[Federal Register Volume 63, Number 223 (Thursday, November 19, 1998)]
[Notices]
[Pages 64292-64297]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-30893]
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Rel. No. IC-23532; 812-11340]
T. Rowe Price Associates, Inc., et al.; Notice of Application
November 12, 1998.
AGENCY: Securities and Exchange Commission (``SEC'').
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
arrangements.
-----------------------------------------------------------------------
SUMMARY OF APPLICATION: Applicants request an order that would permit
certain registered investment companies to participate in a joint
lending and borrowing facility.
APPLICANTS: Price Blue Chip Growth Fund, Inc., T. Rowe Price Capital
Appreciation Fund, T. Rowe Price Capital Opportunity Fund, Inc., T.
Rowe Price Diversified Small-Cap Growth Fund, Inc., T. Rowe Price
Dividend Growth Fund, Inc., T. Rowe Price Equity Income Fund, T. Rowe
Price Equity Series, Inc., T. Rowe Price Equity Income Portfolio, T.
Rowe Price Mid-Cap Growth Portfolio, T. Rowe Price New America Growth
Portfolio, T. Rowe Price Personal Strategy Balanced Portfolio, T. Rowe
Price Financial Services Fund, Inc., T. Rowe Price Growth & Income
Fund, Inc., T. Rowe Price Growth Stock Fund, Inc., T. Rowe Price Health
Sciences Fund, Inc., T. Rowe Price Index Trust, Inc., T. Rowe Price
Equity Index 500 Fund, T. Rowe Price Extended Equity Market Index Fund,
T. Rowe Price Total Equity Market Index Fund, Institutional
[[Page 64293]]
International Funds, Inc., Foreign Equity Fund, T. Rowe Price
International Funds, Inc., T. Rowe Price International Discovery Fund,
T. Rowe Price International Stock Fund, T. Rowe Price European Stock
Fund, T. Rowe Price New Asia Fund, T. Rowe Price Japan Fund, T. Rowe
Price Latin America Fund, T. Rowe Price Emerging Markets Stock Fund, T.
Rowe Price Global Stock Fund, T. Rowe Price International Bond Fund, T.
Rowe Price Global Government Bond Fund, T. Rowe Price Emerging Markets
Bond Fund, T. Rowe Price International Series, Inc., T. Rowe Price
International Stock Portfolio, T. Rowe Price Mid-Cap Growth, Inc., T.
Rowe Price Mid-Cap Value Fund, Inc., T. Rowe Price New America Growth
Fund, T. Rowe Price New Era Fund, Inc., T. Rowe Price New Horizons
Fund, Inc., T. Rowe Price Real Estate Fund, Inc., T. Rowe Price Small
Cap Stock Fund, Inc., T. Rowe Price Small Cap Stock Fund, T. Rowe Price
Science & Technology Fund, Inc., T. Rowe Price Small-Cap Value Fund,
Inc., T. Rowe Price Spectrum Fund, Inc., Spectrum Growth Fund, Spectrum
Income Fund, Spectrum International Fund, T. Rowe Price Value Fund,
Inc., T. Rowe Price Media & Telecommunications Fund, Inc., T. Rowe
Price California Tax-Free Income Trust, California Tax-Free Bond Fund,
California Tax-Free Money Fund, T. Rowe Price Corporate Income Fund,
Inc., T. Rowe Price Fixed Income Series, Inc. T. Rowe Price Limited-
Term Bond Portfolio, T. Rowe Price Prime Reserve Portfolio, T. Rowe
Price GNMA Fund, T. Rowe Price High Yield Fund, Inc., T. Rowe Price New
Income Fund, Inc., T. Rowe Price Personal Strategy Funds, Inc., T. Rowe
Price Personal Strategy Balanced Fund, T. Rowe Price Personal Strategy
Growth Fund, T. Rowe Price Personal Strategy Income Fund, T. Rowe Price
Prime Reserve Fund, Inc., Reserve Investment Funds, Inc., Government
Reserve Investment Fund, Reserve Investment Fund, T. Rowe Price Short-
Term Bond Fund, Inc., T. Rowe Price Short-Term U.S. Government Fund,
Inc., T. Rowe Price Tax Efficient Balanced Fund, Inc., T. Rowe Price
State Tax-Free Income Trust, Maryland Tax-Free Bond Fund, Maryland
Short-Term Tax-Free Bond Fund, New York Tax-Free Bond Fund, New York
Tax-Free Money Fund, Virginia Tax-Free Bond Fund, Virginia Short-Term
Tax-Free Bond Fund, New Jersey Tax-Free Bond Fund, Georgia Tax-Free
Bond Fund, Florida Insured Intermediate Tax-Free Fund, T. Rowe Price
Summit Funds, Inc., T. Rowe Price Summit Cash Reserves Fund, T. Rowe
Price Summit Limited-Term Bond Fund, T. Rowe Price Summit GNMA Fund, T.
Rowe Price Summit Municipal Funds, Inc., T. Rowe Price Summit Municipal
Money Market Fund, T. Rowe Price Summit Municipal Intermediate Fund, T.
Rowe Price Summit Municipal Income Fund, T. Rowe Price Tax-Exempt Money
Fund, Inc., T. Rowe Price Tax-Free High Yield Fund, Inc., T. Rowe Price
Tax-Free Income Fund, Inc., T. Rowe Price Tax-Free Insured Intermediate
Bond Fund, Inc., T. Rowe Price Tax-Free Short-Intermediate Fund, Inc.,
T. Rowe Price U.S. Treasury Funds, Inc., U.S. Treasury Intermediate
Fund, U.S. Treasury Long-Term Fund, U.S. Treasury Money Fund,
Institutional Domestic Equity Funds, Inc., and Mid-Cap Equity Growth
Fund (collectively, the ``Price Funds''); T. Rowe Price Associates,
Inc. (``T. Rowe Price'') and Rowe Price-Fleming International, Inc.
(``Price-Fleming''); and all other registered investment companies and
their series that are advised or subadvised by T. Rowe Price or Price-
Fleming or a person controlling, controlled by, or under common control
with T. Rowe Price or Price-Fleming, and all other registered
investment companies and their series for which T. Rowe Price or Price-
Fleming in the future acts as an investment adviser or subadviser,
other than funds which are not sponsored by T. Rowe Price or Price-
Fleming (together with the Price Funds, the ``Funds'' or the ``Price
Funds'').
FILING DATES: The application was filed on September 30, 1998.
Applicants have agreed to file an amendment during the notice period,
the substance of which is included in this notice.
HEARING OR NOTIFICATION OF HEARING: An order granting the requested
relief will be issued unless the SEC orders a hearing. Interested
person may request a hearing by writing to the SEC's Secretary and
serving applicants with a copy of the request, personally or by mail.
Hearing requests should be received by the SEC by 5:30 p.m. on December
7, 1998, and should be accompanied by proof of service on applicants,
in the form of an affidavit or, for lawyers, a certificate of service.
Hearing request 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.
Applicants, T. Rowe Price Associates, Inc., 100 E. Pratt Street,
Baltimore, Maryland 21202.
FOR FURTHER INFORMATION CONTACT: J. Amanda Machen, Senior Counsel,
(202) 942-7120, or Mary Kay Frech, Branch Chief, (202) 942-0564 (Office
of Investment Company Regulation, Division of Investment Management).
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 5th Street, NW, Washington, DC 20549
(tel. 202-942-8090).
Applicants' Representations
1. Each Price 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 or
series may be added in the future.\1\ T. Rowe Price and Price Fleming
(together, ``Price'') are registered under the Investment Advisers Act
of 1940, and serve as investment advisers to the Price Funds. T. Rowe
Price also provides the Price Funds with certain administrative
services. Each Fund has entered into an investment advisory agreement
with Price under which Price exercises discretionary authority to
purchase and sell securities for the Funds.
---------------------------------------------------------------------------
\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 subsequently may rely on the order will comply with
the terms and conditions in the application.
---------------------------------------------------------------------------
2. Under an existing order, the Price Funds (other than the
municipal funds) can use their cash reserves to purchase shares of the
Reserve Investment Funds, Inc. (``Reserve Investment Funds'').\2\ There
are two series of the Reserve Investment Funds and each is a money
market fund that complies with rule 2a-7 under the Act.\3\ Each manages
the cash reserves of T. Rowe Price clients, principally, the Price
Funds, and neither is offered to the public. T. Rowe Price receives no
compensation for managing the Reserve Investment Funds.
---------------------------------------------------------------------------
\2\ Reserve Investment Funds, Inc., Investment Company Act
Release Nos. 22732 (July 2, 1997) (notice) and 22770 (July 29, 1997)
(order).
\3\ The Reserve Investment Fund invests in a variety of taxable
money market instruments, and the Government Reserve Investment Fund
invests only in money market securities backed by the full faith and
credit of the U.S. government and fully collateralized repurchase
agreements on those securities.
---------------------------------------------------------------------------
3. Some Funds may lend money to banks or other entities by entering
into repurchase agreements or purchasing other short-term instruments,
either directly or through the Reserve Investment Funds. Other Funds
may borrow money from the same or other
[[Page 64294]]
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, the Funds have credit arrangements with their custodians
(i.e., overdraft protection) under which the custodians may, but are
not obligated to, lend money to the Funds to meet the Funds' temporary
cash needs.
4. 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.
5. 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 lendings.
Although the proposed credit facility would substantially reduce the
Funds' need to borrow from banks, the Funds would be free to establish
committed lines of credit or other borrowing arrangements with banks.
The Funds also would continue to maintain overdraft protection
currently provided by their custodians.
6. 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 could arise when redemptions exceed anticipated volumes and
the Funds have insufficient cash on hand to satisfy such redemptions.
When the Funds liquidate portfolio securities to meet redemption
requests, which normally are effected 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.
7. 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.
8. 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 or the Reserve Investment
Funds. Thus, applicants believe that the proposed credit facility would
benefit both borrowing and lending Funds.
9. The interest rate charges 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 Reserve Investment
Funds from investments in overnight repurchase agreements. The Bank
Loan Rate for any day would be calculated by Price each day an
Interfund Loan is made according to a formula established by the Funds'
directors (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 25 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.
10. The credit facility would be administered by T. Rowe Price's
fund accounting and treasury departments (collectively, the ``Credit
Facility Team''). Under the proposed credit facility, the portfolio
managers for each participating fund may provide standing instructions
to participate daily as a borrower or lender. As in the case of the
Reserve Investment Funds, T. Rowe Price on each business day would
collect data on the uninvested cash and borrowing requirements of all
participating Funds from the Funds' custodians. Once it had determined
the aggregate amount of cash available for loans and borrowing demand,
the Credit Facility Team would allocate loans among borrowing Funds
without any further communication from portfolio managers. Applicants
expect far more available uninvested cash each day than borrowing
demand. After allocating cash for Interfund Loans, T. Rowe Price will
invest any remaining cash in accordance with the standing instructions
from portfolio managers or return remaining amounts to the Funds. The
money market funds typically would not participate as borrowers because
they rarely need to borrow cash to meet redemptions.
11. The Credit Facility Team would allocate borrowing demand and
cash available for lending among the Funds on what the 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.
12. T. Rowe Price 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 Funds under the credit
facility and the interest rates charged. The
[[Page 64295]]
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 Funds, 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.
13. T. Rowe Price would administer the credit facility as part of
its duties under its existing management or advisory and service
contract with each Fund and would receive no additional fee as
compensation for its services. T. Rowe Price 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.
14. Each Fund's participation in the proposed credit facility will
be consistent with its organizational documents and its investment
policies and limitations. The prospectus of each Price Fund discloses
that the Price Fund (other than the variable annuity and life
portfolios) may borrow money for temporary purposes in amounts up to
33\1/3\% of its total assets.\4\ Each Price Fund may mortgage or pledge
securities as security for borrowings in amounts up to 33\1/3\% of its
total assets. Each Fund may lend securities or other assets if, as a
result, no more than 33\1/3\% of its total assets would be lent to
other parties.
---------------------------------------------------------------------------
\4\ Price Funds used exclusively as funding vehicles for
variable annuity or life contracts have an operating policy which
states ``the Fund will limit borrowing for any variable annuity
separate account to (1) 10% of net asset value when borrowing for
any general purpose, and (2) 25% of net asset value when borrowing
as a temporary measure to facilitate redemptions.''
---------------------------------------------------------------------------
15. The prospectus of each Price Fund discloses that the Funds may
borrow money and lend securities and other assets. The Statement of
Additional Information (``SAI'') for the Price Funds also provides that
the Funds will not borrow from or lend to any other Price Fund unless
each Fund applies for and receives an exemptive order from the SEC or
the SEC issues rules permitting the transactions. If applicants'
requested order is granted, each Fund will amend its SAI to reflect its
ability and intention to engage in interfund lending and borrowing. All
borrowings and loans by the Funds will be consistent with the
organizational documents and investment policies of the respective
Funds.
16. 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 Price as their 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 for the reasons discussed below.
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) Price 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 short-term instruments either directly
or through the Reserve Investment Funds; (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 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 extent 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) 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 Price would receive no
additional compensation for its services in administering the credit
facility. Applicants also note that the
[[Page 64296]]
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 the 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.
2. On each business day, Price 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 the yield on the Reserve Investment Fund (for Price
Funds which invest in that Fund) and the yield on the Government
Reserve Investment Fund (for Price Funds which invest in that fund),
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 less than 10% 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 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 pledge of
segregated collateral with a market value at last 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 equity, taxable bond or Money Market 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 5%, 7.5% or
10%, respectively, 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.
[[Page 64297]]
9. A Fund's borrowings through the credit facility, as measured on
the day when the most recent loan was made, will not exceed the greater
of 125% of the Fund's total net cash redemptions and 102% of sales
fails for the preceding seven calendar days.
10. Each Interfund Loan may be called on one business day's notice
by the lending Fund and may be repaid on any day by the borrowing Fund.
11. A Fund's participation in the credit facility must be
consistent with its investment policies and limitations and
organizational documents.
12. Price'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. Price
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 to the Funds.
13. Price 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.
14. 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.
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, Price will
promptly refer the loan for arbitration to an independent arbitrator
selected by the Directors of the Funds involved in the loan who will
serve as arbitrator of disputes concerning Interfund Loans.\5\ 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.
---------------------------------------------------------------------------
\5\ 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.
---------------------------------------------------------------------------
16. Each Fund will maintain and preserve for a period of not less
than six years from the end of the fiscal year in which any transaction
under the credit facility occurred, the first two years in an easily
accessible place, written records of all such transactions setting
forth a description of the terms of the transaction, including the
amount, the maturity, and the rate of interest on the loan, the rate of
interest available at the time on short-term repurchase agreements and
bank borrowings, and such other information presented to the Fund's
Directors in connection with the review required by conditions 13 and
14.
17. Price 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 commencement of operations of the credit facility, Price
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, the independent public accountant for each Fund that is a
registered investment company shall prepare an annual report that
evaluates Price'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, and if
applicable the yield of the Reserve Investment Funds, but lower than
the Bank Loan Rate; (b) compliance with the collateral requirements as
set forth in the application; (c) compliance with the percentage
limitations on interfund borrowing and lending; (d) allocation of
interfund borrowing and lending demand in an equitable manner and in
accordance with procedures established by the 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.
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 SEC, by the Division of Investment Management, under
delegated authority.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-30893 Filed 11-18-98; 8:45 am]
BILLING CODE 8010-01-M
