SEC Division of Investment Management staff letter: Federated Municipal Funds

Investment Company Act of 1940 Federated Municipal Funds

November 20, 2006

RESPONSE OF THE OFFICE OF CHIEF COUNSEL DIVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 200510111416 Federated Municipal Funds File No. 132-3

Your letter dated November 15, 2006 requests that we extend the no-action position that we took in United Municipal Bond Fund (pub. avail. Jan. 27, 1995) (the "1995 letter") to address the use of Standard & Poor's Securities Evaluations, Inc. ("SPSE"), an independent pricing service, in connection with certain 17a-7 transactions, as defined below. In the 1995 letter, we agreed not to recommend enforcement action to the Securities and Exchange Commission (the "Commission") under section 17(a) of the Investment Company Act of 1940 (the "1940 Act") against certain affiliated funds if they use the prices provided by Muller Data Corporation, now operating as FT Interactive Data ("FTID"), an independent pricing service, when engaging in 17a-7 transactions involving certain municipal securities for which market quotations are not readily available. 1 We respond to your request below, and also provide general guidance concerning rule 17a-7 and best execution and the duty of loyalty, and the Nasdaq Official Closing Price.

Independent Pricing Services

Section 17(a) of the 1940 Act prohibits any affiliated person of a registered fund, or any affiliated person of such a person, from selling securities to, or purchasing securities from, the fund. Rule 17a-7 under the 1940 Act generally exempts from the prohibitions of section 17(a) certain purchases and sales of securities between funds that are affiliated solely by reason of having a common investment adviser ("17a-7 transactions"). As relevant here, rule 17a-7 requires that: the 17a-7 transactions involve securities for which market quotations are readily available; the 17a-7 transactions are effected at the independent current market prices of the securities; and the "current market price" for certain securities (such as municipal securities) is calculated by averaging the highest and lowest current independent bid and offer price determined on the basis of a reasonable inquiry. 2

In the 1995 letter, we agreed not to recommend enforcement action to the Commission under section 17(a) of the 1940 Act against certain affiliated funds if they engaged in 17a-7 transactions involving municipal securities for which market quotations were not readily available. In the 1995 letter, the prices of the municipal securities that were to be used in the 17a-7 transactions were the same as the prices that were to be used to determine the funds' net asset values per share ("NAV") consistent with section 2(a)(41) of the 1940 Act and rule 2a-4 thereunder. 3 Your letter specifically requests that we extend the no-action position in the 1995 letter to permit certain affiliated funds advised by Federated Investment Management Company (and other commonly controlled investment advisers) that invest primarily in municipal bonds (the "Municipal Funds") to use SPSE, rather than FTID, as their independent pricing service and engage in 17a-7 transactions under substantially similar circumstances.

In the 1995 letter, we did not intend that FTID would be the only independent pricing service that could be used by funds relying on the letter. It may be appropriate for a fund, subject to the approval of its board of directors, to use other independent pricing services for these purposes. Accordingly, we would not recommend enforcement action to the Commission under section 17(a) of the 1940 Act against the Municipal Funds if they use SPSE (or any other independent pricing service) as their independent pricing service and engage in 17a-7 transactions involving municipal securities for which market quotations are not readily available, provided that the Municipal Funds comply with all of the representations contained in the Municipal Bond Fund letters, other than their use of SPSE (or any other independent pricing service), rather than FTID, as their independent pricing service. 4 Please note that this position represents our view on enforcement action only and does not express any legal conclusions on the issues presented. Furthermore, this position is based on all of the facts and representations in your letter; any different facts or representations may require a different conclusion.

Best Execution and the Duty of Loyalty

Before causing funds that it manages to enter into 17a-7 transactions, an investment adviser should carefully consider, among other things, its duty to seek best execution for each fund and its duty of loyalty to each fund. In particular, the investment adviser to the fund seeking to sell securities in a 17a 7 transaction should ensure that the selling fund's total proceeds are the most favorable under the circumstances. 5 The investment adviser also should ensure that the buying fund's total cost is the most favorable under the circumstances. 6 If the adviser to the selling fund can obtain greater proceeds for that fund by selling the security in the market, rather than by selling it to the other fund in a 17a-7 transaction, the adviser should sell the security in the market. The same principle applies to the buying fund's participation in a 17a-7 transaction.

In addition, consistent with an investment adviser's duty of loyalty, we believe that an investment adviser should not cause funds to enter into a 17a-7 transaction unless doing so would be in the best interests of each fund participating in the transaction. Thus, for instance, the buying fund should not participate in a 17a-7 transaction that benefits only the selling fund; if the buying fund were to participate in such a transaction, it may forgo an opportunity to make a better investment in a different security.

Nasdaq Official Closing Price

We also wish to take this opportunity to note that, in our view, the use of another pricing methodology, the Nasdaq Official Closing Price ("NOCP"), is consistent with the policies of section 17(a) and rule 17a-7. Rule 17a-7(b)(1) provides that the current market price for an "NMS stock," as that term is defined in 17 CFR 242.600, is:

[T]he last sale price with respect to such security reported in the consolidated transaction reporting system ('consolidated system') or the average of the highest current independent bid and lowest current independent offer for such security (reported pursuant to 17 CFR 242.602) if there are no reported transactions in the consolidated system that day.

The consolidated last sale price is comprised of the final last sale eligible trade report submitted to the Securities Information Processor during the regular trading session by any market center, including Nasdaq.

In April 2003, Nasdaq began calculating the NOCP, as an alternative to the consolidated last sale price, for a subset of NMS stock made up of all Nasdaq National Market securities (more than 3,900 companies that are the larger and generally more actively traded Nasdaq securities) and Nasdaq SmallCap securities (more than 1,300 securities of smaller, less-capitalized companies that do not qualify for inclusion in the Nasdaq National Market). The NOCP is based on the price of the last unmodified trade reported to Nasdaq's proprietary trade reporting system — Automated Confirmation Transaction System or "ACT" — at or before 4:00:02 pm. To determine the NOCP, Nasdaq systems then normalize that price by ensuring that it is at or within Nasdaq's best bid and ask quotations. The NOCP calculation does not affect, although it may differ from, the consolidated last sale price. 7

We believe that funds' use of NOCP prices in 17a-7 transactions would be consistent with the policies underlying section 17(a) and rule 17a-7 because of the manner in which the NOCP prices are independently determined. We believe that NOCP prices provide "an independent basis for determining that the terms of the transaction are fair and reasonable to each participating investment company and do not involve overreaching." 8 We would not recommend enforcement action to the Commission under section 17(a) of the 1940 Act against affiliated funds if, when engaging in 17a-7 transactions, the funds determine the current market price of a security that is NMS stock by using the NOCP price rather than by using one of the methodologies listed in rule 17a-7(b)(1). 9 Of course, the funds must also comply with the other requirements of rule 17a-7. Please note that this position represents our view on enforcement action only and does not express any legal conclusions on the issues presented.

Susan Gault-Brown Senior Counsel

Endnotes

1 The relief that we provided in the 1995 letter was based on the representations contained in that letter, as well as the representations contained in an earlier related letter, United Municipal Bond Fund (pub. avail. July 30, 1992) (the "1992 letter," together with the 1995 letter, the "Municipal Bond Fund letters").

See rule 17a-7(a); rule 17a-7(b); and rule 17a-7(b)(4).

3 In the 1992 letter, we provided similar no-action relief for 17a-7 transactions involving municipal securities for which market quotations were not readily available, the prices for which were to be obtained through pricing methodologies that differed from those that the funds used when calculating their NAVs. That approach, however, had the unintended effect of causing artificial gains and losses for the funds. As a result, in the 1995 letter, we altered our position in the 1992 letter.

4 For example, the 1995 letter included representations about the steps that the funds took to ensure the reliability of the prices supplied by the pricing service.

5 Although paragraph (d) of the rule generally provides that no brokerage commissions or fees may be charged in connection with 17a-7 transactions, an investment adviser nevertheless has a fiduciary duty to seek to execute any 17a-7 transaction in a manner that ensures that each fund's total cost or proceeds is the most favorable under the circumstances. See generally Securities Exchange Act Release No. 23170 (Apr. 23, 1986) (defining best execution of client trades).

See

In the Matter of Michael L. Smirlock , Advisers Act Release No. 1393 (Nov. 29, 1993) (Advisory employee violated section 206(2) of the Investment Advisers Act of 1940 when he executed cross trades between advisory clients without, among other things, obtaining independent price information on the security involved from any dealer in order to obtain an accurate and independent evaluation of the market prices. "Thus, [he] did not take the necessary and proper steps to ensure that he obtained the best price and execution on behalf of his advisory clients who purchased the securities in the cross trades.")

See Securities Exchange Act Release No. 47517 (Mar. 18, 2003) (order granting approval to proposed rule change by the National Association of Securities Dealers, Inc. relating to the establishment of a NOCP); and Securities Exchange Act Release No. 47022 (Dec. 18, 2002) (notice of filing of proposed rule change by the National Association of Securities Dealers, Inc. relating to the establishment of a NOCP).

See Investment Company Act Release No. 11676 (Mar. 10, 1981) (adopting amendments to Rule 17a-7).

Rule 17a-7(b)(1) has been part of the rule since it was adopted originally in 1966. See Investment Company Act Release No. 4697 (Sept. 8, 1966). The Commission has amended rule 17a-7(b)(1) once since Nasdaq was permitted to establish a NOCP in 2003, but the Commission did not consider the use of NOCP prices in 17a-7 transactions in that amendment. See Securities Exchange Act Release No. 51808 (June 9, 2005) (adopting rules under Regulation NMS) ("the rules adopted today amend a number of rules [including rule 17a-7(b)(1)] that cross-reference current NMS rules or that use terms that Regulation NMS amends or eliminates. These amendments are intended to be non-substantive."). We believe that the Commission's non-inclusion of NOCP in rule 17a-7 does not signify its view that NOCP is inappropriate for purposes of the rule.

9 Most funds calculate their NAVs as of 4:00 p.m. Eastern time each business day. Such funds that engage in 17a-7 transactions using NOCP prices should use the prices in calculating their NAVs as well.

In general, Rule 17a-7 does not mandate a particular time at which 17a-7 transactions should take place. See Investment Company Act Release No. 8494 (Sept. 13, 1974) (adopting amendments to Rule 17a-7), where the Commission stated:

Another comment suggested that an ambiguity may exist in the construction of the word 'last' in paragraph (b)... , i.e., whether 'last' refers to and means the sales price or bid and offer next preceding the transaction or whether 'last' means the closing sales or closing bid and offer on the day of the transaction. The word 'last' in paragraph (b) is intended to refer to sales prices which immediately precede the transaction being executed in accordance with the existing rule.

We note, however, that funds should use the NOCP price for 17a-7 transactions only when the NOCP price is the last sales price that immediately precedes the transaction. We also note that funds may agree, prior to the dissemination of an NOCP price, to engage in a 17a-7 transaction using that price. Thus, the 17a-7 transaction would take place as if it were simultaneous with the dissemination of the NOCP price.

Incoming Letter

The Incoming Letter is in Acrobat format.

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Reed Smith LLP
435 Sixth Avenue
Pittsburgh, PA 15219-1886
Stephen A. Keen 412.288.3131
Direct Phone: 412.288.1567 Fax 412.288.3063
Email: skeen@reedsmith.com
Investment Company Act of 1940-Section 17(a)(l), Rule 17a-7 Douglas J. Scheidt, Esquire Chief Counsel and Associate Director Division of Investment Management U.S. Securities and Exchange Commission 100F Street, N.E. Washington, D.C. 20549 Re: Federated Municipal Funds - Rule 17a-7 Dear Mr. Scheidt:
We are writing on behalf of certain investment companies advised by Federated Investment Management Company (together with other commonly controlled investment advisers, "Federated") that invest, or one or more series of which invest, primarily in municipal securities, i.e., securities issued by state and local governments (the "Municipal Funds"). 1 The Municipal Funds hereby request that the staff (the "Staff ') of the Securities and Exchange Commission (the "Commission" or the "SEC") extend the no-action position that it took in the 1995United Municipal Bond Fund no-action letter to address the use of Standard & Poor's SecuritiesEvaluations, Inc., an independent pricing service ("SPSE), in connection with certain transactions under Rule 17a-7 under the Investment Company Act of 1940, as amended (the "1940 Act"). 1 The Municipal Funds currently include the following open and closed-end management investment companiesregistered with the Commission: Cash Trust Series 11, Cash Trust Series, Inc., Federated Fixed Income Securities, Inc., Federated Income SecuritiesTrust, Federated Intermediate Premier Municipal Income Fund, Federated Municipal High Yield Advantage Fund, Inc., Federated Municipal Securities Fund, Inc., Federated Municipal Securities Income Trust, Federated Premier Municipal Income Fund, Federated Short-Tenn Municipal Trust, IntermediateMunicipal Trust and Money Market Obligations Trust. Federated would also rely on the Staffs interpretive opinion with respect to any additional investment companies that retain Federated as an investment adviser (as defined in Section 2(a)(20) of the 1940 Act) to manage a portfolio invested primarily in municipal securities. NEW YORK * LONDON * LOS ANGELES + PARIS t SAN FRANCISCOWASHINGTON, D.C. * PHILADELPHIA * PITTSBURGHt OAKLAND MUNICH + PRINCETON * NORTHERNVIRGINIA WILMINGTON NEWARK MIDLANDS, U.K. * CENTURY CITY + RICHMOND reedsmith.com

Douglas J. Scheidt, Esquire
The Staff has provided similar relief in a no-action letter to United Municipal Bond Fund (pub. avail. Jan. 27, 1995), which modified the Staffs position in an earlier no-action letter (pub. avail. July 30, 1992) (as modified, the "United Fund Letters"). In the United Fund Letters, the Staff agreed not to recommend that the Commission take any enforcement action under Section 17(a) of the 1940 Act if the mutual funds bought and sold municipal securities under Rule 17a-7 using a price provided by the pricing service that valued the mutual funds' municipal securities for purposes of Rule 2a-4. The Municipal Funds propose to comply with all of the conditions established in the United Fund Letters, except that the Municipal Funds would use prices provided by SPSE rather than prices provided by Muller Data Corporation (now operating as FT Interactive Data, "FTID"). The Municipal Funds believe that SPSE's methods of evaluating municipal securities are, in all material respects, comparable to the methods employed by FTID. A. BACKGROUND
Section 17(a)(l) of the 1940 Act states, in relevant part, that "it shall be unlawfbl for any
affiliated person . . . of ... a registered investment company . . . or any affiliated person of such a person ... acting as principal . . . knowingly to sell any security or other property to such registered investment company . . .." Section 2(a)(3)(C) of the 1940 Act defines an "affiliated person" of an investment company to include "any person directly or indirectly controlling, controlled by, or under common control with, such other person .. . ." The Municipal Funds may be deemed to be under common control because they share common directors, common executive officers and a common investment adviser. This would make a Municipal Fund an "affiliated person" of each other Municipal Fund and, therefore, subject to principal transactions among the Municipal Funds to the prohibition of Section 17(a)(l). In addition, under Section 2(a)(3)(E), Federated is an "affiliated person" of the Municipal Funds and, consequently, entities other than Municipal Funds controlled by Federated may be deemed "affiliated persons" of an "affiliated person" of the Municipal Funds. Principal transactions between the Municipal Funds and these other entities would also be subject to Section 17(a)(l). The Commission has previously determined, however, that certain transactions which involve the purchase or sale of securities between a registered investment company and another investment company or other entity which is an affiliated person, or affiliated person of an affiliated person, of such an investment company, do not necessarily give rise to the concerns underlying Section 17(a) of the 1940 Act. The Commission has therefore adopted regulations that permit certain principal transactions between the investment company and such other affiliated persons without exemptive relief provided certain safeguards are in place to prevent the abuses designed to be prevented by Section 17(a). Thus,

Douglas J. Scheidt, Esquire ReedSmith for example, Rule 17a-7 permits the purchase or sale of securities between an investment company and another affiliated investment company. Rule 17a-7 states that a "purchase or sale transaction between registered investment companies or separate series of registered investment companies, which are affiliated persons, or affiliated persons of affiliated persons, of each other, between separate series of a registered investment company, or between a registered investment company or a separate series of a registered investment company and a person which is an affiliated person of such registered investment company (or affiliated person of such person) solely by reason of having a common investment adviser or investment advisers which are affiliated persons of each other, common directors, andlor common officers, is exempt from Section 17(a) of the Act" provided that certain enumerated conditions are met. One condition of Rule 17a-7 is that the "transaction [be] effected at the independent current market price of the security." In the case of municipal securities, paragraph (b)(4) of Rule 17a-7 defines the independent current market price as "the average of the highest current independent bid and lowest current independent offer determined on the basis of reasonable inquiry." Another condition of Rule 17a-7 is that the transactions involve securities for which market quotations are readily available. The Board of Directors or Board of Trustees of each Municipal Fund (the "Board") has adopted procedures in accordance with Rule 17a-7. The current procedures require Federated to use bid and offered prices obtained from three independent dealers to determine the price at which municipal securities are traded. The price used in the Rule 17a-7 transaction is the average of the highest bid and lowest offer. This normally results in a sale price that is better than the best bid, and a purchase price that is better than the best offer, so that both the buying and selling funds benefit from trading in accordance with Rule 17a-7. The Municipal Funds sometime encounter difficulty obtaining reliable offers from dealers for purposes of Rule 17a-7 trades. While dealers willingly bid for securities held in a Municipal Fund's portfolio, the price at which they would offer to sell securities that they do not hold in inventory and cannot readily obtain is understandably more tentative. Typically, dealers indicate that their offer price would be in the range of a spread over their bid price. In circumstances where the difference between bids from different dealers is greater than their indicated spreads, this can create a misleading impression that one dealer is willing to sell the securities at a lower price than another dealer would bid for it.

Douglas J. Scheidt, Esquire ReedSmith
One alternative to this would be to use the average of three bid prices. This was the methodology initially authorized by the SEC in the United Fund Letters. However, as the United Fund Letters explain, this alternative systematically favors the buyer in the Rule 17a-7 transaction, because the seller necessarily receives less than the best bid for the securities. The Municipal Funds are therefore not seeking relief for this method. In addition, as further explained in the United Fund Letters, use of any price in a Rule 17a-7 trade other than the price used to calculate the Municipal Funds' net asset value may lead to artificial wealth transfers between the trading funds. For example, suppose that two funds hold the same security and use the same pricing service to value the security for purposes of calculating their net asset values. Assume further that the pricing service values the security at $100 at all relevant times. If the funds transfer the security in a transaction under Rule 17a-7 at a price other than $100, then when the funds next calculate their net asset values (using the pricing service valuation of $loo), one fund will appear to incur a loss (the selling fund, if the Rule 17a-7 price is below $100; the buying fund if the Rule 17a-7 price is above $100) while the other fund appears to receive a corresponding gain. The loss and gain are artificial because, in the absence of a contemporaneous market transaction in the security, there is no basis for concluding that the price used for the 17a-7 transaction is more reliable than the price provided by the pricing service. Therefore, Federated believes that the best alternative would be to use prices provided by SPSE for Rule 17a-7 transactions involving municipal securities for which market quotations are not readily available. This approach will result in the same prices being used in the Rule 17a-7 transactions as the affiliated funds used for purposes of valuing the securities under Section 2(a)(41) and Rule 2a-4. Federated represents that the Municipal Funds will comply with all of the representations contained in the United Fund Letters, other than their use of SPSE, rather than FTID, as their independent pricing service. B. THE UNITED FUND LETTERS The United Municipal Bond Fund, Inc. and the United Municipal High Income Fund, Inc. (collectively the "United Funds") made their initial request to use the price provided by their pricing service to value municipal securities for purposes of Rule 17a-7 in a letter dated October 29, 1991. Initially, the Staff was unwilling to provide the requested relief. Instead, the Staff agreed to allow the United Funds to value municipal securities in Rule 17a-7 trades using any of the following methods:

Douglas J. Scheidt, Esquire ReedSmith by averaging prices obtained fiom at least three independent matrix pricing services, or by averaging three independent bid prices, or by averaging three prices obtained from some combination of independent pricing services and independent bid prices; [footnote omitted]. The United Funds renewed their request in a subsequent letter dated April 20, 1993, after:
it became apparent that there was a more fimdamental problem with the averaging approach itself. Specifically, in a sale made in reliance on the no-action letter and at a price determined by averaging two independent bid prices and one price from an independent pricing service, the selling Fund experienced a loss, because each of the bid prices, and therefore the average of the three prices, was lower than that provided by the pricing service (whose price, had there been no sale, would have been used for the Fund's valuation pursuant to Rule 2a-4). [Footnote omitted.] The United Funds based their renewed request primarily on the fact that their pricing service used "hand pricing" rather than "matrix pricing" to value municipal securities. According to the representations made in the United Funds' final request letter dated October 18, 1994:
[FTID] has a staff of evaluators to whom clients' securities are assigned, typically according to particular segments of the municipal market, such as pre-refunded bonds or general obligations. We understand that evaluators operate generally as follows: in the morning, an evaluator calls his or her contacts in the market (e.g., dealers and portfolio managers) to gather further information about recent trades, current bids, offerings of similar securities, general conditions or movements in the market or in particular market sectors, etc.; and in the afternoon, the evaluator makes an evaluation of each security for which he or she is responsible. The United Funds also emphasized their regular testing of FTID's prices:
Under its current procedures, each week the Manager obtains from another pricing service prices for those securities which represent 1%or more of the net assets of all funds advised by the Manager that use [E;TID]'s pricing service. The total of these alternate prices is then compared to the total derived fiom [FTIDI's prices for the same securities. Under current procedures, on an annual basis each Fund's Board of Directors reviews and considers the continuance of the use of the pricing service and the Manager's testing methodology. In addition, in connection with its annual review of the internal control structure for the Funds and the other funds for which it serves as independent accountants, Price Waterhouse tests the reliability of [FTIDJ's pricing. Under these circumstances, the Staff agreed "to modify the pricing condition in the original no-action reIief granted to the Funds, and, accordingly, [not to] recommend that the Commission take any enforcement action under Section 17(a) if the Funds buy and sell portfolio securities between

Douglas J. Scheidt, Esquire ReedSmith themselves using a price provided by the pricing service that values the Funds' municipal bonds for Rule 2a-4 purposes .. . ." [Footnote omitted.]
C. SPSE'S VALUATION METHODOLOGY
We have reviewed the current evaluation methodologies of SPSE and FTID.2 Like FTID, SPSE employs "evaluators" who are "responsible for determining the evaluated prices for securities in a specific market sector." Generally, the evaluators use an Integrated Evaluation System ("IES") "that collect[s] and categorize[s] information to assist evaluators in determining an evaluated price for each security priced by SPSE." The IES incorporates pricing models "that are specific to industry sectors, sub-sectors, and security structure," and that are based on the following types of market data:

• Trades in the security;

e Bid/asked quotes that represent executable trade levels for the security;

• Bids from a market participant with authority and capacity to complete a
  transaction in the security; e Trades of securities that the evaluator determines to be of meaningful size and comparable to the security being priced; and a Opinions of market participants (often referred to as "dealer quotes" or "marks"). We understand that SPSE updates this information daily. Clearly, the SPSE process corresponds in every material respect with the process outlined in the United Fund Letter. In each case, a trained professional uses current market information (including trades in, and offers and bids for, the security) to evaluate each security on a daily basis. The IES uses pricing models to determine valuations based on this information in the same manner as FTID's evaluators, "build internal yield curves" to "extrapolate [various] factors to evaluate related [securities]." In summary, the Municipal Funds believe that the prices provided by SPSE will be as reliable for purposes of inter-fimd trading under Rule 17a-7 as are the prices provided by FTID to the United Funds. D. CONCLUSION In view of the foregoing, we respectfully request that the Staff would not recommend enforcement action to the Commission under Section 17(a) of the Investment Company Act against the Municipal Funds if they use SPSE as their independent pricing service and engage in 17a-7 transactions Copies of the Standard & Poor's Securities Evaluation General Methodology and the FT

Interactive Data U.S. Municipal Bonds Evaluation Methodology are enclosed with this letter.

Douglas J. Scheidt, Esquire involving municipal securities for which market quotations are not readily available, provided that the Municipal Funds comply with all of the representations contained in the United Fund Letters, other than their use of SPSE, rather than FTID, as their independent pricing service. In compliance with the procedures set forth in 1933 Act Release Nos. 6269 (December 5, 1980) and 5127 (January 25, 1971), seven copies of this letter are submitted herewith, and the specific subsections of the particular statutes to which this letter relates are indicated in the upper right hand comer of the first page of this letter and each copy. If, for any reason, the Staff does not concur with our conclusions, we respecthlly request a conference with the Staff before any adverse written response to this letter is issued. Please acknowledge receipt of this letter by date stamping the enclosed receipt copy and returning the same in the enclosed self-addressed stamped envelope. Should you or any member of the Staff have any questions concerning the foregoing or need additional information or clarification, please contact the undersigned, at (412) 288-1 567. Very truly yours, Stephen A. Keen SAK:mlr Enclosures cc: Ms. Susan Brown (w/encls.)

nies use our eva standard database for descriptive information, the evaluation staff is able to bonds into 12 major market sectors. These major sectors are:

• Multifamily Housing * ETM's/Prerefundeds
• Zero Coupon
• Insured * Taxable Municipals
  "Integrated Evaluation System" (IES) is an integrated pricing and portfolio maintenance and delivery system designed to take full advantage of Standard & Poor's internal and external information sources. IES literally integrates all the databases throughout Standard & Poor's - KENNYBASE, Mutual Fund transactions (adds1 deletes), Kenny Drake Market Data, and MSRB Transaction Reports. This system provides the evaluations staff with powerful data-management tools. These tools enable them to track and reflect the intricacies of the municipal marketplace. For more details, please refer to our "IES" fact sheet. Market Models Market models are used to price large numbers of bonds with similar characteristics. Serial, General Obligation, Revenue, Insured, Prerefunded and escrowed to maturity bonds readily lend themselves to pricing by market model. Employing spreads off base curves, state spreads, relative coupon spreads, and call spreads, market models reflect our opinion of the market for bonds within that model. The pricing system enables us to create many different models to help us manage the complexities of the municipal 55 Water Street. 45th Floor, New York, NY 10041 .Tel.: 212.438.4500.Fax:212-438-3958.E-Mail:sp~sales@standardandpoon.com

Market Infomation
Fair Value
Approach
Non-rated Bonds
Documentation
HandQuotes
There are still many securities whose characteristicspreclude using our broad market models. These bonds have characteristicssuch as sinking funds, estimated or projected average lives, unique credit concerns, or other characteristicswhere use of a model would not be reliable. Much like bonds in the market models, hand quoted bonds are grouped by their characteristicsso that they may be reviewed and related to similar securities. Many of these bonds are modeled "off line" on spreadsheets and the resulting prices are transferred to the pricing system. This is particularly prevalent in the derivative, 'distressed' and taxable municipal bond sectors. All bonds priced by Standard & Poor's are compared and related to actual marketactivity. Our unique access to this data contributes to the accuracy of our prices. Market data is collected from:
Actual daily bids receivedby the Kenny Drake Trading System (unique to Kenny) Transactions by customers of Standard & Poor's EvaluationServices (reported by Unit lnvestmentTrust, Mutual Funds etc.) External market sources such as national and regional dealers and other brokers On-line access to offerings shown on the Kenny Drake Trading System a MSRB Transaction Reports used as an on-line next day comparisonto our evaluations

• News Media - news services, newspaper, internet etc.
  Trade History - over three years of on-line Kenny Drake trade data (archived from 1986) Where Standard & Poor's perceives a bond as being a "non-market" bond (bonds where it is difficult to make comparisons to bonds actually traded) Standard & Poor's employs either a Cash Flow Approach, an Asset Valuation Approach or a combination of both. These approaches are used to determine the "inherent value" of a bond inthe absence of any reliable market comparison. When an Inherent Value Approach is employed the methodologyis made available to our institutional clients. This includes the credit information, assumptions, "cap rates", etc. In providing this information, Standard & Poor's creates an opportunity for our clients to provide feedback and update information as it becomes available. In most cases, the price of non-rated bonds that Standard & Poor's perceives as investment grade will change in relation to daily market movements. When there is a non-rated bond that Standard & Poor's perceives to be below investmentgrade, the price will move less with day to day market movements and more with changes inthe perceived credit quality of the bond. Standrd & Poor's can internally group non-ratedbonds by perceived credit quality. The following groups are used:
  Quality Rating Compares to Price Movement
  1 HighQuality (AA- to AAA) High correlation to Good Quality (A- to At) Investment Grade (BBB to BBBt) Below Investment Grade (BB- to BBB-) Below InvestmentGrade (B- to Bt) Below InvestmentGrade (C to CCCt) daily market changes I 7 Default Perceived credit quality J.J. Kennyis a Nationally Recognized Municipal Securities Information Repository (NRMSIR) - therefore, we receive most official statements. As a new issue is added to our pricing list, our research staff collectsthe data needed to begin pricing an item (call features, etc.). Recently, many of our clients have requested the underwriter (placement agent) forward copies of these official statements directly to the evaluation department We also rely on our clients to assist us in gathering these important documents. The evaluation staff will work with both the institutional buyers and placement agents to make sure we have the necessary information to price Private (or limited) Placements. Please contact the evaluation desk at (212) 438-4410.

Secondary Market Credit information used to relate one bond to another or to groups of bonds is collected Disclosure continuously. Sources of credit data include: This information is collected from:

• Auditedllnterim Financial Statements Kenny Repository (a Nationally
• Management Reports Recognized Municipal Securities
  Operating Budgets 8 Information Repository - NRMSIR)
• Trustee NotieesIReports Trustees
• Obligors * Institutional Holders
• News Media
  Evaluator Contacts J.R. Rieger (212) 438-5261 Barney DiBenedetto (212) 438-4508 Mike Maples (212) 438-4425 Lenny Coviello (212) 438-4408 Mike O'Connor (212) 438-4407

FT Interactive Data offers daily evaluafions and related data for U.S. municipal bonds. Experienced fixed income evaluators, with backgrounds that range from trading and sales fo underwriting and credit analysis, closely monifor local markefs prior to releasing evaluations. FT Interactive Data does not buy or sell securities or advise clients as to what securities they should buy or sell; our municipal bond evaluations are estimations of current value, based upon the objectively verifiable information available to us at any given time. FT Interactive Data seeks to obtain market color, including bid information received by our fund clients, we request that clients forward evaluation team. This informati evaluations to the extent that w our good faith opinio marketplace would institutional round I U.S. Municipal Bonds Evaluation Methodology from FT lnteractive Data COVERAGE FT lnteractive Data provides coverage for more than
1.4 million active municipal securities on a database of
more than 2.5 million records. Our evaluated pricing services utilize data from our municipal descriptive database (MuniViewTM), which contains over 120 different bond attributes for each security. FT Interactive Data is designated by the U.S. Securities and Exchange Commission (SEC) as a Nationally Recognized Municipal Securities Information Repository (NRMSIR). We obtain additional data from NRMSIR filings submitted or made available to us. The MuniView database is maintained by a dedicated staff of analysts focused on the timely and accurate input and verification of new issue information secondary market events, including material e reflected in NRMSIR filings. FT lnteractive Data is an lnteractive Data company

FT lnteractive Data's experienced evaluators maintain regular contact with market makers, brokers, dealers, buy-side firms, and analysts to gather information on current trades, bid-wantedlists, offerings, and markets. The evaluators also collect general informationon market movement, direction and trends, and specific data on specialty issues. Investment Grade Municipal Securities We track and analyze actively quoted issues, and compare our evaluationsagainst Municipal Securities Rulemaking Board (MSRB) reports. Daily briefings and reviews of current economic conditions, market psychology, trading levels, spread relationships, and the slope of the yield curve provide evaluators with consistent and comprehensive data on which to base their evaluations. FT lnteractive Data's evaluators group municipal bonds with similar characteristicstogether in market sectors. Each evaluator is designated, based on individual expertise and experience, to work with a specific market sector or group of market sectors. Our current sector breakdownincludes:
General Obligation
Revenue
Pre-Refunded and Escrowed to Maturity (ETM)
Tobacco
Housing
Hospital
Higher Education
Public Power
IndustrialDevelopment Revenue1
Pollution Control Revenue (IDRIPCR)
High Yield / Project Finance
Derivative
Active Sinking Fund
Notes & Money Markets
Other highly specialized issues such as student loans, letter of credit (LOC) backed bonds, single and multi family housing, airlines, and distressed situations are broken out into distinct sectors, as deemed appropriate. Each morning, to serve as a starting point for investment grade evaluations, evaluators build internal yield curves, based on the previous day's closing levels. The criteriathat FT lnteractive Data's evaluators use to generate these curves and to arrive at their daily evaluations are based primarily on factors such as levels on bellwether issues, m established trading spreads between similar issuers or credits, historicaltrading spreads over widely accepted market benchmarks, new issue scales, and m bid informationreceived from clients, as applicable. Evaluators apply this informationto specific bonds, and extrapolate these factors to evaluate related issues. Within a given sector, evaluators make daily spread adjustments for discounts, premiums, original yield, alternative minimum tax (AMT), and callability. High YieldMunicipal Securities For high yield issues, FT lnteractive Data's evaluators work closely with the credit analysis group. The evaluation processes (except for distressed andlor defaulted situations, as noted below) track our investment grade methodology. For most non-rated securities that have been out for at least a year or two, providedthat sufficient information is available, our analysts develop internal credit ratings. Our credit analyses are based on offering documents and the most recent financial statements available to us, as well as material event notices and credit information obtained from our MuniViewdatabase and from trustees, borrowers, and market analysts. The resultant internal credit ratings play a key role in assisting the evaluators in determining relationships to similar, rated securities, when applicable. Our analysts monitor the information available as to internally rated securities. As credit situations change, our internal ratings may change.

Individualevaluations and evaluation changes are based on objectively verifiable information, including credit and market information, which our evaluators obtain from our analysts and from the evaluators' market contacts. FT lnteractive Data performs additional procedures for certain nonperforming high-yield municipalsecurities:
Distressed Municipal Securities-We regard as distressed securities those that have such a diminished financial performanceandlor credit rating (internal or public)that the likelihood of future defaults has significantly increased. Unlessthere is relevanttrade activity, high yield municipal securities meeting this description are often evaluated by estimatingthe value of the underlying assets. This is typically done by either a discounted cash flow ("DCF")analysis or a liquidationvalue approach. A DCF analysis may be appropriate while the assets are generating a positive cash flow. There is no prescribed rule regardingwhen to use a DCF analysis and when to use a liquidation or other valuation analysis. When appropriate, we may also look at bond holder recoveries dictated by a reorganization plan or an agreed restructuring. Defaulted Municipal Securities-These securities may also trade infrequently. In the absence of market information, our credit analysts utilize a liquidation value approach, taking into account the lien priority, the time value of money, and the probabilities of different recovery scenarios. We attempt to obtain up-to-date valuations of assets and liabilities from various sources, and to follow any relevant Bankruptcy Court proceedings. Distressedand defaulted securities are not moved with the market. That is why in most cases, securities that are being evaluated as described above are movedto what we call a "flat" category. Evaluated pricesthat we disseminate for such securities tend to remain constant for relatively long periods. The reason for this is that asset values and bondholder recovery estimates are typically updated only if and when we receive new credit, cash flow, asset value, or bondholder recovery information. Each situation is reviewed and addressed in view of the individualcircumstances of the borrower and the status of the bond issue. As noted above, FT lnteractive Data also seeks to obtain market color, including bid information received by our fund clients. FT lnteractive Data is an lnteractive Data company ergcictive Data

About lnteractive Data lnteractive Data Corporation (Interactive Data) is a leading global provider of securities pricing, financial information and analytic tools to institutional and individual investors. lnteractive Data's branded businesses are: FT lnteractive Data, ComStock, CMS BondEdge and eSigna1. Headquartered in Bedford, Massachusetts, lnteractive Data has approximately 1,800 employees in offices throughout the world. Interactive Data Corporation (NYSE: IDC) is approximately 60per cent owned by Pearson plc and included within its Financial Times Group. FT lnteractive Data FT lnteractive Data, the major operating subsidiary of lnteractive Data Corporation, is a leading provider of financial information and analytical software to global markets. FT Interactive Data supplies global securities pricing, evaluations, dividend, corporate action, and descriptive information for more than 3.5 million securities, including daily evaluations for approximately
2.5 million fixed income and international equity issues.
FT lnteractive Data specializes in "hard-to-value" unlisted fixed income instruments and "hard-to-get" information from emerging markets. For further information on FT lnteractive Data, please contact your nearest office:
North America London Asia Pacific
22 Crosby Drive Boston, Massachusetts Fitzroy House 11 55 Malvern Road Bedford, MA 01730 Tel: 61 7 426-0400 13-17 Epworth Street Malvern USA Chicago, Illinois London EC2A 4DL Melbourne Tel: 781 687 8800 Tel: 312 641-1528 UK Victoria, 3144 Fax: 781 687 8289 Los Angeles, California Tel: +44 (0)20 7825 7800 Australia email: info@interactivedata.com Tel: 949 251-9595 Fax: +44 (0)20 7490 2667 Tel: +61 3 9249 2000 New York, New York email: eu-info@interactivedata.com Fax: +61 3 9249 2001 Tel: 21 2 269-6300 email: info@interactivedata.com Llmctattons Thls document does not have any legal effect, but IS provided for ~nformational purposes only The ~nformatton contained In thls document 1s subject to change and does not constitute any form of warranty, representation, or undertaking Nothing herein should rn any way be deemed to alter the legal r~ghts and obligations contalned in agreements between FT lnteractlve Data and ~ts cilents relating to any of the products or services descnbed hereln The FT lnteracbve Data models descnbed herein may contain mathematical algorithms that compute theoretical approxlmatlons of value for certaln securltles FT Interactwe Data makes no representation or warranty that its evaluations are error-free, that Input data supplled to or by FT lnteractlve Data for use In its evaluations IS complete or free from errors, omissions, or defects, or that approximations of value generated by our models and evaluation methodologies necessarily correspond to the actual traded price whlch could be obtalned on any glven day for any particular security FT lnteractive Data makes no warranties whatsoever, elther express or implied, as to merchantablllty, fitness for a particular purpose, or any other matter MuniViewTMIS a trademark of FT lnteractrve Data Corporation Other products, services, or company names mentioned hereln are the property of, and may be the servlce mark or trademark of, thew respective owners 02005 FT lnteractive Data Corporation 5748 (0105)