SEC Division of Investment Management staff letter: Alliance Funds

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Our Ref. No. 97-141-CC

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
Alliance Funds

DIVISION OF INVSTMNT MAAGEMENT File No. 801-32361

Your letter dated March 5, 1997 requests assurance that we would not recommend enforcement action to th~ Commission under
Section 17 (d) of the Inves~ment Companr Ac~.of 1940 (the "Act")
and Rule 1 7d- 1 thereunder if, as described in your letter, the open-end registered investment companies (the "Funds") for which " Alliance Capital Management L.P. ("Allianc~ Capital") serves as investment adviser enter into a committed line of credit with one

or more banks for which each Fund would pay a portion of the

commitment fee and other expenses under the arrangement. , You state that the line of credit would provide ,the Funds with a

source of cash for temporary and emergency purposes to meet

unanticipated or abnormlly heavy redemption requests by

shareholders of the Funds.

Facts ~
You state that the Funds intend to obtain the line of credit

pursuant to an "umrella" facility. There would be pne loan

agreement ("Agreement") to which each participating Fund would be

a signatory. ~/ The Agreement would stipulate a maximum

amount of aggregate borrowings' and would have a term of

approximately one year, during which time all banks would remain

committed and no amendments could be made without mutual

agreement of the banks and each Fund.

You state that each Fund in the arrangement could, at any

time, borrow up, to the lesser of: (i) a contractual limit, which

will be stated as a percentage of its net assets, or (ii) the

amount unused under the aggregate maimum amount of the facility.

In either case, borrowings will be limited to no more than the

amount permitted under the Act and each Fund's fundamental

investment policies. When a Fund borrows under the facility, the

liability for principal repayment and interest payment would be

the obligation of that Fund only. Under no circumtances would

a~y Fund be liable for the obligations of any other Fund.

Borrowings. under the initial Agreement would be unsecured, but

collateral could be required by negotiations at a later

date. 2:/
~/ Certain Funds, such as money market funds; would not

participate in the Agreement.

2:/ If collateral is required for future borrowings, each Fund

would provide collateral only in connection with its own

borrowing, and would not provide collateral for borrowing by

any other Fund. A Fund would provide collateral for its

(continued. . . )

• 2
  You state that the banks entering into the Agreement would

be compensated with a "commitment fee," which would be fixed for

the term of the Agreement and paid quarterly in arreàrs. The fee

payment would be calculated quarterly on the unused portion of

the credit line, 'so the amount on which the fee would be

calculated would be reduced by the amount of the actual

borrowings (~, if the entire line were being used there would

be no commitment fee). You represent that the basis for

apportioning the fee generally would be pro rata based on each

participating Funds' average net assets. ~/ You further

represent that procedures would be established, under the supervision of the Funds' boards of directors, to allocate loans

on a first-come, first-served basis. If, at a particular time,

the demand for loans exceeds the available supply under the

Agreement, the available loans would be allocated among the Funds

on a fair and equitable basis. ~/

The credit arrangement would involve a numer of banks. The Funds will retain an "agent bank" to facilitate the preparation

of the loan documentation and to arrange the syndication of the

deal to other banks. The agent bank would be paid a fee ,

apportioned on a pro rata basis of each participating Funds' average net assets. Moreover, additional costs, such as outside

2:/ ( . . . continued)
'borrowing only if permitted under the Fund's investment

policies. Telephone conversation on March 25, 1997 between

Brian McCabe and Veena Jain.

3/ You state that the apportionment of the commitment fee may

be adjusted to take into consideration other factors, such

as the level of borrowing by each Fund. Any adjustment to

the apportionment methodology will be approved by each

Fund's Board of directors. Telephone conversation on March

25, 1997 between Brian McCabe and Veena Jain.

4/ You state that although the basis for allocation has not yet

been determined, the most likely basis would be ~ rata

based on the participating Funds' average net assets and the

amount requested. To establish the exact allocation, the

boards of directors would consider such matters as: (i) the

amount available under" the Agreement; (ii) the amount

requested by each Fund and the Funds in the aggregate; (iiil

the availability of other sources of cash to meet each

Fund's needs (such as uncommitted lines ofcredi t , short _ term, liquid investments, and cash reserves); (iv) the

history of each requesting Fund's requests for loans ; (v) each requested loan's expected duration; and (vi) the

expected need for loans in the immediate future.

• 3
  counsel fees for the Funds and banks, also would be apportioned

to the participating Funds on the, same pro rata basis. '

Finally, the Agreement would be approved by each Fund's

board of directors, including a majority of the disinterested

directors, prior to any Fund entering into the Agreement and

annually thereafter. Each Fund's board of directors will

determine annually that the Fund's participation in the Agreement

would be fair and equitable and in the Fund's best interest. The

factors that each board would consider in making this

determination would include: (i) the Fund's expected benefits and

costs; (ii) the Fund's experience under the loan arrangement;

(iii) the Fund's available sources of liquidity; and (iv) the

Fund's expected continuing need for the loan arrangement.

~alysis
Section 17 (d) and Rule 17d-1 prohibit an affiliated person

of an investment company from participating in a j oint enterprise

or other joint arrangement or profit-sharing plan with such

company without first obtaining an order from the Commission.

The purpose of Section 17 (d) and Rule 1 7d- 1 is to protect '

investment companies from participating in transactions with

affiliated persons on inequitable terms.

You believe that the arrangement described above does not

constitute a joint or a joint and several transaction within the

meaning of Section 17 (d) or Rule 1 7d- 1. In addition, you believe

that the proposed arrangement will pose none of the dangers that

Section 17 (d) and Rule 1 7d- 1 are designed to prevent. Yóu assert r

that each Fund will participate in the arrangement on an equal

basis. You represent that each Fund will share the commitment

fee, agent bank fee, and other expenses under the Agreement only

if its board of directors, including a majority o~ the

disinterested directors, determines that such participation would be fair and equitable and in the best interests of the 'Fund. You

also state that all the Funds participating in the arrangement

have common and substantially similar interests. You assert that

the only potential for conflict arises if the demnd for borrowed

funds under the line of credit exceeds the amount available under

the line. You represent that, in such instance, the available

loans would be apportioned among the Funds on a fair and

equitable basis in accordance with procedures established by the

Funds' boards of directors in advance of entering into the

Agreement. ~/ You also represent that the portion of the

commitment fee paid by each Fund will be so small that it will

~/ Telephone conversation on April 22, 1997 between Brian

McCabe and Veena Jain.

• 4
  not, as a practical matter, have any effect on the Fund's net asset value per share,. Without necessarily agreeing with your legal analysis, based

on the facts and representations in your letter, we would not

recommend enforcement action to the Commssion pursuant to

Section 17 (d) or Rule 1 7d- 1 thereunder if the Funds enter into a

committed line of credit arrangement and pay the commitment and

other fees as described above and in your letter. Q/ You

should note that different facts or representations might require a different conclusion. ' Having stated our views with respect to committed line of credit arrangements under Section 17 (d) and Rule 1 7d- 1 thereunder ,we will no longer respond to requests for no-action

relief in this area unless they present novel or unusual issues.

y~ /C.~
Veena K. Jain

Staff Attorney

\
)
Q/ See The T. Rowe Price Funds (pub. avail. Ju~y 31, 1995).

¡ .

30 KENNEDY PLA
PROVIDENCE, RI 02903-2328

(401) 455 -4400
, f"AX: (401) 455-4401
VI COURR

Marh 5, 1997

ROPES & GRAY

ONE INTERNATIONAL PLACE

BOSTON, MASSACHUSETTS 02110-2624

(617) 951-7000
FAX: (617) 951-7050

WRITR'S DIRECT DIAL NUMBER: (6 I 7) 95 I -760 I

ONE f"RANKLIN SOUARE
1301 K STREET, N. W.
SUITE 800 EAST

WASHINGTON, DC 20005-3333

(202) 626-3900 f"AX: (202) 626-3961
John V. O'Hanon, Esquire
Division of Investment Mangement
Securties and Exchage Commssion
450 Fif Street, N. W., MS 7-8

Washigton, D.C. 20549

Re: Commtted Line of Credit
Dear Mr. O'Hanon:
1940 ActSeon 17(d) - Rule 17d-1
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.
On behaf of Alliance Capita Mangement L.P. ("Alliance Capita"), we are wrti to

request assurance tht the staff of the Securities and Exchae Commsion ("Commsion") would not reconÌend enforcement action under the Investment Company Act of 194, as amended (" 1940 Act"), if the open-eIi registered investment companes forwhich Alce Capita serves as investment advisr (the "Al Fun") were to enterii0 a commtt line ' of credt with one or more ban in order to sece a SOuI of fuds forteïtra an .

emergency purses to meet unticipate or abnormy heavy redemption

reeSts by shaeholders of the Ai Fun. Beuse each Aliace Fun would pay a

porton of the commtment fee re'uner the arement, it is arguble tht tbe arement cóuld -; rai issues uner Setion 17(d) of the 194 Act and Rule 17d-l thereuner.

Background
Historicay, uncommtt lines of credit have ben suffcient tó meet the reemption nee of the Allian Fun and, so far as we are aware, the inustr. Uncommtt credit

facilties are arangements with ban whereby the ban ha perforned its creit review of a mutu fud and ha agree to ,entert loan requests from the fud. The clea understaing,

which is reflecte in the documentation for such lines, is tht the ban'¡s under no obligation ) to mae loan and wil mae them at its sole discretion. Despite the tenuous natue of such

ROPES & GRAY

john V. O'Hanon, Esquire -2 March 5, 1997

arangements, they have served the nee of the industr to date. Their advange is tht there

is no cost to the mutual fud but their disadvantig~ is tht the ban is not under any obligation to advance fuds when reqeste.

If al conditions rema constat, and if the history of the industr were a goo

predctor of the futue, uncommtt credit facilties would likely be adeqte to meet the emergency liquidity nee of the Aliance Funds. However, there are several imrt developments which mae Alliance Capita believe tht the Aliance Funds should have the

option to seek commtted lines of credit in the futue.

There are relatively few ban which are active in lendig to mutu fu, even with uncommtt facilties. Moreover, there is. growing resistace among them to invest the effort for the form credit review procss for each individua fud (a necssar precndition to lending) without compensation. If present trends contiue, uncommtt facilties wil be

avaiable only from a shrg number of ban.
Uncommtt loan facilties are generally available only from ban which have, or ' anticipate having, some other relationship with the mutual fud such as securties leml,ing or, custodial services. Alliance Capita believes the Alliance Funds should be in a position to

secure a source of borrowing without regard to these other factors.

Ban in recnt years have seen their tota commtt loan facilties to entities in and around the securties business (e.g., DTC and NYSE) escalate as they prepare themselves for

maging cah durg period of high demad. Ths could increae the chace of loan

requests not beihg fuded under uncommtted facilties.

With the inreaed speialtion and interntionaiztion of mutu fu portolios, the inustr is appropriately givi greater attnton to alterntive method for funding redemptions dur period of maket volatity. ' Th mutu fu inustr ha may new fu. The ripple eftect of how thes fu , an their shaeholders hae negative maket events could have signcat imact on the redemption activity of the mutu fud industr at large. The Aliace Fun dibure viry al redemption proc on the day the

redemption reqest is recived and the shaes are redeemed. If the portolio mager ne to

sell securities, the sale may not sette unti thee days aftr the money was dibured.

Most mutu fuds have established procures to fud redemptions durg unus maket activity. These include: holding the main of redemption prOc an delaying the tranmision of exchage proc for up to five business days; increain reserves in

anticipation of maket volatilty; and the establishment of uncommtt lines of ciedit. In light

ROPES & GRAY

john V. O'Hanon, Esquire -3 March 5, 1997

of the aboye liste factors, however, we believe it is appropnate to consider the establihment of commtt lines of credit as a fuer safeguard. Under curent maket conditions, Aliace Capita believes tht the Alliance Funds would fmd it advantageous to enter into a commtt line of credit so tht, when the tie

comes, the Fun wil be able to act quickly. The iy of commtt line of credit which Alliance Capita ha discussed with varous ban would have the following chaactenstics:
An "umbrella" facilty. There would be one loan agreement ("Agreement") of which

each paricipatig Alliance'Fundwould be a signtory. Certin Funds, such as money maket fuds, would not paricipate, but it is curently expete tht about 30 Alliance Funds, a-list of

which is attched hereto as Exhbit A, would intially be in the facilty. Other fuds advised by Aliance Capital could be added in the future. '

The Agreement would stipulate a maum amount of aggregate borrowings at one time, curently expte to be approximtely $500 miion. '

The Agreement would have a term of approximtely one yea during which al:_ban

would remain commtted and no amendments could be made without mutu agreement of the bank and each Alliance Fund. The Agreement woulct have norml provisions for representations and waranties, business covenats and events of default. ,So long as the paricular Fund requesting a loan were not in default, the ban would be contractually obligated to honor al requests for loan. Each Aliace Fund in the arangement could, at any tie, borrow up to the lesser of:
(1) a contrctu limt which wil be state as a percnt of its net assets or (2) the amoun unused under the aggregate maum amount of the . facilty , in either cae lite to no more

th the amount permtt by the 1940 Actand each fud's fundamenta investment-policieS.

When an Al Fu borrows uner the facilty, the libilty for priipal reayment an interest payment would be the obligation of tht fu only. Under no cirtaces wóuld any Alian Fu be liable for the obligations of any other Alance Fun. Borrowis under the intial Agreement would be unecur (but collatera could'be reqired by negotitions at a later date). No ban paricipating in any loan arement would be an afiliate of Alia Capita or any Aliance Fund. The ban enterig into the agreement would be compensate with a "commtment fee"

which is a rate denomite in basis points. The rate would be fixed for the term of the

ROPES & GRAY

John V. O'Hanon, Esquire -4 March 5, 1997

Agreement, and would be paid quarly in areas. The commtment fee would be caculate

on the unused porton of the line, so the amount on which the fee would.be cacuate would be reduce by the amount of actu borrowins (e.g., if the entire line were bein us there would be no commtment fee durg the remaining period of the loan.) Each Alce Fund parcipatig in the Agreement would pay its ,porton of the commtment fee. Thë basis for apportonig the fee would be pro rata based on the average net assets of the parcipating Alliance Funds. Procures would be established, under the supervision of the boards of directors, to alloète loan on a fist come; first served basis. If at a parcular tie, the demad for loai exce the available supply under the Agreement, the avaiable loan would be apportoned among the Aliance Funds .on a fair and equitable basis. Although the basis for apportonment ha not yet ben determed, the most likely choice would be pro rata based ~n average net assets of the parcipatig Alliance Funds and the amount requešte. To determ the exact method of apportonment, the boards of directors would consider such mattrs as: the amoun avaiable under the Agreement; the amount requested by each Aliance FUd and by the Aliance Funds in the aggregate; the availabilty of other sources of monies to meet tht nee of each Aliance Fund such as uncommtted lines of credit, cah reserves and other short-term, liquid investments; the history of each requesting Alliance Fund's requests for loan; the

expeted duration of each requested loan; and the expete nee for loan in the imediate

futue.
As the credit arangement would involve a number of ban, an "agent ban" would

likely be retåineä to faciltate the prepartion of the loan documentation and to arge the syndication of the dea to other ban. Tht bank would be paid a fee for acti as agent. The fee would be paid when the syndication is complete or in area on some.basis.Such fee would be apportone among each parcipati Alian Fund on a pro based nti'basis on average net assets. There would be other co~ts associate with the Agrment, Sach as outside counl for the Al Fu an the ban, which would alo be apportoned across th parcipati

fu ona pro rata basis. It is the custom in the industr for counel fee to be paid by the borrower. However, such fees are expte to be inignca.

The Agrment would be approved by the board of directors, includi a majority of the independent diectors, of each parcipatig Aliace Fund prior to any Alan Fun enterig into the Agreement and anuay thereaftr. No Aliance Fund would be alowed to intiy parcipate or renew its parcipation in the Agreement uness the Board of such fud

determes tht parcipation would be fair and equitable and in the best interest of each parcipati fud. The factors the boards would consider in mag tl determtion would include the expete benefits and costs to each fud, the experience of each fu under the

_ROPES & GRAY

John V. O'Hanon, Esquire -5 March 5, 1997

loan arangement, the availabilty of other sources of liquidity for each fud and the expete contiuing nee for the loan arangement.

Legal Anysis and Applicable Precent
Setion 17(d) of the 1940 Act provides, in pertent par, as follows:

It sha be unawfl for any affiliate person of ... a registered investment company ... or any affiliate person of such person ... acti as pricipal to effect any tranaction in which

such registered company ... is a joint or a joint and several parcipant with such person ... or afiate person, in contravention of such rules and reguationS as the commssion may prescribe for the purose of limtig or preventig paricipation by such registered or controlled company on a basis different from or less advantageous th tht of such other

parcipant ....
Rule 17d-l under the 1940 Act provides, in relevant par, as follows:
No affliated person of ... any registered investment company ... and no affiate person of such a person ... acting as principal, shal paricipate in, or effect any tranaction in connection with, any joint enterprie or other joint arangement or pr9fit-shaîng plan in which any such registered company ... is a parcipant, and which is entered into, adopte or modified subseqent to the effective date of ths rue, uness an application regarding such joint enterprise, arangement or profit-shag plan has ben fioo with the Commssion and ha ben grate by an order entered prior to the submission of such plan or modifcation to security holders for approval .... Rule 17d-l(a). A "joint entrprie or other joint arement" as us in th rue sha mean an wrttn or ora plan, contrct, authorition or arement, or any practice or unerstadi concern an enterprie or undert whereby a registered investment company ... and any

afiliate person of ... such registered investment company, or an afte person of such a person, ..., have a join or a join an severa parcipation, or shae in the profits of such enterprie or unert, .... Rule 17d-l(c). We do not believe the arangement describe above constitutes a join or.ajoin an severa traction with, the meag of Setion 17(d) or Rule 17d-1. Th is beuse the board of directors of each paricipatig Alia Fund, in approvig parcipation in the Agreement for tht fud, wil consider only tht fud's interest. In no cae wil a decision tht a parcular Aliance Fund should parcipate be based, to any degree, upon a determtion tht such parcipation might fuer the interests of other Aliance Funds. ) We have found only one applicable no action lettr rehitig to the use of a commtt

line of credit and payment of a commtment fee by a group of affiate mutu fuds. The no

ROPES & GRAY

John V. OlHanon, Esquire -6 March 5, 1997

action position taen in T. Rowe Price (pub. avaiL. July 31, 1995) is substatialy identica to

the relief requeste by ths letter. In the area of exemptive relief, the only relevant precent we have found is Rule 17g-1 under the 1940 Act which provides exemptive relief for the purchae of a joint fidelity bond coverig afi1iate mutual fuds and their affi1iate investment advisers and distrbutors. The existence of Rule 17 g-1 does not imly, however, tht any shag of a common resource or asset by affi1iate mutu fuds requires exemptive relief under Section 17 of the 1940 Act. The key fact distinguishig the intat arangement and the arangement to which Rule 17g-1 is addressed is, tht under Rule 17g-1, the affi1iate investment advisers and distributors of the mutual fuds are permtt to be paries to the

fidelity bond. Obviously, situations involving a shag of resources by a mutu fud and its investment adviser or pricipal underwter are vastly different and raise signcat confict of

interest issues which are not present in the commtted line of credit discussed herein. Furermore, there are sound policy reasons for the staff to grant the no-action relief which we request. Whle supplying increased liquidity to the paricipating Aliance Funds, the proposed arangement wil, for the reasons set fort below, pose none of the dagers tht

Section 17 and Rule 17d-l are designed to prevent:
Each Alliance Fund wil paricipate in the arrangement on an equal basis. In th

regard, each Alliance Fund wil have equal access to the line of credit and the costs of the arangement, Le., commtment fees, documentation and legal fees, wil be apportoned on a pro rata basis among the paricipating Alliance Funds. Thus, there wil be no paricipation by any Alliance Fund "on a basis different from or less advantageous than tht of (any) other participant. " All of the Alliance Funds are on the same side of the tranaction, Le., they are al

potenti borrowers. Thus, their interests are common and substatially the same. The only

potential for confict is if the demad for borrowed fuds uner the line of credt by al of the Alliance Funds exce the amouit available under the line. However, th sitution would exit even in the absence of a commtt line beuse any given ban ar group of ban wi only lend a fite amoun of fuds to any given mutu fud or group of fu. As describe earlier, the boards of directors of the Aliance Funds wil be responsible for developin criteri to determe a fai and equitable apportonment of fuds available for borrowing

should the fuds available be less th the demad. The issue of alocting a limte resource also exits with respet to everyday purhaes of securties for the Alliance Funds where there

ca oftn be caes where several funds wil purchae the same securty but no fu wil be

allott the full amount it desires of the security.

To our knowledge, the Commssion ha not taen the position tht the norm purchae by one or more affiate mutu fuds of the same security and the alloction among those funds of diferig amounts of that securty under circumtaces where each fud does not receive all of the security it may have wanted raises an issue under Section 17(d).

ROPES & GRAY

John V. O'Hanon, Esquire -7 March 5, 1997

We would also point out tht the amount of the commtment fee paid by each Aliance

Fud wil be so sma tht there wil not be, as a practical mattr, any effect on any of the

Aliance Funds' net asset value per shae. In our view, each Alia Fund's payment of its

pro rata shae of the commtment fee is no different from the payment of other fees by afiate fuds in a mutu fud complex. For exale, may mutu fud complexes pay a

magement fee composed of an individua fee and a group fee determed by the ratio of the fud's day net assets to the daily net assets of all the mutu funds in the complex. The group fee is intended to reflect the fact tht affiliated mutul fuds in a complex shae resources such as research, trading facilties, overhead and technology. Quite obviously, ths resource shag wil never be exactly equa and each fund wil accss and .ue the common

resources to differig extents. Group fee arangement have been li place for quite some tie.

Again, to our knowledge the Commssion ha never taen the position tht such arangements violate Section 17 (d). The existence of these group fee arangements and others where mutu fuds pay fees on a pro-rata basis for shaed resources, such as tranfer agent or custodia fees, support our view tht the payment of the commtment fee by the Aliance Funds based on pro rata alloction of assets or some simar meaure should not raise concern under
Section 17 (d).
Conclusion
For the reaons stated above, we request tht the staff of the Commssion issue a letter stating that the staff wil not recommend enforcement action to the Commssion if the Aliance Funds enter into the commtted line of credit arangement and pay the commtment fees describeabove~ Should you have any questions regarding th matter , pleae ca the undersign at (617) 951-7801. Sincerely yours, BDMlw:3189.08 cc: Jack W: Murhy, Esq.

Chief Counel

Division of Iivestment Mangement

Securties and Exchage Commssion

Edund P. Bergan, Esq.
Andrew L. Gangolf, Esq.
J.B. Kittedge, Esq.

ROPES & GRAY

John V. O'Hanon, Esquire -8 March 5, 1997

Exhibit A
Aliance Al-Asia Investment Fund, Inc.

Alance Balance Shaes, Inc.

Alce Bond Fund, Inc.

Alian Developin Markets Fund, Inc.
Aliace Global Dollar Governent
Fund, Inc.
Aliance Global Smal Cap Fund, Inc.

Aliance Global Strategic IncomeTrust, Inc.

Aliance Growt'and Income Fund, Inc.

Aliance Income Builder Fund, Inc.

Aliace Interntiona Fund

Aliace Mortgage Securities Income Fund, Inc.

Aliance Limte Matuty Governent Fund, Inc.

Aliace Multi-Market Strategy Trust, Inc.

Aliance Muncipal Income Fund, Inc.

Alance Muncipal Income Fund II

Aliance New Europe Fund, Inc.

Alliance Nort America Governent Income Trut, Inc.
Aliance Premier Growt Fund, Inc.

Aliance Quar Fund, Inc.

Alliance Rea Estate Investment Fund, Inc.

AliancelRegent Sector Opportnity Fund, Inc.

Alliance Short-Term Multi-Market Trut, Inc.

Aliance Technology Fund, Inc.
Alliace Utity Income Fund, Inc.

Aliace Varable Products Series Fund, Inc.
Al World Inme Trut, Inc.

Alce Worldwide Prvatition Fund, Inc.
The Hudson River Trut

The Al Portolios