[Federal Register Volume 64, Number 183 (Wednesday, September 22, 1999)]
[Notices]
[Pages 51356-51360]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-24602]
=======================================================================
-----------------------------------------------------------------------
SECURITIES AND EXCHANGE COMMISSION
[Investment Company Act Release No. 24016; 812-11502]
Franklin Gold Fund, et al., Notice of Application
September 16, 1999.
AGENCY: Securities and Exchange Commission (``SEC'').
ACTION: Notice of application for an order under the Investment Company
Act of 1949 (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: Franklin Gold fund, Franklin Asset Allocation Fund,
Franklin Equity Fund, Franklin High Income Trust, Franklin Custodian
Funds, Inc., Franklin California Tax-Free Income Fund, Inc., Franklin
New York Tax-Free Income Fund, Franklin Federal Tax-Free Income Fund,
Franklin Tax-Free Trust, Franklin California Tax-Free Trust, Franklin
New York Tax-Free Trust, Franklin Investors Securities Trust,
Institutional Fiduciary Trust, Franklin Value Investors Trust, Franklin
Strategic Mortgage Portfolio, Franklin Municipal Securities Trust,
Franklin Managed Trust, Franklin Strategic Series, Adjustable Rate
Securities Portfolios, Franklin Templeton International Trust, Franklin
Real Estate Securities Trust, Franklin Templeton Global Trust, Franklin
Valuemark Funds, Franklin Universal Trust, Franklin Multi-income Trust,
Franklin Templeton Fund Allocator Series, Franklin Money Fund, Franklin
Money Fund Trust, Franklin Federal Money Fund, Franklin Tax-Exempt
Money Fund, Franklin Mutual Series Fund Inc., Franklin Floating Rate
Trust, The Money Market Portfolios, Templeton Growth Fund, Inc.,
Templeton Funds, Inc., Templeton Global Smaller Companies Fund, Inc.,
Templeton Income Trust, Templeton Global Real Estate Fund, Templeton
Capital Accumulator Fund, Inc., Templeton Global Opportunities Trust,
Templeton Institutional Funds, Inc., Templeton Developing Markets
Trust, Templeton Global Investment Trust, Templeton Emerging Markets
Fund, Inc., Templeton Emerging Markets Appreciation Fund, Inc.,
Templeton Global Income Fund, Inc., Templeton Global Governments Income
Trust, Templeton Emerging Markets Income Fund, Inc., Templeton China
World Fund, Inc., Templeton Dragon Fund, Inc., Templeton Vietnam and
Southeast Asia Fund, Inc., Templeton Russia Fund, Inc., Templeton
Variable Products Series Fund (collectively, the ``Franklin Templeton
Funds''), Franklin Advisers, Inc., Franklin Advisory Services, LLC,
Franklin Investment Advisory Services, Inc., Templeton Asset
Management, Ltd., Templeton Global Advisors Limited, Franklin Mutual
Advisers, LLC, Templeton Investment Counsel, Inc., (collectively, the
Franklin Templeton Advisers''), and any future registered management
investment company advised by the Franklin Templeton Advisers or an
entity controlling, controlled by, or under common control with one of
the Franklin Templeton Advisers (together with the Franklin Templeton
Funds, the ``Funds'').\1\
---------------------------------------------------------------------------
\1\ All existing funds that currently intend to rely on the
order are named as applicants. Any other existing Fund and any
future Fund will rely on the order only in accordance with the terms
and conditions of the application.
Filing Dates: The application was filed on February 5. 1999 and
amended on July 6, 1999 and on September 2, 1999.
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 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 October
12, 1999 and should be accompanied by proof of service on applicants in
the form of an affidavit or, for lawyers a certificate or service.
Hearing requests should state the nature of the writer's interest, the
reason for the request, and the issues contested. Persons may request
notification by writing to the SEC's Secretary.
ADDRESSES: Secretary, SEC, 450 Fifth Street, N.W., Washington, D.C.
20549-0609. Applicants, 777 Mariners Island Boulevard, San Mateo,
California, 94404.
FOR FURTHER INFORMATION, CONTACT: Janet M. Grossnickle, Attorney-
Adviser, (202) 942-0526, or Mary Kay Frech, Branch Chief, (202) 942-
0564 (Division of Investment Management, Office of Investment Company
Regulation).
SUPPLEMENTAL INFORMATION: The following is a summary of the
application. The complete application may be obtained for a fee from
the SEC's Public Reference Branch, 450 Fifth Street, N.W., Washington,
D.C. 20549-0102 (telephone (202) 942-8090).
Applicants' Representations
1. Each Franklin Templeton Fund is registered under the Act as a
management investment company and organized as a Massachusetts business
trust, a Delaware business trust, a Maryland corporation, or a
California corporation. Each Franklin Templeton Adviser is or will be
registered as an investment adviser under the Investment Advisers Act
of 1940 and serves as an investment adviser to the Funds.
2. 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 a joint account. Certain of the Funds and
Franklin
[[Page 51357]]
Templeton Advisers obtained an order to permit them to deposit
uninvested cash balances that remain at the end of a trading day in one
or more joint trading accounts (each a ``Joint Account'') to be used to
enter into short-term investments.\2\ The Funds and the Franklin
Templeton Advisers obtained an order to permit them to invest their
cash balances in one or more of the Funds that are money market funds
that comply with rule 2a-7 under the Act (``Money market Funds'').\3\
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.
---------------------------------------------------------------------------
\2\ AGE High Income Fund, Investment Company Act Release Nos.
15485 (Dec. 17, 1986) (notice) and 15534 (Jan. 13, 1987) (order).
\3\ Franklin Gold Fund, Investment Company Act Release Nos.
23633 (Jan. 5, 1999) (notice) and 23675 (Feb. 2, 1999) (order.)
---------------------------------------------------------------------------
3. If the Funds were to borrow money under credit arrangements with
a bank, the Funds would pay interest on the borrowed cash at a rate
which would be significantly higher than the rate would be earned by
other (non-borrowing) Funds on investments in repurchase agreements and
other short-term instruments of the same maturity as the bank loan.
Applicants state that this differential represents the 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 money directly to and borrow money directly from
each other through a credit facility for temporary purposes
(``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, if any, currently provided by their custodians.
Applicants state that closed-end Funds will participate in the credit
facility only as lenders.
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 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.
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 could generally supply
needed cash to cover unanticipated redemptions and sales fails,
applicants state that 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 loans to other Funds would
earn interest at a rate higher than they otherwise could obtain from
investing their cash through the Joint Account in repurchase agreements
or in the Money Market Funds. 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
would be the average of the Repo Rate and the Bank Loan Rate, as
defined below. The Repo Rate for any day would be the highest rate
available to the Joint Account participants from investments in
overnight repurchase agreements. The Bank Loan Rate for any day would
be calculated by the Franklin Templeton Advisers each day an Interfund
Loan is made according to a formula established by the directors or
trustees of the Funds (the ``Trustees'') 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 Trustees
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 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 Trustees.
9. The credit facility would be administered by the Franklin
Templeton Advisers' money market investment professionals (including
the portfolio manager(s) for the Money Market Funds) and fund
accounting department (collectively, the ``Cash Management 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. The Franklin Templeton Advisers on each
business day would collect data on the uninvested cash and borrowing
requirements of all participating Funds from the Funds' custodians.
Applicants expect far more available uninvested cash each day than
borrowing demand. Once it had determined the aggregate amount of cash
available for loans and borrowing demand, the Cash Management Team
would allocate loans among borrowing Funds without any further
communication from portfolio managers (other than the Money Market Fund
portfolio managers on the Cash Management Team). All allocations will
require approval of at least one member of the Cash Management Team who
is not a Money Market Fund's portfolio manager. After the Cash
Management Team has allocated cash for Interfund Loans, the Franklin
Templeton Advisers will invest any remaining cash in accordance with
the standing instructions from portfolio managers or return remaining
amounts for investment to the Funds. The Money Market Funds typically
would not participate as borrowers because they rarely need to borrow
cash to meet redemptions.
[[Page 51358]]
10. The Cash Management Team would allocate borrowing demand and
cash available for lending among the Funds on what the Cash Management
Team believed 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 Funds
necessary to complete the loan transaction. The method of allocation
and related administrative procedures would be approved by each Fund's
Trustees, including a majority of Trustees who are not ``interested
persons'' of the Funds, as defined in section 2(a)(19) of the Act
(``Independent Trustees''), to ensure that the borrowing and lending
Funds participate on an equitable basis.
11. The Franklin Templeton Advisers would (i) monitor the interest
rates charged and the other terms and conditions of the Interfund
Loans, (ii) ensure compliance with each Fund's investment policies and
limitations, (iii) ensure equitable treatment of each Fund, and (iv)
make quarterly reports to the Trustees concerning any transactions by
the Funds under the credit facility and the interest rates charged.
12. The Franklin Templeton Advisers would administer the credit
facility as part of their duties under existing contracts with each
Fund and would receive no additional fee as compensation for their
services. The Franklin Templeton Advisers or companies affiliated with
them 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. The prospectus of each Fund discloses the
individual borrowing and lending limitations of the Fund. Each Fund
will notify shareholders of its intended participation in the proposed
credit facility prior to relying upon any relief granted pursuant to
the application. The Statement of Additional Information (``SAI'') of
each Fund will disclose all material facts about the Fund's intended
participation in the credit facility.
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.
Applicant's 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 by
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 the Franklin Templeton
Advisers as their common investment advisers.
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 party with potential adverse interests to
and 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 (i)
the Franklin Templeton Advisers would administer the program as
disinterested fiduciaries; (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 Joint Account or in the Money Market Funds;
(iii) the Interfund Loans would not involve a greater risk than such
other investments; (iv) the lending Fund would receive interest at a
rate higher than it could obtain through such other investments; and
(v) the borrowing Fund would pay interest at a rate lower than
otherwise available to it under any 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)(1) was intended to prevent
the pyramiding of investment companies in order to avoid duplicative
costs and fees attendant upon multiple layers of investment companies.
Applicants submit that the proposed credit facility does not involve
these abuses. Applicants note that there would be no duplicative costs
or fees to the Funds or shareholders, and that the Franklin Templeton
Advisers would receive no
[[Page 51359]]
additional compensation for their 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; provided, that immediately after any such
borrowing there is an asset coverage of at least 300 per centum for all
borrowings of the company. Under section 18(g) of the Act, the term
``senior security'' includes any bond, debenture, note, or similar
obligation or instrument constituting a security and evidencing
indebtedness. Applicants request 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, the Franklin Templeton Advisers 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 (i)
more favorable to the lending Fund than the Repo Rate; (ii) more
favorable to the lending Fund than the yield on the Money Market Funds
(``MMF Yield'') (for those Funds that invest in the Money Market
Funds); and (iii) 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 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 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
[[Page 51360]]
will be treated as separate loan transactions for purposes of this
condition.
9. A Fund's borrowings through the credit facility, as measured on
the day 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. The Cash Management Team will calculate total Fund borrowing
and lending demand through the credit facility, and allocate loans on
an equitable basis among the Funds without intervention of the
portfolio manager of a Fund (except a portfolio manager of the Money
Market Funds acting in his or her capacity as a member of the Cash
Management Team). All allocations will require approval of at least one
member of the Cash Management Team who is not a portfolio manager of
the Money Market Funds. The Cash Management Team will not solicit cash
for the credit facility from any Fund or prospectively publish or
disseminate loan demand data to portfolio managers (except to the
extent that the portfolio managers of the Money Market Funds on the
Cash Management Team have access to loan demand data). The Franklin
Templeton Advisers 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. The Franklin Templeton Advisers will monitor the interest rates
charged and the other terms and conditions of the Interfund Loans and
will make a quarterly report to the Trustees concerning the
participation of the Funds in the credit facility and the terms and
other conditions of any extensions of credit thereunder.
14. The Trustees of each Fund, including a majority of the
Independent Trustees: (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 such
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 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, the Franklin
Templeton Advisers will promptly refer such loan for arbitration to an
independent arbitrator selected by the Trustees of any Fund involved in
the loan who will serve as arbitrator of disputes concerning Interfund
Loans.\4\ 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.
---------------------------------------------------------------------------
\4\ If the dispute involves Funds with separate boards of
Trustees, the Trustees of each Fund will select an independent
arbitrator that is satisfactory to each party.
---------------------------------------------------------------------------
16. Each Fund will maintain had 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, the MMF Yield, and such other information presented to
the Trustees in connection with the review required by conditions 13
and 14 above.
17. The Franklin Templeton Advisers will prepare and submit to the
Trustees 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 credit facility commences
operations, the Franklin Templeton Advisers will report on the
operations of the 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 the Franklin Templeton Adviser'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 than the MMF Yield, 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 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. 99-24602 Filed 9-21-99; 8:45 am]
BILLING CODE 8010-01-M
