Document ID: SEC-2010-1145-0001
Agency: sec
Document Type: Notice
Title: Applications: Northern Funds, et al.
Posted Date: 2010-07-29T04:00Z

[Federal Register: July 29, 2010 (Volume 75, Number 145)]
[Notices]               
[Page 44821-44826]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr29jy10-88]                         

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SECURITIES AND EXCHANGE COMMISSION

[Investment Company Act Release No. 29368; File No. 812-13707]

 
Northern Funds, et al.; Notice of Application

July 23, 2010.
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:  Northern Funds (``NF''), Northern Institutional Funds 
(``NIF'', each of NF and NIF a ``Trust,'' and together, the 
``Trusts''), Northern Trust Investments, N.A. (``NTI''), Northern Trust 
Global Investments Limited (``NTGIL''), and The Northern Trust Company 
of Connecticut (``NTCC'') (each of NTI, NTGIL, and NTCC, an 
``Adviser,'' and such entities together, the ``Advisers'').

Filing Dates:  The application was filed on September 30, 2009, and 
amended on March 4, 2010. 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 August 17, 2010, 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: NF, NIF, and NTI, 
50 South LaSalle Street, Chicago, Illinois 60603; NTGIL, 50 Bank 
Street, Canary Wharf, London E14 5NT, United Kingdom; NTCC, 300 
Atlantic Street, Stamford, Connecticut 06901.

FOR FURTHER INFORMATION CONTACT: Steven I. Amchan, Senior Counsel, at 
(202) 551-6826 or Jennifer L. Sawin, 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 Web site 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 Trust is organized as a Delaware statutory trust and is 
registered under the Act as an open-end management investment company. 
Each Trust consists of multiple series (``Funds''). Certain of the 
Funds hold themselves out as money market funds in reliance on rule 2a-
7 under the Act (the ``Money Market Funds''). NTI, NTGIL, and NTCC are 
each registered as an investment adviser under the Investment Advisers 
Act of 1940 (``Advisers Act'') and are each indirect subsidiaries of 
Northern Trust Corporation. NTI is a national banking

[[Page 44822]]

association and serves as the investment adviser to NIF and NF. NTGIL 
is a private company with limited liability under the laws of England 
and Wales and serves as co-investment adviser with NTI to the NIF 
International Growth Portfolio, the NF International Growth Equity 
Fund, and NF Global Fixed Income Fund.\1\ NTCC is a state bank and 
trust company organized under the laws of Connecticut and serves as co-
investment adviser with NTI to certain Funds of NF that have multiple 
investment sub-advisers. NTI also serves as administrator of the 
Trusts.\2\
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    \1\ Beginning July 31, 2010, NTGIL will no longer be a co-
investment adviser to the NIF International Growth Portfolio and NF 
International Growth Equity Fund.
    \2\ Applicants request that the relief also apply to any other 
open-end registered management investment company that is advised by 
an Adviser or any entity controlling, controlled by, or under common 
control with an Adviser (such entity is included in the term 
``Adviser'' and is or will be registered as an investment adviser 
under the Advisers Act) and that currently, or in the future, is 
part of the same ``group of investment companies'' as the Trusts, as 
defined in section 12(d)(1)(G)(ii) of the Act (included in the term 
``Trusts''). All entities that currently intend to rely on the 
requested order have been named as applicants. Any other entity that 
relies on the requested 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 enter into repurchase 
agreements, or invest their cash balances in Money Market Funds or 
other short-term instruments, other Funds may need to borrow money 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. Currently, the Trusts have a $100 million revolving 
bank credit agreement administered by a bank (the ``Committed Credit 
Facility'') for short-term temporary purposes.
    3. When a Fund borrows money under the Committed Credit Facility, 
it pays 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, Money Market Funds, and other 
short-term instruments of the same maturity as the bank loan. 
Applicants assert that this differential represents 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 Trusts 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 directly from other Funds through a credit facility for 
temporary purposes (an ``Interfund Loan''). The Money Market Funds 
typically will not participate as borrowers in the proposed credit 
facility. Applicants state that the proposed credit facility would both 
substantially 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 
substantially 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 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 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 Money Market 
Funds. 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 or best (after giving effect to 
factors such as the credit quality of the counterparty) rate available 
to a lending Fund from investment in overnight repurchase agreements 
with counterparties approved by the Fund or its Adviser. The Bank Loan 
Rate for any day would be calculated by the Interfund Lending 
Committee, as defined below, each day an Interfund Loan is made 
according to a formula established by each Fund's board of trustees 
(the ``Trustees'') 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 Trustees. In addition, each Fund's Trustees 
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 investment 
professionals and administrative personnel from one or more of the 
Advisers (the ``Interfund Lending Committee''). No portfolio manager of 
any Fund will serve as a member of the Interfund Lending Committee. 
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 Interfund Lending Committee 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 
Interfund Lending Committee would allocate loans among borrowing Funds 
without any further communication from the

[[Page 44823]]

portfolio managers of the Funds. Applicants anticipate that there 
typically will be far more available uninvested cash each day than 
borrowing demand. Therefore, after the Interfund Lending Committee has 
allocated cash for Interfund Loans, the Interfund Lending Committee 
will invest any remaining cash in accordance with the standing 
instructions of the portfolio managers or such remaining amounts will 
be invested directly by the portfolio managers of the Funds.
    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 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 
Trustees, including a majority of Trustees who are not ``interested 
persons'' of the Fund, as that term is defined in section 2(a)(19) of 
the Act (``Independent Trustees''), to ensure that both borrowing and 
lending Funds participate on an equitable basis.
    11. The Advisers 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 Trustees 
concerning any transactions by the Funds under the proposed credit 
facility and the Interfund Loan Rate charged.
    12. Each Adviser, through the Interfund Lending Committee, would 
administer the proposed credit facility as a disinterested fiduciary as 
part of its duties under the investment management 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. An Adviser 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 Trustees 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) Each Adviser, through the Interfund Lending Committee, 
would administer the program as a disinterested fiduciary as part of 
its duties under the investment management contract with each Fund; (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 either directly or through a 
Money Market Fund; (c) the Interfund Loans would not involve a 
significantly 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 some 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

[[Page 44824]]

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). Applicants also state 
that any 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 each Adviser 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 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 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, 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 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

[[Page 44825]]

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 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 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 portfolio manager of the Funds. 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 portfolio managers. The Interfund Lending Committee will 
invest any amounts remaining after satisfaction of borrowing demand in 
accordance with the standing instructions of the portfolio managers or 
such remaining amounts will be invested directly by the portfolio 
managers of the Funds.
    13. The Interfund Lending Committee 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 Fund 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 Trustees of each Fund, including a majority of the 
Independent Trustees, 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, an Adviser 
will promptly refer such loan for arbitration to an independent 
arbitrator selected by the Trustees 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 Trustees 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 each Interfund Loan is made 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 Trustees in connection 
with the review required by conditions 13 and 14.
    17. The Advisers will prepare and submit to the Trustees 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 Advisers will report on the operations of the proposed 
credit facility at the Trustees' 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 Trustees 
each year that the Fund participates in the proposed credit facility, 
that 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 the Advisers have established procedures 
reasonably designed to

[[Page 44826]]

achieve compliance with the terms and conditions of the order. 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 
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 
Trustees; 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.
Florence E. Harmon,
Deputy Secretary.
[FR Doc. 2010-18675 Filed 7-28-10; 8:45 am]
BILLING CODE 8010-01-P