02-5432. Franklin Strategic Series, et al.; Notice of Application

March 1, 2002.

AGENCY:

Securities and Exchange Commission (“Commission”).

ACTION:

Notice of application for an order under section 17(b) of the Investment Company Act of 1940 (the “Act”) for an exemption from section 17(a) of the Act.

Summary of Application:

Applicants request an order to permit certain series of registered open-end management investment companies to acquire all of the assets, net of liabilities, of certain corresponding series of another registered open-end management investment company. Because of certain affiliations, applicants may not rely on rule 17a-8 of the Act.

Applicants:

Franklin Strategic Series, Franklin Federal Tax-Free Income Fund (“Franklin Federal Tax-Free Fund”), Franklin Investors Securities Trust, Franklin Advisers, Inc. (“FAI”), Templeton Funds, Inc. (“Templeton Funds”), Templeton Global Advisers Limited (“TGAL”, together with FAI, the “Franklin Advisers”), FTI Funds, and Fiduciary International, Inc (“FII”).

Filing Date:

The application was filed on February 28, 2002.

Hearing or Notification of Hearing:

An order granting the requested relief will be issued unless the Commission orders a hearing. Interested persons may request a hearing by writing to the Commission's Secretary and serving Applicants with a copy of the request, personally or by mail. Hearing requests should be received by the Commission by 5:30 p.m. on March 25, 2002 and should be accompanied by proof of service on Applicants, in the form of an affidavit or, for lawyers, a certificate of service. Hearing requests should state the nature of the writer's interest, the reason for the request, and the issues contested. Persons may request notification of a hearing by writing to the Commission's Secretary.

ADDRESSES:

Secretary, Commission, 450 5th Street, NW., Washington, DC 20549-0609. Applicants, c/o David P. Goss, Esq., Franklin Templeton Investments, One Franklin Parkway, San Mateo, California 94403-1906.

FOR FURTHER INFORMATION CONTACT:

Jaea F. Hahn, Senior Counsel, at [phone], or Mary Kay Frech, Branch Chief, at [phone] (Division of Investment Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION:

The following is a summary of the application. The complete application may be obtained for a fee at the Commission's Public Reference Branch, 450 5th Street, NW., Washington, DC 20549-0102 (tel. [phone]).

Applicants' Representations

1. FTI Funds, a Massachusetts business trust, is an open-end management investment company registered under the Act. FTI Funds consists of seven series, four of which are the “Acquired Funds”. Franklin Strategic Series, a Delaware business trust, is an open-end management investment company registered under the Act, and currently offers 13 series, one of which is the Franklin Strategic Series: Large Cap Growth Fund (“Franklin Large Cap Growth Fund”). Franklin Federal Tax-Free Fund, a California corporation, is an open-end management investment company registered under the Act. Franklin Investors Securities Trust, a Massachusetts business trust, is an open-end management investment company registered under the Act, and currently offers six series, one of which is the Franklin Investors Securities Trust: Total Return Fund (“Franklin Total Return Fund”). Templeton Funds, a Maryland corporation, is an open-end management investment company registered under the Act, and currently offers two series, one of which is Templeton Funds: Foreign Fund (“Templeton Foreign Fund”). The Franklin Large Cap Growth Fund, Franklin Federal Tax-Free Fund, Franklin Total Return Fund, and Templeton Foreign Fund are the “Acquiring Funds”.^[1]

2. The Franklin Advisers are each registered under the Investment Advisers Act of 1940 (“Advisers Act”) and serve as investment advisers to the Acquiring Funds.^[2] Each Franklin Adviser is a wholly owned subsidiary of Franklin Resources, Inc. (“Resources”). FII is registered under the Advisers Act and serves as investment adviser to each of the Acquired Funds. FII is an indirect, wholly owned subsidiary of Fiduciary Trust Company International (“FTCI”), which, on behalf of certain fiduciary accounts, owns of record, beneficially, or both, 5% or more of the outstanding shares of each Acquired Fund. FTCI is also an indirect wholly owned subsidiary of Resources.

3. On January 16, 2002, the board of trustees of FTI Funds (“FTI Board”), including all the trustees who are not “interested persons,” as defined in section 2(a)(19) of the Act (“Disinterested Trustees”), unanimously approved the respective Agreements and Plans of Reorganization entered into between the Acquired Funds and the Acquiring Funds (each a “Plan” and together, the “Plans”). On November 20, 2001 (and on December 4, 2001, in the case of Templeton Funds), the respective boards of trustees of the Acquiring Funds each a “Franklin Board” and collectively, the “Franklin Boards”), including the Disinterested Trustees, unanimously approved each Plan. Under each Plan, an Acquiring Fund will acquire substantially all of the assets of the corresponding Acquired Fund in exchange for Advisor Class shares of the Acquiring Fund, which will be distributed pro rata by the Acquired Fund to its shareholders as soon as reasonably practicable after the close of the applicable reorganization (each, a “Reorganization”). The shares of each Acquiring Fund exchanged will have a total net asset value equal to the total net asset value of the corresponding Acquired Fund's shares determined as of 4:00 p.m. Eastern time on the closing date of each Reorganization (each, a “Closing Date”). The net asset value of the Acquiring Fund shares and the value of the corresponding Acquired Fund's net assets will be determined according to each Fund's then-current prospectus and statement of additional information. On the Closing Date, which is currently anticipated to occur on or about March 27, 2002, the Advisor Class shares of each Acquiring Fund will be distributed to the corresponding Acquired Fund's shareholders, and each Acquired Fund will satisfy its liabilities, liquidate and be dissolved as a separate series of FTI Funds.

4. Applicants state that the investment objectives and strategies of each Acquired Fund are similar to those of each respective Acquiring Fund. Shares of the Acquired Funds and the Advisor Class shares of the Acquiring Funds are not subject to a front-end sales load, contingent deferred sales charge or exchange fee. The Acquiring Funds do not have a rule 12b-1 distribution fee for their Advisor Class shares. No sales charges or other fees will be imposed in connection with the Reorganizations. The expenses of each Reorganization will be paid one-quarter by the applicable Acquiring Fund, the corresponding Acquired Fund, the applicable Franklin Adviser, and FII.

5. Each Franklin Board and the FTI Board (together, the “Boards”), including all of the Disinterested Trustees, determined that each Reorganization was in the best interest of each of their respective Funds and their shareholders, and that the interests of each Fund's existing shareholders will not be diluted as a result of its Reorganization. In approving the Reorganizations, the Boards considered various factors, including, among other things: (a) The investment objectives, management policies and investment restrictions of the Funds; (b) the terms and conditions of the Reorganizations including any changes in services to be provided to shareholders of each Fund; (c) the respective expense ratios of the Funds; (d) the tax-free nature of the Reorganizations; and (e) the potential economies of scale that are likely to result from the larger asset base of the combined Funds.

6. The Reorganizations are subject to a number of conditions, including: (a) Each Acquired Fund's shareholders will have approved the Plan; (b) an N-14 registration statement relating to each Reorganization will have become effective with the Commission; (c) each Fund will have received an opinion of counsel concerning the tax-free nature of its respective Reorganization; (d) each Acquired Fund will have declared and paid dividends and other distributions on or before the Closing Date; and (e) applicants will have received from the Commission the exemptive relief requested by the application. A Plan may be terminated and the Reorganization abandoned at any time prior to the Closing Date by mutual written consent of the parties or by either Fund in the case of a breach of the Plan. Applicants agree not to make any material changes to any Plan without prior approval of the Commission staff.

7. A registration statement on Form N-14 with respect to the Reorganization of each Acquired Fund, containing a proxy statement/prospectus, was filed with the Commission on January 22, 2002 (January 18, 2002 for FTI International Equity Fund). A combined prospectus/proxy statement will be mailed to each Acquired Fund's shareholders at least 20 business days before the date of the meeting of shareholders of each Acquired Fund (scheduled for March 22, 2002).

Applicants' Legal Analysis

1. Section 17(a) of the Act, in relevant part, prohibits an affiliated person of a registered investment company, or an affiliated person of such person, acting as principal, from selling any security to, or purchasing any security from the company. Section 2(a)(3) of the Act defines an “affiliated person” of another person to include: (a) Any person directly or indirectly owning, controlling, or holding with power to vote 5% or more of the outstanding voting securities of the other person; (b) any person 5% or more of whose securities are directly or indirectly owned, controlled, or held with power to vote by the other person; (c) any person directly or indirectly controlling, controlled by or under common control with the other person; and (d) if the other person is an investment company, any investment adviser of that company.

2. Rule 17a-8 under the Act exempts from the prohibitions of section 17(a) certain mergers, consolidations, and sales of substantially all of the assets of registered investment companies that are affiliated persons, or affiliated persons of an affiliated person, solely by reason of having a common investment adviser, common directors, and/or common officers, provided that certain conditions are satisfied.

3. Applicants believe that they may not rely on rule 17a-8 in connection with the Reorganizations because the Funds may be deemed to be affiliated by reasons other than having a common investment adviser, common directors, and/or common officers. Applicants state that FTCI, on behalf of certain fiduciary accounts, owns of record, beneficially, or both, 5% or more of the total outstanding voting securities of each Acquired Fund. FTCI is also an affiliated person of each Franklin Adviser because each such company is under the common control of Resources, which directly or indirectly owns 100% of each company's outstanding voting securities. Consequently, each Acquired Fund may be deemed to be an affiliated person of an affiliated person of the corresponding Acquiring Fund for reasons other than those set forth in rule 17a-8.

4. Section 17(b) of the Act provides, in relevant part, that the Commission may exempt a transaction from the provisions of section 17(a) if evidence establishes that the terms of the proposed transaction, including the consideration to be paid or received, are reasonable and fair and do not involve overreaching on the part of any person concerned, and that the proposed transaction is consistent with the policy of each registered investment company concerned and with the general purposes of the Act.

5. Applicants request an order under section 17(b) of the Act exempting them from section 17(a) to the extent necessary to complete the Reorganizations. Applicants submit that each Reorganization satisfies the standards of section 17(b) of the Act. Applicants state that the terms of the Reorganizations are reasonable and fair and do not involve overreaching. Applicants state that the investment objectives, policies and restrictions of the Acquired Funds are similar to those of the corresponding Acquiring Funds. Applicants also state that each Franklin Board and the FTI Board, including all of the Disinterested Trustees, found that the participation of the Acquired and the Acquiring Funds in the Reorganizations is in the best interests of each Fund and its shareholders and that such participation will not dilute the interests 4 of the existing shareholders of each Fund. In addition, applicants state that the Reorganizations will be on the basis of the Funds' relative net asset values.

For the Commission, by the Division of Investment Management, pursuant to delegated authority.

Margaret H. McFarland,

Deputy Secretary.

Footnotes

1.  The Acquired Funds and the corresponding Acquiring Funds are: (a) FTI Funds: Large Cap Growth Fund and Franklin Large Cap Growth Fund; (b) FTI Funds: Municipal Bond Fund and Franklin Federal Tax-Free Fund; (c) FTI Funds: Bond Fund and Franklin Total Return Fund; and (d) FTI Funds: International Equity Fund (“FTI International Equity Fund”) and Templeton Foreign Fund (each, a “Fund” and together, the “Funds”).

2.  FAI serves as investment adviser to Franklin Large Cap Growth Fund, Franklin Federal Tax-Free Fund, and Franklin Total Return Fund. TGAL serves as investment adviser to Templeton Foreign Fund.