
[Federal Register: October 3, 2008 (Volume 73, Number 193)]
[Notices]               
[Page 57688-57693]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr03oc08-111]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 28409; 812-13480]

 
Dodge & Cox Funds and Dodge & Cox Incorporated; Notice of 
Application

September 29, 2008.
AGENCY: Securities and Exchange Com mission (``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 arrangements.

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[[Page 57689]]


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: Dodge & Cox Funds (the ``Trust'') and Dodge & Cox Inc 
orporated (``Dodge & Cox'').

Filing Dates: The application was filed on January 18, 2008 and amended 
on April 16, 2008. 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 October 24, 2008, 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, 555 California 
Street, 40th Floor, San Francisco, California 94104.

FOR FURTHER INFORMATION CONTACT: Laura J. Riegel, Senior Counsel, at 
(202) 551-6873 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 Room, 100 F Street, NE., Washington, DC 
20549-1520 (tel. (202) 551-5850).

Applicants' Representations

    1. The Trust is organized as a Delaware statutory trust and is 
registered under the Act as an open-end management investment company. 
The Trust consists of five series and may offer addit ional series in 
the future (``Funds''). Dodge & Cox, a California corporation, is 
registered as an investment adviser under the Investment Advisers Act 
of 1940, and serves as the investment adviser to each Fund.\1\
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    \1\ Applicants request that the relief apply to (a) any Fund of 
the Trust, (b) any successor entity to Dodge & Cox, (c) any other 
registered open-end management investment company or its series 
advised by Dodge & Cox or a person controlling, controlled by, or 
under common control (within the meaning of section 2(a)(9) of the 
Act) with Dodge & Cox (each, also a ``Fund''). The term 
``successor'' is limited to entities that result from a 
reorganization into another jurisdiction or a change in the type of 
business organization. All entities that currently intend to rely on 
the requested relief are named as applicants. Any other existing or 
future Funds that subsequently rely on the order will comply with 
the terms and conditions in the application.
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    2. Some Funds may lend money to banks or other entities by entering 
into repurchase agreements or purchasing other short-term 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, or for other 
temporary purposes. Currently, the Trust has an overdraft facility with 
its custodian bank and a committed line of credit with a bank.
    3. If a Fund were to borrow money under the committed line of 
credit or incur an overdraft with the custodian bank, the Fund would 
pay interest on the borrowed cash at a rate which would be higher than 
the rate that would 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 profit the bank would earn for serving as a 
middleman between a borrower and lender and is not attributable to any 
material difference in the credit quality or risk of such transactions. 
In addition, while bank borrowings generally could supply needed cash 
to cover unanticipated redemptions and sales fails, the borrowing Funds 
would incur commitment fees and/or other charges involved in obtaining 
a bank loan.
    4. Applicants request an order that would permit the Funds to enter 
into master interfund lending agre ements (``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 unaffiliated banks.
    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 
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.
    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 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.
    7. 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. Thus, applicants believe that the proposed 
credit facility would benefit both borrowing and lending Funds.
    8. 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 a lending Fund from investing in 
overnight repurchase agreements. The Bank Loan Rate on any day would be 
calculated by the ``Interfund Lending Committee'' (as

[[Page 57690]]

defined below) each day an Interfund Loan is made according to a 
formula established by a Fund's board of directors or trustees (``Fund 
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. Each Fund Board 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 Board.
    9. The credit facility would be administered by investment 
professionals and administrative personnel from Dodge & Cox (the 
``Interfund Lending Committee''). No member of Dodge & Cox's investment 
policy committee (``Investment Policy Committee'') for any Fund will 
serve as a member of the Interfund Lending Committee.\2\ Under the 
proposed credit facility, the Investment Policy Committee for each 
participating Fund could provide standing instructions to participate 
daily as a borrower or lender. The Interfund Lending Committee 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 Interfund Lending Committee would allocate loans 
among borrowing Funds without any further communication from a Fund's 
Investment Policy Committee. Applicants expect far more available 
uninvested cash each day than borrowing demand. After the Interfund 
Lending Committee has allocated cash for Interfund Loans, the Interfund 
Lending Committee would invest any remaining cash in accordance with 
the standing instructions of the Investment Policy Committee or return 
remaining amounts for investment directly by a Fund's Investment Policy 
Committee.
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    \2\ Each Fund's investments are managed solely by the members of 
an Investment Policy Committee, which consists of a team of 
portfolio managers.
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    10. The Interfund Lending Committee would allocate borrowing demand 
and cash available for lending among the Funds on what the Interfund 
Lending Committee believes to be an equitable basis, subject to certain 
administrative considerations 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 Board, including a majority of directors or trustees who are 
not ``interested persons'' of the Fund, as defined in section 2(a)(19) 
of the Act (``Independent Fund Board Members''), to ensure that both 
borrowing and lending Funds participate on an equitable basis.
    11. The Interfund Lending Committee 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 
each Fund Board concerning any transactions by the Funds under the 
credit facility and the Interfund Loan Rate charged.
    12. Dodge & Cox, through the Interfund Lending Committee, would 
administer the credit facility under the investment management contract 
with each Fund and would receive no additional compensation for its 
services. Dodge & Cox may in the future collect standard pricing, 
recordkeeping, bookkeeping, and accounting fees in connection with 
repurchase and lending transactions generally, including transactions 
through the credit facility. These fees would be no higher than those 
applicable for comparable bank loan transactions.
    13. 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 information concerning the credit facility in its prospectus 
and/or statement of additional infor mation (``SAI''); and (c) the 
Fund's participation in the credit facility is consistent with its 
investment objectives, limitations and organizational documents. 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) of the Act and rule 17d-1 under the Act to 
permit certain joint arrangements.

Applicants' Legal Analysis

    1. Section 17(a)(3) of the Act 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 Dodge & Cox as their 
common investment adviser and/or by having a common Fund Board and 
officers.
    2. Section 6(c) of the Act 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) of the Act 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) Dodge & Cox, through the Interfund

[[Page 57691]]

Lending Committee, would administer the program as a disinterested 
fiduciary; (b) all Interfund Loans would consist only of uninvested 
cash reserves that the lending Fund otherwise would invest in short-
term repurchase agreements or other short-term instruments; (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 otherwise 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) of the Act 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 
state that the obligation of a borrowing Fund to repay an Interfund 
Loan may constitute a security for the purposes of sections 17(a)(1) 
and 12(d)(1). Section 12(d)(1)(J) of the Act 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 Dodge & Cox will receive no additional 
compensation for its services in administering the credit facility 
through the Interfund Lending Committee. 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) of the Act 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) of the Act and rule 17d-1 under the Act generally 
prohibit any affiliated person of a registered investment company, or 
affiliated persons of an affiliated person, when acting as principal, 
from effecting 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 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 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 Interfund Lending Committee will 
compare the Bank Loan Rate with the Repo Rate and will make cash 
available for Interfund Loans only if the Interfund Loan Rate is: (a) 
more favorable to the lending Fund than the Repo Rate; and (b) more 
favorable to the borrowing Fund than the Bank Loan Rate.
    3. If a Fund has outstanding borrowings, any Interfund Loans to the 
Fund: (a) Will be at an interest rate equal to or lower than any 
outstanding bank loan; (b) will be secured at least on an equal 
priority basis with at least an equivalent percentage of collateral to 
loan value as any outstanding bank loan that requires collateral; (c) 
will have a maturity no longer than any outstanding bank loan (and in 
any event not over seven days); and (d) will provide that, if an event 
of default 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

[[Page 57692]]

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 Interfund Lending Committee 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 member of a Fund's Investment Policy Committee. The 
Interfund Lending Committee will not solicit cash for the proposed 
credit facility from any Fund or prospectively publish or disseminate 
loan demand data to any member of the Investment Policy Committee. The 
Interfund Lending Committee Team will invest any amounts remaining 
after satisfaction of borrowing demand in accordance with the standing 
instructions of the Investment Policy Committee or return remaining 
amounts for investment directly by a Fund's Investment Policy 
Committee.
    13. The Interfund Lending Committee will monitor the Interfund Loan 
Rates charged and the other terms and conditions of the Interfund Loans 
and will make a quarterly report to each Fund Board 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. Each Fund Board, including a majority of the Independent Fund 
Board Members, 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, Dodge & Cox 
will promptly refer such loan for arbitration to an independent 
arbitrator selected by each Fund Board 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 each Fund 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 Fund Boards, 
the respective Fund Boards 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, and such other information presented to the 
Fund Board in connection with the review required by conditions 13 and 
14.
    17. The Interfund Lending Committee will prepare and submit to the 
Fund 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, the Interfund Lending Committee will report 
on the operations of the proposed credit facility at the Fund Board's 
quarterly meetings.
    In addition, for two years following the commencement of the 
proposed credit facility, the independent auditors for each Fund shall 
prepare an annual report that evaluates the Interfund Lending 
Committee'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:

[[Page 57693]]

    (a) That the Interfund Loan Rate will be higher than the Repo Rate, 
but lower than the Bank Loan Rate;
    (b) Compliance with the collateral requirements as set forth in the 
application;
    (c) Compliance with the percentage limitations on interfund 
borrowing and lending;
    (d) Allocation of interfund borrowing and lending demand in an 
equitable manner and in accordance with procedures established by the 
Fund 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 Fund's independent auditors, 
in connection with their audit examinations of the Fund, 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.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-23343 Filed 10-2-08; 8:45 am]

BILLING CODE 8011-01-P
