts remaining after satisfaction of
borrowing demand in accordance with their normal practice.
12. Federated will monitor the interest rates charged and the other
terms and conditions of the Interfund Loans and will make a quarterly
report to the Directors concerning the participation of the Funds in
the credit facility and the terms and other conditions of any
extensions of credit under the facility.
13. The Directors of each Fund, including a majority of the
Independent Directors: (a) Will review no less frequently than
quarterly the Fund's participation in the credit facility during the
preceding quarter for compliance with the conditions of any order
permitting the transactions; (b) will establish the Bank Loan Rate
formula used to determine the interest rate on Interfund Loans and
review no less frequently than annually the continuing appropriateness
of the Bank Loan Rate formula; and (c) will review no less frequently
than annually the continuing appropriateness of the Fund's
participation in the credit facility.
14. 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, Federated will
promptly refer the loan for arbitration to an independent arbitrator
selected by the Directors of any fund involved in the loan who will
serve as arbitrator of disputes concerning Interfund Loans.\2\ The
arbitrator will resolve any problem promptly, and the arbitrator's
decision will be binding on both Funds. The arbitrator will submit, at
least annually, a written report to the Directors 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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\2\ If the dispute involves Funds with separate Boards of
Directors, the Directors of each Fund will select an independent
arbitrator that is satisfactory to each Fund.
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15. Each Fund will maintain and preserve for a period of not less
than six years from the end of the fiscal year in which any transaction
under the credit facility occurred, the first two years in an easily
accessible place, written records of all such transactions setting
forth a description of the terms of the transaction, including the
amount, the maturity, and the rate of interest on the loan, the rate of
interest available at the time on short-term repurchase agreements and
bank borrowings, and such other information presented to the Fund's
Directors in connection with the review required by conditions 12 and
13.
16. Federated will prepare and submit to the Directors for review
an initial report describing the operations of the credit facility and
the procedures to be implemented to ensure that all Funds are treated
fairly. After the commencement of operations of the credit facility,
Federated will report on the operations of the credit facility at the
Directors' quarterly meetings.
In addition, for two years following the commencement of the credit
facility, an independent public accountant for each Fund shall prepare
an annual report that evaluates Federated'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. 3 and
it shall be filed pursuant to Item 77Q3 of Form N-SAR. In particular,
the report shall address procedures designed to achieve the following
objectives: (a) That the Interfund Rate will be higher than the Repo
Rate, but lower than the Bank Loan Rate; (b) compliance with the
collateral requirements as set forth in the application; (c) compliance
with the percentage limitations on interfund borrowing and lending: (d)
allocation of interfund borrowing and lending demand in an equitable
manner and in accordance with procedures established by the Directors;
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.
17. No Fund will participate in the credit facility upon receipt of
requisite regulatory approval unless it has fully disclosed in its
statement of additional information all material facts about its
intended participation.
For the SEC, by the Division of Investment Management, pursuant
to delegated authority.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-27643 Filed 10-21-99; 8:45 am]
BILLING CODE 8010-01-M
