

[Federal Register: May 1, 2006 (Volume 71, Number 83)]
[Notices]               
[Page 25616-25620]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr01my06-92]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 27292; 812-13214]

 
Frank Russell Investment Company, et al.; Notice of Application

April 25, 2006.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order under (a) section 6(c) of 
the Investment Company Act of 1940 (``Act'') granting an exemption from 
sections 18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act 
granting an exemption from section 12(d)(1) of the Act; (c) sections 
6(c) and 17(b) of the Act granting an exemption from sections 17(a)(1) 
and 17(a)(3) of the Act; and (d) section 17(d) of the Act and rule 17d-
1 under the Act to permit certain joint transactions.

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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: Frank Russell Investment Company and Russell Investment 
Funds (each, a ``Trust'' and collectively, the ``Trusts''), and Frank 
Russell Investment Management Company (``FRIMCo'').

Filing Dates: The application was filed on July 19, 2005 and amended on 
April 13, 2006. Applicants have agreed to file an amendment during the 
notice period, the substance of which is reflected in the notice.

Hearing or Notification of Hearing: An order granting the application 
will be issued unless the Commission orders a hearing. Interested 
persons may request a hearing by writing to the Commission's Secretary 
and serving applicants with a copy of the request, personally or by 
mail. Hearing requests should be received by the Commission by 5:30 
p.m. on May 22, 2006, and should be accompanied by proof of service on 
applicants, in the form of an affidavit or, for lawyers, a certificate 
of service. Hearing requests should state the nature of the writer's 
interest, the reason for the request, and the issues contested. Persons 
who wish to be notified of a hearing may request notification by 
writing to the Commission's Secretary.

ADDRESSES: Secretary, U.S. Securities and Exchange Commission, 100 F 
Street, NE., Washington, DC, 20549-1090. Applicants, c/o Gregory J. 
Lyons, Esq., Frank Russell Company, 909 A Street, Tacoma, Washington 
98402.

FOR FURTHER INFORMATION CONTACT: Marilyn Mann, Senior Counsel, at (202) 
551-6813 or Mary Kay Frech, Branch Chief, at (202) 551-6821 (Division 
of Investment Management, Office of Investment Company Regulation).

SUPPLEMENTARY INFORMATION: The following is a summary of the 
application. The complete application may be obtained for a fee at the 
Commission's Public Reference Desk, 100 F Street, NE., Washington, DC, 
20549-0102 (tel. (202) 551-5850).

Applicants' Representations

    1. Each Trust is organized as a Massachusetts business trust and is 
registered under the Act as an open-end management investment company. 
Frank Russell Investment Company consists of 34 separate series 
(``Funds'') and Russell Investment Funds consists of 5 separate Funds. 
FRIMCo, a Washington corporation, is registered as an investment 
adviser under the Investment Advisers Act of 1940, and serves as the 
investment adviser to each Fund.\1\ An existing Commission order 
permits the Funds to invest uninvested cash balances in money market 
Funds that comply with rule 2a-7 under the Act.\2\
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    \1\ All entities that currently intend to rely on the requested 
relief have been named as applicants.
    \2\ Frank Russell Investment Company, Investment Company Act 
Release Nos. 25416 (February 12, 2002) (notice) and 25458 (March 12, 
2002) (order).
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    2. Some Funds may lend money to banks or other entities by entering 
into

[[Page 25617]]

repurchase agreements or purchasing other short-term investments. Other 
Funds may borrow money from the same or similar 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 
security sold by a Fund has been delayed. Currently, the Funds have 
entered into a credit agreement with a bank. If a Fund were to borrow 
money under the credit agreement, it would pay interest on the loan at 
a rate that is significantly higher than the rate that is earned by 
other (non-borrowing) Funds on investments in repurchase agreements and 
other short-term instruments of the same maturity as the loan under the 
credit agreement. Applicants state that this differential represents 
the profit the bank would earn on loans under the credit agreement and 
is not attributable to any material difference in the credit quality or 
risk of such transactions.
    3. Applicants request an order that would permit the Funds to enter 
into interfund 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 reduce the Funds' borrowing costs and enhance their 
ability to earn higher interest rates on short-term investments. 
Although the proposed credit facility would 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.
    4. 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 
certain Funds have insufficient cash on hand to satisfy such 
redemptions. When a Fund liquidates portfolio securities to meet 
redemption requests which normally are effected immediately, it often 
does 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.
    5. 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 a Fund's custodian or improper delivery 
instructions by the broker effecting the transaction. Sales fails may 
present a cash shortfall if a Fund has undertaken to purchase 
securities using the proceeds from the securities sold. Alternatively, 
the Fund could fail on its intended purchase due to lack of funds from 
the previous sale, resulting in additional cost to the Fund, or sell a 
security on a same day settlement basis, earning a lower return on the 
investment. Use of the credit facility under these circumstances would 
enable the Fund to have access to immediate short-term liquidity.
    6. While bank borrowings generally could supply needed cash to 
cover unanticipated redemptions and sales fails, under the proposed 
credit facility a borrowing Fund would pay lower interest rates than 
those 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 purchasing shares of a money market Fund. 
Thus, applicants believe that the proposed credit facility would 
benefit both borrowing and lending Funds.
    7. The interest rate charged to a Fund on any Interfund Loan 
(``Interfund Loan Rate'') would be the average of the ``Repo Rate'' and 
the ``Bank Loan Rate,'' both as defined below. The Repo Rate on any day 
would be the highest rate available to the Funds from investing in 
overnight repurchase agreements. The Bank Loan Rate on any day would be 
calculated by FRIMCo each day an Interfund Loan is made according to a 
formula established by a Fund's board of trustees (``Board'') intended 
to approximate the lowest interest rate at which bank short-term loans 
would be available to the Funds. The formula would be based upon a 
publicly available rate (e.g., Federal funds plus 25 basis points) and 
would vary with this rate so as to reflect changing bank loan rates. 
The Board of each Fund would periodically review the continuing 
appropriateness of using the publicly available rate to determine the 
Bank Loan Rate, as well as the relationship between the Bank Loan Rate 
and current bank loan rates that would be available to the Funds. The 
initial formula and any subsequent modifications to the formula would 
be subject to the approval of each Fund's Board.
    8. The credit facility would be administered by FRIMCo's fund 
accounting department, an investment professional within FRIMCo who 
serves as a portfolio manager of money market Funds and a compliance 
professional within FRIMCo (collectively, the ``Credit Facility 
Team''). Under the proposed credit facility, the portfolio managers for 
each participating Fund could provide standing instructions to 
participate daily as a borrower or lender. The Credit Facility Team on 
each business day would collect data on the uninvested cash and 
borrowing requirements of all participating Funds from the Funds' 
custodian. Once it 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 other than the money market Fund portfolio manager 
on the Credit Facility Team. Applicants expect far more available 
uninvested cash each day than borrowing demand. All allocations will 
require the approval of at least one member of the Credit Facility Team 
who is not a money market Fund portfolio manager. After the Credit 
Facility Team has allocated cash for Interfund Loans, the Credit 
Facility Team would invest any remaining cash in accordance with the 
standing instructions of 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.
    9. 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 Interfund Loan normally would 
be allocated in a manner intended to minimize the number of 
participants necessary to complete the loan transaction. The method of 
allocation and related administrative procedures would be approved by 
each Fund's Board, including a majority of trustees who are not 
``interested persons'' of the Fund, as defined in section 2(a)(19) of 
the Act (``Independent Trustees''), to ensure that both borrowing and 
lending Funds participate on an equitable basis.
    10. FRIMCo would (a) monitor the Interfund Loan Rate and the other 
terms and conditions of the loans; (b) limit the borrowings and loans 
entered into by each Fund to ensure that they comply with the Fund's 
investment policies and limitations; (c) ensure equitable treatment of 
each Fund; and (d) make quarterly reports to the Board of each Fund 
concerning any transactions by

[[Page 25618]]

the Funds under the credit facility and the Interfund Loan Rate 
charged.
    11. FRIMCo, through the Credit Facility Team, would administer the 
credit facility under its existing management, advisory, or 
administrative contract with each Fund and would receive no additional 
compensation for its services. FRIMCo may collect fees in connection 
with repurchase and lending transactions generally, including 
transactions through the credit facility, for pricing and record 
keeping, bookkeeping and accounting services. These fees would be no 
higher than those applicable for comparable bank loan transactions.
    12. No Fund may participate in the credit facility unless: (a) The 
Fund has obtained shareholder approval for its participation, if such 
approval is required by law; (b) the Fund has fully disclosed all 
material facts concerning the credit facility in its prospectus and/or 
statement of additional information (``SAI''); and (c) the Fund's 
participation in the credit facility is consistent with its investment 
objectives, limitations and organizational documents.
    13. In connection with the credit facility, applicants request an 
order under (a) section 6(c) of the Act granting relief from sections 
18(f) and 21(b) of the Act; (b) section 12(d)(1)(J) of the Act granting 
relief from section 12(d)(1) of the Act; (c) sections 6(c) and 17(b) of 
the Act granting relief from sections 17(a)(1) and 17(a)(3) of the Act; 
and (d) under section 17(d) 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 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 FRIMCo as their common 
investment adviser and having a common Board and officers.
    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 Commission to exempt a proposed transaction from section 
17(a) provided that the terms of the transaction, including the 
consideration to be paid or received, are fair and reasonable and do 
not involve overreaching on the part of any person concerned, and the 
transaction is consistent with the policy of the investment company as 
recited in its registration statement and with the general purposes of 
the Act. Applicants believe that the proposed arrangements satisfy 
these standards for the reasons discussed below.
    3. Applicants submit that sections 17(a)(3) and 21(b) of the Act 
were intended to prevent a party with strong potential adverse 
interests to, and some influence over the investment decisions of, a 
registered investment company from causing or inducing the investment 
company to engage in lending transactions that unfairly inure to the 
benefit of such party and that are detrimental to the best interests of 
the investment company and its shareholders. Applicants assert that the 
proposed credit facility transactions do not raise these concerns 
because: (a) FRIMCo, through the Credit Facility Team, would administer 
the program as a disinterested fiduciary; (b) all Interfund Loans would 
consist only of uninvested cash reserves that the Funds otherwise would 
invest in short-term repurchase agreements or other short-term 
instruments either directly or through a money market Fund; (c) the 
Interfund Loans would not involve a greater risk than such other 
investments; (d) the lending Fund would receive interest at a rate 
higher than it could obtain through such other investments; and (e) the 
borrowing Fund would pay interest at a rate lower than otherwise 
available to it under its bank loan agreements and avoid the up-front 
commitment fees associated with committed lines of credit. Moreover, 
applicants believe that the other terms and conditions 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) 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 state 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 Commission may exempt persons or 
transactions from any provision of section 12(d)(1) if and to the 
extent such exemption is consistent with the public interest and the 
protection of investors. Applicants contend that the standards under 
sections 6(c), 17(b), and 12(d)(1)(J) are satisfied for all the reasons 
set forth above in support of their request for relief from sections 
17(a)(3) and 21(b) and for the reasons discussed below.
    5. Applicants state that section 12(d)(1) was intended to prevent 
the pyramiding of investment companies in order to avoid imposing on 
investors additional and duplicative costs and fees attendant upon 
multiple layers of investment companies. Applicants submit that the 
proposed credit facility does not involve these abuses. Applicants note 
that there will be no duplicative costs or fees to the Funds or 
shareholders, and that FRIMCo will 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 of the participating Funds and their 
shareholders.
    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 the borrowing, 
there is asset coverage of at least 300 per centum for all borrowings 
of the company. Under section 18(g) of the Act, the term ``senior 
security'' includes any bond, debenture, note or similar obligation or 
instrument constituting a security and evidencing indebtedness. 
Applicants request 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 a Fund, including combined 
interfund and bank borrowings, have at least 300% asset coverage. Based 
on the conditions and safeguards described in the application, 
applicants also submit that to allow the Funds to borrow from other 
Funds pursuant to the proposed credit facility is consistent with the 
purposes and policies of section 18(f)(1).
    8. Section 17(d) and rule 17d-1 generally prohibit any affiliated 
person of a registered investment company, or affiliated persons of an 
affiliated person, when acting as principal, from effecting

[[Page 25619]]

any joint transactions in which the company participates unless the 
transaction is approved by the Commission. Rule 17d-1(b) provides that 
in passing upon applications filed under the rule, the Commission 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 an 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 that are no 
different from or less advantageous than that of other participating 
Funds.

Applicants' Conditions

    Applicants agree that any order granting the requested relief will 
be subject to the following conditions:
    1. The Interfund Loan Rate will be the average of the Repo Rate and 
the Bank Loan Rate.
    2. On each business day, the Credit Facility Team 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, if applicable, the yield of 
any money market Fund in which the lending Fund could otherwise invest; 
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 by the Fund occurs under any agreement evidencing an 
outstanding bank loan to the Fund, that event of default will 
automatically (without need for action or notice by the lending Fund) 
constitute an immediate event of default under the Interfund Lending 
Agreement entitling the lending Fund to call the Interfund Loan (and 
exercise all rights with respect to any collateral) and that such call 
will be made if the lending bank exercises its right to call its loan 
under its agreement with the borrowing Fund.
    4. A Fund may make an unsecured borrowing through the proposed 
credit facility if its outstanding borrowings from all sources 
immediately after the interfund borrowing total 10% or less of its 
total assets, provided that if the Fund has a secured loan outstanding 
from any other lender, including but not limited to another Fund, the 
Fund's interfund borrowing will be secured on at least an equal 
priority basis with at least an equivalent percentage of collateral to 
loan value as any outstanding loan that requires collateral. If a 
Fund's total outstanding borrowings immediately after an interfund 
borrowing would be greater than 10% of its total assets, the Fund may 
borrow through the proposed credit facility only on a secured basis. A 
Fund may not borrow through the proposed credit facility or from any 
other source if its total outstanding borrowings immediately after such 
borrowing would be more than 33\1/3\% of its total assets.
    5. Before any Fund that has outstanding interfund borrowings may, 
through additional borrowings, cause its outstanding borrowings from 
all sources to exceed 10% of its total assets, the Fund must first 
secure each outstanding 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 exceed 10% of its 
total assets for any other reason (such as a decline in net asset value 
or because of shareholder redemptions), the Fund will within one 
business day thereafter: (a) Repay all 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 Interfund Loan.
    6. No Fund may lend to another Fund through the proposed credit 
facility if the loan would cause its aggregate outstanding loans 
through the proposed credit facility to exceed 15% of the lending 
Fund's current net assets at the time of the loan.
    7. A Fund's Interfund Loans to any one Fund shall not exceed 5% of 
the lending Fund's net assets.
    8. The duration of Interfund Loans will be limited to the time 
required to receive payment for securities sold, but in no event more 
than seven days. Loans effected within seven days of each other will be 
treated as separate loan transactions for purposes of this condition.
    9. The Fund's borrowings through the proposed credit facility, as 
measured on the day when the most recent loan was made, will not exceed 
the greater of 125% of the Fund's total net cash redemptions or 102% of 
sales fails for the preceding seven calendar days.
    10. Each Interfund Loan may be called on one business day's notice 
by a lending Fund and may be repaid on any day by a borrowing Fund.
    11. A Fund's participation in the proposed credit facility must be 
consistent with its investment objectives, and limitations and 
organizational documents.
    12. The Credit Facility Team will calculate total Fund borrowing 
and lending demand through the proposed credit facility, and allocate 
loans on an equitable basis among the Funds, without the intervention 
of any portfolio manager of the Funds (other than the money market Fund 
portfolio manager acting in his or her capacity as a member of the 
Credit Facility Team). All allocations will require the approval of at 
least one member of the Credit Facility Team who is not the money 
market Fund portfolio manager. The Credit Facility Team will not 
solicit cash for the proposed credit facility from any Fund or 
prospectively publish or disseminate loan demand data to portfolio 
managers (except to the extent that the money market Fund portfolio 
manager on the Credit Facility Team has access to loan demand data). 
The Credit Facility Team will invest any amounts remaining after 
satisfaction of borrowing demand in accordance with the

[[Page 25620]]

standing instructions of the portfolio managers or return remaining 
amounts for investment directly by the portfolio managers of the Funds.
    13. FRIMCo will monitor the Interfund Loan Rate and the other terms 
and conditions of the Interfund Loans and will make a quarterly report 
to the Trustees of each Trust concerning the participation of the Funds 
in the proposed credit facility and the terms and other conditions of 
any extensions of credit under the credit facility.
    14. The Board of each Trust, including a majority of the 
Independent Trustees, will:
    (a) Review, no less frequently than quarterly, each Fund's 
participation in the proposed credit facility during the preceding 
quarter for compliance with the conditions of any order permitting such 
transactions;
    (b) Establish the Bank Loan Rate formula used to determine the 
interest rate on Interfund Loans and review, no less frequently than 
annually, the continuing appropriateness of the Bank Loan Rate formula; 
and
    (c) Review, no less frequently than annually, the continuing 
appropriateness of each Fund's participation in the proposed credit 
facility.
    15. In the event an Interfund Loan is not paid according to its 
terms and such default is not cured within two business days from its 
maturity or from the time the lending Fund makes a demand for payment 
under the provisions of the Interfund Lending Agreement, FRIMCo will 
promptly refer such loan for arbitration to an independent arbitrator 
selected by the Board of each Fund involved in the loan who will serve 
as arbitrator of disputes concerning Interfund Loans.\3\ The arbitrator 
will resolve any problem promptly, and the arbitrator's decision will 
be binding on both Funds. The arbitrator will submit, at least 
annually, a written report to the Board setting forth a description of 
the nature of any dispute and the actions taken by the Funds to resolve 
the dispute.
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    \3\ If the dispute involves Funds with different Trustees, the 
respective Trustees of each Fund will select an independent 
arbitrator that is satisfactory to each Fund.
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    16. Each Fund will maintain and preserve for a period of not less 
than six years from the end of the fiscal year in which any transaction 
by it under the proposed credit facility occurred, the first two years 
in an easily accessible place, written records of all such transactions 
setting forth a description of the terms of the transactions, including 
the amount, the maturity and the Interfund Loan Rate, the rate of 
interest available at the time on overnight repurchase agreements and 
commercial bank borrowings, the yield of any money market Fund in which 
the lending Fund could otherwise invest, and such other information 
presented to the Fund's Board in connection with the review required by 
conditions 13 and 14.
    17. FRIMCo will prepare and submit to the Board for review an 
initial report describing the operations of the proposed credit 
facility and the procedures to be implemented to ensure that all Funds 
are treated fairly. After the commencement of the proposed credit 
facility, FRIMCo will report on the operations of the proposed credit 
facility at the Board's quarterly meetings.
    In addition, for two years following the commencement of the 
proposed credit facility, the independent auditors for each Trust shall 
prepare an annual report that evaluates FRIMCo's assertion that it has 
established procedures reasonably designed to achieve compliance with 
the terms and conditions of the order. The report shall be prepared in 
accordance with the Statements on Standards for Attestation Engagements 
No. 10 and it shall be filed pursuant to Item 77Q3 of Form N-SAR, as 
such Statements or Form may be revised, amended, or superseded from 
time to time. In particular, the report shall address procedures 
designed to achieve the following objectives:
    (a) That the Interfund Loan Rate will be higher than the Repo Rate, 
and, if applicable, the yield of the money market 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 
Board; 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, each 
Trust's independent auditors, in connection with their audit 
examinations of the Funds, will continue to review the operation of the 
proposed credit facility for compliance with the conditions of the 
application and their review will form the basis, in part, of the 
auditor's report on internal accounting controls in Form N-SAR.
    18. No Fund will participate in the proposed credit facility upon 
receipt of requisite regulatory approval unless it has fully disclosed 
in its prospectus and/or SAI all material facts about its intended 
participation.
    19. The Board of each Trust will satisfy the fund governance 
standards as defined in rule 0-1(a)(7) under the Act.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E6-6481 Filed 4-28-06; 8:45 am]

BILLING CODE 8010-01-P
