
[Federal Register Volume 76, Number 193 (Wednesday, October 5, 2011)]
[Notices]
[Pages 61764-61768]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2011-25677]


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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29824; File No. 812-13869]


Principal Funds, Inc., et al.; Notice of Application

September 29, 2011.
AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Notice of an application for an order pursuant to (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), 17(a)(2) 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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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:  Principal Funds, Inc. (``PFI''), Principal Variable 
Contracts Funds, Inc. (``PVC,'' each of PFI and PVC a ``Company'' and 
collectively the ``Companies''), and Principal Management Corporation 
(``PMC'').

FILING DATES:  The application was filed on February 16, 2011, and 
amended on August 12, 2011. Applicants have agreed to file an amendment 
during the notice period, the substance of which is reflected in this 
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, 2011, 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 Principal 
Financial Group, 680 8th Street, Des Moines, Iowa 50392.

FOR FURTHER INFORMATION CONTACT: Bruce R. MacNeil, Senior Counsel, at 
(202) 551-6817 or Daniele Marchesani, 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 via the 
Commission's website by searching for the file number, or an applicant 
using the Company name box, at http://www.sec.gov/search/search.htm or 
by calling (202) 551-8090.

Applicants' Representations

    1. Each Company is organized as a Maryland corporation and is 
registered under the Act as an open-end management investment company. 
Each Company consists of multiple series (``Funds''). The Funds are 
offered directly to the public as well as to certain separate accounts 
of Principal Life Insurance Company (``Principal Life''). PMC, an Iowa 
corporation, is an indirect wholly-owned subsidiary of Principal 
Financial Group, Inc., the ultimate parent entity of Principal Life. 
PMC is registered as an investment adviser under the Investment 
Advisers Act of 1940 (``Advisers Act'') and serves as the investment 
manager to the Funds. As investment manager, PMC provides investment 
advisory and certain corporate administrative services to the Funds.\1\
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    \1\ Applicants request that the relief apply to: (a) Any Funds; 
(b) any other registered open-end investment company or series 
thereof (included in the term ``Funds'') for which PMC or a person 
controlling, controlled by, or under common control (within the 
meaning of section 2(a)(9) of the Act) with PMC serves as investment 
adviser; and (c) any successor entity to PMC. 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 entity that 
relies on the order in the future will comply with the terms and 
conditions set forth in the application.
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    2. At any particular time, while some Funds are making short-term 
loans to banks or other entities by entering into repurchase 
agreements, or purchasing other short-term instruments, either directly 
or through the Joint Account (as defined below), other Funds may need 
to borrow money from the same or similar banks for temporary purposes 
to satisfy redemption requests, 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.\2\
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    \2\ Each Fund may deposit uninvested cash balances in a joint 
trading account administered by PMC (the ``Joint Account'') for 
purposes of investing those balances in short-term instruments to 
the extent consistent with each participating Fund's investment 
objectives, policies and restrictions. In addition, under a ``Cash 
Management Program,'' PMC may invest a Fund's available cash and 
cash flows from investments in the Fund in stock index futures 
contracts or in the Joint Account. Finally, the Companies, on behalf 
of certain Funds, have entered into a credit agreement with certain 
lenders where such Funds have access to a joint line of credit (the 
``Credit Agreement'').
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    3. When a Fund borrows money from a bank or under the Credit 
Agreement, it pays interest on the loan at a rate that is higher than 
the rate that is earned by other (non-borrowing) Funds on investments 
in repurchase agreements or other short-term instruments of the same 
maturity as the bank loan or loan under the Credit Agreement. 
Applicants assert that this differential represents

[[Page 61765]]

the profit earned by the lender on loans and is not attributable to any 
material difference in the credit quality or risk of such transactions.
    4. The Companies seek to enter into master interfund lending 
agreements (``Interfund Lending Agreements'') with each other on behalf 
of the Funds that would permit each Fund to lend money directly to and 
borrow money directly from other Funds through a credit facility for 
temporary purposes (an ``Interfund Loan''). The Companies' money market 
Funds will not participate as borrowers in the proposed credit 
facility. Applicants state that the proposed credit facility would both 
reduce the Funds' potential borrowing costs and enhance the ability of 
the lending Funds to earn higher rates of interest on their short-term 
lendings. Although the proposed credit facility would reduce the Funds' 
need to borrow from banks, the Funds would be free to establish and 
maintain committed lines of credit or other borrowing arrangements with 
unaffiliated banks.
    5. Applicants anticipate that the proposed credit facility would 
provide a borrowing Fund with significant savings at times when the 
cash position of the borrowing Fund is insufficient to meet temporary 
cash requirements. This situation could arise when shareholder 
redemptions exceed anticipated volumes and certain Funds have 
insufficient cash on hand to satisfy such redemptions. When the Funds 
liquidate portfolio securities to meet redemption requests, they often 
do not receive payment in settlement for up to three days (or longer 
for certain foreign transactions). However, redemption requests 
normally are effected immediately. The proposed credit facility would 
provide a source of immediate, short-term liquidity pending settlement 
of the sale of portfolio securities.
    6. Applicants also anticipate that a Fund could use the proposed 
credit facility when a sale of securities ``fails'' due to 
circumstances beyond the Fund's control, 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 using the proceeds from 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 proposed credit facility under these 
circumstances would enable the Fund to have access to immediate short-
term liquidity.
    7. While bank borrowings could generally 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 that would be payable under short-term loans offered by banks. 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 assert that the proposed 
credit facility would benefit both borrowing and lending Funds.
    8. The interest rate to be charged to the Funds on any Interfund 
Loan (the ``Interfund Loan Rate'') would be the average of the ``Repo 
Rate'' and the ``Bank Loan Rate,'' both as defined below. The Repo Rate 
for any day would be the highest rate available to a lending Fund, 
directly or through the Joint Account, from investment in overnight 
repurchase agreements. The Bank Loan Rate for any day would be 
calculated by PMC each day an Interfund Loan is made according to a 
formula established by each Fund's board of directors (the ``Board'') 
and 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 initial formula and any subsequent modifications to the 
formula would be subject to the approval of each Fund's Board. In 
addition, each Fund's Board would periodically review the continuing 
appropriateness of using the formula 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.
    9. The proposed credit facility would be administered by one or 
more investment, administrative and fund accounting personnel from PMC, 
a portfolio manager for the Companies' money market Funds, which are 
sub-advised by Principal Global Investors, LLC, an affiliate of PMC, 
and a representative of the corporate treasury of Principal Life 
(collectively, the ``Credit Facility Team''). No other portfolio 
manager of any Fund will serve as a member of 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. Once it had determined the 
aggregate amount of cash available for loans and borrowing demand, the 
Credit Facility Team would allocate loans among borrowing Funds without 
any further communication from the portfolio managers 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 
made by the Credit Facility Team will require the approval of at least 
one member of the Credit Facility Team, who is a high level employee, 
other than the money market Fund portfolio manager. Applicants 
anticipate that there typically will be far more available uninvested 
cash each day than borrowing demand. Therefore, after the Credit 
Facility Team has allocated cash for Interfund Loans, any remaining 
cash will be invested by PMC in the Joint Account or pursuant to the 
Cash Management Program in accordance with the instructions of the 
portfolio managers.
    10. 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 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 directors who are not ``interested 
persons'' of the Fund, as that term is defined in section 2(a)(19) of 
the Act (``Independent Directors''), to ensure that both borrowing and 
lending Funds participate on an equitable basis.
    11. PMC 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's Board 
concerning any transactions by the Funds under the proposed credit 
facility and the Interfund Loan Rate charged.

[[Page 61766]]

    12. PMC, through the Credit Facility Team, would administer the 
proposed credit facility as a disinterested fiduciary as part of its 
duties under the relevant advisory or administrative contract with each 
Fund and would receive no additional fee as compensation for its 
services in connection with the administration of the proposed credit 
facility. PMC may collect standard pricing, record keeping, bookkeeping 
and accounting fees associated with the transfer of cash and/or 
securities in connection with repurchase and lending transactions 
generally, including transactions effected through the proposed credit 
facility. Such fees would be no higher than those applicable for 
comparable bank loan transactions.
    13. No Fund may participate in the proposed 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 information; and (c) the 
Fund's participation in the credit facility is consistent with its 
investment objectives, limitations and organizational documents.
    14. In connection with the credit facility, applicants request an 
order under section 6(c) of the Act exempting them from the provisions 
of sections 18(f) and 21(b) of the Act; under section 12(d)(1)(J) of 
the Act exempting them from section 12(d)(1) of the Act; under sections 
6(c) and 17(b) of the Act exempting them from sections 17(a)(1), 
17(a)(2), and 17(a)(3) of the Act; and 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 of a registered investment company, or affiliated person of an 
affiliated person, from borrowing money or other property from the 
registered investment company. Section 21(b) of the Act generally 
prohibits any registered management company from lending money or other 
property to any person, directly or indirectly, if that person controls 
or is under common control with that 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, such other person. Section 2(a)(9) of the Act 
defines ``control'' as the ``power to exercise a controlling influence 
over the management or policies of a company,'' but excludes 
circumstances in which ``such power is solely the result of an official 
position with such company.'' Applicants state that the Funds may be 
under common control by virtue of having common investment advisers 
and/or by having common directors 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 assert 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) PMC, through the Credit Facility Team, would administer 
the program as a disinterested fiduciary as part of its duties under 
the relevant advisory or administrative contract with each Fund; (b) 
all Interfund Loans would consist only of uninvested cash reserves that 
the lending Fund otherwise would invest in the Joint Account or 
pursuant to the Cash Management Program; (c) the Interfund Loans would 
not involve a significantly greater risk than other such 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 assert that the other terms and conditions that applicants 
propose also 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 any affiliated person of 
such a person, from selling securities or other property to the 
investment company. Section 17(a)(2) of the Act generally prohibits an 
affiliated person of a registered investment company, or any affiliated 
person of such a person, from purchasing securities or other property 
from the investment company. Section 12(d)(1) of the Act generally 
prohibits a registered investment company from purchasing or otherwise 
acquiring any security issued by any other investment company except in 
accordance with the limitations set forth in that section.
    5. Applicants state that the obligation of a borrowing Fund to 
repay an Interfund Loan could be deemed to constitute a security for 
the purposes of sections 17(a)(1) and 12(d)(1) of the Act. Applicants 
also state that a pledge of assets in connection with an Interfund Loan 
could be construed as a purchase of the borrowing Fund's securities or 
other property for purposes of section 17(a)(2) of the Act. 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 that 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. 
Applicants also state that the requested relief from section 17(a)(2) 
of the Act meets the standards of section 6(c) and 17(b) because any 
collateral pledged to secure an Interfund Loan would be subject to the 
same conditions imposed by any other lender to a Fund that imposes 
conditions on the quality of or access to collateral for a borrowing 
(if the lender is another Fund) or the same or better conditions (in 
any other circumstance).
    6. 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 investments. 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 their 
shareholders, and that PMC will receive no additional

[[Page 61767]]

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 the participating Funds and 
their shareholders.
    7. 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'' generally includes any bond, debenture, note or 
similar obligation or instrument constituting a security and evidencing 
indebtedness. Applicants request exemptive relief under section 6(c) 
from section 18(f)(1) to the limited extent necessary to implement the 
proposed credit facility (because the lending Funds are not banks).
    8. 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).
    9. Section 17(d) of the Act and rule 17d-1 under the Act generally 
prohibit an affiliated person of a registered investment company, or 
any affiliated person of such a person, when acting as principal, from 
effecting any joint transaction in which the investment company 
participates, unless, upon application, the transaction has been 
approved by the Commission. Rule 17d-1(b) under the Act provides that 
in passing upon an application filed under the rule, the Commission 
will consider whether the participation of the 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 such participation is on a basis different from or less 
advantageous than that of the other participants.
    10. Applicants assert that the purpose of section 17(d) is to avoid 
overreaching by and unfair advantage to insiders. Applicants assert 
that the proposed 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 assert that each Fund's participation in the 
proposed credit facility would 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 (b) more favorable to the 
borrowing Fund than the Bank Loan Rate.
    3. If a Fund has outstanding bank borrowings, any Interfund Loans 
to the Fund: (a) Will be at an interest rate equal to or lower than the 
interest rate of 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 of 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 exceed 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

[[Page 61768]]

transactions for purposes of this condition.
    9. A 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 for the 
preceding seven calendar days or 102% of the Fund's 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 a high level 
employee, other than 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). Any amounts remaining after satisfaction of 
borrowing demand will be invested in the Joint Account or pursuant to 
the Cash Management Program in accordance with the instructions of the 
portfolio managers.
    13. PMC will monitor the Interfund Loan Rate and the other terms 
and conditions of the Interfund Loans and will make a quarterly report 
to the Board of each Company 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 Fund, including a majority of the Independent 
Directors, will:
    (a) Review, no less frequently than quarterly, the 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 the 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, PMC 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 of each Fund 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 Boards of 
Directors, the respective Board 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 each Interfund Loan is made on overnight 
repurchase agreements and commercial bank borrowings and such other 
information presented to the Fund's Board in connection with the review 
required by conditions 13 and 14.
    17. PMC will prepare and submit to the Board of each Fund 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, PMC will report on the operations of the proposed credit 
facility at each Board's quarterly meetings.
    Each Fund's chief compliance officer, as defined in Rule 38a-
1(a)(4) under the Act, shall prepare an annual report for its Board 
each year that the Fund participates in the proposed credit facility, 
which report evaluates the Fund's compliance with the terms and 
conditions of the application and the procedures established to achieve 
such compliance. Each Fund's chief compliance officer will also 
annually file a certification pursuant to Item 77Q3 of Form N-SAR as 
such Form may be revised, amended, or superseded from time to time, for 
each year that the Fund participates in the proposed credit facility, 
that certifies that the Fund and PMC have established procedures 
reasonably designed to achieve compliance with the terms and conditions 
of the application. In particular, such certification will address 
procedures designed to achieve the following objectives:
    (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 
Board of each Fund; and
    (e) that the Interfund Loan Rate does not exceed the interest rate 
on any third party borrowings of a borrowing Fund at the time of the 
Interfund Loan.
    Additionally, each Fund's independent public accountants, in 
connection with their audit examination of the Fund, will 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 statement of additional information all 
material facts about its intended participation.

    For the Commission, by the Division of Investment Management, 
under delegated authority.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2011-25677 Filed 10-4-11; 8:45 am]
BILLING CODE 8011-01-P


