As filed with the Securities and Exchange Commission on July 27, 2007
File Nos.
002-60470
811-02790
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM N-1A
REGISTRATION STATEMENT UNDER THE SECURITIES ACT OF 1933
Pre-Effective Amendment No.
Post-Effective Amendment No. 35 (X)
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and/or
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REGISTRATION STATEMENT UNDER THE INVESTMENT COMPANY ACT OF 1940
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
(a Delaware Statutory Trust, as successor to Franklin California Tax-Free
Income Fund, Inc., a Maryland corporation)
(Exact Name of Registrant as Specified in Charter)
ONE FRANKLIN PARKWAY, SAN MATEO, CA 94403-1906
(Address of Principal Executive Offices) (Zip Code)
Registrant's Telephone Number, Including Area Code (650) 312-2000
Approximate Date of Proposed Public Offering:
It is proposed that this filing will become effective (check appropriate box)
[ ] immediately upon filing pursuant to paragraph (b)
[x] on August 1, 2007 pursuant to paragraph (b)
[ ] 60 days after filing pursuant to paragraph (a)(1)
[ ] on (date) pursuant to paragraph (a)(1)
[ ] 75 days after filing pursuant to paragraph (a)(2)
[ ] on (date) pursuant to paragraph (a)(2) of rule 485
If appropriate, check the following box
[ ] This post-effective amendment designates a new effective date for a
previously filed post-effective amendment.
Pursuant to Rule 414 under the Securities Act of 1933, Franklin California Tax-Free Income Fund, Inc., a Maryland Corporation (FCTFIF - MA), and its proposed successor, Franklin California Tax-Free Income Fund, a Delaware Statutory Trust (FCTFIF - DE), are filing this amendment to the registration statement of FCTFIF - MA, and FCTFIF - DE expressly adopts the registration statement of FCTFIF - MA as its own for all purposes of the Securities Act of 1933, as amended, and the Investment Company Act of 1940, as amended.
This Amendment to the registration statement on Form N-1A is being filed pursuant to Rule 485(b) under the Securities and Exchange Act of 1933, as amended, to make the annual update to the Registrant's registration statement to be effective August 1, 2007. This filing also updates the Investment Company Act of 1940 registration statement.
AUGUST 1, 2007
The SEC has not approved or disapproved these securities or passed upon the adequacy of this prospectus. Any representation to the contrary is a criminal offense.
PROSPECTUS CLASS A, B, C & ADVISOR
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
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CONTENTS
THE FUND
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INFORMATION ABOUT THE FUND YOU SHOULD KNOW BEFORE INVESTING
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Goal and Strategies 2 Main Risks 4 Performance 8 Fees and Expenses 11 Management 13 Distributions and Taxes 17 Financial Highlights 22 |
YOUR ACCOUNT
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INFORMATION ABOUT SALES CHARGES, QUALIFIED INVESTORS, ACCOUNT TRANSACTIONS
AND SERVICES
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Choosing a Share Class 26 Buying Shares 35 Investor Services 38 Selling Shares 41 Exchanging Shares 43 Account Policies 50 Questions 58 |
FOR MORE INFORMATION
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WHERE TO LEARN MORE ABOUT THE FUND
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Back Cover
THE FUND
GOAL AND STRATEGIES
GOAL
The Fund's investment goal is to provide investors with as high a level of income exempt from federal income taxes, including alternative minimum tax, and exempt from California personal income taxes for California residents as is consistent with prudent investment management and the preservation of shareholders' capital.
MAIN INVESTMENT STRATEGIES
Under normal market conditions, the Fund invests at least 80% of its total assets in investment grade municipal securities whose interest is free from federal income taxes, including the federal alternative minimum tax, and from California personal income taxes. Although the Fund tries to invest all of its assets in tax-free securities, it is possible that up to 20% of its total assets may be invested in securities that pay interest that may be subject to the federal alternative minimum tax and, although not anticipated, in securities that pay taxable interest.
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MUNICIPAL SECURITIES are issued by state and local governments, their
agencies and authorities, as well as by the District of Columbia and U.S.
territories and possessions, to borrow money for various public and private
projects. Municipal securities pay a fixed, floating or variable rate of
interest, and require that the amount borrowed (principal) be repaid at
maturity.
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The Fund only buys municipal securities that are rated at the time of purchase in one of the top four ratings by a U.S. nationally recognized rating service (or comparable unrated securities). The manager selects securities that it believes will provide the best balance between risk and return within the Fund's range of allowable investments and typically uses a buy and hold strategy. This means it holds securities in the Fund's portfolio for income purposes, rather than trading securities for capital gains, although the manager may sell a security at any time if it believes it could help the Fund meet its goal.
The Fund also may invest in municipal lease obligations. Municipal lease obligations generally are issued to finance the purchase of public property that is leased to a state or local government and the lease payments are used to pay the interest on the obligations. The Fund also may invest up to 35% of its assets in municipal securities issued by U.S. territories.
TEMPORARY INVESTMENTS
When the manager believes market or economic conditions are unusual or unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Temporary defensive investments generally may include securities that pay taxable interest. The manager also may invest in these types of securities or hold cash when securities meeting the Fund's investment criteria are unavailable or to maintain liquidity. In these circumstances, the Fund may be unable to achieve its investment goal.
MAIN RISKS
CALIFORNIA
Since the Fund invests heavily in California municipal securities, events in California are likely to affect the Fund's investments and its performance. These events may include economic or political policy changes, tax base erosion, state constitutional limits on tax increases, budget deficits and other financial difficulties, and changes in the credit ratings assigned to California's municipal issuers.
A negative change in any one of these or other areas could affect the ability of California's municipal issuers to meet their obligations. During the summer of 2003, both Moody's Investors Service (Moody's) and Standard & Poor's (S&P(R)) lowered the state's general obligation bond rating. Both agencies felt the downgrades were required as a result of the state's fiscal stress. In March 2004, after voters approved a $15 billion economic recovery bond, Moody's and S&P changed the state's outlooks to stable and positive respectively. In May 2004, Moody's upgraded the state to A3, positive, in August 2004 S&P's upgraded the state to A, stable and in September 2004 Fitch upgraded the state to A-. During 2005, Moody's upgraded the state to A2 and Fitch to A. After further revenue growth and a stabilized economy, Moody's raised the state's rating to A1 and S&P raised the rating to A+, both in May 2006. In June 2007, S&P changed the state's outlook to positive.
In past years, certain municipal issuers in California have experienced financial difficulties, such as the 1994 bankruptcy of Orange County. It is important to remember that economic, budget and other conditions within California, or any state, are unpredictable and can change at any time. For example, in the early 1990s, California was particularly hard hit due to cuts in defense and aerospace. Starting in the beginning of 2001, there was a significant moderation in the California economy, which had an adverse impact on state revenues. The economic and fiscal condition of the state has since improved and it is currently producing budget surpluses. Investment in the Fund may involve more risk than an investment in a fund that does not focus on securities of a single state.
U.S. TERRITORIES
The Fund may invest up to 35% of its assets in municipal securities issued by U.S. territories. As with California municipal securities, events in any of these territories where the Fund is invested may affect the Fund's investments and its performance.
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Because interest rates and municipal security prices fluctuate, the amount of
the Fund's distributions, the Fund's yield, and the value of your investment
in the Fund will go up and down. This means you could lose money over short
or even extended periods.
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INTEREST RATE
When interest rates rise, municipal security prices fall. The opposite is also true: municipal security prices rise when interest rates fall. In general, securities with longer maturities are more sensitive to these price changes.
TAX-EXEMPT SECURITIES
While the Fund endeavors to purchase only bona fide tax-exempt securities,
there are risks that: (a) a security issued as tax-exempt may be reclassified
as taxable by the Internal Revenue Service, or a state tax authority, and/or
(b) future legislative, administrative or court actions could adversely
impact the qualification of income from a tax-exempt security as tax-free.
Such reclassifications or actions could cause interest from a security to
become taxable, possibly retroactively, subjecting you to increased tax
liability. In addition, such reclassifications or actions could cause the
value of a security, and therefore, the value of a Fund's shares, to decline.
CREDIT
An issuer of municipal securities may be unable to make interest payments and repay principal. Changes in an issuer's financial strength or in a security's credit rating may affect a security's value and, thus, impact Fund performance.
Many of the Fund's portfolio securities may be supported by credit enhancements, which may be provided by either U.S. or foreign entities. These securities have the credit risk of the entity providing the credit support. Credit support provided by a foreign entity may be less certain because of the possibility of adverse foreign economic, political or legal developments that may affect the ability of that entity to meet its obligations. To the extent the Fund holds insured securities, a change in the credit rating of any one or more of the municipal bond insurers that insure securities in the Fund's portfolio may affect the value of the securities they insure, the Fund's share price and Fund performance. The Fund might also be adversely impacted by the inability of an insurer to meet its insurance obligations.
INCOME
Since the Fund can only distribute what it earns, the Fund's distributions to shareholders may decline when interest rates fall.
CALL
A municipal security may be prepaid (called) before maturity. An issuer is more likely to call its securities when interest rates are falling, because the issuer can issue new securities with lower interest payments. If a security is called, the Fund may have to replace it with a lower-yielding security. At any time, the Fund may have a large amount of its assets invested in municipal securities subject to call risk. A call of some or all of these securities may lower the Fund's income and yield and its distributions to shareholders.
MARKET
A security's value may be reduced by market activity or the results of supply and demand. This is a basic risk associated with all securities. When there are more sellers than buyers, prices tend to fall. Likewise, when there are more buyers than sellers, prices tend to rise.
The Fund may invest more than 25% of its assets in municipal securities that finance similar types of projects, such as hospitals, housing, industrial development, and transportation or pollution control. A change that affects one project, such as proposed legislation on the financing of the project, a shortage of the materials needed for the project, or a declining need for the project, would likely affect all similar projects, thereby increasing market risk.
WHEN-ISSUED AND DELAYED DELIVERY TRANSACTIONS
Municipal securities may be issued on a when-issued or delayed delivery basis, where payment and delivery take place at a future date. Since the market price of the security may fluctuate during the time before payment and delivery, the Fund assumes the risk that the value of the security at delivery may be more or less than the purchase price.
MUNICIPAL LEASE OBLIGATIONS
Municipal lease obligations, which generally are issued to finance the purchase of public property, differ from other municipal securities because the relevant legislative body must appropriate the money each year to make the lease payments. If the money is not appropriated, the lease can be cancelled without penalty and investors who own the lease obligations may not be paid.
More detailed information about the Fund, its policies and risks, and about municipal securities held by the Fund can be found in the Fund's Statement of Additional Information (SAI).
A description of the Fund's policies and procedures regarding the release of portfolio holdings information is also available in the Fund's SAI. Portfolio holdings information can be viewed online at franklintempleton.com.
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Mutual fund shares are not deposits or obligations of, or guaranteed or
endorsed by, any bank, and are not insured by the Federal Deposit Insurance
Corporation, the Federal Reserve Board, or any other agency of the U.S.
government. Mutual fund shares involve investment risks, including the
possible loss of principal.
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PERFORMANCE
This bar chart and table show the volatility of the Fund's returns, which is one indicator of the risks of investing in the Fund. The bar chart shows changes in the Fund's returns from year to year over the past 10 calendar years. The table shows how the Fund's average annual total returns compare to those of a broad-based securities market index. Of course, past performance (before or after taxes) cannot predict or guarantee future results. All Fund performance assumes reinvestment of dividends and capital gains.
CLASS A ANNUAL TOTAL RETURNS(1)
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8.81% 6.49% -4.39% 12.63% 5.36% 6.76% 4.62% 5.48% 5.10% 5.43%
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97 98 99 00 01 02 03 04 05 06
YEAR
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Best Quarter: Q3'02 4.49% Worst Quarter: Q2'04 -2.67%
AVERAGE ANNUAL TOTAL RETURNS FOR THE PERIODS ENDED DECEMBER 31, 2006
1 YEAR 5 YEARS 10 YEARS
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Franklin California Tax-Free Income 1.01% 4.56% 5.09%
Fund - Class A(2)
Return Before Taxes
Return After Taxes on
Distributions 0.99% 4.54% 5.06%
Return After Taxes on Distributions
and Sale of Fund Shares 2.22% 4.57% 5.07%
Lehman Brothers Municipal Bond
Index(3) 4.84% 5.53% 5.76%
(index reflects no deduction
for fees, expenses, or taxes)
SINCE
INCEPTION
1 YEAR 5 YEARS (1/1/99)
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Franklin California Tax-Free Income
Fund - Class B(2) 0.85% 4.59% 4.46%
Lehman Brothers Municipal Bond
Index(3) 4.84% 5.53% 5.24%
1 YEAR 5 YEARS 10 YEARS
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Franklin California Tax-Free Income 3.86% 4.90% 4.96%
Fund - Class C(2)
Lehman Brothers Municipal Bond Index(3) 4.84% 5.53% 5.76%
1 YEAR 5 YEARS 10 YEARS
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Franklin California Tax-Free Income 5.39% 5.57% 5.59%
Fund - Advisor Class(4)
Lehman Brothers Municipal Bond Index(3) 4.84% 5.53% 5.76%
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After-tax returns are calculated using the historical highest individual federal marginal income tax rates and do not reflect the impact of state and local taxes. Your actual after-tax returns depend on your particular tax situation and may differ from those shown.
These after-tax return figures do not apply to you if you hold your Fund shares through a tax-deferred arrangement such as a 401(k) plan or individual retirement account. The Fund's past performance, before and after taxes, is not necessarily an indication of how it will perform in the future.
After-tax returns are shown only for Class A; after-tax returns for other classes of shares will vary.
1. Figures do not reflect sales charges. If they did, returns would be lower.
As of June 30, 2007, the Fund's year-to-date return was 0.72% for Class A.
2. Figures reflect sales charges.
3. Source: Standard & Poor's Micropal. The unmanaged Lehman Brothers
Municipal Bond Index is a market value-weighted index engineered for the
long-term tax-exempt bond market. All bonds included have a minimum credit
rating of at least Baa. They must have an outstanding par value of at least
$7 million and be issued as part of a transaction of at least $75 million.
The bonds must be dated after 12/31/90, and must be at least one year from
their maturity date. Remarketed issues, taxable municipal bonds, bonds with
floating rates and derivatives are excluded from the index. The index has
four main bond sectors: general obligation, revenue, insured and prerefunded.
It includes reinvested income or distributions. One cannot invest directly in
an index, nor is an index representative of the Fund's portfolio.
4. Effective October 1, 2001, the Fund began offering Advisor Class shares,
which do not have sales charges or a Rule 12b-1 plan. Performance quotations
for this class reflect the following methods of calculation: (a) for periods
prior to October 1, 2001, a restated figure is used based on the Fund's Class
A performance, excluding the effect of Class A's maximum initial sales charge
but reflecting the effect of the Class A Rule 12b-1 fees; and (b) for periods
after October 1, 2001, actual Advisor Class performance is used reflecting
all charges and fees applicable to that class.
FEES AND EXPENSES
This table describes the fees and expenses that you may pay if you buy and hold shares of the Fund.
SHAREHOLDER FEES (FEES PAID DIRECTLY FROM YOUR INVESTMENT)
ADVISOR
CLASS A CLASS B(4) CLASS C CLASS
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Maximum sales charge (load) as a percentage
of offering price 4.25%(2) 4.00% 1.00% None
Load imposed on purchases 4.25%(2) None None None
Maximum deferred sales charge (load)
None(3) 4.00%(5) 1.00% None
Redemption fee on shares sold within 7
calendar days following their purchase
date(1) 2.00% 2.00% 2.00% 2.00%
Please see "Choosing a Share Class" on page 26 for an explanation of how and
when these sales charges apply.
ANNUAL FUND OPERATING EXPENSES (expenses deducted from Fund assets)
ADVISOR
CLASS A CLASS B(4) CLASS C CLASS
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Management fees 0.45% 0.45% 0.45% 0.45%
Distribution and service (12b-1) fees
0.09% 0.65% 0.65% None
Other expenses 0.04% 0.04% 0.04% 0.04%
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Total annual Fund operating expenses 0.58% 1.14% 1.14% 0.49%
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1. The redemption fee is calculated as a percentage of the amount redeemed
(using standard rounding criteria), and may be charged when you sell or
exchange your shares or if your shares are involuntarily redeemed. The fee
is retained by the Fund and generally withheld from redemption proceeds. For
more details, see "Redemption Fee" section.
2. The dollar amount of the sales charge is the difference between the
offering price of the shares purchased (which factors in the applicable sales
charge in this table) and the net asset value of those shares. Since the
offering price is calculated to two decimal places using standard rounding
criteria, the number of shares purchased and the dollar amount of the sales
charge as a percentage of the offering price and of your net investment may
be higher or lower depending on whether there was a downward or upward
rounding.
3. There is a 1% contingent deferred sales charge that applies to investments of $1 million or more (see page 30).
4. New or additional investments into Class B are no longer permitted.
Existing shareholders of Class B shares may continue as Class B shareholders,
continue to reinvest dividends into Class B shares and exchange their Class B
shares for Class B shares of other Franklin Templeton funds as permitted by
the current exchange privileges.
5. Declines to zero after six years.
EXAMPLE
This example can help you compare the cost of investing in the Fund with the cost of investing in other mutual funds. It assumes:
o You invest $10,000 for the periods shown;
o Your investment has a 5% return each year; and
o The Fund's operating expenses remain the same.
Although your actual costs may be higher or lower, based on these assumptions your costs would be:
1 YEAR 3 YEARS 5 YEARS 10 YEARS
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If you sell your shares at the end of
the period:
CLASS A $482(1) $603 $735 $1,120
CLASS B $516 $662 $828 $1,229(2)
CLASS C $216 $362 $628 $1,386
ADVISOR CLASS $50 $157 $274 $616
If you do not sell your shares:
CLASS B $116 $362 $628 $1,229(2)
CLASS C $116 $362 $628 $1,386
1. Assumes a contingent deferred sales charge (CDSC) will not apply.
2. Assumes conversion of Class B shares to Class A shares after eight years,
lowering your annual expenses from that time on.
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MANAGEMENT
Franklin Advisers, Inc. (Advisers), One Franklin Parkway, San Mateo, CA 94403-1906, is the Fund's investment manager. Together, Advisers and its affiliates manage $624 billion in assets.
The Fund is managed by dedicated professionals focused on investments in tax-free municipal securities. The portfolio managers are as follows:
JOHN WILEY, VICE PRESIDENT OF ADVISERS
Mr. Wiley has been an analyst or portfolio manager of the Fund since 1991. He
joined Franklin Templeton Investments in 1989.
CHRISTOPHER SPERRY, VICE PRESIDENT OF ADVISERS
Mr. Sperry has been an analyst or portfolio manager of the Fund since 2000.
He joined Franklin Templeton Investments in 1996.
MR. WILEY AND MR. SPERRY have equal authority over all aspects of the Fund's investment portfolio, including but not limited to, purchases and sales of individual securities, portfolio risk assessment, and the management of daily cash balances in accordance with anticipated management requirements. The degree to which each manager may perform these functions, and the nature of these functions, may change from time to time.
The Fund's SAI provides additional information about the portfolio managers' compensation, other accounts that they manage and their ownership of Fund shares.
The Fund pays Advisers a fee for managing the Fund's assets. For the fiscal year ended March 31, 2007, the Fund paid 0.45% of its average monthly net assets to the manager for its services.
A discussion regarding the basis for the board of trustees approving the investment management contract of the Fund is available in the Fund's semiannual report to shareholders for the six-month period ended September 30.
On August 2, 2004, Franklin Resources, Inc. announced that Advisers (investment manager to many of the funds within Franklin Templeton Investments, and an affiliate of the investment manager to the other funds) reached a settlement with the Securities and Exchange Commission (SEC) that resolved the issues resulting from the SEC's investigation of market timing activity in the Franklin Templeton Investments funds. Under the terms of the settlement and the SEC's administrative order, pursuant to which Advisers neither admitted nor denied any of the findings contained therein, Advisers agreed, among other matters, to pay $50 million, of which $20 million is a civil penalty, to be distributed to shareholders of certain funds in accordance with a plan to be developed by an independent distribution consultant. Such a distribution plan has been prepared and submitted to the SEC for approval. On June 6, 2007, the SEC posted for public comment the proposed plan of distribution for the market timing settlement. Following a 30-day public comment period, and once the SEC approves the final plan of distribution, disbursements of settlement monies will be made promptly to individuals who were shareholders of the designated funds during the relevant period, in accordance with the terms and conditions of the settlement and plan.
Franklin Resources, Inc., certain of its subsidiaries and certain funds, current and former officers, employees, and directors have been named in multiple lawsuits in different courts alleging violations of various federal securities and state laws and seeking, among other relief, monetary damages, restitution, removal of fund trustees, directors, investment managers, administrators, and distributors, rescission of management contracts and 12b-1 plans, and/or attorneys' fees and costs. Specifically, the lawsuits claim breach of duty with respect to alleged arrangements to permit market timing and/or late trading activity, or breach of duty with respect to the valuation of the portfolio securities of certain Templeton funds managed by Franklin Resources, Inc. subsidiaries, allegedly resulting in market timing activity. The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in the SEC's findings as described above. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds or Franklin Resources, Inc.
To date, more than 400 similar lawsuits against at least 19 different mutual fund companies, among other defendants, have been filed in federal district courts throughout the country. Because these cases involve common questions of fact, the Judicial Panel on Multidistrict Litigation (the Judicial Panel) ordered the creation of a multidistrict litigation in the United States District Court for the District of Maryland, entitled "In re Mutual Funds Investment Litigation" (the MDL). The Judicial Panel then transferred similar cases from different districts to the MDL for coordinated or consolidated pretrial proceedings.
On December 13, 2004, Franklin Templeton Distributors, Inc. (Distributors)
(the principal underwriter of shares of the Franklin Templeton mutual funds)
and Advisers reached an agreement with the SEC, resolving the issues
resulting from the SEC's investigation concerning marketing support payments
to securities dealers who sell fund shares. In connection with that
agreement, in which Advisers and Distributors neither admitted nor denied any
of the findings contained therein, they agreed to pay the funds a penalty of
$20 million and disgorgement of $1 (one dollar), in accordance with a plan to
be developed by an independent distribution consultant to be paid for by
Advisers and Distributors. The SEC approved the independent distribution
consultant's proposed plan of distribution arising from this SEC order, and
disbursement of the settlement monies to the designated funds under this plan
was completed in September 2006, in accordance with the terms and conditions
of the SEC's order and the plan.
Franklin Resources, Inc., certain of its subsidiaries and certain funds, current and former officers, employees, and directors, have also been named in multiple lawsuits alleging violations of federal securities and state laws relating to the disclosure of marketing support payments and/or payment of allegedly excessive commissions and/or advisory or distribution fees, and seeking, among other relief, monetary damages, restitution, rescission of advisory contracts, including recovery of all fees paid pursuant to those contracts, an accounting of all monies paid to the named investment managers, declaratory relief, injunctive relief, and/or attorneys' fees and costs. These lawsuits are styled as class actions or derivative actions brought on behalf of certain funds.
Franklin Resources, Inc. previously disclosed these issues as matters under investigation by government authorities and the subject of an internal company inquiry as well as private lawsuits in its regulatory filings and on its public website. Any further updates on these matters will be disclosed on Franklin Resources, Inc.'s website at franklintempleton.com under "Statement on Current Industry Issues."
DISTRIBUTIONS AND TAXES
INCOME AND CAPITAL GAIN DISTRIBUTIONS
The Fund has qualified to be treated as a regulated investment company under the Internal Revenue Code (Code). As a regulated investment company, the Fund generally pays no federal income tax on the income and gains it distributes to you. The Fund intends to pay an income dividend monthly from its net investment income. Capital gains, if any, may be distributed at least annually. The amount of any distribution will vary, and there is no guarantee the Fund will pay either income dividends or a capital gain distribution. Your income dividends and capital gain distribution will be automatically reinvested in additional shares at net asset value unless you elect to receive cash payments.
ANNUAL STATEMENTS. Every January, you will receive a statement that shows the tax status of distributions you received the previous year. Under provisions adopted in the 2005 Tax Act, the Fund is now required for income distributions of $10 or more to provide you with a statement showing the amount of exempt-interest dividends paid as well as distributions of taxable ordinary income and capital gains. Distributions declared in December but paid in January are taxable as if they were paid in December, and distributions of ordinary income and capital gains are taxable whether you reinvest your distributions in additional Fund shares or receive them in cash.
AVOID "BUYING A DIVIDEND." If you invest in a Fund shortly before it makes a capital gain distribution, you may receive some of your investment back in the form of a taxable distribution. For example, if you buy 500 shares in the Fund on December 10th at the Fund's current net asset value (NAV) of $10 per share, and the Fund makes a capital gain distribution on December 15th of $1 per share, your shares will then have an NAV of $9 per share (disregarding any change in the Fund's market value), and you will have to pay a tax on what is essentially a return of your investment of $1 per share. This tax treatment is required even if you reinvest the $1 per share capital gain distribution in additional Fund shares.
TAX CONSIDERATIONS
You may receive three different types of distributions from the Fund:
o EXEMPT-INTEREST DIVIDENDS. Most Fund distributions consist of exempt-interest dividends (dividends paid from interest earned on municipal securities). In general, these dividends are exempt from regular federal income tax. Exempt-interest dividends from interest earned on municipal securities of the state of California, or its political subdivisions, generally are also exempt from California's personal income tax. Income from municipal securities of other states generally does not qualify as tax-free. Because of these tax exemptions, the Fund may not be a suitable investment for retirement plans and other tax-exempt investors, or for residents of states other than California.
A Kentucky Court of Appeals recently found, in the case captioned DAVIS V. DEPT. OF REVENUE, that a provision in Kentucky law that exempts from taxation interest earned on municipal securities of Kentucky or its political subdivisions, but taxes such income when it is derived from non-Kentucky municipal securities, is unconstitutional. The Kentucky Supreme Court declined to review the decision of the Kentucky Court of Appeals, but the U.S. Supreme Court has now granted CERTIORARI to hear Kentucky's petition challenging this decision. The final outcome of DAVIS will likely not be known until the spring or early summer of 2008. At that time, a final decision affirming the Kentucky Appellate Court could impact the state tax status of distributions from state tax-free funds, such as the Fund, and could negatively impact the value of securities held by such funds, and, therefore, the value of fund shares. However, irrespective of how the U.S. Supreme Court decides DAVIS, exempt-interest dividends will continue to be exempt from regular federal income tax as described above.
Corporate shareholders subject to California's corporate franchise tax system should note that these dividends may be fully taxable in California, and they should consult with their tax advisor about whether the Fund is a suitable investment given the potential taxability of these dividends.
Exempt-interest dividends are taken into account when determining the taxable portion of your Social Security or railroad retirement benefits. The Fund may invest a portion of its assets in private activity bonds. The income from these bonds is a tax preference item when determining your federal alternative minimum tax.
o TAXABLE INCOME DIVIDENDS. The Fund may invest a portion of its assets in securities that pay income that is not tax-exempt. The Fund also may distribute to you any market discount and net short-term capital gains from the sale of its portfolio securities. If you are a taxable investor, Fund distributions from this income are taxable to you as ordinary income, and generally will not be treated as qualified dividends subject to reduced rates of taxation for individuals.
o CAPITAL GAIN DISTRIBUTIONS. The Fund also may realize net long-term capital gains and distribute these gains to you as capital gain distributions. These distributions are taxable to you as long-term capital gains no matter how long you have owned your shares. Capital gain distributions and any net long-term capital gains you realize from the sale of Fund shares are subject to a maximum rate of tax of 15% for individuals in the 25% or higher federal income tax brackets. For individuals in the 10% and 15% tax brackets, the rate for taxation of any capital gain distributions received and gains realized in calendar year 2007 is 5% and in calendar years 2008 through 2010 is 0%. These reduced rates of taxation of capital gain distributions and net long-term capital gains are now scheduled to sunset on December 31, 2010, unless extended or made permanent before that date.
RECLASSIFICATION RISK. The Internal Revenue Service (IRS) has announced that holders of tax-exempt bonds have risks that their tax-exempt income may be reclassified as taxable if the bonds that they own were issued in an abusive transaction or become taxable by reason of refinancing irregularities or the misuse of proceeds from the bond offering. While the Fund endeavors to purchase only bona fide tax-exempt securities, there is a risk that a bond issued as tax-exempt may be reclassified by the IRS as taxable, creating taxable rather than tax-exempt income for the Fund. In this case, the Fund might be required to send to you and file with the IRS information returns (Forms 1099-DIV) for the current or prior calendar years classifying (or reclassifying) some of its exempt-interest dividends as taxable dividends. On prior year dividends, you might need to file amended income tax returns and pay additional tax and interest to avoid additional penalties and to limit interest charges on these taxable dividends.
SALES OF FUND SHARES. When you sell your shares in the Fund, you may realize a capital gain or loss. For tax purposes, an exchange of your Fund shares for shares of a different Franklin Templeton fund is the same as a sale, and will normally generate a gain or loss that will be reported to you in your year-end tax information. An exchange of your shares in one class in the Fund for shares of another class in the same Fund is not a taxable event, and no gain or loss will be reported on such a transaction.
BACKUP WITHHOLDING. If you do not provide your Fund with your proper taxpayer identification number and certain required certifications, you may be subject to backup withholding at a rate of 28% on any distributions of income (including any exempt-interest dividends), capital gains or proceeds from the sale of your shares. The Fund also must withhold if the IRS instructs it to do so.
STATE AND LOCAL TAXES. Distributions of ordinary income and capital gains (if any), and gains from the sale of your Fund shares, generally are subject to state and local taxes.
NON-U.S. INVESTORS. The United States imposes a withholding tax (at a 30% or lower treaty rate) on all Fund dividends of ordinary income. Exempt-interest dividends and capital gain dividends paid by the Fund from its net long-term capital gains are generally exempt from this withholding tax.
The 2004 Tax Act amended these withholding tax provisions to exempt most dividends paid by the Fund from U.S. source taxable interest income and short-term capital gains to the extent such income and gains would be exempt if earned directly by a non-U.S. investor. Under this law, any taxable ordinary dividends designated as interest-related dividends (dividends that are designated as a payment out of qualified interest income) and short-term capital gain dividends generally will not be subject to a U.S. withholding tax, provided you properly certify your status as a non-U.S. investor.
These exemptions from nonresident alien withholding apply to any distributions of taxable interest-related and short-term capital gain dividends paid by a Fund out of income earned by the Fund prior to April 1, 2008. Distributions of exempt-interest and net capital gains (distributions of net long-term capital gains) remain exempt from nonresident withholding.
Non-U.S. investors may also be subject to U.S. estate tax. The 2004 Tax Act provides a partial exemption from U.S. estate tax that may apply to Fund shares held by the estate of a non-U.S. decedent dying after December 31, 2004 and before January 1, 2008.
Special U.S. tax certification requirements apply to non-U.S. investors. Non-U.S. investors who fail to meet these certification requirements will be subject to backup withholding on any taxable and tax-exempt dividends, short-term capital gain dividends, distributions of long-term capital gains, and redemption proceeds received from the Fund. Non-U.S. investors should note that the application of backup withholding will apply even though this income is otherwise not taxable.
The federal income and estate tax rules that apply to non-U.S. investors are detailed and complex. Non-U.S. investors are encouraged to see the more detailed information contained in the section on "Distributions and Taxes" in the Statement of Additional Information, or contact Franklin Templeton Investments at 1-800/DIAL BEN for more information on these requirements.
OTHER TAX INFORMATION. This discussion of "Distributions and Taxes" is not written to provide you with tax advice, and does not purport to deal with all of the tax consequences that may be applicable to your investment in the Fund. You should consult your own tax advisor regarding your particular circumstances before making an investment in the Fund, or about the federal, state, local or foreign tax consequences of your investment in the Fund.
FINANCIAL HIGHLIGHTS
This table presents the Fund's financial performance for the past five years. Certain information reflects financial results for a single Fund share. The total returns in the table represent the rate that an investor would have earned on an investment in the Fund assuming reinvestment of dividends and capital gains. This information has been derived from the financial statements audited by PricewaterhouseCoopers LLP, whose report, along with the Fund's financial statements, are included in the annual report, which is available upon request.
YEAR ENDED MARCH 31,
--------------------------------------------------------------------------------
CLASS A 2007 2006 2005 2004 2003
--------------------------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .......... $ 7.26 $ 7.27 $ 7.32 $ 7.24 $ 7.07
--------------------------------------------------------------------------------
Income from investment operations a:
Net investment income b .................... 0.33 0.33 0.34 0.35 0.35
Net realized and unrealized gains (losses) . 0.10 -- d (0.04) 0.07 s0.21
--------------------------------------------------------------------------------
Total from investment operations ............ 0.43 0.33 0.30 0.42 0.56
--------------------------------------------------------------------------------
Less distributions from:
Net investment income ...................... (0.33) (0.33) (0.34) (0.34) (0.36)
Net realized gains ......................... (0.01) (0.01) (0.01) -- (0.03)
--------------------------------------------------------------------------------
Total distributions ......................... (0.34) (0.34) (0.35) (0.34) (0.39)
--------------------------------------------------------------------------------
Redemption fees ............................. -- d -- d -- d -- --
--------------------------------------------------------------------------------
Net asset value, end of year ................ $ 7.35 $ 7.26 $ 7.27 $ 7.32 $ 7.24
================================================================================
Total return c .............................. 6.01% 4.64% 4.16% 6.04% 8.05%
RATIO TO AVERAGE NET ASSETS:
Expenses ................................... 0.58% 0.58% 0.57% 0.58% 0.57%
Net investment income ...................... 4.52% 4.55% 4.76% 4.80% 4.90%
SUPPLEMENTAL DATA:
Net assets, end of year (000's) ............. $ 12,949,083 $ 12,418,764 $ 12,270,603 $ 12,784,815 $ 13,376,339
Portfolio turnover rate ..................... 8.02% 8.82% 8.46% 11.57% 11.92%
|
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
------------------------------------------------------------
YEAR ENDED MARCH 31,
CLASS B 2007 2006 2005 2004 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 7.26 $ 7.26 $ 7.31 $ 7.23 $ 7.07
------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.29 0.29 0.30 0.30 0.31
Net realized and unrealized gains (losses) ........... 0.09 0.01 (0.04) 0.08 0.20
------------------------------------------------------------
Total from investment operations ...................... 0.38 0.30 0.26 0.38 0.51
------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.29) (0.29) (0.30) (0.30) (0.32)
Net realized gains ................................... (0.01) (0.01) (0.01) -- (0.03)
------------------------------------------------------------
Total distributions ................................... (0.30) (0.30) (0.31) (0.30) (0.35)
------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- --
------------------------------------------------------------
Net asset value, end of year .......................... $ 7.34 $ 7.26 $ 7.26 $ 7.31 $ 7.23
============================================================
Total return c ........................................ 5.28% 4.20% 3.57% 5.44% 7.46%
RATIO TO AVERAGE NET ASSETS:
Expenses ............................................. 1.14% 1.14% 1.14% 1.15% 1.14%
Net investment income ................................ 3.96% 3.99% 4.19% 4.23% 4.33%
SUPPLEMENTAL DATA:
Net assets, end of year (000's) ....................... $289,147 $331,385 $358,856 $394,728 $402,085
Portfolio turnover rate ............................... 8.02% 8.82% 8.46% 11.57% 11.92%
|
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
------------------------------------------------------------
YEAR ENDED MARCH 31,
CLASS C 2007 2006 2005 2004 2003
------------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 7.25 $ 7.26 $ 7.31 $ 7.23 $ 7.06
------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.29 0.29 0.30 0.30 0.31
Net realized and unrealized gains (losses) ........... 0.10 -- d (0.04) 0.08 0.21
------------------------------------------------------------
Total from investment operations ...................... 0.39 0.29 0.26 0.38 0.52
------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.29) (0.29) (0.30) (0.30) (0.32)
Net realized gains ................................... (0.01) (0.01) (0.01) -- (0.03)
------------------------------------------------------------
Total distributions ................................... (0.30) (0.30) (0.31) (0.30) (0.35)
------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- --
------------------------------------------------------------
Net asset value, end of year .......................... $ 7.34 $ 7.25 $ 7.26 $ 7.31 $ 7.23
============================================================
Total return c ........................................ 5.43% 4.06% 3.57% 5.46% 7.46%
RATIO TO AVERAGE NET ASSETS:
Expenses ............................................. 1.14% 1.14% 1.14% 1.15% 1.13%
Net investment income ................................ 3.96% 3.99% 4.19% 4.23% 4.34%
SUPPLEMENTAL DATA:
Net assets, end of year (000's) ....................... $631,184 $546,815 $494,254 $523,545 $538,460
Portfolio turnover rate ............................... 8.02% 8.82% 8.46% 11.57% 11.92%
|
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
-----------------------------------------------------------
YEAR ENDED MARCH 31,
ADVISOR CLASS 2007 2006 2005 2004 2003
-----------------------------------------------------------
PER SHARE OPERATING PERFORMANCE
(for a share outstanding throughout the year)
Net asset value, beginning of year .................... $ 7.25 $ 7.26 $ 7.31 $ 7.23 $ 7.07
------------------------------------------------------------
Income from investment operations a:
Net investment income b .............................. 0.34 0.34 0.35 0.35 0.36
Net realized and unrealized gains (losses) ........... 0.10 -- d (0.05) 0.08 0.19
------------------------------------------------------------
Total from investment operations ...................... 0.44 0.34 0.30 0.43 0.55
------------------------------------------------------------
Less distributions from:
Net investment income ................................ (0.34) (0.34) (0.34) (0.35) (0.36)
Net realized gains ................................... (0.01) (0.01) (0.01) -- (0.03)
------------------------------------------------------------
Total distributions ................................... (0.35) (0.35) (0.35) (0.35) (0.39)
------------------------------------------------------------
Redemption fees ....................................... -- d -- d -- d -- --
------------------------------------------------------------
Net asset value, end of year .......................... $ 7.34 $ 7.25 $ 7.26 $ 7.31 $ 7.23
============================================================
Total return c ........................................ 6.11% 4.73% 4.26% 6.13% 8.00%
RATIO TO AVERAGE NET ASSETS:
Expenses ............................................. 0.49% 0.49% 0.49% 0.50% 0.49%
Net investment income ................................ 4.61% 4.64% 4.84% 4.88% 4.98%
SUPPLEMENTAL DATA:
Net assets, end of year (000's) ....................... $122,456 $ 65,655 $ 42,389 $ 14,096 $ 10,217
Portfolio turnover rate ............................... 8.02% 8.82% 8.46% 11.57% 11.92%
|
a The amount shown for a share outstanding throughout the period may not correlate with the Statement of Operations for the period due to the timing of sales and repurchase of the Fund shares in relation to income earned and/or fluctuating market value of the investments of the Fund.
b Based on average daily shares outstanding.
c Total return does not reflect sales commissions or contingent deferred sales charges, if applicable.
d Amount rounds to less than $0.01 per share.
YOUR ACCOUNT
The board of trustees has approved the termination of offering Class B shares. Existing shareholders of Class B shares may continue as Class B shareholders, continue to reinvest dividends into Class B shares and exchange their Class B shares for Class B shares of other Franklin Templeton funds as permitted by the current exchange privileges. New or additional investments into Class B are not permitted. For Class B shares outstanding on February 28, 2005 and Class B shares acquired upon reinvestment of dividends, all Class B share attributes, including the associated Rule 12b-1 fee, contingent deferred sales charge and conversion features, will continue.
CHOOSING A SHARE CLASS
Each class has its own sales charge and expense structure, allowing you to choose the class that best meets your situation. Your investment representative can help you decide. Investors may purchase Class C shares only for Fund accounts on which they have appointed an investment representative (financial advisor) of record. Investors who have not appointed an investment representative (financial advisor) to existing Class C share Fund accounts, may not make additional purchases to those accounts but may exchange their shares to a Franklin Templeton fund that offers Class C shares. Dividend and capital gain distributions may continue to be reinvested in existing Class B or Class C share Fund accounts.
CLASS A CLASS C ADVISOR CLASS ---------------------------------------------------------------- o Initial sales o No initial sales For qualified charge of 4.25% or charge investors, see less page 34 o Deferred sales o Deferred sales charge of 1% on charge of 1% on purchases of $1 shares you sell million or more within 12 months sold within 18 months o Lower annual o Higher annual expenses than expenses than Class C due to Class A due to lower distribution higher fees] distribution fees |
[Begin callout]
FRANKLIN TEMPLETON FUNDS include all of the U.S. registered mutual funds of
Franklin Templeton Investments and the Franklin Mutual Recovery Fund. They do
not include the funds in the Franklin Templeton Variable Insurance Products
Trust.
[End callout]
CLASS A, B & C
SALES CHARGES - CLASS A
THE SALES CHARGE MAKES
UP THIS % OF THE WHICH EQUALS THIS % OF
WHEN YOU INVEST THIS AMOUNT OFFERING PRICE* YOUR NET INVESTMENT*
-------------------------------------------------------------------------------
Under $100,000 4.25 4.44
$100,000 but under $250,000 3.50 3.63
$250,000 but under $500,000 2.50 2.56
$500,000 but under $1 million 2.00 2.04
|
*The dollar amount of the sales charge is the difference between the offering price of the shares purchased (which factors in the applicable sales charge in this table) and the net asset value of those shares. Since the offering price is calculated to two decimal places using standard rounding criteria, the number of shares purchased and the dollar amount of the sales charge as a percentage of the offering price and of your net investment may be higher or lower depending on whether there was a downward or upward rounding.
SALES CHARGE REDUCTIONS AND WAIVERS
QUANTITY DISCOUNTS. We offer two ways for you to combine your current
purchase of Class A Fund shares with other existing Franklin Templeton fund
share holdings that might enable you to qualify for a lower sales charge with
your current purchase. You can qualify for a lower sales charge when you
reach certain "sales charge breakpoints." This quantity discount information
is also available free of charge at www.franklintempleton.com/
retail/jsp_cm/fund_perf/pub/quantity_discount.jsp. This web page can also be
reached at franklintempleton.com by clicking the "Funds & Performance" tab
and then choosing "Quantity Discounts."
1. CUMULATIVE QUANTITY DISCOUNT - lets you combine certain existing holdings
of Franklin Templeton fund shares - referred to as "cumulative quantity
discount eligible shares" - with your current purchase of Class A shares to
determine if you qualify for a sales charge breakpoint.
Cumulative quantity discount eligible shares are shares:
(i) Registered to (or held for):
o You, individually;
o Your spouse or domestic partner, as recognized by applicable state law;
o You jointly with your spouse or domestic partner;
o You jointly with another unrelated (not a spouse or domestic partner) person if that other person has not included the value of the shares as cumulative quantity discount eligible shares for purposes of that person's separate investments in Franklin Templeton fund shares;
o Any entity over which you or your spouse or domestic partner have
individual or shared authority, as principal, to buy and sell shares for
the account (for example, an UGMA/UTMA account for a child on which you
or your spouse or domestic partner are the custodian, a trust on which
you or your spouse or domestic partner are the trustee, a business
account [not to include retirement plans] for your solely owned business
[or the solely owned business of your spouse or domestic partner] on
which you [or your spouse or domestic partner] are the authorized
signer); THAT ARE
(ii) in one or more accounts maintained by the transfer agent for the Franklin Templeton funds on which your "current purchase broker-dealer" (as defined below) is the broker-dealer of record or one or more brokerage accounts maintained with your "current purchase broker-dealer." Your current purchase broker-dealer is the broker-dealer (financial advisor) for the Fund account (or brokerage account) that will hold the shares from your current purchase. If you do not select a broker-dealer (financial advisor) for your current purchase, we will consider the distributor of the Fund's shares to be your current purchase broker-dealer for purposes of identifying cumulative quantity discount eligible shares that might be combined with your current purchase.
If you believe there are cumulative quantity discount eligible shares that can be combined with your current purchase to achieve a sales charge breakpoint, you must, at the time of your purchase (including at the time of any future purchase) specifically identify those shares to your current purchase broker-dealer.
The value of cumulative quantity discount eligible shares equals the cost or current value of those shares, whichever is higher. The current value of shares is determined by multiplying the number of shares by their highest current public offering price. You should retain any records necessary to substantiate historical share costs because your current purchase broker-dealer may not have or maintain this information.
If there are cumulative quantity discount eligible shares that would qualify for combining with your current purchase and you do not tell your current purchase broker-dealer at the time of your current purchase or any future purchase, you may not receive the benefit of a reduced sales charge that might otherwise be available.
Franklin Templeton fund shares held as follows cannot be combined with your current purchase for purposes of the cumulative quantity discount:
o Shares held indirectly through financial intermediaries other than your current purchase broker-dealer (for example, shares held in a different broker-dealer's brokerage account or with a bank or an investment advisor);or
o Shares held directly in a Franklin Templeton fund account on which the broker-dealer (financial advisor) of record is different than your current purchase broker-dealer.
2. LETTER OF INTENT (LOI) - expresses your intent to buy a stated dollar amount of "cumulative quantity discount eligible shares" (as defined in the "Cumulative quantity discount" section above) over a 13-month period and lets you receive the same sales charge as if all shares had been purchased at one time. We will reserve 5% of your total intended purchase in Class A shares registered in your name until you fulfill your LOI to cover any additional sales charge that may apply if you do not buy the amount stated in your LOI. Please refer to the SAI for more LOI details. To sign up for these programs, complete the appropriate section of your account application.
SALES CHARGE WAIVERS. Class A shares may be purchased without an initial sales charge or contingent deferred sales charge (CDSC) by certain investors or for certain payments. If you would like information about available sales charge waivers, call your investment representative or call Shareholder Services at 1-800/632-2301. A list of available sales charge waivers also may be found in the SAI.
INVESTMENTS OF $1 MILLION OR MORE
If you invest $1 million or more, either as a lump sum or through our cumulative quantity discount or letter of intent programs, you can buy Class A shares without an initial sales charge. However, there is a 1% CDSC on any shares you sell within 18 months of purchase. The way we calculate the CDSC is the same for each class (please see page 32).
DISTRIBUTION AND SERVICE (12B-1) FEES
Class A has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution fees of up to 0.10% per year to those who sell and distribute Class A shares and provide other services to shareholders. Because these fees are paid out of Class A's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS B
IF YOU SELL YOUR SHARES
WITHIN THIS MANY YEARS AFTER BUYING THEM THIS % IS DEDUCTED FROM
YOUR PROCEEDS AS A CDSC
-----------------------------------------------------------------------
1 Year 4
2 Years 4
3 Years 3
4 Years 3
5 Years 2
6 Years 1
7 Years 0
|
There is a CDSC if you sell your shares within six years, as described in the table above. The way we calculate the CDSC is the same for each class (please see page 32). After eight years, your Class B shares automatically convert to Class A shares, lowering your annual expenses from that time on.
DISTRIBUTION AND SERVICE (12B-1) FEES
Class B has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other fees of up to 0.65% per year for the sale of Class B shares and for services provided to shareholders. Because these fees are paid out of Class B's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
SALES CHARGES - CLASS C
With Class C shares, there is no initial sales charge.
We place any investment of $1 million or more in Class A shares, since Class A's annual expenses are lower.
CDSC
There is a 1% CDSC on any Class C shares you sell within 12 months of purchase. The way we calculate the CDSC is the same for each class (please see page 32).
DISTRIBUTION AND SERVICE (12B-1) FEES
Class C has a distribution plan, sometimes known as a Rule 12b-1 plan, that allows the Fund to pay distribution and other fees of up to 0.65% per year for the sale of Class C shares and for services provided to shareholders. Because these fees are paid out of Class C's assets on an ongoing basis, over time these fees will increase the cost of your investment and may cost you more than paying other types of sales charges.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B & C
The CDSC for each class is based on the current value of the shares being sold or their net asset value when purchased, whichever is less. There is no CDSC on shares you acquire by reinvesting your dividends or capital gain distributions.
[Begin callout]
The HOLDING PERIOD FOR THE CDSC begins on the day you buy your shares. Your
shares will age one month on that same date the next month and each following
month.
For example, if you buy shares on the 18th of the month, they will age one
month on the 18th day of the next month and each following month.
[End callout]
To keep your CDSC as low as possible, each time you place a request to sell shares we will first sell any shares in your account that are not subject to a CDSC. If there are not enough of these to meet your request, we will sell the shares in the order they were purchased. We will use this same method if you exchange your shares into another Franklin Templeton fund (please see page 43 for exchange information).
REINSTATEMENT PRIVILEGE
If you sell shares of a Franklin Templeton fund that were held indirectly for
your benefit in an account with your investment representative's firm or your
bank's trust department or that were registered to you directly by the Fund's
transfer agent (or, to an affiliated custodian or trustee of the Fund's
transfer agent), you may reinvest all or a portion of the proceeds from that
sale within 90 days of the sale without an initial sales charge. This
Reinstatement Privilege does not apply to: (i) a purchase of Fund shares made
through a regularly scheduled automatic investment plan such as a purchase by
a regularly scheduled payroll deduction or transfer from a bank account, or
(ii) a purchase of Fund shares with proceeds from the sale of Franklin
Templeton fund shares that were held indirectly through an Employer Sponsored
Retirement Plan that is not a DCS Plan or a non-Franklin Templeton individual
or employer sponsored IRA.
In order to take advantage of this Reinstatement Privilege, you must inform your investment representative or the Fund's transfer agent of this privilege at the time of your investment. The proceeds from the earlier sale must also be invested within the same share class as that of the sold shares, except proceeds will be reinvested in Class A shares if the proceeds are from the sale of (i) Class B shares; or (ii) Class C shares if at the time of investment you have not appointed an investment representative (financial advisor) of record for the Fund account(s) in which the purchased shares will be held. Proceeds from the earlier sale of Class Z shares may also be invested in Class A shares under this Reinstatement Privilege.
If you paid a CDSC when you sold your Class A or C shares, we will credit back to you the CDSC paid on the amount you are reinvesting within 90 days of the sale by adding it to the amount of your reinvestment (for example, if you are reinvesting $10,000 within 90 days of an earlier $10,000 sale on which you paid a $100 CDSC, the amount of your reinvestment will equal $10,100). The new shares issued with your reinvestment WILL BE subject to any otherwise applicable CDSC. If, however, you (except Employer Sponsored Retirement Plans) paid a CDSC when you sold (1) Class B shares; or (2) Class C shares held at the time of sale in a Franklin Templeton fund account without an investment representative (financial advisor) appointed by you and invest the proceeds from that sale in Class A shares within 90 days of the sale, you will not be credited with any CDSC paid at the time of sale. In this case, the new Class A shares issued with your reinvestment WILL NOT BE subject to any otherwise applicable CDSC.
Proceeds immediately placed in a Franklin Templeton Bank Certificate of Deposit (CD) also may be reinvested without an initial sales charge if you reinvest them within 90 days from the date the CD matures, including any rollover.
This privilege does not apply to shares you buy and sell under our exchange program. Shares purchased with the proceeds from a money fund may be subject to a sales charge.
QUALIFIED INVESTORS - ADVISOR CLASS
The following investors or investments may qualify to buy Advisor Class shares of the Fund:
o Shares acquired by a financial intermediary in connection with its mutual fund trading platform that the intermediary holds, directly or indirectly, on behalf of a beneficial owner who has entered into a comprehensive fee or other advisory fee arrangement with any broker-dealer, trust company or registered investment advisor (RIA) that is not an affiliate or associated person of the financial intermediary, provided the financial intermediary has entered into an agreement with Distributors authorizing the sale of Fund shares. Minimum initial investment: $50,000 for individual or multiple clients.
o Shares acquired by a financial intermediary that the intermediary holds on behalf of a beneficial owner who has entered into a comprehensive fee or other advisory fee arrangement with the financial intermediary or an affiliate or associated person of the financial intermediary, provided the financial intermediary has entered into an agreement with Distributors authorizing the sale of Fund shares. No minimum initial investment.
o Governments, municipalities, and tax-exempt entities that meet the requirements for qualification under section 501 of the Internal Revenue Code. Minimum initial investment: $1 million in Advisor Class or Class Z shares of any Franklin Templeton fund.
o Current and former officers, trustees, directors, full-time employees (and their family members) of both Franklin Templeton Investments and Franklin Templeton Funds, consistent with our then-current policies. Minimum initial investment: $100 ($50 for accounts with an automatic investment plan).
o Assets held in accounts managed by a subsidiary of Franklin Resources, Inc.: (1) under an advisory agreement (including sub-advisory agreements); and/or (2) as Trustee of an inter vivos or testamentary trust.
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets.
o An individual or entity associated with a current customer of Franklin Templeton Institutional, LLC (FTI, LLC) if approved by FTI, LLC in consultation with its customer.
BUYING SHARES
Regular accounts $1,000 Automatic investment plans $50 UGMA/UTMA accounts $100 Broker-dealer sponsored wrap account programs no minimum Current and former full-time employees, officers, trustees and directors of Franklin Templeton entities, and their family members $100 |
Please note that you may only buy shares of a fund eligible for sale in your state or jurisdiction.
ACCOUNT APPLICATION
If you are opening a new account, please complete and sign the enclosed account application. Make sure you indicate the share class you have chosen. If you do not indicate a class, we will place your purchase in Class A shares. To save time, you can sign up now for services you may want on your account by completing the appropriate sections of the application (see "Investor Services" on page 38). For example, if you would like to link one of your bank accounts to your Fund account so that you may use electronic funds transfer to and from your bank account to buy and sell shares, please complete the bank information section of the application. We will keep your bank information on file for future purchases and redemptions. We do not accept cash, credit card convenience checks, non-bank money orders or travelers checks as forms of payment to purchase shares.
BUYING SHARES
---------------------------------------------------------------------------------------------
OPENING AN ACCOUNT ADDING TO AN ACCOUNT
---------------------------------------------------------------------------------------------
THROUGH YOUR INVESTMENT
REPRESENTATIVE Contact your investment Contact your investment
representative representative
---------------------------------------------------------------------------------------------
If you have another Franklin Before requesting a telephone or
BY PHONE/ONLINE Templeton fund account with your online purchase into an existing
bank account information on account, please make sure we
(Up to $100,000 per file, you may open a new account have your bank account
shareholder per day) by phone. At this time, a new information on file. If we do
account may not be opened online. not have this information, you
1-800/632-2301 will need to send written
To make a same day investment, instructions with your bank's
franklintempleton.com your phone order must be name and address and a voided
received and accepted by us by check or savings account deposit
Note: (1) certain 1:00 p.m. Pacific time or the slip. If the bank and Fund
account types are not close of the New York Stock accounts do not have at least
available for online Exchange, whichever is earlier. one common owner, your written
account access and (2) request must be signed by ALL
the amount may be fund AND bank account owners,
higher for members of and each individual must have
Franklin Templeton VIP his or her signature guaranteed.
ServicesTM. Please see
page 40 for more To make a same day investment,
information regarding your phone or online order must
eligibility. be received and accepted by us
by 1:00 p.m. Pacific time or the
close of the New York Stock
Exchange, whichever is earlier.
---------------------------------------------------------------------------------------------
Make your check payable to Make your check payable to
Franklin California Tax-Free Franklin California Tax-Free
BY MAIL Income Fund. Income Fund. Include your
account number on the check.
Mail the check and your signed
application to Investor Services. Fill out the deposit slip from
your account statement. If you
do not have a slip, include a
note with your name, the Fund
name, and your account number.
Mail the check and deposit slip
or note to Investor Services.
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Call to receive a wire control Call to receive a wire control
number and wire instructions. number and wire instructions.
BY WIRE Wire the funds and mail your To make a same day wire
signed application to Investor investment, the wired funds must
1-800/632-2301 Services. Please include the be received and accepted by us
(or 1-650/312-2000 wire control number or your new by 1:00 p.m. Pacific time or the
collect) account number on the close of the New York Stock
application. Exchange, whichever is earlier.
To make a same day wire
investment, the wired funds must
be received and accepted by us
by 1:00 p.m. Pacific time or the
close of the New York Stock
Exchange, whichever is earlier.
---------------------------------------------------------------------------------------------
Call Shareholder Services at Call Shareholder Services at
BY EXCHANGE 1-800/632-2301, or send signed 1-800/632-2301, or send signed
written instructions. You also written instructions. You also
may place an online exchange may place an online exchange
order. The automated telephone order.
franklintempleton.com system cannot be used to open a
new account. (Please see page 43 for
information on exchanges.)
(Please see page 43 for
information on exchanges.)
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Franklin Templeton Investor Services
P.O. Box 997151, Sacramento, CA 95899-7151
Call toll-free: 1-800/632-2301
(Monday through Friday 5:30 a.m. to 5:00 p.m., Pacific time)
or visit us online 24 hours a day, 7 days a week,
at franklintempleton.com
|
INVESTOR SERVICES
AUTOMATIC INVESTMENT PLAN
This plan offers a convenient way for you to invest in the Fund by automatically transferring money from your checking or savings account each month to buy shares. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your account application and mail it to Investor Services. If you are opening a new account, please include your minimum initial investment with your application.
AUTOMATIC PAYROLL DEDUCTION
You may invest in the Fund automatically by transferring money from your paycheck to the Fund by electronic funds transfer. If you are interested, indicate on your application that you would like to receive an Automatic Payroll Deduction Program kit.
AUTOMATED TELEPHONE SYSTEM
Our automated system offers around-the-clock access to information about your account or any Franklin Templeton fund. This service is available by dialing any of the following numbers from a touch-tone phone:
Shareholder Services 1-800/632-2301 Advisor Services 1-800/524-4040
DISTRIBUTION OPTIONS
You may reinvest distributions you receive from the Fund in an existing account in the same share class* of the Fund or another Franklin Templeton fund. Initial sales charges and CDSCs will not apply to reinvested distributions. You also can have your distributions deposited in a bank account, or mailed by check. Deposits to a bank account may be made by electronic funds transfer.
If you received a distribution and chose to return it to purchase additional shares in Class A shares of another Franklin Templeton fund, you will not be charged an initial sales charge if you invest the distribution within 90 days of the distribution date.
Please indicate on your application the distribution option you have chosen, otherwise we will reinvest your distributions in the same share class of the Fund.
*Class B and C shareholders may reinvest their distributions in Class A shares of any Franklin Templeton money fund. Advisor Class shareholders may reinvest in Advisor Class or Class A shares of another Franklin Templeton fund. To reinvest your distributions in Advisor Class shares of another Franklin Templeton fund, you must be a current shareholder in Advisor Class or otherwise qualify to buy that fund's Advisor Class shares.
TELEPHONE/ONLINE PRIVILEGES
You will automatically receive telephone/online privileges when you open your account, allowing you to obtain or view your account information, and conduct a number of transactions by phone or online, including: buy, sell, or exchange shares of most funds; use electronic funds transfer to buy or sell shares of most funds; change your address; and, add or change account services (including distribution options, systematic withdrawal plans and automatic investment plans).
To view your account information or request online transactions, you will first need to register for these services at the shareholder section of our website at franklintempleton.com. You will be asked to accept the terms of an online agreement(s) and establish a password for online services. If you are registered for online services, you may enroll online in Franklin Templeton's electronic delivery program for your shareholder documents. This will allow you to receive electronic delivery (through our website) of most funds' prospectuses, annual/semiannual reports to shareholders, and proxy statements, as well as your account(s) statements and trade confirmations, and discontinue receiving your paper copies through the U.S. mail. Using our shareholder website means you are consenting to sending and receiving personal financial information over the Internet, so you should be sure you are comfortable with the risks.
As long as we follow reasonable security procedures and act on instructions we reasonably believe are genuine, we will not be responsible for any losses that may occur from unauthorized requests. We will request passwords or other information, and also may record calls. To help safeguard your account, keep your password confidential, and verify the accuracy of your confirmation statements immediately after you receive them. Contact us immediately if you believe someone has obtained unauthorized access to your account or password. For transactions done over the Internet, we recommend the use of an Internet browser with 128-bit encryption. Certain methods of contacting us (such as by phone or by Internet) may be unavailable or delayed during periods of unusual market activity. OF COURSE, YOU CAN DECLINE TELEPHONE BUY, SELL, OR EXCHANGE PRIVILEGES ON YOUR ACCOUNT APPLICATION, OR CHOOSE NOT TO REGISTER FOR ONLINE PRIVILEGES. IF YOU HAVE TELEPHONE/ONLINE PRIVILEGES ON YOUR ACCOUNT AND WANT TO DISCONTINUE THEM, PLEASE CONTACT US FOR INSTRUCTIONS. You may reinstate these privileges at any time in writing, including online registration with respect to online privileges.
NOTE: We discourage you from including confidential or sensitive information in any Internet communication to us. If you do choose to send email (encrypted or not) to us over the Internet, you are accepting the associated risks of lack of confidentiality.
SYSTEMATIC WITHDRAWAL PLAN
This plan allows you to automatically sell your shares and receive regular payments from your account. A CDSC may apply to withdrawals that exceed certain amounts. Certain terms and minimums apply. To sign up, visit us online at franklintempleton.com or complete the appropriate section of your application.
FRANKLIN TEMPLETON VIP SERVICES/TM
You may be eligible for Franklin Templeton VIP ServicesTM if you are currently eligible for the $250,000 sales charge breakpoint based solely on shares registered directly with the Franklin Templeton funds' transfer agent and excluding shares held indirectly through brokerage accounts. Franklin Templeton VIP ServicesTM shareholders enjoy enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/632-2301 for additional information on this program.
SELLING SHARES
You can sell your shares at any time. Please keep in mind that a contingent deferred sales charge (CDSC) may apply.
SELLING SHARES IN WRITING
Generally, requests to sell $100,000 or less can be made over the phone, online, or with a simple letter. Sometimes, however, to protect you and the Fund we will need written instructions signed by all registered owners, with a signature guarantee for each owner, if:
[Begin callout]
A SIGNATURE GUARANTEE helps protect your account against fraud. You can
obtain a signature guarantee at most banks and securities dealers.
A notary public CANNOT provide a signature guarantee.
[End callout]
o you are selling more than $100,000 worth of shares
o you want your proceeds paid to someone who is not a registered owner
o you want to send your proceeds somewhere other than the address of record, or preauthorized bank or brokerage firm account
We also may require a signature guarantee on instructions we receive from an agent, not the registered owners, or when we believe it would protect the Fund against potential claims based on the instructions received.
The amount may be higher for members of Franklin Templeton VIP ServicesTM. Please see page 40 for more information regarding eligibility.
SELLING RECENTLY PURCHASED SHARES
If you sell shares recently purchased, we may delay sending you the proceeds until your check, draft or wire/electronic funds transfer has cleared, which may take seven business days or more.
REDEMPTION PROCEEDS
Your redemption check will be sent within seven days after we receive your request in proper form. We are not able to receive or pay out cash in the form of currency.
THROUGH YOUR INVESTMENT
REPRESENTATIVE Contact your investment representative
-------------------------------------------------------------------------------
Send written instructions and endorsed share
BY MAIL certificates (if you hold share certificates) to
Investor Services. Corporate, partnership or trust
accounts may need to send additional documents.
Specify the Fund, the account number and the dollar
value or number of shares you wish to sell. If you
own both Class A and B shares, also specify the class
of shares, otherwise we will sell your Class A shares
first. Be sure to include all necessary signatures
and any additional documents, as well as signature
guarantees if required.
A check will be mailed to the name(s) and address on
the account, or otherwise according to your written
instructions.
-------------------------------------------------------------------------------
As long as your transaction is for $100,000 or less,
BY PHONE/ONLINE you do not hold share certificates and you have not
changed your address by phone or online within the
1-800/632-2301 last 15 days, you can sell your shares by phone or
online. The amount may be higher for members of
franklintempleton.com Franklin Templeton VIP ServicesTM. Please see page
40 for more information regarding eligibility.
A check will be mailed to the name(s) and address on
the account, or a pre-authorized secondary address.
Written instructions, with a signature guarantee, are
required to send the check to another address or to
make it payable to another person.
-------------------------------------------------------------------------------
You can call, write, or visit us online to have
BY ELECTRONIC FUNDS redemption proceeds sent to a bank account. See the
TRANSFER (ACH) policies at left for selling shares by mail, phone,
or online.
Before requesting to have redemption proceeds sent to
a bank account, please make sure we have your bank
account information on file. If we do not have this
information, you will need to send written
instructions with your bank's name and a voided check
or savings account deposit slip. If the bank and Fund
accounts do not have at least one common owner, you
must provide written instructions signed by ALL fund
AND bank account owners, and each individual must
have his or her signature guaranteed.
If we receive your request in proper form by 1:00
p.m. Pacific time, proceeds sent by ACH generally
will be available within two to three business days.
-------------------------------------------------------------------------------
Obtain a current prospectus for the fund you are
BY EXCHANGE considering. Prospectuses are available online at
franklintempleton.com.
Call Shareholder Services at the number below or send
signed written instructions. You also may place an
exchange order online. See the policies at left for
selling shares by mail, phone, or online.
If you hold share certificates, you will need to
return them to the Fund before your exchange can be
processed.
-------------------------------------------------------------------------------
|
Franklin Templeton Investor Services P.O. Box 997151,
Sacramento, CA 95899-7151
Call toll-free: 1-800/632-2301
(Monday through Friday 5:30 a.m. to 5:00 p.m., Pacific time)
or visit us online 24 hours a day, 7 days a week, at
franklintempleton.com
EXCHANGING SHARES
EXCHANGE PRIVILEGE
CLASS A, B & C
You can exchange shares between most Franklin Templeton funds within the same class,* generally without paying any additional sales charges. If you exchange shares held for less than six months, however, you may be charged the difference between the initial sales charge of the two funds if the difference is more than 0.25%. If you exchange shares from a money fund or another fund that does not have a sales charge, a sales charge may apply no matter how long you have held the shares.
Any CDSC will continue to be calculated from the date of your initial investment and will not be charged at the time of the exchange. The purchase price for determining a CDSC on exchanged shares will be the price you paid for the original shares. If you exchange shares subject to a CDSC into a Class A money fund, the time your shares are held in the money fund will not count towards the CDSC holding period.
If you exchange your Class B shares for the same class of shares of another Franklin Templeton fund, the time your shares are held in that fund will count towards the eight-year period for automatic conversion to Class A shares.
*Class Z shareholders of Franklin Mutual Series Fund Inc. may exchange into Class A without any sales charge.
ADVISOR CLASS
You can exchange your Advisor Class shares for Advisor Class shares of other
Franklin Templeton funds. You also may exchange your Advisor Class shares for
Class A shares of a fund that does not currently offer an Advisor Class
(without any sales charge)* or for Class Z shares of Franklin Mutual Series
Fund Inc.
*If you exchange into Class A shares and you later decide you would like to
exchange into a fund that offers an Advisor Class, you may exchange your
Class A shares for Advisor Class shares if you are a current shareholder in
Advisor Class or you otherwise qualify to buy the fund's Advisor Class
shares.
ALL CLASSES
The remainder of the "Exchanging Shares" section applies to all classes.
[Begin callout]
An EXCHANGE is really two transactions: a sale of one fund and the purchase
of another. In general, the same policies that apply to purchases and sales
apply to exchanges, including minimum investment amounts. Exchanges also have
the same tax consequences as ordinary sales and purchases.
[End callout]
Generally exchanges may only be made between identically registered accounts, unless you send written instructions with a signature guarantee.
REJECTED EXCHANGES. If the Fund rejects an exchange request involving the sale of Fund shares, the rejected exchange request will also mean rejection of the request to purchase shares of another fund with the proceeds of the sale. Of course, you may generally redeem shares of the Fund at any time.
EXCHANGES THROUGH FINANCIAL INTERMEDIARIES. If you are investing indirectly in the Fund through a financial intermediary such as a broker-dealer, a bank, an insurance company separate account, an investment advisor, an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan that maintains a master account (an Omnibus Account) with the Fund for trading on behalf of its customers, different exchange and/or transfer limit guidelines and restrictions may apply. The financial intermediary through whom you are investing may choose to adopt different trading restrictions designed to discourage short-term or excessive trading. Consult with your financial intermediary (or, in the case of a 401(k) retirement plan, your plan sponsor) to determine what trading restrictions, including exchange/transfer limitations, may be applicable to you.
FUND EXCHANGE PRIVILEGE CHANGES/WAIVER. The Fund may terminate or modify (temporarily or permanently) this exchange privilege in the future. You will receive 60 days' notice of any material changes, unless otherwise provided by law.
OTHER FUNDS' EXCHANGE PRIVILEGES. If there is a conflict between the exchange privileges of two funds involved in an exchange transaction, the stricter policy will apply to the transaction. Other Franklin Templeton funds may have different exchange restrictions. Check each fund's prospectus for details.
MARKET TIMING TRADING POLICY
The Fund's board of trustees has adopted the following policies and procedures with respect to market timing (Market Timing Trading Policy).
MARKET TIMING GENERALLY. The Fund discourages and does not intend to accommodate short-term or frequent purchases and redemptions of Fund shares, often referred to as "market timing." It intends to seek to restrict or reject such trading or take other action, as described below, if in the judgment of the Fund manager or transfer agent such trading may interfere with the efficient management of the Fund's portfolio, may materially increase the Fund's transaction costs, administrative costs or taxes, or may otherwise be detrimental to the interests of the Fund and its shareholders.
MARKET TIMING CONSEQUENCES. If information regarding your trading activity in this Fund or in any other Franklin Templeton fund or non-Franklin Templeton fund is brought to the attention of the Fund's manager or transfer agent and based on that information the Fund or its manager or transfer agent in its sole discretion concludes that your trading may be detrimental to the Fund as described in this Market Timing Trading Policy, the Fund may temporarily or permanently bar your future purchases into the Fund or, alternatively, may limit the amount, number or frequency of any future purchases and/or the method by which you may request future purchases and redemptions (including purchases and/or redemptions by an exchange or transfer between the Fund and any other mutual fund).
In considering an investor's trading activity, the Fund may consider, among other factors, the investor's trading history both directly and, if known, through financial intermediaries, in the Fund, in other Franklin Templeton funds, in non-Franklin Templeton mutual funds, or in accounts under common control or ownership (see, for example, "Investment by asset allocators" in the Statement of Additional Information).
MARKET TIMING THROUGH FINANCIAL INTERMEDIARIES. You are an investor subject to this Market Timing Trading Policy whether you are a direct shareholder of the Fund or you are investing indirectly in the Fund through a financial intermediary (such as a broker-dealer, a bank, trust company, an insurance company separate account, an investment advisor, or an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan) that maintains an Omnibus Account with the Fund for trading on behalf of its customers.
While the Fund will encourage financial intermediaries to apply the Fund's Market Timing Trading Policy to their customers who invest indirectly in the Fund, the Fund is limited in its ability to monitor the trading activity or enforce the Fund's Market Timing Trading Policy with respect to customers of financial intermediaries. For example, should it occur, the Fund may not be able to detect market timing that may be facilitated by financial intermediaries or made difficult to identify in the Omnibus Accounts used by those intermediaries for aggregated purchases, exchanges and redemptions on behalf of all their customers. More specifically, unless the financial intermediaries have the ability to apply the Fund's Market Timing Trading Policy to their customers (for example, participants in a 401(k) retirement plan) through such methods as implementing short-term trading limitations or restrictions, imposing the Fund's redemption fee and monitoring trading activity for what might be market timing, the Fund may not be able to determine whether trading by customers of financial intermediaries is contrary to the Fund's Market Timing Trading Policy.
RISKS FROM MARKET TIMERS. Depending on various factors, including the size of the Fund, the amount of assets the portfolio manager typically maintains in cash or cash equivalents, the dollar amount and number and frequency of trades and the types of securities in which the Fund typically invests, short-term or frequent trading may interfere with the efficient management of the Fund's portfolio, increase the Fund's transaction costs, administrative costs and taxes and/or impact Fund performance.
In addition, if the nature of the Fund's portfolio holdings exposes the Fund to "arbitrage market timers," the value of the Fund's shares may be diluted if redeeming shareholders receive proceeds (and buying shareholders receive shares) based upon net asset values which do not reflect appropriate fair value prices. Arbitrage market timing occurs when an investor seeks to take advantage of the possible delay between the change in the value of a mutual fund's portfolio holdings and the reflection of the change in the fund's net asset value per share.
The Fund is currently using several methods to reduce the risks associated with market timing. These methods include:
o committing staff to selectively review on a continuing basis recent trading activity in order to identify trading activity that may be contrary to the Fund's Market Timing Trading Policy;
o imposing a redemption fee for short-term trading;
o seeking the cooperation of financial intermediaries to assist the Fund in identifying market timing activity.
Though these methods involve judgments that are inherently subjective and involve some selectivity in their application, the Fund seeks to make judgments and applications that are consistent with the interests of the Fund's shareholders. There is no assurance that the Fund or its agents will gain access to any or all information necessary to detect market timing in Omnibus Accounts. While the Fund will seek to take actions (directly and with the assistance of financial intermediaries) that will detect market timing, the Fund cannot represent that such trading activity can be minimized or completely eliminated.
REVOCATION OF MARKET TIMING TRADES. Transactions placed in violation of the Fund's Market Timing Trading Policy are not necessarily deemed accepted by the Fund and may be cancelled or revoked by the Fund following receipt by the Fund.
REDEMPTION FEE
REDEMPTION FEE ASSESSMENT. A short-term trading redemption fee will be imposed (with some exceptions) on any Fund shares in a Fund account that are sold (by redemption, whether voluntary or involuntary, or exchange) within seven (7) calendar days following their purchase date. This redemption fee will equal 2% of the amount redeemed (using standard rounding criteria) and shares held the longest will be treated as being redeemed first and shares held shortest as being redeemed last. The redemption fee may be collected by deduction from the redemption proceeds or, if imposed after the redemption transaction, by billing you.
This redemption fee is imposed to discourage short-term trading and is paid to the Fund to help offset any cost associated with such short-term trading. This redemption fee is not intended to accommodate short-term trading and the Fund will monitor the assessment of redemption fees against your account. Based on the frequency of redemption fees assessed against your account in the Fund and/or in your other Franklin Templeton fund accounts, the Fund manager or transfer agent may in its sole discretion determine that your trading activity may be detrimental to the Fund as described in the Fund's "Market Timing Trading Policy" section and elect to (i) reject or limit the amount, number, frequency or method for requesting future purchases into the Fund and/or (ii) reject or limit the amount, number, frequency or method for requesting future exchanges or redemptions out of the Fund.
REDEMPTIONS THROUGH FINANCIAL INTERMEDIARIES. You are an investor subject to this 2% short-term trading redemption fee whether you are a direct shareholder of the Fund or you are investing indirectly in the Fund through a financial intermediary such as a broker-dealer, a bank, an insurance company separate account, an investment advisor, an administrator or trustee of an IRS-recognized tax-deferred savings plan such as a 401(k) retirement plan and a 529 college savings plan that maintains an Omnibus Account with the Fund for trading on behalf of its customers. Currently, only certain intermediaries have the ability to collect the Fund's redemption fee on the Fund's behalf from their customers' accounts. Even in the case of these intermediaries who are collecting the redemption fee, due to policy, operational and/or systems' requirements and limitations, these intermediaries may use criteria and methods for tracking, applying and/or calculating the fee that may differ in some respects from that of the Fund. The Fund will continue to encourage all financial intermediaries to develop the capability to begin imposing the redemption fee from their customers who invest in the Fund. If you are investing in Fund shares through a financial intermediary, you should contact your financial intermediary (or, in the case of a 401(k) retirement plan, your plan sponsor) for more information on any differences in how the redemption fee is applied to your investments in the Fund.
WAIVER/EXCEPTIONS/CHANGES. The Fund reserves the right to waive the redemption fee at its discretion if the Fund's transfer agent believes such waiver is consistent with the best interests of the Fund and to the extent permitted or required by applicable law. The Fund's transfer agent may also, at its discretion and upon receipt of a shareholder's written request, waive the redemption fee because of a bona fide and unanticipated financial emergency. The redemption fee does not apply to redemptions by other mutual funds, Omnibus Account owners and certain comprehensive fee programs where investment instructions are given at the firm level of Fund approved broker-dealers on behalf of their clients invested in Franklin Templeton funds. In addition, the Fund reserves the right to modify or eliminate the redemption fee or waivers at any time. You will receive 60 days' notice of any material changes, unless otherwise provided by law.
LIMITATIONS ON COLLECTION. Currently, the Fund is very limited in its ability to ensure that the redemption fee is imposed by financial intermediaries on behalf of their customers. For example, where a financial intermediary is not able to determine if the redemption fee applies and/or is not able to impose or collect the fee, or omits to collect the fee at the time of a redemption, the Fund will not receive the redemption fees. Further, if Fund shares are redeemed by a financial intermediary at the direction of its customer(s), the Fund may not know: (1) whether a redemption fee is applicable; and/or (2) the identity of the customer who should pay the redemption fee.
INVOLUNTARY REDEMPTIONS. The Fund reserves the right to close your account if the account value falls below $500 ($50 for employee and UGMA/UTMA accounts), or you are deemed to engage in activities that are illegal (such as late trading) or otherwise believed to be detrimental to the Fund (such as market timing).
ACCOUNT POLICIES
CALCULATING SHARE PRICE
CLASS A, B & C
When you buy shares, you pay the "offering price" for the shares. The
"offering price" is determined by dividing the NAV per share by an amount
equal to 1 minus the sales charge applicable to the purchase (expressed in
decimals), calculated to two decimal places using standard rounding
criteria. The number of Fund shares you will be issued will equal the amount
invested divided by the applicable offering price for those shares,
calculated to three decimal places using standard rounding criteria. For
example, if the NAV per share is $10.25 and the applicable sales charge for
the purchase is 5.75%, the offering price would be calculated as follows:
10.25 divided by 1.00 minus 0.0575 [10.25/0.9425] equals 10.87533, which,
when rounded to two decimal points, equals 10.88. The offering price per
share would be $10.88.
When you sell shares, you receive the NAV minus any applicable CDSC.
ALL CLASSES
The value of a mutual fund is determined by deducting the fund's liabilities from the total assets of the portfolio. The NAV per share is determined by dividing the total net asset value of each fund's share class by the applicable number of shares outstanding per share class.
The Fund calculates the NAV per share each business day at the close of trading on the New York Stock Exchange (NYSE) (normally 1:00 p.m. Pacific time). The Fund does not calculate the NAV on days the NYSE is closed for trading, which include New Year's Day, Martin Luther King Jr. Day, President's Day, Good Friday, Memorial Day, Independence Day, Labor Day, Thanksgiving Day and Christmas Day.
When determining its NAV, the Fund values cash and receivables at their realizable amounts, and records interest as accrued and dividends on the ex-dividend date. The Fund generally utilizes two independent pricing services to assist in determining a current market value for each security. If market quotations are readily available for portfolio securities listed on a securities exchange, the Fund values those securities at the last quoted sale price or the official closing price of the day, respectively, or, if there is no reported sale, within the range of the most recent quoted bid and ask prices. The Fund values over-the-counter portfolio securities within the range of the most recent bid and ask prices. If portfolio securities trade both in the over-the-counter market and on a stock exchange, the Fund values them according to the broadest and most representative market.
Requests to buy and sell shares are processed at the NAV next calculated after we receive your request in proper form.
Generally, trading in corporate bonds, U.S. government securities and money market instruments is substantially completed each day at various times before the close of the NYSE. The value of these securities used in computing the NAV is determined as of such times. Occasionally, events affecting the values of these securities may occur between the times at which they are determined and the close of the NYSE that will not be reflected in the computation of the NAV. The Fund relies on third party pricing vendors to monitor for events materially affecting the value of these securities during this period. If an event occurs, the third party pricing vendors will provide revised values to the Fund.
FAIR VALUATION - INDIVIDUAL SECURITIES
The Fund has procedures, approved by the board of trustees, to determine the fair value of individual securities and other assets for which market prices are not readily available (such as certain restricted or unlisted securities and private placements) or which may not be reliably priced (such as in the case of trade suspensions or halts, price movement limits set by certain foreign markets, and thinly traded or illiquid securities). Some methods for valuing these securities may include: fundamental analysis (earnings multiple, etc.), matrix pricing, discounts from market prices of similar securities, or discounts applied due to the nature and duration of restrictions on the disposition of the securities. The board of trustees oversees the application of fair value pricing procedures.
The application of fair value pricing procedures represents a good faith determination based upon specifically applied procedures. There can be no assurance that the Fund could obtain the fair value assigned to a security if it were able to sell the security at approximately the time at which the Fund determines its NAV per share.
SECURITY VALUATION - MUNICIPAL SECURITIES - MATRIX PRICING (FAIR VALUATION)
Municipal securities generally trade in the over-the-counter market rather than on a securities exchange. The Fund's pricing services use valuation models or matrix pricing to determine current value. In general, they use information with respect to comparable bond and note transactions, quotations from bond dealers or by reference to other securities that are considered comparable in such characteristics as rating, interest rate and maturity date. Matrix pricing is considered a form of fair value pricing.
ACCOUNTS WITH LOW BALANCES
If your account has been open for more than one year and its value falls below $500 ($50 for employee and UGMA/UTMA accounts), we will mail you a notice asking you to bring the account back up to its applicable minimum investment amount. If you choose not to do so within 30 days, we will close your account and mail the proceeds to the address of record. You will not be charged a CDSC if your account is closed for this reason. This policy does not apply to: (1) certain broker-controlled accounts established through the National Securities Clearing Corporation's Networking system; and, (2) accounts in Class B and Class A accounts established pursuant to a conversion from Class B.
STATEMENTS, REPORTS AND PROSPECTUSES
You will receive quarterly account statements that show all your account transactions during the quarter. You also will receive written notification after each transaction affecting your account (except for distributions and transactions made through automatic investment or withdrawal programs, which will be reported on your quarterly statement).
You also will receive the Fund's financial reports every six months as well as an annual updated prospectus. To reduce Fund expenses, we try to identify related shareholders in a household and send only one copy of the financial reports and prospectus. This process, called "householding," will continue indefinitely unless you instruct us otherwise. If you prefer not to have these documents householded, please call us at 1-800/632-2301. At any time you may view current prospectuses and financial reports on our website.
If you choose, you may receive your statements, financial reports and prospectuses through electronic delivery (please see "Telephone/Online Privileges" on page 39).
INVESTMENT REPRESENTATIVE ACCOUNT ACCESS
If there is a dealer or other investment representative of record on your account, he or she will be able to obtain your account information, conduct transactions for your account, and also will receive copies of all notifications and statements and other information about your account directly from the Fund.
STREET OR NOMINEE ACCOUNTS
You may transfer your shares from the street or nominee name account of one dealer to another, as long as both dealers have an agreement with Distributors. We will process the transfer after we receive authorization in proper form from your delivering securities dealer.
JOINT ACCOUNTS
Unless you specify a different registration, shares issued to two or more owners are registered as "joint tenants with rights of survivorship" (shown as "Jt Ten" on your account statement). To make any ownership changes to jointly owned shares, or to sever a joint tenancy in jointly owned shares, all owners must agree in writing.
JOINT ACCOUNT RISK WITH TELEPHONE/ONLINE PRIVILEGES
You will automatically receive telephone/online privileges when you open your account. If your account has more than one registered owner, telephone/online privileges allow the Fund to accept online registration for online services (including electronic delivery of shareholder documents) and transaction instructions online or by telephone from only one registered owner. This means that ANY ONE REGISTERED OWNER ON YOUR ACCOUNT, ACTING ALONE AND WITHOUT THE CONSENT OF ANY OTHER REGISTERED OWNER, may give the Fund instructions by telephone, online or in writing (subject to any limitations in telephone or online privileges) to:
o Exchange shares from a jointly registered Fund account requiring all registered owner signatures into an identically registered money fund account that only requires one registered owner's signature to redeem shares;
o Redeem Fund shares and direct the redemption proceeds to a bank account that may or may not be owned by you and, if owned by you jointly with someone else, only requires one person to withdraw funds by check or otherwise;
o Add/Change the bank account to which Fund share redemption proceeds may be sent, which bank account may not be owned by you;
o Purchase Fund shares by debiting a bank account that may be owned by you; and
o Add/Change the bank account that may be debited for Fund share purchases, which new account may be owned by you.
If you do NOT want another registered owner on your account to be able to issue these kinds of instructions to the Fund without your consent, you must instruct the Fund to deny/terminate online privileges and the ability to issue such instructions by telephone so that these types of instructions will only be accepted in writing signed by all account owners. This decision will apply to any other fund into which you may exchange your jointly owned Fund shares. Any later decision to permit these types of instructions by telephone and/or online will need to be given to the Fund in a written instruction signed by all registered owners.
ADDITIONAL POLICIES
Please note that the Fund maintains additional policies and reserves certain rights, including:
o The Fund may restrict, reject or cancel any purchase orders, including an exchange request.
o The Fund may modify, suspend, or terminate telephone/online privileges at any time.
o The Fund may make material changes to or discontinue the exchange privilege on 60 days' notice or as otherwise provided by law.
o The Fund may stop offering shares completely or may offer shares only on a limited basis, for a period of time or permanently.
o Normally, redemptions are processed by the next business day, but may take up to seven days to be processed if making immediate payment would adversely affect the Fund.
o In unusual circumstances, we may temporarily suspend redemptions or postpone the payment of proceeds, as allowed by federal securities laws.
o For redemptions over a certain amount, the Fund may pay redemption proceeds in securities or other assets rather than cash if the manager determines it is in the best interest of the Fund, consistent with applicable law.
o You may only buy shares of a fund (including the purchase side of an exchange) eligible for sale in your state or jurisdiction.
o To permit investors to obtain the current price, dealers are responsible for transmitting all orders to the Fund promptly.
DEALER COMPENSATION
CLASS A, B & C
Qualifying dealers who sell Fund shares may receive sales commissions and
other payments. These are paid by Distributors from sales charges received
from purchasing or redeeming shareholders, from distribution and service
(12b-1) fees from the Fund and from Distributors' other financial resources.
Dealers may also receive shareholder servicing fees for servicing investors
who indirectly hold Franklin Templeton fund shares through dealer-maintained
brokerage accounts as more fully described under "Shareholder servicing and
transfer agent" in the SAI. These fees are paid by the Fund's transfer agent
from payments it receives under its agreement with the Fund.
CLASS A CLASS B CLASS C
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COMMISSION (%) --- --- 1.00(3)
Investment under $100,000 4.00 --- ---
$100,000 but under $250,000 2.80 --- ---
$250,000 but under $500,000 2.00 --- ---
$500,000 but under $1 million 1.60 --- ---
$1 million or more up to 0.75(1) --- ---
12B-1 FEE TO DEALER 0.10(1) 0.15(2) 0.65(4)
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If any dealer commissions are paid in connection with a purchase which is subsequently rejected or results in any trading restriction placed on the purchaser as a result of a determination by the Fund's manager or transfer agent that the purchase may be connected with trading activity that may be detrimental to the Fund as described in the Fund's "Market Timing Trading Policy," the dealer shall, upon demand, refund such commissions to Distributors.
1. For purchases at NAV where Distributors paid a prepaid commission, dealers
may start to receive the 12b-1 fee in the 13th month after purchase. For
~purchases at NAV where Distributors did not pay a prepaid commission,
dealers may start to receive the 12b-1 fee at the time of purchase.
2. After eight years, Class B shares convert to Class A shares and dealers may
then receive the 12b-1 fee applicable to Class A.
3. Commission includes advance of the first year's 0.15% 12b-1 service fee.
Distributors may pay a prepaid commission.
4. Dealers may be eligible to receive up to 0.15% at the time of purchase and
may be eligible to receive 0.65% starting in the 13th month. During the
first 12 months, the full 12b-1 fee will be paid to Distributors to
partially offset the commission and the prepaid service fee paid at the
time of purchase. For purchases at NAV where Distributors did not pay a
prepaid commission, dealers may start to receive the 12b-1 fee at the time
of purchase.
OTHER DEALER COMPENSATION. Distributors may make payments from its own financial resources to certain dealers who have sold shares of the Franklin Templeton mutual funds. In the case of any one dealer, marketing support payments will not exceed the sum of 0.10% of that dealer's current year's total sales of Franklin Templeton mutual funds, and 0.05% (or 0.03%) of the total assets of equity (or fixed income) funds attributable to that dealer, on an annual basis. Marketing support payments made to organizations located outside the U.S., with respect to investments in the Fund by non-U.S. persons, may exceed this limitation. Distributors makes these payments in connection with the qualifying dealers' efforts to educate financial advisors about the Franklin Templeton funds. A number of factors will be considered in determining payments, including the qualifying dealer's sales, assets and redemption rates, and the quality of the dealer's relationship with Distributors. Distributors will, on an annual basis, determine the advisability of continuing these payments.
To the extent permitted by SEC and NASD rules and other applicable laws and regulations, Distributors may pay or allow other promotional incentives or payments to dealers.
Sale of Fund shares, as well as shares of other funds in Franklin Templeton Investments, is not considered a factor in the selection of broker-dealers to execute the Fund's portfolio transactions. Accordingly, the allocation of portfolio transactions for execution by broker-dealers that sell Fund shares is not considered marketing support payments to such broker-dealers.
You can find further details in the SAI about the payments made by Distributors and the services provided by your financial advisor. Your financial advisor may charge you additional fees or commissions other than those disclosed in this prospectus. You should ask your financial advisor for information about any payments it receives from Distributors and any services it provides, as well as about fees and/or commissions it charges.
ADVISOR CLASS
Qualifying dealers who sell Advisor Class shares may receive up to 0.25% of the amount invested. This amount is paid by Distributors from its own resources.
QUESTIONS
If you have any questions about the Fund or your account, you can write to us at P.O. Box 997151, Sacramento, CA 95899-7151. You also can call us at one of the following numbers. For your protection and to help ensure we provide you with quality service, all calls may be monitored or recorded.
HOURS (PACIFIC TIME,
DEPARTMENT NAME TELEPHONE NUMBER MONDAY THROUGH FRIDAY)
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SHAREHOLDER SERVICES 1-800/632-2301 5:30 a.m. to 5:00 p.m.
FUND INFORMATION 1-800/DIAL BEN(R) 5:30 a.m. to 5:00 p.m.
(1-800/342-5236)
ADVISOR SERVICES 1-800/524-4040 5:30 a.m. to 5:00 p.m.
INSTITUTIONAL SERVICES 1-800/321-8563 6:00 a.m. to 4:00 p.m.
TDD (HEARING IMPAIRED) 1-800/851-0637 5:30 a.m. to 5:00 p.m.
AUTOMATED TELEPHONE SYSTEM 1-800/632-2301 (around-the-clock access)
1-800/524-4040
1-800/527-2020
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FOR MORE INFORMATION
You can learn more about the Fund in the following documents:
ANNUAL/SEMIANNUAL REPORT TO SHAREHOLDERS
Includes a discussion of recent market conditions and Fund strategies that significantly affected Fund performance during its last fiscal year, financial statements, detailed performance information, portfolio holdings and, in the annual report only, the independent registered public accounting firm's report.
STATEMENT OF ADDITIONAL INFORMATION (SAI)
Contains more information about the Fund, its investments and policies. It is incorporated by reference (is legally a part of this prospectus).
For a free copy of the current annual/semiannual report or the SAI, please contact your investment representative or call us at the number below. You also can view the current annual/semiannual report and the SAI online through franklintempleton.com.
You also can obtain information about the Fund by visiting the SEC's Public Reference Room in Washington, DC (phone 1-202/551-8090) or the EDGAR Database on the SEC's Internet site at http://www.sec.gov. You can obtain copies of this information, after paying a duplicating fee, by writing to the SEC's Public Reference Section, Washington, DC 20549-0102 or by electronic request at the following email address: publicinfo@sec.gov.
[Insert FRANKLIN TEMPLETON INVESTMENTS logo]
One Franklin Parkway, San Mateo, CA 94403-1906
1-800/DIAL BEN(R) (1-800/342-5236)
TDD (Hearing Impaired) 1-800/851-0637
FRANKLINTEMPLETON.COM
GAIN FROM OUR PERSPECTIVE(R)
2230 Investment Company Act file #811-02790 112 P 08/07
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
CLASS A, B, C & ADVISOR
STATEMENT OF ADDITIONAL INFORMATION
AUGUST 1, 2007
[Insert Franklin Templeton Investments logo]
This Statement of Additional Information (SAI) is not a prospectus. It contains information in addition to the information in the Fund's prospectus. The Fund's prospectus, dated August 1, 2007, which we may amend from time to time, contains the basic information you should know before investing in the Fund. You should read this SAI together with the Fund's prospectus.
The audited financial statements and Report of Independent Registered Public Accounting Firm in the Fund's Annual Report to Shareholders, for the fiscal year ended March 31, 2007, are incorporated by reference (are legally a part of this SAI).
For a free copy of the current prospectus or annual report, contact your
investment representative or call
1-800/DIAL BEN(R) (1-800/342-5236).
CONTENTS
Goal, Strategies and Risks................................... .2 Officers and Trustees........................................ 13 Fair Valuation and Liquidity................................. 19 Management and Other Services.................................19 Portfolio Transactions........................................22 Distributions and Taxes.......................................23 Organization, Voting Rights and Principal Holders........................................26 Buying and Selling Shares.....................................26 The Underwriter...............................................32 Performance...................................................34 Miscellaneous Information.....................................37 Description of Ratings........................................38 |
o ARE NOT INSURED BY THE FEDERAL DEPOSIT INSURANCE CORPORATION, THE FEDERAL RESERVE BOARD, OR ANY OTHER AGENCY OF THE U.S. GOVERNMENT;
o ARE NOT DEPOSITS OR OBLIGATIONS OF, OR GUARANTEED OR ENDORSED BY, ANY BANK;
Generally, the policies and restrictions discussed in this SAI and in the prospectus apply when the Fund makes an investment. In most cases, the Fund is not required to sell a security because circumstances change and the security no longer meets one or more of the Fund's policies or restrictions. If a percentage restriction or limitation is met at the time of investment, a later increase or decrease in the percentage due to a change in the value or liquidity of portfolio securities will not be considered a violation of the restriction or limitation.
If a bankruptcy or other extraordinary event occurs concerning a particular security the Fund owns, the Fund may receive stock, real estate or other investments that the Fund would not, or could not, buy. If this happens, the Fund intends to sell such investments as soon as practicable while trying to maximize the return to shareholders.
The Fund has adopted certain investment restrictions as fundamental and
non-fundamental policies. A fundamental policy may only be changed if the
change is approved by (i) more than 50% of the Fund's outstanding shares or
(ii) 67% or more of the Fund's shares present at a shareholder meeting if
more than 50% of the Fund's outstanding shares are represented at the meeting
in person or by proxy, whichever is less. A non-fundamental policy may be
changed by the board of trustees without the approval of shareholders.
FUNDAMENTAL INVESTMENT POLICIES
The Fund's investment goal is to provide investors with as high a level of income exempt from federal income taxes, including alternative minimum tax, and exempt from California personal income taxes for California residents as is consistent with prudent investment management and the preservation of shareholders' capital. Of course, there is no assurance that the Fund will meet its goal.
The Fund normally invests at least 80% of its total assets in securities that pay interest free from regular federal income taxes, including the federal alternative minimum tax and from California personal income taxes.
The Fund may not:
1. Borrow money, except to the extent permitted by the Investment Company Act of 1940, as amended (1940 Act), or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the U.S. Securities and Exchange Commission (SEC).
2. Act as an underwriter except to the extent the Fund may be deemed to be an underwriter when disposing of securities it owns or when selling its own shares.
3. Make loans if, as a result, more than 33-1/3% of its total assets would be lent to other persons, including other investment companies to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC. This limitation does not apply to (i) the lending of portfolio securities, (ii) the purchase of debt securities, other debt instruments, loan participations and/or engaging in direct corporate loans in accordance with its investment goals and policies, and (iii) repurchase agreements to the extent the entry into a repurchase agreement is deemed to be a loan.
4. Purchase or sell real estate unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) purchasing or selling securities or instruments secured by real estate or interests therein, securities or instruments representing interests in real estate or securities or instruments of issuers that invest, deal or otherwise engage in transactions in real estate or interests therein, and (ii) making, purchasing or selling real estate mortgage loans.
5. Purchase or sell physical commodities, unless acquired as a result of ownership of securities or other instruments and provided that this restriction does not prevent the Fund from (i) engaging in transactions involving currencies and futures contracts and options thereon or (ii) investing in securities or other instruments that are secured by physical commodities.
6. Issue senior securities, except to the extent permitted by the 1940 Act or any rules, exemptions or interpretations thereunder that may be adopted, granted or issued by the SEC.
7. Invest more than 25% of the Fund's net assets in securities of issuers in any one industry (other than securities issued or guaranteed by the U.S. government or any of its agencies or instrumentalities or securities of other investment companies).(1)
8. Purchase the securities of any one issuer (other than the U.S. government
or any of its agencies or instrumentalities or securities of other investment
companies, whether registered or excluded from registration under Section
3(c) of the 1940 Act) if immediately after such investment (i) more than 5%
of the value of the Fund's total assets would be invested in such issuer or
(ii) more than 10% of the outstanding voting securities of such issuer would
be owned by the Fund, except that up to 25% of the value of the Fund's total
assets may be invested without regard to such 5% and 10% limitations.
1. Although not part of the Fund's fundamental investment restriction, consistent with SEC Staff interpretations and guidance, governments or their political subdivisions that issue tax-exempt municipal securities are not considered by the Fund to be members of any industry.
NON-FUNDAMENTAL INVESTMENT POLICIES
Municipal securities issued by California or its counties, municipalities, authorities, agencies, or other subdivisions, as well as qualifying municipal securities issued by U.S. territories such as Guam, Puerto Rico, the Mariana Islands, or the U.S. Virgin Islands, generally pay interest free from federal income tax and from California personal income taxes for California residents.
Although the Fund must, under normal market conditions, invest at least 80% of its assets in securities that pay interest free from regular federal income taxes, including the federal alternative minimum tax and California personal income taxes, the Fund seeks to invest all of its assets in tax-free municipal securities. The issuer's bond counsel generally gives the issuer an opinion on the tax-exempt status of a municipal security when the security is issued.
INVESTMENTS, TECHNIQUES, STRATEGIES AND THEIR RISKS
Certain words or phrases may be used in descriptions of Fund investment policies and strategies to give investors a general sense of the Fund's levels of investment. They are broadly identified with, but not limited to, the following percentages of Fund total assets:
"small portion" less than 10% "portion" 10% to 25% "significant" 25% to 50% "substantial" 50% to 66% "primary" 66% to 80% "predominant" 80% or more |
If the Fund intends to limit particular investments or strategies to no more than specific percentages of Fund assets, the prospectus or SAI will clearly identify such limitations. The percentages above are not limitations unless specifically stated as such in the Fund's prospectus or elsewhere in this SAI.
The value of your shares will increase as the value of the securities owned by the Fund increases and will decrease as the value of the Fund's investments decreases. In this way, you participate in any change in the value of the securities owned by the Fund. In addition to the factors that affect the value of any particular security that the Fund owns, the value of the Fund's shares may also change with movements in the stock and bond markets as a whole.
Below is a description of various types of municipal and other securities that the Fund may buy. Other types of municipal securities may become available that are similar to those described below and in which the Fund also may invest, if consistent with its investment goal and policies.
MUNICIPAL BONDS have two principal classifications: general obligation bonds and revenue bonds.
GENERAL OBLIGATION BONDS. Issuers of general obligation bonds include states, counties, cities, towns and regional districts. The proceeds of these obligations are used to fund a wide range of public projects, including construction or improvement of schools, highways and roads. The basic security behind general obligation bonds is the issuer's pledge of its full faith, credit and taxing power for the payment of principal and interest. The taxes that can be levied for the payment of debt service may be limited or unlimited as to the rate or amount of special assessments.
REVENUE BONDS. The full faith, credit and taxing power of the issuer do not secure revenue bonds. Instead, the principal security for a revenue bond generally is the net revenue derived from a particular facility, group of facilities, or, in some cases, the proceeds of a special excise tax or other specific revenue source. Revenue bonds are issued to finance a wide variety of capital projects, including: electric, gas, water and sewer systems; highways, bridges and tunnels; port and airport facilities; colleges and universities; and hospitals. The principal security behind these bonds may vary. For example, housing finance authorities have a wide range of security, including partially or fully insured mortgages, rent subsidized and/or collateralized mortgages, and/or the net revenues from housing or other public projects. Many bonds provide additional security in the form of a debt service reserve fund that may be used to make principal and interest payments. Some authorities have further security in the form of state assurances (although without obligation) to make up deficiencies in the debt service reserve fund.
ANTICIPATION NOTES are issued to provide interim financing of various municipal needs in anticipation of the receipt of other sources of money for repayment of the notes.
BOND ANTICIPATION NOTES are normally issued to provide interim financing until a long-term bond financing can be arranged which provides the money for the repayment of the notes.
REVENUE ANTICIPATION NOTES are issued in expectation of the receipt of revenue sources, other than tax receipts, such as federal revenues available under the Federal Revenue Sharing Program.
TAX ANTICIPATION NOTES are issued to finance the short-term working capital needs of municipalities in anticipation of the receipt of various seasonal tax revenues that are used to repay the notes. They are usually general obligations of the issuer and are secured by the taxing power for the payment of principal and interest.
CALLABLE BONDS The Fund may invest in callable bonds, which allow the issuer to repay some or all of the bonds ahead of schedule. If a bond is called, the Fund will receive the principal amount, the accrued interest, and may receive a small additional payment as a call premium. The manager may sell a callable bond before its call date if it believes the bond is at its maximum premium potential. When pricing callable bonds, the call feature is factored into the price of the bonds and may impact the Fund's net asset value.
An issuer is more likely to call its bonds when interest rates are below the rate at which the original bond was issued, because the issuer can issue new bonds with lower interest payments. If a bond is called, the Fund may have to replace it with a lower-yielding security. A call of some or all of these securities may lower the Fund's income, its yield and its distributions to shareholders. If the Fund originally paid a premium for the bond because it had appreciated in value from its original issue price, the Fund also may not be able to recover the full amount it paid for the bond. One way for the Fund to protect itself from call risk is to buy bonds with call protection. Call protection is an assurance that the bond will not be called for a specific time period, typically five to 10 years from when the bond is issued.
COMMERCIAL PAPER is a promissory note issued by a corporation to finance its short-term credit needs. The Fund may invest in taxable commercial paper only for temporary defensive purposes.
CONVERTIBLE AND STEP COUPON BONDS The Fund may invest a portion of its assets in convertible and step coupon bonds. Convertible bonds are zero-coupon securities until a predetermined date, at which time they convert to a specified coupon security. The coupon on step coupon bonds changes periodically during the life of the security based on predetermined dates chosen when the security is issued. Zero coupon bonds tend to react more sharply to changes in interest rates than traditional bonds.
ESCROW-SECURED OR PRE-REFUNDED BONDS are created when an issuer uses the proceeds from a new bond issue to buy high grade, interest bearing debt securities, generally direct obligations of the U.S. government in order to redeem (or pre-refund), before maturity, an outstanding bond issue that is not immediately callable. These securities are then deposited in an irrevocable escrow account held by a trustee bank to secure all future payments of principal and interest on the pre-refunded bond. Pre-refunded bonds often receive a triple A or equivalent rating. Because pre-refunded bonds still bear the same interest rate, and have a very high credit quality, their price may increase. However, as the original bond approaches its call date, the bond's price will fall to its call price. The Fund's manager attempts to manage the pre-refunded bonds in its portfolio so that it sells them before this decline in price occurs.
MELLO-ROOS BONDS are issued under the California Mello-Roos Community Facilities Act to finance the building of roads, sewage treatment plants and other projects designed to improve the infrastructure of a community. They may not be rated and are not considered obligations of the municipality.
Mello-Roos bonds are primarily secured by real estate taxes levied on property located in the community. The timely payment of principal and interest on the bonds depends on the property owner's continuing ability to pay the real estate taxes. Various factors could negatively affect this ability, including a decline in the economy or in the real estate market of California.
MUNICIPAL LEASE OBLIGATIONS are created to finance the purchase of property for public use. The property is then leased to the state or a local government and these leases secure the municipal lease obligations. The lease payments are used to pay the interest on the obligations. However, municipal lease obligations differ from other municipal securities because each year the lessee's governing body must appropriate (set aside) the money to make the lease payments. If the money is not appropriated the issuer or the lessee can end the lease without penalty. If the lease is cancelled, investors who own the municipal lease obligations may not be paid.
The Fund may invest in municipal lease obligations, including certificates of participation. Since annual appropriations are required to make lease payments, municipal lease obligations generally are not subject to constitutional limitations on the issuance of debt and may allow an issuer to increase government liabilities beyond constitutional debt limits. When faced with increasingly tight budgets, local governments have more discretion to curtail lease payments under a municipal lease obligation than they do to curtail payments on other municipal securities. If not enough money is appropriated to make the lease payments, the leased property may be repossessed as security for holders of the municipal lease obligations. If this happens, there is no assurance that the property's private sector or re-leasing value will be enough to make all outstanding payments on the municipal lease obligations or that the payments will continue to be tax-free.
While cancellation risk is inherent to municipal lease obligations, the Fund believes that this risk may be reduced, although not eliminated, by its policies on the quality of municipal lease securities in which it may invest.
STRIPPED MUNICIPAL SECURITIES Municipal securities may be sold in "stripped" form. Stripped municipal securities represent separate ownership of principal and interest payments on municipal securities.
TAX-EXEMPT COMMERCIAL PAPER typically represents a short-term obligation (270 days or less) issued by a municipality to meet working capital needs.
TAX-EXEMPT INDUSTRIAL DEVELOPMENT REVENUE BONDS are issued by or on behalf of public authorities to finance various privately operated facilities which are expected to benefit the municipality and its residents, such as business, manufacturing, housing, sports and pollution control, as well as public facilities such as airports, mass transit systems, ports and parking. The payment of principal and interest is solely dependent on the ability of the facility's user to meet its financial obligations and the pledge, if any, of the facility or other property as security for payment.
U.S. GOVERNMENT SECURITIES are issued by the U.S. Treasury or by agencies and instrumentalities of the U.S. government and are backed by the full faith and credit of the U.S. government. They include Treasury bills, notes and bonds.
VARIABLE OR FLOATING RATE SECURITIES The Fund may invest in variable or floating rate securities, including variable rate demand notes and municipal inflation protected securities, which have interest rates that change either at specific intervals from daily up to semi-annually or whenever a benchmark rate changes. The interest rate adjustments are designed to help stabilize the security's price or maintain a fixed spread to a predetermined benchmark. While this feature may protect against a decline in the security's market price when interest rates rise, it lowers the Fund's income when interest rates or benchmark rates fall. Of course, the Fund's income from its variable rate investments also may increase if interest rates rise.
Variable rate demand notes may include a demand feature, which may be unconditional. The demand feature allows the holder to demand prepayment of the principal amount before maturity, generally on one to 30 days' notice. The holder receives the principal amount plus any accrued interest either from the issuer or by drawing on a bank letter of credit, a guarantee or insurance issued with respect to the security. The Fund generally uses variable or floating rate securities as short-term investments while waiting for long-term investment opportunities.
ZERO-COUPON AND DELAYED INTEREST SECURITIES The Fund may invest in zero-coupon and delayed interest securities. Zero-coupon securities make no periodic interest payments, but are sold at a deep discount from their face value. The buyer recognizes a rate of return determined by the gradual appreciation of the security, which is redeemed at face value on a specified maturity date. The discount varies depending on the time remaining until maturity, as well as market interest rates, liquidity of the security, and the issuer's perceived credit quality. The discount, in the absence of financial difficulties of the issuer, typically decreases as the final maturity date approaches. If the issuer defaults, the Fund may not receive any return on its investment.
Because zero-coupon securities bear no interest and compound semiannually at the rate fixed at the time of issuance, their value generally is more volatile than the value of other fixed-income securities. Since zero-coupon bondholders do not receive interest payments, when interest rates rise, zero-coupon securities fall more dramatically in value than bonds paying interest on a current basis. When interest rates fall, zero-coupon securities rise more rapidly in value because the bonds reflect a fixed rate of return.
An investment in zero-coupon and delayed interest securities may cause the Fund to recognize income and make distributions to shareholders before it receives any cash payments on its investment. To generate cash to satisfy distribution requirements, the Fund may have to sell portfolio securities that it otherwise would have continued to hold or to use cash flows from other sources such as the sale of Fund shares.
IN ADDITION TO STANDARD PURCHASES AND SALES OF VARIOUS MUNICIPAL SECURITIES, THE FUND MAY ALSO BE SUBJECT TO CERTAIN OTHER CHARACTERISTICS AND RISKS, AND MAY ALSO ENGAGE IN OTHER STRATEGIES, WHICH, ALONG WITH THESE RISKS, ARE DESCRIBED BELOW. SHOULD OTHER STRATEGIES, NOT SPECIFICALLY DESCRIBED BELOW, BECOME AVAILABLE OR ATTRACTIVE, THE MANAGER MAY ENGAGE IN THEM SO LONG AS THEY ARE CONSISTENT WITH THE FUND'S GOALS AND OBJECTIVES.
CREDIT QUALITY All things being equal, the lower a security's credit quality, the higher the risk and the higher the yield the security generally must pay as compensation to investors for the higher risk.
A security's credit quality depends on the issuer's ability to pay interest on the security and, ultimately, to repay the principal. Independent rating agencies, such as Fitch Ratings (Fitch), Moody's Investors Service (Moody's), and Standard & Poor's (S&P(R)), often rate municipal securities based on their analysis of the issuer's credit quality. Most rating agencies use a descending alphabet scale to rate long-term securities, and a descending numerical scale to rate short-term securities. Securities in the top four ratings are "investment grade," although securities in the fourth highest rating may have some speculative features. These ratings are described at the end of this SAI under "Description of Ratings."
An insurance company, bank or other foreign or domestic entity may provide credit support for a municipal security and enhance its credit quality. For example, some municipal securities are insured, which means they are covered by an insurance policy that guarantees the timely payment of principal and interest. Other municipal securities may be backed by letters of credit, guarantees, or escrow or trust accounts that contain securities backed by the full faith and credit of the U.S. government to secure the payment of principal and interest.
As discussed in the prospectus, the Fund has limitations on the credit quality of the securities it may buy. These limitations generally are applied when the Fund makes an investment so that the Fund is not required to sell a security because of a later change in circumstances.
In addition to considering ratings in its selection of the Fund's portfolio securities, the manager may consider, among other things, information about the financial history and condition of the issuer, revenue and expense prospects and, in the case of revenue bonds, the financial history and condition of the source of revenue to service the bonds. Securities that depend on the credit of the U.S. government are regarded as having a triple A or equivalent rating.
DIVERSIFICATION The Fund is a diversified fund.
The Fund intends to meet certain diversification requirements for tax purposes. Generally, to meet federal tax requirements at the close of each quarter, the Fund may not invest more than 25% of its total assets in any one issuer and, with respect to 50% of total assets, may not invest more than 5% of its total assets in any one issuer. These limitations do not apply to U.S. government securities and may be revised if applicable federal income tax requirements are revised.
ILLIQUID INVESTMENTS The Fund may invest up to 15% of its net assets in illiquid securities. Illiquid securities generally are securities that cannot be sold within seven days in the normal course of business at approximately the amount at which the Fund has valued them.
MATURITY Municipal securities are issued with a specific maturity date - the date when the issuer must repay the amount borrowed. Maturities typically range from less than one year (short term) to 30 years (long term). In general, securities with longer maturities are more sensitive to price changes, although they may provide higher yields. The Fund has no restrictions on the maturity of the securities it may buy or on its average portfolio maturity.
PORTFOLIO TURNOVER The frequency of portfolio transactions, usually referred to as the portfolio turnover rate, varies for the Fund from year to year, depending on market conditions. While short-term trading increases portfolio turnover and may increase costs, execution costs for municipal securities are substantially less than for equivalent dollar values of equity securities.
TEMPORARY INVESTMENTS When the manager believes market or economic conditions are unusual or unfavorable for investors, the manager may invest up to 100% of the Fund's assets in a temporary defensive manner by holding all or a substantial portion of its assets in cash, cash equivalents or other high quality short-term investments. Unfavorable market or economic conditions may include excessive volatility or a prolonged general decline in the securities markets, the securities in which the Fund normally invests, or the economies of California and territories where the Fund invests.
Temporary defensive investments generally may include securities that pay taxable interest, including (i) high quality commercial paper and obligations of U.S. banks (including commercial banks and savings and loan associations) with assets of $1 billion or more; (ii) securities issued by or guaranteed by the full faith and credit of the U.S. government, including indirect U.S. government securities such as mortgage-backed securities issued or guaranteed by the Government National Mortgage Association or the Federal National Mortgage Association, and repurchase agreements collateralized by U.S. government securities; or (iii) municipal securities issued by a state or local government other than California. The Fund also may invest all of its assets in municipal securities issued by a U.S. territory such as Guam, Puerto Rico, the Mariana Islands or the U.S. Virgin Islands. The manager also may invest in these types of securities or hold cash when securities meeting the Fund's investment criteria are unavailable or to maintain liquidity.
WHEN-ISSUED TRANSACTIONS Municipal securities may be offered on a "when-issued" basis. When so offered, the price, which is generally expressed in yield terms, is fixed at the time the commitment to buy is made, but delivery and payment take place at a later date. During the time between purchase and settlement, no payment is made by the Fund to the issuer and no interest accrues to the Fund. If the other party to the transaction fails to deliver or pay for the security, the Fund could miss a favorable price or yield opportunity, or could experience a loss.
When the Fund makes the commitment to buy a municipal security on a when-issued basis, it records the transaction and includes the value of the security in the calculation of its net asset value. The Fund does not believe that its net asset value or income will be negatively affected by its purchase of municipal securities on a when-issued basis. The Fund will not engage in when-issued transactions for investment leverage purposes.
Although the Fund generally will buy municipal securities on a when-issued basis with the intention of acquiring the securities, it may sell the securities before the settlement date if it is considered advisable. When the Fund is the buyer, it will set aside on its books cash or liquid securities, with an aggregate value equal to the amount of its purchase commitments, until payment is made. If assets of the Fund are held in cash pending the settlement of a purchase of securities, the Fund will not earn income on those assets.
STATE AND U.S. TERRITORY RISKS
In addition to the risk factors discussed in the prospectus, the following risks should be considered.
CALIFORNIA Since the Fund mainly invests in California municipal securities, its performance is closely tied to the ability of issuers of California municipal securities to continue to make principal and interest payments on their securities. The issuers' ability to do this is in turn dependent on economic, political and other conditions within California. Below is a discussion of certain conditions that may affect California municipal issuers. It is not a complete analysis of every material fact that may affect the ability of issuers of California municipal securities to meet their debt obligations or the economic or political conditions within California and is subject to change. The information below is based on data available to the Fund from historically reliable sources, but the Fund has not independently verified it.
The ability of issuers of municipal securities to continue to make principal and interest payments is dependent in large part on their ability to raise revenues, primarily through taxes, and to control spending. Many factors can affect the state's revenues including the rate of population growth, unemployment rates, personal income growth, federal aid, and the ability to attract and retain successful businesses. A number of factors can also affect the state's spending including current debt levels, and the existence of accumulated budget deficits. The following provides some information on these and other factors.
ECONOMY:
California's economy has been the largest of all the states in the nation, and ranks 6th internationally. From 1993 to early 2001, California's economy was fueled by growth in the construction, entertainment, tourism and computer services sectors. From April 2000 to April 2001, California generated 2/3 of the nation's job growth. Although the state entered calendar year 2001 with strong job growth numbers, there has been a significant moderation in the economy since then that was further affected by 9/11.
However, it appears that the state's economy has held up fairly well, largely because of stability in the southern part of the state. The first half of the 2007 was predicted to show modest growth with slightly higher unemployment possible. The second half is predicted to bring in slightly better growth as the state housing downturn is expected to slow. Reduced home building could also affect taxable sales growth.
The state added 275,000 jobs in 2006, the best gain since 2000. Nine out of the 11 major industry sectors saw employment growth in 2006. The unemployment rate averaged 4.9% in 2006 and was 4.8% in each of the first three months of 2007 before increasing to 5.1% in April and 5.2% in May 2000. Job growth improved in the San Francisco Bay Area, giving this region the strongest job growth of the major regional economies in 2006.
The state's diverse employment, as represented by an employment mix, is as follows: manufacturing at 10% of employment (based on 2006 state figures), trade 19.1%, services 42.1%, and government 16.2%. California's per capita personal income has consistently been above that of the nation as a whole. During the 1990s, per capita income as a percent of the nation's increased to 108.8% in 2000. Since 2000, the ratio declined but has rebounded slightly in the past two years to 107.4% as of 2006.
FINANCIAL:
By the end of fiscal year 2000, the state had experienced strong improvement in its financial condition, and general fund balances were a positive $8.4 billion or 13.6% of expenditures on a GAAP basis. But, beginning in fiscal year 2001, the state started to see a slowdown in revenue growth with an increase in expenditures. The state generated deficits in fiscal year 2001, fiscal year 2002 and fiscal year 2003, leaving the state with an accumulated deficit in its general fund. In May and June 2004, the state issued $11.3 billion in economic recovery bonds, part of which was used to help erase the accumulated deficit. As a result, the state posted a surplus for fiscal year 2004 helping erase the accumulated deficit to just $1.5 billion. The state's improving fiscal condition continued into 2005 with a $1.7 billion surplus and in 2006 with a $2.5 billion surplus.
The governor recently released his May revision of his January budget. It reveals a $1.9 billion decline since January and several one-time measures to fill this hole. The $2.3 billion decline is partially due to a slowing economy (-$243 million in tax revenues) and higher Prop 98 and prison spending. To get the state back to a projected $2.2 billion reserve, it uses several aggressive measures including the sale of EdFund (the state's student loan guarantee agency). The fiscal year 2008 budget identifies a 5.9% increase in personal income tax from fiscal year 2007 and 4.8% for sales taxes. General fund revenues are projected to increase 7.8%. The budget reflects weaker economic assumptions from the January budget. Personal income is projected to grow 5.3% in fiscal year 2007, 5.5% in fiscal year 2008, 5.8% in fiscal year 2009. Nonfarm payroll employment is forecast to increase 1.3% in fiscal year 2007, 1.5% in fiscal year 2008 and 1.8% in fiscal year 2009.
In 2000, personal income grew 28%, due in large part to the increase in stock options exercised. In fiscal year 2001, the state still saw growth although it slowed substantially from fiscal year 2000 to 12.9%. Due to the effects of 9/11 and the substantial economic slowdown, the state saw further declines in fiscal year 2002 and fiscal year 2003. This is largely due to the weak stock market and lack of stock option exercising. Stock market-related personal income tax revenue declined from $17.6 billion in fiscal year 2001 to $8.6 billion in fiscal year 2002 and $5.2 billion for fiscal year 2003.
Stock market related personal income tax revenue again began increasing in 2004, and continues to grow. In fiscal year 1996, it was 5.6% of general fund revenues, it surged to 24.7% in fiscal year 2001, dropped to 12.0% in fiscal year 2002, dropped further to 7.2% in fiscal year 2003. This percentage again started increasing to 8.7% in 2004, 11.9% in 2005, 12.9% in 2006, a predicted 15.3% in 2007 and 15.1% in 2008.
California's debt levels have grown in recent years as the state has been upgrading its infrastructure and financing new facilities resulting from its large population growth. In 1990, the state's debt per capita was below the median for all states. By 2006, it was $1,623, above the $1,101 median for all states, and it ranks 10th nationally. In November 2006, voters approved close to $43 billion in debt for infrastructure needs which will further increase debt levels. The debt won't be issued all at once, but rather phased in.
The State of California has never defaulted on any state debt. Under the California State Constitution, debt service on the state's general obligation bonds come second only after funding public education.
In June 2007, S&P changed the state's outlook to positive from stable. In May 2006, Moody's upgraded the state's rating to A1 and S&P upgraded the state to A+.
U.S. TERRITORIES Since the Fund may invest up to 35% of its assets in municipal securities issued by U.S. territories, the ability of municipal issuers in U.S. territories to continue to make principal and interest payments also may affect a Fund's performance. As with municipal issuers, the ability to make these payments is dependent on economic, political and other conditions. Below is a discussion of certain conditions within some of the territories where the Fund may invest. It is not a complete analysis of every material fact that may affect the ability of issuers of U.S. territory municipal securities to meet their debt obligations or the economic or political conditions within the territories and is subject to change. It is based on data available to the Fund from historically reliable sources, but it has not been independently verified by the Fund.
PUERTO RICO. Puerto Rico is the fourth largest island in the Caribbean and an estimated 3.9 million people call it home. Puerto Rico's economy continues to track those of the U.S. mainland. Performance has improved, but is expected to slow. In fiscal year 2005, the U.S. mainland accounted for 83% of Puerto Rico's exports and 50% of imports. Tourism has improved in the last year. The number of rented hotel rooms has increased as has the number of rooms available. The Commonwealth has recently opened a new convention center, which it hopes will attract new business and continue to improve tourism. Since 2002, the Commonwealth reports its economy has been expanding at a moderate annual rate of 2.3%, but recently, several key economic indicators have begun to indicate a slowing of activity. The Planning Board recently lowered its real gross national product forecast from 2.5% to 0.6% for fiscal year 2007. It also lowered projections during fiscal year 2006 to 1.2% from 2.2%.
The island's unemployment rate dropped from 13.6% in 1998 down to an average of 11.3% as of 2004 and 10.4% for 2006. As of March 2007, unemployment was 10.1%. The largest employment sectors include government (29%), services (29%), trade (16%) and manufacturing (11%). The manufacturing sector has undergone some major changes as pharmaceuticals, biotech and technology have proven to be growth areas for the Commonwealth.
The Commonwealth's financial stresses continue. Its financial situation reached a low point in May 2006, when the government disclosed a significant budget gap of $738 million for the then current fiscal year. After a political impasse on how to handle the deficit, the governor ordered the closing of certain non-essential government offices and schools due to the lack of money available for operations on May 1, 2006. During the shut-down, the governor and legislative leaders were unable to agree on a loan from the Government Development Bank of Puerto Rico (GDB) and what sources would be used for repayment. After an impasse, a four-person commission of non-elected citizens was charged with resolving the fiscal crisis. The commission decided on a special 1% sales tax to repay the GDB loan, and the sales tax was expected to be part of a larger sales tax that could generate a net $300-400 million for the General Fund. Employees went back to work on May 15, 2006. After much political wrangling, including taking the sales tax to court, the legislature and governor were able to agree on a sales tax rate, agree on spending reductions and enable a loan from the GDB.
The government was able to agree on a fiscal year 2007 budget. (It did not have a budget agreement in fiscal year 2006.) The key component of the budget was implementation of a sales tax, which occurred on November 15, 2006, at the same time that the general excise tax was repealed. The 7% sales tax is divided with 4.7% going to the Commonwealth's General Fund, 1.3% to local municipalities and 1% for funding repayment of debt. The budget was passed with the gap closed using spending decreases, the sales tax, a debt refinancing and improvement in the economy.
In April 2007, the governor released updated fiscal year 2007 results identifying a $603 million shortfall for fiscal year 2007. This shortfall is partially due to lower-than-expected sales tax revenues. The governor proposed closing this current year gap by using $160 million in anticipated savings from various government agencies, $107 million from saving from the Health Insurance Administration and $240 million of revenue generated last year from a one-time tax measure. If these gap closing measures are successful, it would bring the gap down to $96 million. It is unclear at this time whether the government will be able to close any or all of this fiscal year 2007 gap.
The governor has also released his fiscal year 2008 budget proposal. The $9.2 billion plan identifies a decline in revenue of $261 million or 2.75% from the fiscal year 2007 budget. Due to performance below expectations in fiscal year 2007, the fiscal year 2008 revenue estimate is actually 3.8% higher then fiscal year 2007. Expenditures would be reduced $253 million under the governor's fiscal year 2008 plan. Again, assuming the budget savings outlined for fiscal year 2007 by the governor last month are successful, the actual fiscal year 2008 proposal identifies spending at the same level as fiscal year 2007.
The new fiscal year 2007 budget gap as outlined by the governor in April 2007 shows that the government is still struggling to stabilize its financial situation. The new sales tax could still help to improve the Commonwealth's revenues, but if it continues to overspend without significant cost reductions, elimination of the structural deficit will be very difficult.
While Puerto Rico's debt per capita levels are at the higher end of the spectrum compared to American states, this is partly explained by the fact that Puerto Rico generally centralizes the majority of its debt issuance at the territory level. These debt levels have increased as Puerto Rico financed significant capital and infrastructure improvements. Puerto Rico continues to maintain a large un-funded pension liability of almost $10 billion, that risks running out of money as early as 2014. The governor has proposed a multi-billion bond secured by future employer contributions to partially deal with this liability. The bonds have not been approved by the legislature nor issued as of yet.
S&P rates Puerto Rico's general obligation debt at BBB, with a Creditwatch negative outlook. Moody's rates the island's general obligation debt to Baa3, and it maintains a Watchlist negative outlook.
Puerto Rico will continue to face challenges from the 1996 passage of a bill eliminating Section 936 of the Internal Revenue Code. This section has given certain U.S. corporations operating in Puerto Rico significant tax advantages. These incentives have helped drive Puerto Rico's economic growth, especially with the development of its manufacturing sector. U.S. firms that have benefited from these incentives have provided a significant portion of Puerto Rico's revenues, employment and deposits in local financial institutions. The section 936 incentives are being phased out over a 10-year period ending in 2006. In fiscal year 2005, manufacturing provided 40% of Puerto Rico's gross domestic product and 11% of non-farm payroll employment.
Outstanding issues relating to the potential for a transition to statehood may also have broad implications for Puerto Rico and its financial and credit position.
GUAM. The island of Guam has an estimated population of 171,000. Its economy is driven by tourism and U.S. Military activity. The government of Guam also receives significant support from the U.S. Treasury. Japan accounts for a substantial amount of Guam's tourism, which makes the island's economy very sensitive to fluctuations in the Japanese economy. Economic weakness in Japan and other parts of Asia has had a negative impact on Guam, and Typhoon Paka (12/97) and Supertyphoon Pongsona (12/02) also contributed to the island's financial difficulties. However, tourism has rebounded in recent years, helped by favorable weather and a steadying Japanese economy. Japan now represents approximately 80% of Guam's tourism.
Employment has been quite erratic on Guam since 1998. Total employment reached a peak of 62,350 in March of 1999. Small increases followed in 2000 and 2001, but then employment fell by nearly 10% in early 2002. Employment has slowly but steadily climbed during the past four years, reaching 61,390 in March of 2006. Despite the decrease in employment, Guam's unemployment rate has fallen steadily since July of 2000, when it peaked at 15.3%. Unemployment had dropped to 11.4% by March of 2002, and was recently measured at 6.9% in March of 2006. Military redeployment in the Pacific should have a favorable impact on employment and the economy at large. 7,000 U.S. troops have been moved from Okinawa to Guam, and the U.S. Navy has stationed several submarines and carrier strike forces on the island. The total U.S. Military population on Guam is growing significantly, and the short- and long-term implications of this growth are expected to be positive.
Guam's overall financial condition has deteriorated due to a slough of misfortunes and mismanagement. Natural disasters, economic crisis in Japan, and the events of September 11, 2001 have all contributed to Guam's financial hardship. In fiscal year 2001, Guam produced a General Fund deficit of $30 million, followed by a deficit of $21 million in fiscal year 2002. A deficit of $88 million followed in fiscal year 2003, driving Guam's accumulated deficit to $314 million. In fiscal year 2004, Guam produced a surplus of less than $1 million, which was followed by a deficit of $30 million in fiscal year 2005. At the end of fiscal year 2005, Guam had an accumulated General Fund deficit of $344 million, which represents more than 90% of General Fund expenditures. There are no indications that Guam will have the resources or economic activity to erase this deficit in the foreseeable future.
The persistent financial crisis has prevented Guam from issuing any government-supported debt since fiscal year 2001. Guam has many infrastructural needs that must be addressed. Until the general government improves its financial condition, the island will have to rely upon autonomous agencies, such as Guam Power Authority and Guam Waterworks Authority, to address some of these issues. Guam also has a substantial unfunded pension liability. Plans to issue pension obligation bonds have been postponed until Guam's financial condition improves. Guam is not in a position to issue any meaningful amount of new debt in the immediate future.
As of December 2005, S&P has assigned a rating of "B" to Guam's general obligation debt with a stable outlook.
MARIANA ISLANDS. The Mariana Islands became a U.S. territory in 1975. At that time, the U.S. government agreed to exempt the islands from federal minimum wage and immigration laws in an effort to help stimulate industry and the economy. The islands' minimum wage is currently $4.20 per hour below the U.S. level. Because of this wage differential, tens of thousands of workers have emigrated from various Asian countries to provide cheap labor for the islands' industries over the last several decades. Foreign workers have accounted for approximately four times the number of indigenous workers.
It is estimated that the garment industry contributes about 30% of General Fund expenditures compared to 40% just a few years ago. The decline is largely a result of the elimination of quota restrictions for World Trade Organization (WTO) members in 2005. The export value of the industry dropped 13% in 2005 and 26% in 2006. Employment in the industry has dropped from 17,000 workers in 2001 to about 7,000 in 2007 and the number of factories has dropped from 34 to 16 over the same period. There is also additional legislation being considered in Congress that could negatively affect this industry further if passed including implementation of the federal minimum wage rate in the Commonwealth of the Northern Mariana Islands (CNMI) and the implementation of federal immigration laws in the islands.
The Commonwealth's gross business revenues were $1.4 billion in 1993, then increased to a high of $2.6 billion in 1997. Gross business revenues have since declined to $1.3 billion for 2006.
The tourism industry is the other large contributor to the CNMI economy. Tourism, which is largely driven by trends in Asia is estimated to account for up to 35% of the economy. Visitors to the islands have declined over the last several years from 694,888 in 1997 to 459,458 in 2003 and 435,494 in 2006. The decline is a result of many factors including the weakening of the Asian economy, SARS, the war in Iraq and most recently from the reduction in flights available from Japan to CNMI. The islands continue to be an attractive destination for the Japanese who account for 62% of all visitors.
The Commonwealth's financials have been in a deficit position since 1994. The most recent audited financial statement is from 2005 and it identified a $132 million negative fund balance which is 85% of annual expenditures after transfers. Unaudited results from 2006 identify balanced operations. However this came as a result of the CNMI not making its annual pension contribution. The CNMI has used this measure to help balance its budget for several years, and as a result its pension funds are now seriously underfunded. Although the Commonwealth's government was able to pass a budget for fiscal year 2007, it didn't have a budget for the previous three years, contributing for the lack of budget control and increasing deficits.
The population of all the islands combined was estimated at 82,500 in 2006, a 19% increase from the 2000 census.
U.S. VIRGIN ISLANDS. Approximately 108,450 people reside in the 70 small islands and cays that make up the U.S. Virgin Islands. The U.S. Virgin Islands did not participate in the record economic boom experienced by the mainland U.S. in the late 1990s. As such, the U.S. Virgin Islands continue to experience higher unemployment rates and lower wealth levels than realized in the U.S. The U.S. Virgin Islands are highly dependent on tourism, which accounts for approximately 80% of gross domestic product and a significant share of employment. Although the islands' tourism industry was hit hard after the events of September 11, 2001, recent statistics indicate a slight recovery. The majority of the islands' visitors arrive via cruise ships. After cruise ship arrivals fell in 2002 and 2003, they increased 11.9% in 2004. Total cruise ship arrivals decreased slightly in 2005 and 2006, but have increased 6.8% through the first quarter of 2007. Air arrivals reached an all-time high in 2005 before decreasing slightly in 2006. Hotel occupancy rates have been above 60% since 2004, including an average rate of 60.6% in 2006. In the five years prior to 2004, hotel occupancy had ranged between 55% and 58%. The unemployment rate peaked at 9.4% in 2003, but had fallen to 7.1% by the end of 2005 due to increased tourism. 71% of all non-farm jobs are in the private sector with 42.5% comprising services, including tourism employment. Manufacturing represents just more than 5.0% of employment, and construction represents about 4.5%.
The U.S. Virgin Islands government's large public sector payroll and heavy reliance on taxes as a revenue source (roughly 90% of all revenues), together with the lingering effects of several major hurricanes in the past two decades, have contributed to the government's lackluster financial performance. The government has suffered numerous years of budget imbalances over the past decade, resulting in recurring annual General Fund deficits. The cash-flow crisis in the government intensified in fiscal year 2002 due to the slumping economy and lower tax receipts. In fiscal year 2003, the government stabilized cash flows with the help of approximately $81.5 million of financing proceeds. For the fiscal year ending September 30, 2003, the government reduced its operating deficit from $164.4 million to $109.8 million, and used transfers and bank anticipation notes proceeds to increase the fund balance by $68.3 million. The ending fund balance of $97.2 million was equal to 16.85% of expenditures. The ensuing increases in tourism during fiscal year 2004 and fiscal year 2005 were expected to help stabilize the government's finances. Unaudited results indicate that tax revenues increased significantly in fiscal year 2004, although expenditures continued to exceed revenues. Unofficial fiscal year 2005 results show another sizeable increase in tax revenues. Coupled with a decrease in expenditures, it appears that the U.S. Virgin Islands produced a surplus in fiscal year 2005. There is no timeline for official results for fiscal year 2004 and fiscal year 2005, and there are no results of any kind for fiscal year 2006.
In October 1999, the government and the U.S. Department of Interior entered into a Memorandum of Understanding stipulating that federal grants will be awarded contingent on several financial performance and accountability standards being met that will demonstrate improvement in the economic and financial condition of the islands. In recent years, the government has tried to improve its financial profile by implementing several cost-cutting measures, including renegotiating debt obligations, consolidating departments, cutting healthcare costs, hiring freezes, and a reduction in overtime. At this time, it is not yet certain whether or to what extent the plan will be successful in helping the Virgin Islands improve its financial condition.
POLICIES AND PROCEDURES REGARDING THE RELEASE OF PORTFOLIO HOLDINGS The Fund's overall policy with respect to the release of portfolio holdings is to release such information consistent with applicable legal requirements and the fiduciary duties owed to shareholders. Subject to the limited exceptions described below, the Fund will not make available to anyone non-public information with respect to its portfolio holdings, until such time as the information is made available to all shareholders or the general public.
For purposes of this policy, portfolio holdings information does not include aggregate, composite or descriptive information that does not present risks of dilution, arbitrage, market timing, insider trading or other inappropriate trading for the applicable U.S. registered fund. Information excluded from the definition of portfolio holdings information generally includes, without limitation: (1) descriptions of allocations among asset classes, regions, countries or industries/sectors; (2) aggregated data such as average or median ratios, market capitalization, credit quality or duration; (3) performance attributions by industry, sector or country; or (4) aggregated risk statistics. Such information, if made available to anyone, will be made available to any person upon request, but, because such information is generally not material to investors, it may or may not be posted on the Fund's website. In addition, other information may also be deemed to not be portfolio holdings information if, in the reasonable belief of the Fund's Chief Compliance Officer (or his/her designee), the release of such information would not present risks of dilution, arbitrage, market timing, insider trading or other inappropriate trading for the Fund.
Consistent with current law, the Fund releases complete portfolio holdings information each fiscal quarter through regulatory filings with no more than a 60-day lag.
In addition, a complete list of the Fund's portfolio holdings is released 30 calendar days after the end of each calendar quarter. Other portfolio holdings information, such as the Fund's top 10 holdings, may be released monthly on the Fund's website, no sooner than five days after the end of each month. Released portfolio holdings information can be viewed on franklintempleton.com.
To the extent that this policy would require the release of portfolio holdings information regarding a particular portfolio holding for the Fund, the portfolio manager for the Fund may request that the holding be withheld from the portfolio holdings information if the holding is the subject of ongoing purchase or sale orders/programs, or if the release of such portfolio holdings information would otherwise be sensitive or inappropriate due to liquidity and other market considerations, in each case as determined by the portfolio manager in consultation with the head of Global Investment Adviser Compliance (or his/her designee).
Exceptions to the portfolio holdings release policy will be made only when:
(1) the Fund has a legitimate business purpose for releasing portfolio
holdings information to selected third parties in advance of release to all
shareholders or the general public; (2) the recipient is subject to a duty of
confidentiality pursuant to a signed non-disclosure agreement; and (3) the
release of such information would not otherwise violate the antifraud
provisions of the federal securities laws or the Fund's fiduciary duties.
The determination of whether the Fund has a legitimate business purpose for
releasing portfolio holdings information in advance of release to all
shareholders or the general public shall be made by the Fund's Chief
Compliance Officer or his/her designee, following a request submitted in
writing. The Chief Compliance Officer will report to the board of trustees on
exceptions granted to the policy, along with an explanation of the legitimate
business purpose that is served as a result of the exception.
The eligible third parties to whom portfolio holdings information may be
released in advance of general release fall into the following categories:
data consolidators, including rating agencies, fund rating/ranking services
and other data providers; service providers to the Fund; shareholders of a
fund to whom such fund has determined to process a redemption request in-kind
based upon a determination by the Fund's portfolio manager and the Fund's
Chief Compliance Officer (or his/her designee) that such redemption in-kind
is in the best interests of the redeeming fund and its remaining
shareholders; provided, however, that the portfolio holdings information so
released in advance of the actual delivery of the redemption proceeds is
limited to only that information reasonably necessary to allow the
shareholder to prepare for receipt of the in-kind redemption proceeds;
municipal securities brokers using the Investor Tools product; and certain
entities approved by the Fund's Chief Compliance Officer (or his/her
designee) on a case-by-case basis, in limited circumstances, including where
the release of such information is required by foreign law or regulation (in
these situations, the recipient will be requested to execute a non-disclosure
agreement).
The specific entities to whom the Fund may provide portfolio holdings in advance of their release to the general public are:
o Bloomberg, Capital Access, CDA (Thomson Financial), FactSet, Fidelity Advisors, Lipper Inc., Morningstar, Standard & Poor's, Vestek, and Fidelity Management Trust Company, all of whom may receive portfolio holdings information 15 days after the quarter end
o Service providers to the Fund that receive portfolio holdings information from time to time in advance of general release in the course of performing, or to enable them to perform, services for the Fund, including: CUSTODIAN BANK: Bank of New York; INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM: PricewaterhouseCoopers LLP; OUTSIDE FUND LEGAL COUNSEL: Stradley Ronon Stevens & Young, LLP; INDEPENDENT DIRECTORS'/TRUSTEES' COUNSEL: Bleakley, Platt & Schmidt, LLP; PROXY VOTING SERVICES: Glass, Lewis & Co. and Institutional Shareholder Services; BROKERAGE ANALYTICAL SERVICES: Sanford Bernstein, Brown Brothers Harriman, Royal Bank of Canada Capital Markets, JP Morgan Securities Inc.; FINANCIAL PRINTERS: RR Donnelley & Sons Company or GCOM Solutions, Inc.; and CLASS B SHARE FINANCING: Lightning Asset Finance Limited.
In all cases, eligible third parties are required to execute a non-disclosure agreement. Non-disclosure agreements include the following provisions:
o The recipient agrees to keep confidential any portfolio holdings information received until such information either is released to the public or the release is otherwise approved by the head of Global Compliance (or his/her designee) or the Fund's Chief Compliance Officer (or his/her designee);
o The recipient agrees not to trade on the non-public information received; and
o The recipient agrees to refresh its representation as to confidentiality and abstention from trading upon request from Franklin Templeton Investments.
In no case does the Fund receive any compensation in connection with the arrangements to release portfolio holdings information to any of the above-described recipients of the information.
Lightning Asset Finance Limited (Lightning) is the company used to finance advanced commissions for the Fund's Class B shares and is a 49% owned subsidiary of Franklin Resources, Inc. Lightning receives portfolio holdings information on a weekly basis, with no time lag. Lightning may utilize such information to construct a "global hedge" to lessen its exposure to market fluctuations with respect to the fees it receives in connection with the financing of the Fund's Class B shares. The global hedge is not specific to the Fund but rather is constructed with respect to the aggregate portfolio of securities underlying all funds, including funds within Franklin Templeton Investments as well as funds in other investment company complexes for which Lightning provides Class B share financing. The global hedge can be comprised of a number of financial instruments, including futures contracts, swaps, index shares, exchange-traded funds and, in limited circumstances, individual stocks. In its confidentiality agreement with Franklin Templeton Investments, Lightning has agreed to keep confidential any portfolio holdings information it receives from the Fund and also has agreed not to purchase or sell or sell short any individual stocks held by the Fund based on such portfolio holdings information. If other funds for which Lightning provides financing have supplied Lightning with portfolio holdings information, and such holdings include individual stocks that are also included in the list of portfolio holdings supplied by the Fund, it is possible that the global hedge constructed by Lightning may include individual stock transactions based on such other funds' holdings of a particular stock, but not based on the Fund's holdings of that stock. Lightning does not seek to profit from the global hedge, does not invest in Fund shares, and has established precautionary measures so that its personnel may not use the Fund's portfolio information for the purpose of trading in Fund shares or for any other unauthorized trading. Although neither the Fund nor any Franklin Templeton entity receives compensation in connection with the provision of portfolio holdings information to Lightning, because Franklin Resources is an affiliate of Lightning, to the extent that Lightning's global hedge is successful, Franklin Resources may receive an indirect economic benefit from the global hedge and, consequently, from the release of portfolio holdings information.
Several investment managers within Franklin Templeton Investments (F-T Managers) serve as investment managers to offshore funds that are registered or otherwise authorized for sale with foreign regulatory authorities. The release of portfolio holdings information for such offshore funds is excluded from the Fund's portfolio holdings release policy if such information is given to offshore banks, broker-dealers, insurance companies, registered investment managers and other financial institutions (offshore investment managers) with discretionary authority to select offshore funds on behalf of their clients. Because such offshore funds may from time to time invest in securities substantially similar to those of the Fund, there is the risk that such portfolio holdings information may be used to trade inappropriately against the Fund. To mitigate such risks, such information may only be disclosed for portfolio analytic purposes, such as risk analysis/asset allocation, and the offshore investment manager will be required to execute a non-disclosure agreement, whereby such offshore investment manager agrees to maintain such information as confidential, including limiting the dissemination of such information within its organization, and not to trade in any shares of any U.S. registered Franklin or Templeton fund, including the Fund.
In addition, some F-T Managers serve as investment managers to various bank commingled trusts maintained by a Franklin Templeton Investments trust company, to various Canadian institutional pooled funds, to separate accounts, and as sub-advisers to other mutual funds not within the Franklin Templeton Investments fund complex. Such trusts, pooled funds, accounts and other funds (collectively, "other accounts") are not subject to the Fund's portfolio holdings release policy. However, in some instances the portfolio holdings of such other accounts may be similar to and, in certain cases, nearly identical to those of a Franklin Templeton mutual fund, including the Fund. In the case of bank commingled trusts and Canadian institutional pooled funds, to mitigate risks that such portfolio holdings information may be used to trade inappropriately against a mutual fund, the recipient of such portfolio holdings information will be required to execute a non-disclosure agreement similar to the one described above for offshore funds. With respect to the other mutual funds not within the Franklin Templeton Investments fund complex, the sponsors of such funds may disclose the portfolio holdings of such funds at different times than the Fund discloses its portfolio holdings.
The Fund's portfolio holdings release policy and all subsequent amendments have been reviewed and approved by the Fund's board of trustees, and any other material amendments shall also be reviewed and approved by the board. The investment manager's compliance staff conducts periodic reviews of compliance with the policy and provides at least annually a report to the board of trustees regarding the operation of the policy and any material changes recommended as a result of such review. The investment manager's compliance staff also will report to the board on exceptions granted to the policy, along with an explanation of the legitimate business purpose of the Fund that is served as a result of the exception.
The Fund has a board of trustees. Each trustee will serve until that person resigns and/or a successor is elected and qualified. The board is responsible for the overall management of the Fund, including general supervision and review of the Fund's investment activities. The board, in turn, elects the officers of the Fund who are responsible for administering the Fund's day-to-day operations. The board also monitors the Fund to ensure that no material conflicts exist among share classes. While none are expected, the board will act appropriately to resolve any material conflict that may arise.
The name, year of birth and address of the officers and board members, as well as their affiliations, positions held with the Fund, principal occupations during the past five years and number of portfolios overseen in the Franklin Templeton fund complex are shown below.
NUMBER OF
PORTFOLIOS
NAME, YEAR OF IN FUND
BIRTH AND ADDRESS LENGTH OF COMPLEX OTHER DIRECTORSHIPS
POSITION TIME SERVED OVERSEEN BY HELD
BOARD MEMBER*
-------------------------------------------------------------------------------
Harris J. Ashton Trustee Since 1977 139 Director, Bar-S Foods
(1932) (meat packing
One Franklin company).
Parkway
San Mateo, CA
94403-1906
|
Robert F. Trustee Since March 120 None Carlson (1928) 2007 One Franklin Parkway San Mateo, CA 94403-1906 |
Sam Ginn (1937) Trustee Since March 120 Director, Chevron
One Franklin 2007 Corporation (global
Parkway energy company) and
San Mateo, CA ICO Global
94403-1906 Communications
(Holdings) Limited
(satellite company).
|
Edith E. Holiday Trustee Since 1998 139 Director, Hess
(1952) Corporation
One Franklin (formerly, Amerada
Parkway Hess Corporation)
San Mateo, CA (exploration and
94403-1906 refining of oil and
gas), H.J. Heinz
Company (processed
foods and allied
products), RTI
International Metals,
Inc. (manufacture and
distribution of
titanium), Canadian
National Railway
(railroad) and White
Mountains Insurance
Group, Ltd. (holding
company).
|
Frank W.T. Trustee Since March 121 Director, Center for LaHaye (1929) 2007 Creative Land One Franklin Recycling Parkway (redevelopment). San Mateo, CA 94403-1906 |
Frank A. Olson Trustee Since 2006 139 Director, Hess
(1932) Corporation
One Franklin (formerly, Amerada
Parkway San Hess Corporation)
Mateo, CA (exploration and
94403-1906 refining of oil and
gas) and Sentient Jet
(private jet
service); and
FORMERLY, Director,
Becton Dickinson and
Company (medical
technology), Cooper
Industries, Inc.
(electrical products
and tools and
hardware), Health
Net, Inc. (formerly,
Foundation Health)
(integrated managed
care), The Hertz
Corporation (car
rental), Pacific
Southwest Airlines,
The RCA Corporation,
Unicom (formerly,
Commonwealth Edison),
UAL Corporation
(airlines) and White
Mountains Insurance
Group, Ltd. (holding
company).
|
Larry D. Trustee Since March 139 None Thompson 2007 (1945) One Franklin Parkway San Mateo, CA 94403-1906 |
John B. Wilson Trustee Since March 120 None (1959) 2007 One Franklin Parkway San Mateo, CA 94403-1906 |
NUMBER OF
PORTFOLIOS
NAME, YEAR OF IN FUND
BIRTH AND ADDRESS LENGTH OF COMPLEX
POSITION TIME SERVED OVERSEEN BY OTHER DIRECTORSHIPS
BOARD MEMBER* HELD
-------------------------------------------------------------------------------
**Charles B. Trustee, Trustee 139 None
Johnson (1933) President, and since 1977,
One Franklin Chief Executive President
Parkway Officer - since 1984
San Mateo, CA Investment and Chief
94403-1906 Management Executive
Officer -
Investment
Management
since 2002
|
**Rupert H. Trustee and Trustee 55 None Johnson, Jr. Vice President since 1983 (1940) and Vice One Franklin President Parkway since 1982 San Mateo, CA 94403-1906 |
Sheila Amoroso Vice President Since 1999 Not Not Applicable (1959) Applicable One Franklin Parkway San Mateo, CA 94403-1906 |
Rafael R. Vice President Since 1999 Not Not Applicable Costas, Jr. Applicable (1965) One Franklin Parkway San Mateo, CA 94403-1906 |
James M. Davis Chief Chief Not Not Applicable
(1952) Compliance Compliance Applicable
One Franklin Officer and Officer
Parkway Vice President since 2004
San Mateo, CA - AML Compliance and Vice
94403-1906 President -
AML
Compliance
since 2006
|
PRINCIPAL OCCUPATION DURING PAST 5 YEARS:
Laura Fergerson Treasurer Since 2004 Not Not Applicable (1962) Applicable One Franklin Parkway San Mateo, |
CA 94403-1906
Jimmy D. Gambill Senior Vice Since 2002 Not Applicable Not Applicable (1947) President and 500 East Broward Chief Executive Blvd. Officer -Finance Suite 2100 Fort and Lauderdale, FL Administration 33394-3091 |
David P. Goss Vice President Since 2000 Not Not Applicable (1947) Applicable One Franklin Parkway San Mateo, CA 94403-1906 |
Karen L. Vice President Since 2006 Not Not Applicable Skidmore (1952) and Secretary Applicable One Franklin Parkway San Mateo, CA 94403-1906 |
Craig S. Tyle Vice President Since 2005 Not Not Applicable (1960) Applicable One Franklin Parkway San Mateo, CA 94403-1906 |
Galen G. Vetter Chief Financial Since 2004 Not Not Applicable (1951) Officer and Applicable 500 East Broward Chief Blvd. Accounting Suite 2100 Fort Officer Lauderdale, FL 33394-3091 |
Thomas Walsh Vice President Since 1999 Not Not Applicable (1961) Applicable One Franklin Parkway San Mateo, CA 94403-1906 - |
*We base the number of portfolios on each separate series of the U.S. registered investment companies within the Franklin Templeton Investments fund complex. These portfolios have a common investment manager or affiliated investment managers.
**Charles B. Johnson and Rupert H. Johnson, Jr. are considered to be interested persons of the Fund under the federal securities laws due to their positions as officers and directors and major shareholders of Franklin Resources, Inc., which is the parent company of the Fund's investment manager and distributor.
Note 1: Charles B. Johnson and Rupert H. Johnson, Jr. are brothers.
Note 2: Officer information is current as of the date of this SAI. It is
possible that after this date, information about officers may change.
Note 3: Prior to August 1, 2007, S. Joseph Fortunato and Gordon S. Macklin
ceased to be trustees of the Trust.
The Fund's noninterested board members constitute the sole non-interested board members of 28 funds in the Franklin Templeton Investments complex for which each noninterested board member currently is paid a $232,000 annual retainer fee, together with a $7,000 per meeting fee for attendance at board meetings, a portion of which is allocated to the Fund. Board members who serve on the Audit Committee of the Fund and such other funds receive a flat fee of $3,000 per Committee meeting attended in person and $2,000 per telephonic meeting, a portion of which is allocated to the Fund. John B. Wilson, who serves as chairman of the Audit Committee of the Fund and such other funds receives an additional fee of $40,000 per year, a portion of which is allocated to the Fund. Members of the Committee are not separately compensated for any committee meeting held on the day of a regularly scheduled board meeting. The foregoing fee arrangements went into effect June 1, 2007, and the following table reflects fees paid prior to such date under arrangements then in effect.
TOTAL FEES NUMBER OF
RECEIVED FROM BOARDS IN
FRANKLIN FRANKLIN
TOTAL FEES TEMPLETON TEMPLETON
RECEIVED INVESTMENTS(2) INVESTMENTS ON
FROM THE ($) WHICH EACH
NAME FUND(1) ($) SERVES(3)
-------------------------------------------------------------------------
Harris J. Ashton 28,457 409,510 42
Robert F. Carlson N/A 132,523 28
S. Joseph Fortunato(4) 13,814 292,948 N/A
Sam Ginn N/A N/A 28
Edith E. Holiday 28,615 422,501 42
Frank W.T. LaHaye N/A 225,560 28
Gordon S. Macklin(5) 15,812 302,820 N/A
Frank A. Olson 36,640 373,818 42
Larry D. Thompson N/A 147,950 42
John B. Wilson N/A 117,917 28
|
1. For the fiscal year ended March 31, 2007.
2. For the calendar year ended December 31, 2006.
3. We base the number of boards on the number of U.S. registered investment
companies in Franklin Templeton Investments. This number does not include
the total number of series or portfolios within each investment company for
which the board members are responsible.
4. Retired, September 5, 2006.
5. Retired, September 12, 2006.
Noninterested board members are reimbursed for expenses incurred in connection with attending board meetings and are paid pro rata by the fund in Franklin Templeton Investments for which they serve as director or trustee. No officer or board member received any other compensation, including pension or retirement benefits, directly or indirectly from the Fund or other funds in Franklin Templeton Investments. Certain officers or board members who are shareholders of Franklin Resources, Inc. (Resources) may be deemed to receive indirect remuneration by virtue of their participation, if any, in the fees paid to its subsidiaries.
Board members historically have followed a policy of having substantial investments in one or more of the Franklin Templeton funds, as is consistent with their individual financial goals. In February 1998, this policy was formalized through the adoption of a requirement that each board member invest one-third of fees received for serving as a director or trustee of a Templeton fund (excluding committee fees) in shares of one or more Templeton funds and one-third of fees received for serving as a director or trustee of a Franklin fund (excluding committee fees) in shares of one or more Franklin funds until the value of such investments equals or exceeds five times the annual retainer and regular board meeting fees paid to such board member. Investments in the name of family members or entities controlled by a board member constitute fund holdings of such board member for purposes of this policy, and a three-year phase-in period applies to such investment requirements for newly elected board members. In implementing such policy, a board member's fund holdings existing on February 27, 1998, are valued as of such date with subsequent investments valued at cost.
The following tables provide the dollar range of equity securities beneficially owned by the board members of the Fund on December 31, 2006.
INDEPENDENT BOARD MEMBERS
--------------------------
AGGREGATE
DOLLAR RANGE OF
EQUITY SECURITIES IN
ALL FUNDS OVERSEEN
BY THE BOARD
MEMBER IN THE
DOLLAR RANGE OF EQUITY FRANKLIN TEMPLETON
NAME OF BOARD MEMBER SECURITIES IN THE FUND FUND COMPLEX
------------------------------------------------------------------------------
Harris J. Ashton None Over $100,000
Robert F. Carlson Over $100,000 Over $100,000
Sam Ginn None Over $100,000
Edith E. Holiday None Over $100,000
Frank W.T. LaHaye Over $100,000 Over $100,000
Frank A. Olson None Over $100,000
Larry D. Thompson None Over $100,000
John B. Wilson None Over $100,000
INTERESTED BOARD MEMBERS
-------------------------
AGGREGATE
DOLLAR RANGE OF
EQUITY SECURITIES IN
ALL FUNDS OVERSEEN
BY THE BOARD
MEMBER IN THE
DOLLAR RANGE OF EQUITY FRANKLIN TEMPLETON
NAME OF BOARD MEMBER SECURITIES IN THE FUND FUND COMPLEX
------------------------------------------------------------------------------
Charles B. Johnson Over $100,000 Over $100,000
Rupert H. Johnson, Jr. Over $100,000 Over $100,000
|
BOARD COMMITTEES The board maintains two standing committees: the Audit
Committee and the Nominating Committee. The Audit Committee is generally
responsible for recommending the selection of the Fund's independent
registered public accounting firm (auditors), including evaluating their
independence and meeting with such auditors to consider and review matters
relating to the Fund's financial reports and internal controls. The Audit
Committee is comprised of the following independent trustees of the Fund:
Harris J. Ashton, Edith E. Holiday, Frank A. Olson and John B. Wilson. The
Nominating Committee is comprised of the following independent trustees of
the Fund: Harris J. Ashton, Robert F. Carlson, Sam Ginn, Edith E. Holiday,
Frank W.T. LaHaye, Frank A. Olson, Larry D. Thompson and John B. Wilson.
The Nominating Committee is responsible for selecting candidates to serve as board members and recommending such candidates (a) for selection and nomination as independent board member by the incumbent independent board member and the full board; and (b) for selection and nomination as interested board members by the full board.
When the board has or expects to have a vacancy, the Nominating Committee receives and reviews information on individuals qualified to be recommended to the full board as nominees for election as board members, including any recommendations by "Qualifying Fund Shareholders" (as defined below). To date, the Nominating Committee has been able to identify, and expects to continue to be able to identify, from its own resources an ample number of qualified candidates. The Nominating Committee, however, will review recommendations from Qualifying Fund Shareholders to fill vacancies on the board if these recommendations are submitted in writing and addressed to the Nominating Committee at the Fund's offices at P.O. Box 997151, Sacramento, CA 95899-7151 and are presented with appropriate background material concerning the candidate that demonstrates his or her ability to serve as a board member, including as an independent board member, of the Fund. A Qualifying Fund Shareholder is a shareholder who (i) has continuously owned of record, or beneficially through a financial intermediary, shares of the Fund having a net asset value of not less than two hundred and fifty thousand dollars ($250,000) during the 24-month period prior to submitting the recommendation; and (ii) provides a written notice to the Nominating Committee containing the following information: (a) the name and address of the Qualifying Fund Shareholder making the recommendation; (b) the number of shares of the Fund which are owned of record and beneficially by such Qualifying Fund Shareholder and the length of time that such shares have been so owned by the Qualifying Fund Shareholder; (c) a description of all arrangements and understandings between such Qualifying Fund Shareholder and any other person or persons (naming such person or persons) pursuant to which the recommendation is being made; (d) the name, age, date of birth, business address and residence address of the person or persons being recommended; (e) such other information regarding each person recommended by such Qualifying Fund Shareholder as would be required to be included in a proxy statement filed pursuant to the proxy rules of the SEC had the nominee been nominated by the board; (f) whether the shareholder making the recommendation believes the person recommended would or would not be an "interested person" of the Fund, as defined in the 1940 Act; and (g) the written consent of each person recommended to serve as a board member of the Fund if so nominated and elected/appointed.
The Nominating Committee may amend these procedures from time to time, including the procedures relating to the evaluation of nominees and the process for submitting recommendations to the Nominating Committee.
During the fiscal year ended March 31, 2007, the Audit Committee met three times; the Nominating Committee met six times.
The Fund's board of trustees has delegated to the manager the task of ensuring that regulatory guidelines governing the fair valuation for securities are applied to the Fund and that the required level of liquidity is maintained. The manager has formed a Valuation & Liquidity Oversight Committee (VLOC) to oversee these obligations. The VLOC oversees and administers the policies and procedures governing fair valuation and liquidity determination of securities. The VLOC meets monthly to review and approve fair value and liquidity reports and conduct other business, and meets whenever necessary to review potential significant market events and take appropriate steps to adjust valuations in accordance with established policies. The VLOC provides regular reports that document its activities to the board of trustees for its review and approval of pricing determinations at scheduled meetings. VLOC meeting minutes are regularly submitted to the board of trustees for their review.
The Fund's policies and procedures governing fair valuation and liquidity determination of securities have been initially reviewed and approved by the board of trustees and any material amendments will also be reviewed and approved by the board. The manager's compliance staff conducts periodic reviews of compliance with the policies and provides at least annually a report to the board of trustees regarding the operation of the policies and any material changes recommended as a result of such review.
MANAGER AND SERVICES PROVIDED The Fund's manager is Franklin Advisers, Inc. The manager is a wholly owned subsidiary of Resources, a publicly owned company engaged in the financial services industry through its subsidiaries. Charles B. Johnson and Rupert H. Johnson, Jr. are the principal shareholders of Resources.
The manager provides investment research and portfolio management services, and selects the securities for the Fund to buy, hold or sell. The manager's extensive research activities include, as appropriate, traveling to meet with issuers and to review project sites. The manager also selects the brokers who execute the Fund's portfolio transactions. The manager provides periodic reports to the board, which reviews and supervises the manager's investment activities. To protect the Fund, the manager and its officers, directors and employees are covered by fidelity insurance.
The manager and its affiliates manage numerous other investment companies and accounts. The manager may give advice and take action with respect to any of the other funds it manages, or for its own account, that may differ from action taken by the manager on behalf of the Fund. Similarly, with respect to the Fund, the manager is not obligated to recommend, buy or sell, or to refrain from recommending, buying or selling any security that the manager and access persons, as defined by applicable federal securities laws, may buy or sell for its or their own account or for the accounts of any other fund. The manager is not obligated to refrain from investing in securities held by the Fund or other funds it manages. Because the manager is a subsidiary of a financial holding company (FHC) under the Gramm-Leach-Bliley Act of 1999, federal regulations applicable to FHCs may limit or restrict the Fund's ability to acquire or hold a position in a given security when it might otherwise be advantageous for the Fund to acquire or hold that security.
The Fund, its manager and principal underwriter have each adopted a code of ethics, as required by federal securities laws. Under the code of ethics, employees who are designated as access persons may engage in personal securities transactions, including transactions involving securities that are being considered for the Fund or that are currently held by the Fund, subject to certain general restrictions and procedures. The personal securities transactions of access persons of the Fund, its manager and principal underwriter will be governed by the code of ethics. The code of ethics is on file with, and available from, the SEC.
MANAGEMENT FEES The Fund pays the manager a fee equal to a monthly rate of:
o 5/96 of 1% (0.625 annually) of the value of net assets up to and including $100 million; and
o 1/24 of 1% (0.500% annually) of the value of net assets over $100 million and not over $250 million; and
o 9/240 of 1% (0.450% annually) of the value of net assets over $250 million and not over $10 billion; and
o 11/300 of 1% (0.440% annually of the value of net assets over $10 billion and not over $12.5 billion; and
o 7/200 of 1% (0>420% annually) of the value of net assets over $12.5 billion and not over $15 billion; and
o 1/30 of 1% (0.400% annually) of the value of net assets over $15 billion and not over $17.5 billion; and
o 19/600 of 1% (0.380% annually) of the value of net assets over $17.5 billion and not over $20 billion; and
o 3/100 of 1% (0.360% annually) of the value of net assets in excess of $20 billion.
The fee is calculated daily and paid monthly according to the terms of the management agreement. Each class of the Fund's shares pays its proportionate share of the fee.
For the last three fiscal years ended March 31, the Fund paid the following
management fees:
MANAGEMENT
FEES PAID ($)
-------------------------------------------------------------------------------
2007 61,011,923
2006 60,047,061
2005 58,916,055
|
PORTFOLIO MANAGERS This section reflects information about the portfolio managers as of March 31, 2007.
The following table shows the number of other accounts managed by each portfolio manager and the total assets in the accounts managed within each category:
---------------------------------------------------------------------------------------------
Name Number of Assets of Number of Assets of Number of Assets of
Other Other Other Pooled Other Other Other
Registered Registered Investment Pooled Accounts Accounts
Investment Investment Vehicles Investment Managed Managed
Companies Companies Managed Vehicles (x $1
Managed Managed Managed million)
(x $1 (x $1
million) million)
---------------------------------------------------------------------------------------------
Christopher
Sperry 5 4,903.0 0 N/A 0 N/A
John Wiley 8 11,668.2 0 N/A 0 N/A
|
Portfolio managers that provide investment services to the Fund may also provide services to a variety of other investment products, including other funds, institutional accounts and private accounts. The advisory fees for some of such other products and accounts may be different than that charged to the Fund and may include performance based compensation. This may result in fees that are higher (or lower) than the advisory fees paid by the Fund. As a matter of policy, the fund or account is managed solely for the benefit of the beneficial owners thereof. As discussed below, the separation of the trading execution function from the portfolio management function and the application of objectively based trade allocation procedures helps to mitigate potential conflicts of interest that may arise as a result of the portfolio managers managing accounts with different advisory fees.
CONFLICTS. The management of multiple funds, including the Fund, and accounts may also give rise to potential conflicts of interest if the funds and other accounts have different objectives, benchmarks, time horizons, and fees as the portfolio manager must allocate his or her time and investment ideas across multiple funds and accounts. The manager seeks to manage such competing interests for the time and attention of portfolio managers by having portfolio managers focus on a particular investment discipline. Most other accounts managed by a portfolio manager are managed using the same investment strategies that are used in connection with the management of the Fund. Accordingly, portfolio holdings, position sizes, and industry and sector exposures tend to be similar across similar portfolios, which may minimize the potential for conflicts of interest. As noted above, the separate management of the trade execution and valuation functions from the portfolio management process also helps to reduce potential conflicts of interest. However, securities selected for funds or accounts other than the Fund may outperform the securities selected for the Fund. Moreover, if a portfolio manager identifies a limited investment opportunity that may be suitable for more than one fund or other account, the Fund may not be able to take full advantage of that opportunity due to an allocation of that opportunity across all eligible funds and other accounts. The manager seeks to manage such potential conflicts by using procedures intended to provide a fair allocation of buy and sell opportunities among funds and other accounts.
The structure of a portfolio manager's compensation may give rise to potential conflicts of interest. A portfolio manager's base pay and bonus tend to increase with additional and more complex responsibilities that include increased assets under management. As such, there may be an indirect relationship between a portfolio manager's marketing or sales efforts and his or her bonus.
Finally, the management of personal accounts by a portfolio manager may give rise to potential conflicts of interest. While the funds and the manager have adopted a code of ethics which they believe contains provisions reasonably necessary to prevent a wide range of prohibited activities by portfolio managers and others with respect to their personal trading activities, there can be no assurance that the code of ethics addresses all individual conduct that could result in conflicts of interest.
The manager and the Fund have adopted certain compliance procedures that are designed to address these, and other, types of conflicts. However, there is no guarantee that such procedures will detect each and every situation where a conflict arises.
COMPENSATION. The manager seeks to maintain a compensation program that is competitively positioned to attract, retain and motivate top-quality investment professionals. Portfolio managers receive a base salary, a cash incentive bonus opportunity, an equity compensation opportunity, and a benefits package. Portfolio manager compensation is reviewed annually and the level of compensation is based on individual performance, the salary range for a portfolio manager's level of responsibility and Franklin Templeton guidelines. Portfolio managers are provided no financial incentive to favor one fund or account over another. Each portfolio manager's compensation consists of the following three elements:
BASE SALARY Each portfolio manager is paid a base salary.
ANNUAL BONUS Annual bonuses are structured to align the interests of the portfolio manager with those of the Fund's shareholders. Each portfolio manager is eligible to receive an annual bonus. Bonuses generally are split between cash (50% to 65%) and restricted shares of Franklin Resources stock (17.5% to 25%) and mutual fund shares (17.5% to 25%). The deferred equity-based compensation is intended to build a vested interest of the portfolio manager in the financial performance of both Franklin Resources and mutual funds advised by the manager. The bonus plan is intended to provide a competitive level of annual bonus compensation that is tied to the portfolio manager achieving consistently strong investment performance, which aligns the financial incentives of the portfolio manager and Fund shareholders. The Chief Investment Officer of the manager and/or other officers of the manager, with responsibility for the Fund, have discretion in the granting of annual bonuses to portfolio managers in accordance with Franklin Templeton guidelines. The following factors are generally used in determining bonuses under the plan:
o INVESTMENT PERFORMANCE. Primary consideration is given to the historic investment performance of all accounts managed by the portfolio manager over the 1, 3 and 5 preceding years measured against risk benchmarks developed by the fixed income management team. The pre-tax performance of the fund managed is measured relative to a relevant peer group and/or applicable benchmark as appropriate.
o NON-INVESTMENT PERFORMANCE. The more qualitative contributions of the portfolio manager to the manager's business and the investment management team, including business knowledge, productivity, customer service, creativity, and contribution to team goals, are evaluated in determining the amount of any bonus award.
o RESPONSIBILITIES. The characteristics and complexity of funds managed by the portfolio manager are factored in the manager's appraisal.
ADDITIONAL LONG-TERM EQUITY-BASED COMPENSATION Portfolio managers may also be awarded restricted shares or units of Franklin Resources stock or restricted shares or units of one or more mutual funds, and options to purchase common shares of Franklin Resources stock. Awards of such deferred equity-based compensation typically vest over time, so as to create incentives to retain key talent.
Portfolio managers also participate in benefit plans and programs available generally to all employees of the manager.
OWNERSHIP OF FUND SHARES. The manager has a policy of encouraging portfolio managers to invest in the funds they manage. Exceptions arise when, for example, a fund is closed to new investors or when tax considerations or jurisdictional constraints cause such an investment to be inappropriate for the portfolio manager. The following is the dollar range of Fund shares beneficially owned by each portfolio manager as of March 31, 2007 (such amounts may change from time to time):
DOLLAR RANGE
OF FUND SHARES
PORTFOLIO MANAGER BENEFICIALLY OWNED
------------------------------------------------------------------
Christopher Sperry None
John Wiley $1- $10,000
|
ADMINISTRATOR AND SERVICES PROVIDED Franklin Templeton Services, LLC (FT Services) has an agreement with the manager to provide certain administrative services and facilities for the Fund. FT Services is an indirect, wholly owned subsidiary of Resources and is an affiliate of the Fund's manager and principal underwriter.
The administrative services FT Services provides include preparing and maintaining books, records, and tax and financial reports, and monitoring compliance with regulatory requirements.
ADMINISTRATION FEES The manager pays FT Services a monthly fee equal to an annual rate of:
o 0.15% of the Fund's average daily net assets up to $200 million;
o 0.135% of average daily net assets over $200 million up to $700 million;
o 0.10% of average daily net assets over $700 million up to $1.2 billion; and
o 0.075% of average daily net assets over $1.2 billion.
During the last three fiscal years ended March 31, the manager paid FT
Services the following administration fees:
ADMINISTRATION
FEES PAID ($)
-------------------------------------------------------------------------------
2007 10,801,169
2006 10,616,727
2005 10,442,442
|
SHAREHOLDER SERVICING AND TRANSFER AGENT Franklin Templeton Investor Services, LLC (Investor Services) is the Fund's shareholder servicing agent and acts as the Fund's transfer agent and dividend-paying agent. Investor Services is located at 3344 Quality Drive, Rancho Cordova, CA 95640-7313. Please send all correspondence to Investor Services at P.O. Box 997151, Sacramento, CA 95899-7151.
Investor Services receives a fee for servicing Fund shareholder accounts. The Fund also will reimburse Investor Services for certain out-of-pocket expenses necessarily incurred in servicing the shareholder accounts in accordance with the terms of its servicing contract with the Fund.
Investor Services may also pay servicing fees, that will be reimbursed by the Fund, in varying amounts to certain financial institutions (primarily to help offset their costs associated with client account maintenance support, statement preparation and transaction processing) that (i) maintain omnibus accounts with the Fund in the institution's name on behalf of numerous beneficial owners of Fund shares who are either direct clients of the institution or are participants in an IRS-recognized tax-deferred savings plan (including Employer Sponsored Retirement Plans and Section 529 Plans) for which the institution, or its affiliate, provides participant level recordkeeping services (called "Beneficial Owners"); or (ii) provide support for Fund shareholder accounts by sharing account data with Investor Services through the National Securities Clearing Corporation (NSCC) networking system. In addition to servicing fees received from the Fund, these financial institutions also may charge a fee for their services directly to their clients. Investor Services will also receive a fee from the Fund for services provided in support of Beneficial Owners and NSCC networking system accounts.
CUSTODIAN Bank of New York, Mutual Funds Division, 100 Church Street, New York, NY 10286, acts as custodian of the Fund's securities and other assets.
INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM PricewaterhouseCoopers LLP, Three Embarcadero Center, San Francisco, CA 94111-4004, is the Fund's independent registered public accounting firm. The Independent Registered Public Accounting Firm audits the financial statements included in the Fund's Annual Report to Shareholders.
Since most purchases by the Fund are principal transactions at net prices, the Fund incurs little or no brokerage costs. The Fund deals directly with the selling or buying principal or market maker without incurring charges for the services of a broker on its behalf, unless it is determined that a better price or execution may be obtained by using the services of a broker. Purchases of portfolio securities from underwriters will include a commission or concession paid to the underwriter, and purchases from dealers will include a spread between the bid and ask price. The Fund seeks to obtain prompt execution of orders at the most favorable net price. Transactions may be directed to dealers in return for research and statistical information, as well as for special services provided by the dealers in the execution of orders.
It is not possible to place an accurate dollar value on the special execution or on the research services the manager receives from dealers effecting transactions in portfolio securities. The allocation of transactions to obtain additional research services allows the manager to supplement its own research and analysis activities and to receive the views and information of individuals and research staffs from many securities firms. The receipt of these products and services does not reduce the manager's research activities in providing investment advice to the Fund.
As long as it is lawful and appropriate to do so, the manager and its affiliates may use this research and data in their investment advisory capacities with other clients.
If purchases or sales of securities of the Fund and one or more other investment companies or clients supervised by the manager are considered at or about the same time, transactions in these securities will be allocated among the several investment companies and clients in a manner deemed equitable to all by the manager, taking into account the respective sizes of the accounts and the amount of securities to be purchased or sold. In some cases this procedure could have a detrimental effect on the price or volume of the security so far as the Fund is concerned. In other cases it is possible that the ability to participate in volume transactions may improve execution and reduce transaction costs to the Fund.
During the last three fiscal years ended March 31, the Fund did not pay any brokerage commissions.
As of March 31, 2007, the Fund did not own securities of its regular broker-dealers.
MULTICLASS DISTRIBUTIONS The Fund calculates income dividends and capital gain distributions the same way for each class. The amount of any income dividends per share generally will differ, however, due to any differences in the distribution and service (Rule 12b-1) fees applicable to the classes.
DISTRIBUTIONS OF NET INVESTMENT INCOME The Fund receives income generally in the form of interest on its investments. This income, less expenses incurred in the operation of the Fund, constitutes the Fund's net investment income from which dividends may be paid to you. This net investment income may either be tax-exempt or taxable when distributed to you.
EXEMPT-INTEREST DIVIDENDS. By meeting certain requirements of the Internal Revenue Code (Code), the Fund qualifies to pay exempt-interest dividends to you. These dividends are derived from interest income exempt from regular federal income tax, and are not subject to regular federal income tax when they are paid to you.
In addition, to the extent that exempt-interest dividends are derived from interest on obligations of the state of California or its political subdivisions, or from interest on qualifying U.S. territorial obligations (including qualifying obligations of Puerto Rico, the U.S. Virgin Islands or Guam), these dividends also may be exempt from California's personal income tax. Income from municipal securities of other states generally does not qualify as tax-free in California.
RISKS OF TAX-EXEMPT SECURITIES. Two residents of the Commonwealth of Kentucky who paid income tax on the interest they earned on out-of-state municipal obligations brought suit against the state's Department of Revenue, claiming that the state's tax policy illegally burdened interstate commerce. In early 2006, a Kentucky Appellate Court agreed with these residents that the state's policy was unconstitutional. The Kentucky Supreme Court declined to review this decision, and the U.S. Supreme Court has now granted CERTIORARI to hear this case in their 2007-2008 term (DAVIS V. DEPARTMENT OF REVENUE). The U.S. Supreme Court may reverse the Kentucky Appeals Court, in which case there will be no change in the operation of the Fund, or it may affirm the decision of this court, in which case Kentucky (and possible all other states) may be required to give equal treatment to all municipal obligations. In the latter case, each state legislature will be required to assess any current tax policy that gives preferential treatment to in-state municipal obligations and pass new legislation that will either exempt all in-state and out-of-state municipal obligations from taxation, or cause all of the interest earned on these obligations to become taxable for state personal income tax reporting. This change to the taxation of municipal obligation interest, if made, would cause all of the exempt-interest dividends paid by the Fund to be taxable to you on your state personal income tax return, and may cause the Fund's net asset value to decrease. The U.S. Supreme Court may also remand this case to the Kentucky Supreme Court or Appellate Court for further proceedings consistent with its ruling, in which case the outcome and impact of its decision will not be known until these proceedings are complete.
Corporate shareholders should be advised that these personal income tax rules may not apply to them, and that these exempt-interest dividends may be taxable for state franchise or income tax reporting. Additionally, if the DAVIS case is affirmed by the U.S. Supreme Court, the California state legislature may be required to make changes in its treatment of the interest earned on state and local obligations, and by extension, on exempt-interest dividends. These changes may be unfavorable to corporate shareholders (irrespective of whether or not they are favorable to individual shareholders). Corporate shareholders should talk to their tax advisors about the impact of this case on their income reporting obligations.
TAXABLE INCOME DIVIDENDS. The Fund may earn taxable income from many sources, including temporary investments, the discount on stripped obligations or their coupons, income from securities loans or other taxable transactions, and ordinary income on the sale of market discount bonds. If you are a taxable investor, any income dividends the Fund pays from this income are taxable to you as ordinary income. Because the Fund invests primarily in tax-exempt debt securities, it does not anticipate that any of its dividends will be treated as qualified dividends subject to reduced rates of federal taxation for individuals.
DISTRIBUTIONS OF CAPITAL GAINS The Fund may realize capital gains and losses on the sale of its portfolio securities. Distributions of short-term capital gains are taxable to you as ordinary income. Distributions of long-term capital gains are taxable to you as long-term capital gains, regardless of how long you have owned your shares in the Fund. Any net capital gains realized by the Fund generally are distributed once each year, and may be distributed more frequently, if necessary, to reduce or eliminate excise or income taxes on the Fund.
Capital gain dividends and any net long-term capital gains you realize from the sale of Fund shares are subject to a maximum rate of tax of 15% for individuals (5% for individuals in the 10% and 15% federal income tax brackets). For individuals in the 10% and 15% tax brackets, the rate for net long-term capital gains realized in calendar years 2008 through 2010 is further reduced from 5% to 0%. These reduced rates of taxation of capital gain dividends and net long-term capital gains are now scheduled to sunset on December 31, 2010, unless extended or made permanent before that date.
INFORMATION ON THE AMOUNT AND TAX CHARACTER OF DISTRIBUTIONS The Fund will inform you of the amount of your taxable income dividends and capital gain distributions at the time they are paid, and will advise you of their tax status for federal income tax purposes shortly after the close of each calendar year. This information will include the portion of the distributions that on average are comprised of taxable or tax-exempt income or interest income that is a tax preference item when determining your federal alternative minimum tax. If you have not owned your Fund shares for a full year, the Fund may designate and distribute to you, as taxable, tax-exempt or tax preference income, a percentage of income that may not be equal to the actual amount of each type of income earned during the period of your investment in the Fund. Taxable distributions declared in December but paid in January are taxable to you as if paid in December.
ELECTION TO BE TAXED AS A REGULATED INVESTMENT COMPANY The Fund has elected to be treated as a regulated investment company under Subchapter M of the Code. It has qualified as a regulated investment company for its most recent fiscal year, and intends to continue to qualify during the current fiscal year. As a regulated investment company, the Fund generally pays no federal income tax on the income and gains it distributes to you. The board reserves the right not to maintain the qualification of the Fund as a regulated investment company if it determines this course of action to be beneficial to shareholders. In that case, the Fund would be subject to federal, and possibly state, corporate taxes on its taxable income and gains, and distributions to you (including dividends from tax-exempt interest) would be taxed as ordinary income dividends to the extent of the Fund's earnings and profits.
EXCISE TAX DISTRIBUTION REQUIREMENTS To avoid federal excise taxes, the Code requires the Fund to distribute to you by December 31 of each year, at a minimum, the following amounts:
o 98% of its taxable ordinary income earned during the calendar year;
o 98% of its capital gain net income earned during the 12-month period ending October 31; and
o 100% of any undistributed amounts of these categories of income or gain from the prior year.
The Fund intends to declare and pay these distributions in December (or to pay them in January, in which case you must treat them as received in December), but can give no assurances that its distributions will be sufficient to eliminate all taxes.
SALES OF FUND SHARES Sales and exchanges of Fund shares are taxable transactions for federal and state income tax purposes. If you sell your Fund shares, or exchange them for shares of a different Franklin Templeton fund, the IRS requires you to report any gain or loss on your sale or exchange. If you owned your shares as a capital asset, any gain or loss that you realize is a capital gain or loss and is long-term or short-term, depending on how long you owned your shares.
SALES AT A LOSS WITHIN SIX MONTHS OF PURCHASE. If you sell or exchange Fund shares that you owned for six months or less:
o any loss incurred is disallowed to the extent of any exempt-interest dividends paid to you on your shares, and
o any remaining loss is treated as a long-term capital loss to the extent of any long-term capital gains distributed to you by the Fund.
WASH SALES. All or a portion of any loss that you realize on the sale of your Fund shares is disallowed to the extent that you buy other shares in the Fund within 30 days before or after your sale. Any loss disallowed under these rules is added to your tax basis in the new shares.
DEFERRAL OF BASIS. (CLASS A ONLY) In reporting gain or loss on the sale of your Fund shares, you may be required to adjust your basis in the shares you sell under the following circumstances:
IF:
o In your original purchase of Fund shares, you received a reinvestment right (the right to reinvest your sales proceeds at a reduced or with no sales charge), and
o You sell some or all of your original shares within 90 days of their purchase, and
o You reinvest the sales proceeds in the Fund or in another Franklin Templeton fund, and the sales charge that would otherwise apply is reduced or eliminated;
THEN: In reporting any gain or loss on your sale, all or a portion of the sales charge that you paid for your original shares is excluded from your tax basis in the shares sold and added to your tax basis in the new shares.
TAX CERTIFICATION AND BACKUP WITHHOLDING Tax laws require that you certify your tax information when you become an investor in the Fund. For U.S. residents and resident aliens, this certification is made on IRS Form W-9. Under these laws, the Fund must withhold a portion of your distributions and sales proceeds unless you:
o provide your correct Social Security or taxpayer identification number,
o certify that this number is correct,
o certify that you are not subject to backup withholding, and
o certify that you are a U.S. person (including a U.S. resident alien).
The Fund also must withhold if the IRS instructs it to do so. When withholding is required, the amount will be 28% of any distributions or proceeds paid.
Under the 2005 Tax Act, shareholders subject to backup withholding will be subject to withholding at a rate of 28% on any reportable payments that they receive from the Fund, including any exempt-interest dividends paid to them, even though this income is not taxable.
DIVIDENDS-RECEIVED DEDUCTION FOR CORPORATIONS For corporate shareholders, a portion of the dividends paid by a fund may qualify for the dividends-received deduction. This deduction generally is available to corporations for dividends paid by a fund out of income earned on its investments in domestic corporations. Because the Fund's income primarily is derived from investments earning interest rather than dividend income, generally NONE of its income dividends will be eligible for this deduction.
QUALIFIED DIVIDEND INCOME FOR INDIVIDUALS For the same reason, NONE of its distributions are expected to be qualified dividends eligible for federal taxation of individuals at long-term capital gain rates.
INVESTMENT IN COMPLEX SECURITIES The Fund may invest in securities issued or purchased at a discount, such as zero coupon, step-up or payment-in-kind (PIK) bonds, that could require it to accrue and distribute income not yet received. In order to generate sufficient cash to make these distributions, the Fund could be required to sell securities in its portfolio that it otherwise might have continued to hold. These rules could affect the amount, timing and/or tax character of income distributed to you by the Fund.
TREATMENT OF PRIVATE ACTIVITY BOND INTEREST Interest on certain private activity bonds, while exempt from regular federal income tax, is a tax preference item for taxpayers when determining their alternative minimum tax under the Code. Private activity bond interest could subject you to or increase your liability under the federal alternative minimum tax, depending on your personal or corporate tax position. Persons defined in the Code as substantial users (or persons related to such users) of facilities financed by private activity bonds should consult their tax advisors before buying Fund shares.
NON-U.S. INVESTORS Non-U.S. investors may be subject to U.S. withholding or estate tax, and are subject to special U.S. tax certification requirements.
The United States imposes a flat 30% withholding tax (or a tax at a lower treaty rate) on ordinary dividend income paid by the Fund to non-U.S. investors. Exempt-interest dividends and capital gain dividends paid by the Fund from its net long-term capital gains are generally exempt from this withholding tax. The 2004 Tax Act also exempts from U.S. withholding tax most dividends paid by the Fund from U.S. source taxable interest income and net short-term capital gains to the extent such income and gains would be exempt if earned directly by the non-U.S. investor, but this provision is due to sunset for any Fund distributions paid from income earned by the Fund on or after April 1, 2008. If you are a non-resident alien individual present in the U.S. for a period or periods aggregating 183 days or more during the taxable year in which you receive the distributions, any short-term capital gain dividends and capital gain distributions are subject to a 30% (or lower treaty rate) U.S. withholding tax.
In addition, any taxable and tax-exempt dividends and distributions, including any interest-related and short-term capital gain dividends, and any proceeds from the sale of a non-U.S. investor's shares will be subject to backup withholding at a rate of 28% if you fail to properly certify that you are not a U.S. person. See the discussion below for "Tax certification and backup withholding as applied to non-U.S. investors." Any Fund taxable dividends and distributions that are effectively connected with the conduct of a U.S. trade or business by a non-U.S. investor are also taxable in the U.S. on a net basis, and may require you to file a U.S. income tax return.
U.S. ESTATE TAX. The 2004 Tax Act also provides a partial exemption from U.S. estate tax that may apply to Fund shares held by the estate of a non-U.S. decedent dying on or after January 1, 2005 and before January 1, 2008. The amount treated as exempt is based on the proportion of the assets held by a Fund at the end of the quarter immediately preceding the decedent's death that are treated as property generating exempt-interest income or constitute other property not within the United States.
TAX CERTIFICATION AND BACKUP WITHHOLDING AS APPLIED TO NON-U.S. INVESTORS. Non-U.S. investors have special U.S. tax certification requirements to avoid backup withholding, and if applicable, to obtain the benefit of any income tax treaty between the non-U.S. investor's country of residence and the United States. To claim these tax benefits, the non-U.S. investor must provide a properly completed Form W-8BEN (or other Form W-8, where applicable, or their substitute forms) to establish his or her status as a non-U.S. investor, to claim beneficial ownership over the assets in the account, and to claim, if applicable, a reduced rate of or exemption from withholding tax under the applicable treaty. A Form W-8BEN provided without a U.S. taxpayer identification number remains in effect for a period of three years beginning on the date that it is signed and ending on the last day of the third succeeding calendar year. However, non-U.S. investors must advise the Fund of any changes of circumstances that would render the information given on the form incorrect, and must then provide a new W-8BEN to avoid the prospective application of backup withholding. Forms W-8BEN with U.S. taxpayer identification numbers remain valid indefinitely, or until the investor has a change of circumstances that renders the form incorrect and necessitates a new form and tax certification.
U.S. TREASURY CIRCULAR 230 NOTICE This discussion of "Distributions and Taxes" is not intended or written to be used, and cannot be used, by you for the purpose of avoiding any penalties that may be imposed by the Internal Revenue Service. It is not written as tax advice, and does not purport to deal with all of the federal, state or foreign tax consequences that may be applicable to your investment in the Fund. You should consult your personal tax advisor for advice on these consequences.
The Fund is an open-end management investment company, commonly called a mutual fund. The Fund was originally organized as a Maryland corporation on November 28, 1977, was converted to a Delaware statutory trust effective August 1, 2007, and is registered with the SEC.
The Fund currently offers four classes of shares: Class A, Class B, Class C, and Advisor Class. New or additional investments into Class B are no longer permitted. Existing shareholders of Class B shares may continue as Class B shareholders, continue to reinvest dividends into Class B shares and exchange their Class B shares for Class B shares of other Franklin Templeton funds as permitted by the current exchange privileges. The Fund may offer additional classes of shares in the future. The full title of each class is:
o Franklin California Tax-Free Income Fund - Class A
o Franklin California Tax-Free Income Fund - Class B
o Franklin California Tax-Free Income Fund - Class C
o Franklin California Tax-Free Income Fund - Advisor Class
Shares of each class represent proportionate interests in the Fund's assets. On matters that affect the Fund as a whole, each class has the same voting and other rights and preferences as any other class. On matters that affect only one class, only shareholders of that class may vote. Each class votes separately on matters affecting only that class, or expressly required to be voted on separately by state or federal law.
The Fund has noncumulative voting rights. For board member elections, this gives holders of more than 50% of the shares voting the ability to elect all of the members of the board. If this happens, holders of the remaining shares voting will not be able to elect anyone to the board.
The Fund does not intend to hold annual shareholder meetings. The Fund may hold special meetings, however, for matters requiring shareholder approval.
As of July 3, 2007, the principal shareholders of the Fund, beneficial or of record, were:
NAME AND ADDRESS SHARE CLASS PERCENTAGE (%) ------------------------------------------------------------------------- Corsiglia Family Trust Advisor 7.17 Wendy Beth Corsiglia Laird Trustee 3 Deerfield Drive Scotts Valley, CA 95066-2747 Ellard & Co Advisor 13.80 P.O. Box 3199 New York, NY 10008-3199 Frederick J Hanshaw Advisor 17.48 10921 Westminster Avenue Garden Grove, CA 92843-4929 |
From time to time, the number of Fund shares held in the "street name" accounts of various securities dealers for the benefit of their clients or in centralized securities depositories may exceed 5% of the total shares outstanding.
As of July 3, 2007, the officers and board members, as a group, owned of record and beneficially 6.8% of the Fund's Advisor Class shares and less than 1% of the outstanding shares of the Fund's other classes. The board members may own shares in other funds in Franklin Templeton Investments.
The Fund continuously offers its shares through securities dealers who have an agreement with Franklin Templeton Distributors, Inc. (Distributors). A securities dealer includes any financial institution that, either directly or through affiliates, has an agreement with Distributors to handle customer orders and accounts with the Fund. This reference is for convenience only and does not indicate a legal conclusion of capacity. Banks and financial institutions that sell shares of the Fund may be required by state law to register as securities dealers. If you buy or sell shares through your securities dealer, you may be charged a transaction processing fee by your securities dealer. Your securities dealer will provide you with specific information about any transaction processing fees you will be charged.
For investors outside the U.S., the offering of Fund shares may be limited in many jurisdictions. An investor who wishes to buy shares of the Fund should determine, or have a broker-dealer determine, the applicable laws and regulations of the relevant jurisdiction. Investors are responsible for compliance with tax, currency exchange or other regulations applicable to redemption and purchase transactions in any jurisdiction to which they may be subject. Investors should consult appropriate tax and legal advisors to obtain information on the rules applicable to these transactions.
All checks, drafts, wires and other payment mediums used to buy or sell shares of the Fund must be denominated in U.S. dollars. We may, in our sole discretion, either (a) reject any order to buy or sell shares denominated in any other currency or (b) honor the transaction or make adjustments to your account for the transaction as of a date and with a foreign currency exchange factor determined by the drawee bank. We may deduct any applicable banking charges imposed by the bank from your account.
When you buy shares, if you submit a check or a draft that is returned unpaid to the Fund we may impose a $10 charge against your account for each returned item.
If you buy shares through the reinvestment of dividends, the shares will be purchased at the net asset value determined on the business day following the dividend record date (sometimes known as the "ex-dividend date"). The processing date for the reinvestment of dividends may vary and does not affect the amount or value of the shares acquired.
INVESTMENT BY ASSET ALLOCATORS The Fund permits investment in the Fund by certain asset allocators (Asset Allocators) who represent underlying clients that have granted a power of attorney to the Asset Allocators to invest on their behalf. The Asset Allocators typically make asset allocation decisions across similarly situated underlying accounts that are invested in the Fund. As a result of adjustments in such asset allocation decisions, the Fund may experience relatively large purchases and redemptions when the Asset Allocators implement their asset allocation adjustment decisions. The Fund, based on monitoring of the trading activity of such Asset Allocator accounts, reserves the right to treat such Asset Allocators as market timers. In such circumstances, the Fund may restrict or reject trading activity by Asset Allocators if, in the judgment of the Fund's manager or transfer agent, such trading may interfere with the efficient management of the Fund's portfolio, may materially increase the Fund's transaction costs or taxes, or may otherwise be detrimental to the interests of the Fund and its shareholders. Neither the Fund, nor its investment manager nor any other affiliated party receives any compensation or other consideration in return for permitting Fund investments by Asset Allocators.
INITIAL SALES CHARGES The maximum initial sales charge is 4.25% for Class A. There is no initial sales charge for Class C and Advisor Class.
The initial sales charge for Class A shares may be reduced for certain large purchases, as described in the prospectus. We offer several ways for you to combine your purchases in Franklin Templeton funds to take advantage of the lower sales charges for large purchases.
LETTER OF INTENT (LOI). You may buy Class A shares at a reduced sales charge by completing the LOI section of your account application. An LOI is a commitment by you to invest a specified dollar amount during a 13-month period. The amount you agree to invest determines the sales charge you pay. By completing the LOI section of the application, you acknowledge and agree to the following:
o You authorize Distributors to reserve approximately 5% of your total intended purchase in Class A shares registered in your name until you fulfill your LOI. Your periodic statements will include the reserved shares in the total shares you own, and we will pay or reinvest dividend and capital gain distributions on the reserved shares according to the distribution option you have chosen.
o You give Distributors a security interest in the reserved shares and appoint Distributors as attorney-in-fact.
o Distributors may sell any or all of the reserved shares to cover any additional sales charge if you do not fulfill the terms of the LOI.
o Although you may exchange your shares, you may not sell reserved shares until you complete the LOI or pay the higher sales charge.
After you file your LOI with the Fund, you may buy Class A shares at the sales charge applicable to the amount specified in your LOI. Sales charge reductions based on purchases in more than one Franklin Templeton fund will be effective only after notification to Distributors that the investment qualifies for a discount. If you file your LOI with the Fund before a change in the Fund's sales charge, you may complete the LOI at the lower of the new sales charge or the sales charge in effect when the LOI was filed.
Your holdings in Franklin Templeton funds acquired before you filed your LOI will be counted towards the completion of the LOI. Any redemptions you make during the 13-month period will be subtracted from the amount of the purchases for purposes of determining whether the terms of the LOI have been completed.
If the terms of your LOI are met, the reserved shares will be deposited to an account in your name or delivered to you or as you direct.
If the amount of your total purchases, less redemptions, is less than the amount specified in your LOI, the sales charge will be adjusted upward, depending on the actual amount purchased (less redemptions) during the period. You will need to send Distributors an amount equal to the difference in the actual dollar amount of sales charge paid and the amount of sales charge that would have applied to the total purchases if the total of the purchases had been made at one time. Upon payment of this amount, the reserved shares held for your account will be deposited to an account in your name or delivered to you or as you direct. If within 20 days after written request the difference in sales charge is not paid, we will redeem an appropriate number of reserved shares to realize the difference. If you redeem the total amount in your account before you fulfill your LOI, we will deduct the additional sales charge due from the sale proceeds and forward the balance to you.
WAIVERS FOR INVESTMENTS FROM CERTAIN PAYMENTS. Class A shares may be purchased without an initial sales charge or contingent deferred sales charge (CDSC) by investors who reinvest within 90 days:
o Dividend and capital gain distributions from any Franklin Templeton fund. The distributions generally must be reinvested in the same share class. Certain exceptions apply, however, to Class C shareholders who chose to reinvest their distributions in Class A shares of the Fund before November 17, 1997, and to Advisor Class or Class Z shareholders of a Franklin Templeton fund who may reinvest their distributions in the Fund's Class A shares.
o Annuity payments received under either an annuity option or from death benefit proceeds, if the annuity contract offers as an investment option the Franklin Templeton Variable Insurance Products Trust. You should contact your tax advisor for information on any tax consequences that may apply.
o Redemption proceeds from the sale of Class A shares of any of the Franklin Templeton Investment Funds if you are a qualified investor.
If you paid a CDSC when you redeemed your Class A shares from a Franklin Templeton Investment Fund, a new CDSC will apply to your purchase of Fund shares and the CDSC holding period will begin again. We will, however, credit your Fund account with additional shares based on the CDSC you previously paid and the amount of the redemption proceeds that you reinvest.
If you immediately placed your redemption proceeds in a Franklin Templeton money fund, you may reinvest them as described above. The proceeds must be reinvested within 90 days from the date they are redeemed from the money fund.
WAIVERS FOR CERTAIN INVESTORS. The following investors or investments may qualify to buy Class A shares without an initial sales charge or CDSC due to anticipated economies in sales efforts and expenses, including:
o Governments, municipalities, and tax-exempt entities that meet the requirements for qualification under section 501 of the Internal Revenue Code. Please consult your legal and investment advisors to determine if an investment in the Fund is permissible and suitable for you.
o Registered securities dealers and their affiliates, for their investment accounts only
o Current employees of securities dealers and their affiliates and their family members, as allowed by the internal policies of their employer
o Current and former officers, trustees, directors, full-time employees (and their family members) of both Franklin Templeton Investments and Franklin Templeton funds, consistent with our then-current policies
o Current partners of law firms that currently provide legal counsel to the funds, Resources or its affiliates
o Assets held in accounts managed by a subsidiary of Franklin Resources, Inc.: (1) under an advisory agreement (including sub-advisory agreements); and/or (2) as Trustee of an inter vivos or testamentary trust
o Certain unit investment trusts and their holders reinvesting distributions from the trusts
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets
o Shares acquired by a financial intermediary that the intermediary holds, directly or indirectly, on behalf of a beneficial owner who has entered into a comprehensive fee or other advisory fee arrangement with any broker-dealer, trust company or registered investment advisor (RIA), whether or not affiliated with the financial intermediary, provided the financial intermediary has entered into an agreement with Distributors authorizing the sale of Fund shares
DEALER COMPENSATION Securities dealers may at times receive the entire sales charge. A securities dealer who receives 90% or more of the sales charge may be deemed an underwriter under the Securities Act of 1933, as amended. Financial institutions or their affiliated brokers may receive an agency transaction fee in the percentages indicated in the dealer compensation table in the Fund's prospectus.
Distributors may pay the following commissions, out of its own resources, to securities dealers who initiate and are responsible for purchases of Class A shares of $1 million or more: 0.75% on sales of $1 million or more but less than $4 million, plus 0.50% on sales of $4 million or more but less than $50 million, plus 0.25% on sales of $50 million or more.
In addition to the sales charge payments described above and the distribution and service (12b-1) fees described below under "The Underwriter - Distribution and service (12b-1) fees," Distributors and/or its non-fund affiliates may make the following additional payments out of their own assets to securities dealers that sell shares of Franklin Templeton funds:
MARKETING SUPPORT PAYMENTS. Distributors may make payments to certain dealers who are holders or dealers of record for accounts in one or more of the Franklin Templeton funds. A dealer's marketing support services may include business planning assistance, advertising, educating dealer personnel about the Franklin Templeton funds and shareholder financial planning needs, placement on the dealer's list of offered funds, and access to sales meetings, sales representatives and management representatives of the dealer. Distributors compensates dealers differently depending upon, among other factors, sales and assets levels, redemption rates and the level and/or type of marketing and educational activities provided by the dealer. Such compensation may include financial assistance to dealers that enable Distributors to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events and other dealer-sponsored events. These payments may vary depending upon the nature of the event. Distributors will, on an annual basis, determine whether to continue such payments.
In the case of any one dealer, marketing support payments will not exceed the sum of 0.10% of that dealer's current year's total sales of Franklin Templeton mutual funds and 0.05% (or 0.03%) of the total assets respectively, of equity or fixed income funds attributable to that dealer, on an annual basis.
As noted below, Distributors may make additional payments to dealers, including dealers not listed below, related to ticket charges and various dealer-sponsored events intended to educate financial advisers and their clients about the Franklin Templeton funds. The following is a list of NASD member broker-dealers (including their respective affiliates) receiving marketing support payments as of March 31, 2007:
Advantage Capital Corporation, AG Edwards & Sons, Inc., AIG Financial Advisors, Inc., American General Securities, Inc., American Portfolios Financial Services, Inc., Ameriprise Financial Services, Inc., Associated Securities Corp., AXA Advisors, LLC, Cadaret Grant & Co., Inc., Cambridge Investment Research Inc., CCO Investment Services Corp., Chase Investment Services Corp., Citicorp Investment Services, Comerica Securities, Inc., Commerce Brokerage Services, Inc., Compass Brokerage, Inc., CUNA Brokerage Services, Inc., CUSO Financial Services, L.P., Edward Jones, Fidelity Investments Institutional Services Company, Inc., Fifth Third Securities, Inc., Financial Network Investment Corporation, FSC Securities Corporation, First Command Financial Planning, Inc., Genworth Financial Securities Corp., J.J.B. Hilliard, W.L. Lyons, Inc., IFC Holdings Inc. D/B/A INVEST Financial Corporation, ING Financial Partners, Inc., Investacorp, Inc., Investment Centers of America, Inc., Jefferson Pilot Securities Corporation, Legend Equities Corporation, Lincoln Financial Advisors Corp., Lincoln Investment Planning, Inc., Linsco/Private Ledger Corp., M&T Securities Inc., Merrill Lynch, Pierce, Fenner & Smith, Inc., Morgan Keegan & Company, Inc., Morgan Stanley DW Inc., Multi-Financial Securities Corporation, Mutual Service Corporation, NatCity Investments, Inc., National Planning Corporation, PFS Investments, Inc., PrimeVest Financial Services, Inc., Raymond James & Associates, Inc., Raymond James Financial Services, Inc., RBC Dain Rauscher, Inc., Richard D. Schubert, Inc., Robert W. Baird & Co., Inc., Royal Alliance Associates, Inc., Securities America, Inc., Signator Investors, Inc., SII Investments, Inc., Smith Barney, SunTrust Investment Services, Inc., TFS Securities, Inc., The Investment Center, Inc., UBS Financial Services, Inc., UBS Global Asset Management (US) Inc., UnionBanc Investment Services, LLC, United Planners Financial Services, U.S. Bancorp Investments, Inc., Vanderbilt Securities, LLC, Wachovia Securities, LLC, Waterstone Financial Group, Inc., Wells Fargo Investments, LLC, WM Financial Services, Inc.
Marketing support payments made to organizations located outside the U.S., with respect to investments in the Fund by non-U.S. persons, may exceed the above-stated limitation.
TRANSACTION SUPPORT PAYMENTS. The types of payments that Distributors may make under this category include, among others, payment of ticket charges of up to $20 per purchase or exchange order placed by a dealer or one time payments for ancillary services such as setting up funds on a dealer's mutual fund trading system.
OTHER PAYMENTS. From time to time, Distributors, at its expense, may make additional payments to dealers that sell or arrange for the sale of shares of the Fund. Such compensation may include financial assistance to dealers that enable Distributors to participate in and/or present at conferences or seminars, sales or training programs for invited registered representatives and other employees, client and investor events, co-operative advertising, newsletters, and other dealer-sponsored events. These payments may vary depending upon the nature of the event, and can include travel expenses, such as lodging incurred by registered representatives and other employees in connection with training and educational meetings, client prospecting and due diligence trips.
Distributors routinely sponsors due diligence meetings for registered representatives during which they receive updates on various Franklin Templeton funds and are afforded the opportunity to speak with portfolio managers. Invitation to these meetings is not conditioned on selling a specific number of shares. Those who have shown an interest in Franklin Templeton funds, however, are more likely to be considered. To the extent permitted by their firm's policies and procedures, registered representatives' expenses in attending these meetings may be covered by Distributors.
Other compensation may be offered to the extent not prohibited by federal or state laws or any self-regulatory agency, such as the NASD. Distributors makes payments for events it deems appropriate, subject to Distributors' guidelines and applicable law.
You should ask your dealer for information about any payments it receives from Distributors and any services provided.
CONTINGENT DEFERRED SALES CHARGE (CDSC) - CLASS A, B AND C If you invest any amount in Class C shares or $1 million or more in Class A shares, either as a lump sum or through our cumulative quantity discount or letter of intent programs, a CDSC may apply on any Class A shares you sell within 18 months and any Class C shares you sell within 12 months of purchase. The CDSC is 1% of the value of the shares sold or the net asset value at the time of purchase, whichever is less.
For Class B shares, there is a CDSC if you sell your shares within six years, as described in the table below. The charge is based on the value of the shares sold or the net asset value at the time of purchase, whichever is less.
IF YOU SELL YOUR CLASS B SHARES WITHIN THIS % IS DEDUCTED FROM THIS MANY YEARS AFTER BUYING THEM YOUR PROCEEDS AS A CDSC ------------------------------------------------------------------------------- 1 Year 4 2 Years 4 3 Years 3 4 Years 3 5 Years 2 6 Years 1 7 Years 0 |
CDSC WAIVERS. The CDSC for any share class generally will be waived for:
o Assets held in accounts managed by a state or federally regulated trust
company or bank (Trust Company) either as discretionary trustee of an inter
vivos or testamentary trust or as manager under an advisory agreement
(including sub-advisory) or other agreement that grants the Trust Company
investment discretion over those assets (Trust Company Managed Assets) if
(i) the aggregate value of Trust Company Managed Assets invested in
Franklin Templeton funds at the time of purchase equals at least $1
million; and (ii) the purchased shares are registered directly to the Trust
Company in its corporate capacity (not as trustee of an individual trust)
and held solely as Trust Company Managed Assets.
o Account fees
o Redemptions by the Fund when an account falls below the minimum required account size
o Redemptions following the death of the shareholder or beneficial owner
o Redemptions through a systematic withdrawal plan set up before February 1, 1995
o Redemptions through a systematic withdrawal plan set up on or after February 1, 1995, up to 1% monthly, 3% quarterly, 6% semiannually or 12% annually of your account's net asset value depending on the frequency of your plan
EXCHANGE PRIVILEGE If you request the exchange of the total value of your account, declared but unpaid income dividends and capital gain distributions will be reinvested in the Fund and exchanged into the new fund at net asset value when paid. Backup withholding and information reporting may apply.
If a substantial number of shareholders should, within a short period, sell their Fund shares under the exchange privilege, the Fund might have to sell portfolio securities it might otherwise hold and incur the additional costs related to such transactions. On the other hand, increased use of the exchange privilege may result in periodic large inflows of money. If this occurs, it is the Fund's general policy to initially invest this money in short-term, tax-exempt municipal securities, unless it is believed that attractive investment opportunities consistent with the Fund's investment goal exist immediately. This money will then be withdrawn from the short-term, tax-exempt municipal securities and invested in portfolio securities in as orderly a manner as is possible when attractive investment opportunities arise.
The proceeds from the sale of shares of an investment company generally are not available until the seventh day following the sale. The funds you are seeking to exchange into may delay issuing shares pursuant to an exchange until that seventh day. The sale of Fund shares to complete an exchange will be effected at net asset value at the close of business on the day the request for exchange is received in proper form.
SYSTEMATIC WITHDRAWAL PLAN Our systematic withdrawal plan allows you to sell your shares and receive regular payments from your account on a monthly, quarterly, semiannual or annual basis. The value of your account must be at least $5,000 and the minimum payment amount for each withdrawal must be at least $50. There are no service charges for establishing or maintaining a systematic withdrawal plan.
Each month in which a payment is scheduled, we will redeem an equivalent amount of shares in your account on the day of the month you have indicated on your account application or, if no day is indicated, on the 20th day of the month. If that day falls on a weekend or holiday, we will process the redemption on the next business day. For plans set up before June 1, 2000, we will continue to process redemptions on the 25th day of the month (or the next business day) unless you instruct us to change the processing date. Available processing dates currently are the 1st, 5th, 10th, 15th, 20th and 25th days of the month. When you sell your shares under a systematic withdrawal plan, it is a taxable transaction.
To avoid paying sales charges on money you plan to withdraw within a short period of time, you may not want to set up a systematic withdrawal plan if you plan to buy shares on a regular basis. Shares sold under the plan also may be subject to a CDSC.
Redeeming shares through a systematic withdrawal plan may reduce or exhaust the shares in your account if payments exceed distributions received from the Fund. This is especially likely to occur if there is a market decline. If a withdrawal amount exceeds the value of your account, your account will be closed and the remaining balance in your account will be sent to you. Because the amount withdrawn under the plan may be more than your actual yield or income, part of the payment may be a return of your investment.
To discontinue a systematic withdrawal plan, change the amount and schedule of withdrawal payments, or suspend one payment, we must receive instructions from you at least three business days before a scheduled payment. The Fund may discontinue a systematic withdrawal plan by notifying you in writing and will discontinue a systematic withdrawal plan automatically if all shares in your account are withdrawn, if the Fund receives notification of the shareholder's death or incapacity, or if mail is returned to the Fund marked "unable to forward" by the postal service.
REDEMPTIONS IN KIND The Fund has committed itself to pay in cash (by check) all requests for redemption by any shareholder of record, limited in amount, however, during any 90-day period to the lesser of $250,000 or 1% of the value of the Fund's net assets at the beginning of the 90-day period. This commitment is irrevocable without the prior approval of the SEC. In the case of redemption requests in excess of these amounts, the board reserves the right to make payments in whole or in part in securities or other assets of the Fund, in case of an emergency, or if the payment of such a redemption in cash would be detrimental to the existing shareholders of the Fund. In these circumstances, the securities distributed would be valued at the price used to compute the Fund's net assets and you may incur brokerage fees in converting the securities to cash. The Fund does not intend to redeem illiquid securities in kind. If this happens, however, you may not be able to recover your investment in a timely manner.
SHARE CERTIFICATES We will credit your shares to your Fund account. We do not issue share certificates unless you specifically request them. This eliminates the costly problem of replacing lost, stolen or destroyed certificates. If a certificate is lost, stolen or destroyed, you may have to pay an insurance premium of up to 2% of the value of the certificate to replace it.
Any outstanding share certificates must be returned to the Fund if you want to sell or exchange those shares or if you would like to start a systematic withdrawal plan. The certificates should be properly endorsed. You can do this either by signing the back of the certificate or by completing a share assignment form. For your protection, you may prefer to complete a share assignment form and to send the certificate and assignment form in separate envelopes.
GENERAL INFORMATION If dividend checks are returned to the Fund marked "unable to forward" by the postal service, we will consider this a request by you to change your dividend option to reinvest all distributions. The proceeds will be reinvested in additional shares at net asset value until we receive new instructions.
Distribution or redemption checks sent to you do not earn interest or any other income during the time the checks remain uncashed. Neither the Fund nor its affiliates will be liable for any loss caused by your failure to cash such checks. The Fund is not responsible for tracking down uncashed checks, unless a check is returned as undeliverable.
In most cases, if mail is returned as undeliverable we are required to take certain steps to try to find you free of charge. If these attempts are unsuccessful, however, we may deduct the costs of any additional efforts to find you from your account. These costs may include a percentage of the account when a search company charges a percentage fee in exchange for its location services.
Sending redemption proceeds by wire or electronic funds transfer (ACH) is a special service that we make available whenever possible. By offering this service to you, the Fund is not bound to meet any redemption request in less than the seven-day period prescribed by law. Neither the Fund nor its agents shall be liable to you or any other person if, for any reason, a redemption request by wire or ACH is not processed as described in the prospectus.
There are special procedures for banks and other institutions that wish to open multiple accounts. An institution may open a single master account by filing one application form with the Fund, signed by personnel authorized to act for the institution. Individual sub-accounts may be opened when the master account is opened by listing them on the application, or by providing instructions to the Fund at a later date. These sub-accounts may be registered either by name or number. The Fund's investment minimums apply to each sub-account. The Fund will send confirmation and account statements for the sub-accounts to the institution.
If you buy or sell shares through your securities dealer, we use the net asset value next calculated after your securities dealer receives your request, which is promptly transmitted to the Fund. If you sell shares through your securities dealer, it is your dealer's responsibility to transmit the order to the Fund in a timely fashion. Your redemption proceeds will not earn interest between the time we receive the order from your dealer and the time we receive any required documents. Any loss to you resulting from your dealer's failure to transmit your redemption order to the Fund in a timely fashion must be settled between you and your securities dealer.
Certain shareholder servicing agents may be authorized to accept your transaction request.
For institutional and bank trust accounts, there may be additional methods of buying or selling Fund shares than those described in this SAI or in the prospectus. Institutional and bank trust accounts include accounts opened by or in the name of a person (includes a legal entity or an individual) that has signed an Institutional Account Application or Bank Trust Account Application accepted by Franklin Templeton Institutional, LLC or entered into a selling agreement and/or servicing agreement with Distributors or Investor Services. For example, the Fund permits the owner of an institutional account to make a same day wire purchase if a good order purchase request is received (a) before the close of the New York Stock Exchange (NYSE) or (b) through the National Securities Clearing Corporation's automated system for processing purchase orders (Fund/SERV), even though funds are delivered by wire after the close of the NYSE. If funds to be wired are not received as scheduled, the purchase order may be cancelled or reversed and the institutional account owner could be liable for any losses or fees the Fund, Distributors and/or Investor Services may incur.
In the event of disputes involving conflicting claims of ownership or authority to control your shares, the Fund has the right (but has no obligation) to: (i) restrict the shares and require the written agreement of all persons deemed by the Fund to have a potential interest in the shares before executing instructions regarding the shares; or (ii) interplead disputed shares or the proceeds from the court-ordered sale thereof with a court of competent jurisdiction.
Should the Fund be required to defend against joint or multiple shareholders in any action relating to an ownership dispute, you expressly grant the Fund the right to obtain reimbursement for costs and expenses including, but not limited to, attorneys' fees and court costs, by unilaterally redeeming shares from your account.
The Fund may be required (i) pursuant to a validly issued levy, to turn your shares over to a levying officer who may, in turn, sell your shares at a public sale; or (ii) pursuant to a final order of forfeiture to sell your shares and remit the proceeds to the U.S. or state government as directed.
Clients of financial advisors whose firms have a Selling Agreement with Franklin Templeton Distributors, Inc., and who are eligible for the Financial Advisor Service Team (FAST) may be eligible for Franklin Templeton VIP ServicesTM which offers enhanced service and transaction capabilities. Please contact Shareholder Services at 1-800/632-2301 for additional information on this program.
Franklin Templeton Distributors, Inc. (Distributors) acts as the principal underwriter in the continuous public offering of the Fund's shares. Distributors is located at One Franklin Parkway, San Mateo, CA 94403-1906.
Distributors pays the expenses of the distribution of Fund shares, including advertising expenses and the costs of printing sales material and prospectuses used to offer shares to the public. The Fund pays the expenses of preparing and printing amendments to its registration statements and prospectuses (other than those necessitated by the activities of Distributors) and of sending prospectuses to existing shareholders.
Distributors does not receive compensation from the Fund for acting as underwriter of the Fund's Advisor Class shares.
The table below shows the aggregate underwriting commissions Distributors received in connection with the offering of the Fund's Class A, B and C shares, the net underwriting discounts and commissions Distributors retained after allowances to dealers, and the amounts Distributors received in connection with redemptions or repurchases of shares for the last three fiscal years ended March 31:
AMOUNT
RECEIVED IN
CONNECTION
WITH
TOTAL AMOUNT REDEMPTIONS
COMMISSIONS RETAINED BY AND
RECEIVED DISTRIBUTORS REPURCHASES
($) ($) ($)
--------------------------------------------------------------------------------
2007 15,950,284 2,755,603 433,145
2006 15,152,469 2,509,703 580,478
2005 11,789,033 1,826,868 789,740
|
Distributors may be entitled to payments from the Fund under the Rule 12b-1 plans, as discussed below. Except as noted, Distributors received no other compensation from the Fund for acting as underwriter.
DISTRIBUTION AND SERVICE (12B-1) FEES - CLASS A, B AND C The board has adopted a separate plan pursuant to Rule 12b-1 for each class. Although the plans differ in some ways for each class, each plan is designed to benefit the Fund and its shareholders. The plans are expected to, among other things, increase advertising of the Fund, encourage purchases of Fund shares and service to its shareholders, and increase or maintain assets of the Fund so that certain fixed expenses may be spread over a broader asset base, with a positive impact on per share expense ratios. In addition, a positive cash flow into the Fund is useful in managing the Fund because the manager has more flexibility in taking advantage of new investment opportunities and handling shareholder redemptions.
Under each plan, the Fund pays Distributors or others for the expenses of activities that are primarily intended to sell shares of the class. These expenses also may include service fees paid to securities dealers or others who have executed a servicing agreement with the Fund, Distributors or its affiliates and who provide service or account maintenance to shareholders (service fees); and the expenses of printing prospectuses and reports used for sales purposes, and of preparing and distributing sales literature and advertisements. Together, these expenses, including the service fees, are "eligible expenses." The 12b-1 fees charged to each class are based only on the fees attributable to that particular class. Because Class B is currently closed to new investors, the amounts paid by the Fund under its plan are primarily to pay for ongoing shareholder servicing and to pay third party financing entities.
THE CLASS A PLAN. The Fund may pay up to 0.10% per year of Class A's average daily net assets.
In implementing the Class A plan, the board has determined that the annual fees payable under the plan will be equal to the sum of: (i) the amount obtained by multiplying 0.10% by the average daily net assets represented by the Fund's Class A shares that were acquired by investors on or after May 1, 1994, the effective date of the plan (new assets), and (ii) the amount obtained by multiplying 0.05% by the average daily net assets represented by the Fund's Class A shares that were acquired before May 1, 1994 (old assets). These fees will be paid to the current securities dealer of record on the account. In addition, until such time as the maximum payment of 0.10% is reached on a yearly basis, up to an additional 0.01% will be paid to Distributors under the plan or, should Class A's assets fall below $4 billion, up to an additional 0.02% could be paid to Distributors under the plan. The payments made to Distributors will be used by Distributors to defray other marketing expenses that have been incurred in accordance with the plan, such as advertising.
The fee is a Class A expense. This means that all Class A shareholders, regardless of when they purchased their shares, will bear Rule 12b-1 expenses at the same rate. The initial rate will be at least 0.06% (0.05% plus 0.01%) of the average daily net assets of Class A and, as Class A shares are sold on or after May 1, 1994, will increase over time. Thus, as the proportion of Class A shares purchased on or after May 1, 1994, increases in relation to outstanding Class A shares, the expenses attributable to payments under the plan also will increase (but will not exceed 0.10% of average daily net assets). While this is the currently anticipated calculation for fees payable under the Class A plan, the plan permits the board to allow the Fund to pay a full 0.10% on all assets at any time. The approval of the board would be required to change the calculation of the payments to be made under the Class A plan.
The Class A plan is a reimbursement plan. It allows the Fund to reimburse Distributors for eligible expenses that Distributors has shown it has incurred. The Fund will not reimburse more than the maximum amount allowed under the plan. Any unreimbursed expenses from one year may not be carried over to or reimbursed in later years.
For the fiscal year ended March 31, 2007, the amounts paid by the Fund pursuant to the plan were:
($)
---------------------------------------------------------------
Advertising 340,484
Printing and mailing of prospectuses
other than to current shareholders 26,846
Payments to underwriters 132,324
Payments to broker-dealers 10,462,960
Other -
------------------
Total 10,962,614
==================
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THE CLASS B AND C PLANS. The Fund pays Distributors up to 0.65% per year of Class B and Class C's average daily net assets, out of which 0.15% may be paid for services to the shareholders (service fees). The Class B and C plans also may be used to pay Distributors for advancing commissions to securities dealers with respect to the initial sale of Class B and C shares. Class B plan fees payable to Distributors are used by Distributors to pay for ongoing shareholder servicing and to pay third party financing entities that have provided financing to Distributors in connection with advancing commissions to securities dealers. Resources owns a minority interest in one of the third party financing entities.
The Class B and C plans are compensation plans. They allow the Fund to pay a fee to Distributors that may be more than the eligible expenses Distributors has incurred at the time of the payment. Distributors must, however, demonstrate to the board that it has spent or has near-term plans to spend the amount received on eligible expenses. The Fund will not pay more than the maximum amount allowed under the plans.
Under the Class B plan, the amounts paid by the Fund pursuant to the plan for the fiscal year ended March 31, 2007, were:
($)
------------------------------------------------------------
Advertising -
Printing and mailing prospectuses
other than to current shareholders -
Payments to underwriters -
Payments to broker-dealers 469,714
Other 1,601,858
---------------
Total 2,071,572
===============
|
Under the Class C plan, the amounts paid by the Fund pursuant to the plan for the fiscal year ended March 31, 2007, were:
($)
------------------------------------------------------------
Advertising 23,321
Printing and mailing prospectuses
other than to current shareholders 1,816
Payments to underwriters 25,182
Payments to broker-dealers 3,642,771
Other 1
---------------
Total 3,693,091
===============
|
THE CLASS A, B AND C PLANS. In addition to the payments that Distributors or others are entitled to under each plan, each plan also provides that to the extent the Fund, the manager or Distributors or other parties on behalf of the Fund, the manager or Distributors make payments that are deemed to be for the financing of any activity primarily intended to result in the sale of Fund shares within the context of Rule 12b-1 under the Investment Company Act of 1940, as amended, then such payments shall be deemed to have been made pursuant to the plan.
To the extent fees are for distribution or marketing functions, as distinguished from administrative servicing or agency transactions, certain banks may not participate in the plans because of applicable federal law prohibiting certain banks from engaging in the distribution of mutual fund shares. These banks, however, are allowed to receive fees under the plans for administrative servicing or for agency transactions.
Distributors must provide written reports to the board at least quarterly on the amounts and purpose of any payment made under the plans and any related agreements, and furnish the board with such other information as the board may reasonably request to enable it to make an informed determination of whether the plans should be continued.
Each plan has been approved according to the provisions of Rule 12b-1. The terms and provisions of each plan also are consistent with Rule 12b-1.
Performance quotations are subject to SEC rules. These rules require the use of standardized performance quotations or, alternatively, that every non-standardized performance quotation furnished by the Fund be accompanied by certain standardized performance information computed as required by the SEC. Average annual total return before taxes, average annual total return after taxes on distributions, average annual total return after taxes on distributions and sale of shares and current yield quotations used by the Fund are based on the standardized methods of computing performance mandated by the SEC. An explanation of these and other methods used by the Fund to compute or express performance follows. Regardless of the method used, past performance does not guarantee future results, and is an indication of the return to shareholders only for the limited historical period used.
AVERAGE ANNUAL TOTAL RETURN BEFORE TAXES Average annual total return before taxes is determined by finding the average annual rates of return over certain periods that would equate an initial hypothetical $1,000 investment to its ending redeemable value. The calculation assumes that the maximum initial sales charge, if applicable, is deducted from the initial $1,000 purchase, and income dividends and capital gain distributions are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees. If a change is made to the sales charge structure, historical performance information will be restated to reflect the maximum initial sales charge currently in effect.
When considering the average annual total return before taxes quotations for Class A shares, you should keep in mind that the maximum initial sales charge reflected in each quotation is a one time fee charged on all direct purchases, which will have its greatest impact during the early stages of your investment. This charge will affect actual performance less the longer you retain your investment in the Fund.
The following SEC formula is used to calculate these figures:
n
P(1+T) = ERV
where:
P = a hypothetical initial payment of $1,000
T = average annual total return
n = number of years
ERV = ending redeemable value of a hypothetical $1,000 payment made at
the beginning of each period at the end of each period
|
AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS
Average annual total return after taxes on distributions is determined by
finding the average annual rates of return over certain periods that would
equate an initial hypothetical $1,000 investment to its ending redeemable
value, after taxes on distributions. The calculation assumes that the maximum
initial sales charge, if applicable, is deducted from the initial $1,000
purchase, and income dividends and capital gain distributions, less the taxes
due on such distributions, are reinvested at net asset value. The quotation
assumes the account was completely redeemed at the end of each period and the
deduction of all applicable charges and fees, but assumes that the redemption
itself had no tax consequences. If a change is made to the sales charge
structure, historical performance information will be restated to reflect the
maximum initial sales charge currently in effect.
Taxes due on distributions are calculated by applying the highest individual
marginal federal income tax rates in effect on the reinvestment date, using
the rates that correspond to the tax character of each component of the
distributions (e.g., the ordinary income rate for distributions of ordinary
income and net short-term capital gains, and the long-term capital gain rate
for distributions of net long-term capital gains). The taxable amount and
tax character of a distribution may be adjusted to reflect any
recharacterization of the distribution since its original date.
Distributions are adjusted to reflect the federal tax impact the distribution
would have on an individual taxpayer on the reinvestment date; for example,
no taxes are assumed to be due on the portion of any distribution that would
not result in federal income tax on an individual (e.g., tax-exempt interest
or non-taxable returns of capital). The effect of applicable tax credits,
such as the foreign tax credit, is taken into account in accordance with
federal tax law. Any potential tax liabilities other than federal tax
liabilities (e.g., state and local taxes) are disregarded, as are the effects
of phaseouts of certain exemptions, deductions, and credits at various income
levels, and the impact of the federal alternative minimum tax. Any
redemptions of shares required to pay recurring fees charged to shareholder
accounts are assumed to result in no additional taxes or tax credits.
The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (pre-liquidation). When considering the average annual total return after taxes on distributions quotations for Class A shares, you should keep in mind that the maximum initial sales charge reflected in each quotation is a one time fee charged on all direct purchases, which will have its greatest impact during the early stages of your investment. This charge will affect actual performance less the longer you retain your investment in the Fund.
The following SEC formula is used to calculate these figures:
n
P(1+T) = ATV
D
|
where:
P = a hypothetical initial payment of $1,000
T = average annual total return (after taxes on distributions)
n = number of years
ATV = ending value of a hypothetical $1,000 payment made at the beginning
D of each period at the end of each period, after taxes on fund
distributions but not after taxes on redemption
|
AVERAGE ANNUAL TOTAL RETURN AFTER TAXES ON DISTRIBUTIONS AND SALE OF FUND SHARES Average annual total return after taxes on distributions and sale of fund shares is determined by finding the average annual rates of return over certain periods that would equate an initial hypothetical $1,000 investment to its ending redeemable value, after taxes on distributions and sale of fund shares. The calculation assumes that the maximum initial sales charge, if applicable, is deducted from the initial $1,000 purchase, and income dividends and capital gain distributions are reinvested at net asset value. The quotation assumes the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees, including taxes upon sale of fund shares. If a change is made to the sales charge structure, historical performance information will be restated to reflect the maximum initial sales charge currently in effect.
Taxes due on distributions are calculated by applying the highest individual marginal federal income tax rates in effect on the reinvestment date, using the rates that correspond to the tax character of each component of the distributions (e.g., the ordinary income rate for distributions of ordinary income and net short-term capital gains, and the long-term capital gain rate for distributions of net long-term capital gains). The taxable amount and tax character of a distribution may be adjusted to reflect any recharacterization of the distribution since its original date. Distributions are adjusted to reflect the federal tax impact the distribution would have on an individual taxpayer on the reinvestment date; for example, no taxes are assumed to be due on the portion of any distribution that would not result in federal income tax on an individual (e.g., tax-exempt interest or non-taxable returns of capital). The effect of applicable tax credits, such as the foreign tax credit, is taken into account in accordance with federal tax law. Any potential tax liabilities other than federal tax liabilities (e.g., state and local taxes) are disregarded, as are the effects of phaseouts of certain exemptions, deductions, and credits at various income levels, and the impact of the federal alternative minimum tax. Any redemptions of shares required to pay recurring fees charged to shareholder accounts are assumed to result in no additional taxes or tax credits.
The capital gain or loss upon redemption is calculated by subtracting the tax basis from the redemption proceeds, after deducting any nonrecurring charges assessed at the end of the period, subtracting capital gains taxes resulting from the redemption, or adding the tax benefit from capital losses resulting from the redemption. In determining the basis for a reinvested distribution, the distribution is included net of taxes assumed paid from the distribution, but not net of any sales loads imposed upon reinvestment. Tax basis is adjusted for any distributions representing returns of capital and any other tax basis adjustments that would apply to an individual taxpayer, as permitted by applicable federal law. The amount and character (e.g., short-term or long-term) of capital gain or loss upon redemption is separately determined for shares acquired through the initial investment and each subsequent purchase through reinvested distributions. Shares acquired through reinvestment of distributions are not assumed to have the same holding period as the initial investment. The tax character of such reinvestments is determined by the length of the period between reinvestment and the end of the measurement period in the case of reinvested distributions. Capital gains taxes (or the benefit resulting from tax losses) is calculated using the highest federal individual capital gains tax rate for gains of the appropriate character in effect on the redemption date and in accordance with federal law applicable on the redemption date. Shareholders are assumed to have sufficient capital gains of the same character from other investments to offset any capital losses from the redemption, so that the taxpayer may deduct the capital losses in full.
The Fund's sales literature and advertising commonly refer to this calculation as the Fund's after-tax average annual total return (post-liquidation). When considering the average annual total return after taxes on distributions quotations for Class A shares, you should keep in mind that the maximum initial sales charge reflected in each quotation is a one time fee charged on all direct purchases, which will have its greatest impact during the early stages of your investment. This charge will affect actual performance less the longer you retain your investment in the Fund.
The following SEC formula is used to calculate these figures:
n
P(1+T) = ATV
DR
|
where:
P = a hypothetical initial payment of $1,000
T = average annual total return (after taxes on distributions and
redemptions)
n = number of years
ATV = ending value of a hypothetical $1,000 payment made at the beginning
DR of each period at the end of each period, after taxes on fund
distributions and redemption
|
CUMULATIVE TOTAL RETURN Like average annual total return, cumulative total return assumes that the maximum initial sales charge, if applicable, is deducted from the initial $1,000 purchase, income dividends and capital gain distributions are reinvested at net asset value, the account was completely redeemed at the end of each period and the deduction of all applicable charges and fees. Cumulative total return, however, is based on the actual return for a specified period rather than on the average return.
CURRENT YIELD Current yield shows the income per share earned by the Fund. It is calculated by dividing the net investment income per share earned during a 30-day base period by the applicable maximum offering price per share on the last day of the period and annualizing the result. Expenses accrued for the period include any fees charged to all shareholders of the class during the base period.
The following SEC formula is used to calculate these figures:
where:
a = interest earned during the period
b = expenses accrued for the period (net of reimbursements)
c = the average daily number of shares outstanding during the
period that were entitled to receive dividends
d = the maximum offering price per share on the last day of the period
TAXABLE-EQUIVALENT YIELD The Fund also may quote a taxable-equivalent yield that shows the before-tax yield that would have to be earned from a taxable investment to equal the yield. Taxable-equivalent yield is computed by dividing the portion of the yield that is tax-exempt by one minus the highest applicable combined federal and state income tax rate and adding the product to the portion of the yield that is not tax-exempt, if any.
From time to time, as any changes to the rate become effective, taxable-equivalent yield quotations advertised by the Fund will be updated to reflect these changes. The Fund expects updates may be necessary as tax rates are changed by federal and state governments. The advantage of tax-free investments, like the Fund, will be enhanced by any tax rate increases. Therefore, the details of specific tax increases may be used in sales material for the Fund.
CURRENT DISTRIBUTION RATE Current yield and taxable-equivalent yield, which are calculated according to a formula prescribed by the SEC, is not indicative of the amounts that were or will be paid to shareholders. Amounts paid to shareholders are reflected in the quoted current distribution rate or taxable-equivalent distribution rate. The current distribution rate is usually computed by annualizing the dividends paid per share by a class during a certain period and dividing that amount by the current maximum offering price. The current distribution rate differs from the current yield computation because it may include distributions to shareholders from sources other than interest, if any, and is calculated over a different period of time.
A taxable-equivalent distribution rate shows the taxable distribution rate equivalent to the current distribution rate. The advertised taxable-equivalent distribution rate will reflect the most current federal and state tax rates available to the Fund.
VOLATILITY Occasionally statistics may be used to show the Fund's volatility or risk. Measures of volatility or risk are generally used to compare the Fund's net asset value or performance to a market index. One measure of volatility is beta. Beta is the volatility of a fund relative to the total market, as represented by an index considered representative of the types of securities in which the fund invests. A beta of more than 1.00 indicates volatility greater than the market and a beta of less than 1.00 indicates volatility less than the market. Another measure of volatility or risk is standard deviation. Standard deviation is used to measure variability of net asset value or total return around an average over a specified period of time. The idea is that greater volatility means greater risk undertaken in achieving performance.
OTHER PERFORMANCE QUOTATIONS The Fund also may quote the performance of Class A shares without a sales charge. Sales literature and advertising may quote a cumulative total return, average annual total return and other measures of performance with the substitution of net asset value for the public offering price.
The Fund may include in its advertising or sales material information relating to investment goals and performance results of funds belonging to Franklin Templeton Investments. Resources is the parent company of the advisors and underwriter of Franklin Templeton funds.
The Fund may help you achieve various investment goals such as accumulating money for retirement, saving for a down payment on a home, college costs and other long-term goals. The Franklin College Savings Planner may help you in determining how much money must be invested on a monthly basis to have a projected amount available in the future to fund a child's college education. (Projected college cost estimates are based upon current costs published by the College Board.) The Franklin Retirement Savings Planner leads you through the steps to start a retirement savings program. Of course, an investment in the Fund cannot guarantee that these goals will be met.
The Fund is a member of Franklin Templeton Investments, one of the largest mutual fund organizations in the U.S., and may be considered in a program for diversification of assets. Founded in 1947, Franklin is one of the oldest mutual fund organizations and now services over 4 million shareholder accounts. In 1992, Franklin, a leader in managing fixed-income mutual funds and an innovator in creating domestic equity funds, joined forces with Templeton, a pioneer in international investing. The Mutual Series team, known for its value-driven approach to domestic equity investing, became part of the organization four years later. In 2001, the Fiduciary Trust team, known for providing global investment management to institutions and high net worth clients worldwide, joined the organization. Together, Franklin Templeton Investments has $624 billion in assets under management for more than 7 million U.S. based mutual fund shareholder and other accounts. Franklin Templeton Investments offers 111 U.S. based open-end investment companies to the public. The Fund may identify itself by its Nasdaq symbol or CUSIP number.
Franklin is a leader in the tax-free mutual fund industry and manages more than $55 billion in municipal security assets for over 630,000 investors.
Under current tax laws, municipal securities remain one of the few investments offering the potential for tax-free income. In 2007, taxes could cost $42.01 on every $100 earned from a fully taxable investment (based on the combination of the highest federal tax rate of 35.0%, and a combined state and local tax rate of 10.78% as of January 1, 2007 (before the federal tax deduction)). Franklin tax-free funds, however, offer tax relief through a professionally managed portfolio of tax-free securities selected based on their yield, quality and maturity. An investment in a Franklin tax-free fund can provide you with the potential to earn income free of federal taxes and, depending on the fund, state and local taxes as well, while supporting state and local public projects. Franklin tax-free funds also may provide tax-free compounding, when dividends are reinvested. An investment in Franklin's tax-free funds can grow more rapidly than similar taxable investments. Shareholders should also be aware that many states are experiencing budget shortfalls in their annual budgets and these states may raise taxes on investment income to generate additional revenue to cover these shortfalls. This factor may create one more reason why investors should consider an investment in a tax-free fund as an investment opportunity at this time.
Municipal securities are generally considered to be creditworthy, second in quality only to securities issued or guaranteed by the U.S. government and its agencies. The market price of municipal securities, however, may fluctuate. This fluctuation will have a direct impact on the net asset value of the Fund's shares.
Currently, there are more mutual funds than there are stocks listed on the NYSE. While many of them have similar investment goals, no two are exactly alike. Shares of the Fund are generally sold through securities dealers, whose investment representatives are experienced professionals who can offer advice on the type of investments suitable to your unique goals and needs, as well as the risks associated with such investments.
MUNICIPAL BOND RATINGS
MOODY'S INVESTORS SERVICE (MOODY'S)
Municipal Ratings are the opinions of the investment quality of issuers and issues in the U.S. municipal and tax-exempt markets. As such, these ratings incorporate Moody's assessment of the default probability and loss severity of these issuers and issues. The default and loss content for Moody's municipal long-term rating scale differs from Moody's general long-term rating scale.
Municipal Ratings are based upon the analysis of four primary factors relating to municipal finance: economy, debt, finances, and administration/management strategies. Each of the factors is evaluated individually and for its effect on the other factors in the context of the municipality's ability to repay its debt.
INVESTMENT GRADE
Aaa: Issues or issuers rated Aaa demonstrate the strongest creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
Aa: Issues or issuers rated Aa demonstrate very strong creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
A: Issues or issuers rated A present above-average creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
Baa: Issues or issuers rated Baa represent average creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
BELOW INVESTMENT GRADE
Ba: Issues or issuers rated Ba demonstrate below-average creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
B: Issues or issuers rated B demonstrate weak creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
Caa: Issues or issuers rated Caa demonstrate very weak creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
Ca: Issues or issuers rated Ca demonstrate extremely weak creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
C: Issues or issuers demonstrate the weakest creditworthiness relative to other U.S. municipal or tax-exempt issues or issuers.
Con.(-): Municipal bonds for which the security depends upon the completion of some act or the fulfillment of some condition are rated conditionally. These are bonds secured by (a) earnings of projects under construction, (b) earnings of projects unseasoned in operation experience, (c) rentals that begin when facilities are completed, or (d) payments to which some other limiting condition attaches. Parenthetical rating denotes probable credit stature upon the completion of construction or the elimination of the basis of the condition.
Note: Moody's appends numerical modifiers 1, 2 and 3 to each generic rating classification from Aa through Caa. The modifier 1 indicates that the issue or issuer ranks in the higher end of its generic rating category; modifier 2 indicates a mid-range ranking; and modifier 3 indicates that the issue or issuer ranks in the lower end of its generic rating category.
STANDARD & POOR'S (S&P(R))
INVESTMENT GRADE
AAA: An obligation rated AAA has the highest rating assigned by S&P. The obligor's capacity to meet its financial commitment on the obligation is extremely strong.
AA: An obligation rated AA differs from AAA issues only in a small degree. The obligor's capacity to meet its financial commitment on the obligation is very strong.
A: An obligation rated A is somewhat more susceptible to the adverse effects of changes in circumstances and economic conditions than an obligation in the higher rating categories. However, the obligor's capacity to meet its financial commitment is considered still strong.
BBB: An obligation rated BBB normally exhibits adequate protection parameters. However, adverse economic conditions or changing circumstances are more likely to lead to a weakened capacity of the obligor to meet its financial commitment on the obligation.
BELOW INVESTMENT GRADE
BB, B, CCC, CC, C: Obligations rated BB, B, CCC, CC and C are regarded as having significant speculative characteristics. BB indicates the least degree of speculation and C the highest degree of speculation. While these obligations will likely have some quality and protective characteristics, these are outweighed by large uncertainties or major exposure to adverse conditions.
BB: An obligation rated BB is less vulnerable to nonpayment than other speculative issues. However, it faces major ongoing uncertainties or exposure to adverse business, financial, or economic conditions, which could lead to the obligor's inadequate capacity to meet its financial commitment on the obligation.
B: An obligation rated B is more vulnerable to nonpayment than obligations rated BB, but the obligor currently has the capacity to meet its financial commitment on the obligation. Adverse business, financial, or economic conditions will likely impair the obligor's capacity or willingness to meet its financial commitment on the obligation.
CCC: An obligation rated CCC is currently vulnerable to nonpayment and is dependent upon favorable business, financial, and economic conditions for the obligor to meet its financial commitment on the obligation. In the event of adverse business, financial, or economic conditions, the obligor is not likely to have the capacity to meet its financial commitment on the obligation.
CC: An obligation rated CC is currently highly vulnerable to nonpayment.
C: The C rating may be used to cover a situation where a bankruptcy petition has been filed or similar action has been taken, but payments on the obligation are continuing.
D: An obligation rated D is in payment default. The D rating category is used when payments on an obligation are not made on the date due even if the applicable grace period has not expired, unless S&P believes that such payments will be made during such grace period. The D rating is also used upon the filing of a bankruptcy petition or the taking of a similar action if payments on the obligation are jeopardized.
Plus (+) or minus (-): The ratings from "AA" to "CCC" may be modified by the addition of a plus or minus sign to show relative standing within the major rating categories.
pr: The designation "pr" indicates that the rating is provisional. Such a rating assumes the successful completion of the project financed by the debt being rated and also indicates that payment of the debt service is largely or entirely dependent upon the successful and timely completion of the project. This rating addresses credit quality subsequent to the completion of the project, but makes no comment on the likelihood of or the risk of default upon failure of such completion.
FITCH RATINGS (FITCH)
INVESTMENT GRADE
AAA: Highest credit quality. AAA ratings denote the lowest expectation of credit risk. They are assigned only in case of exceptionally strong capacity for timely payment of financial commitments. This capacity is highly unlikely to be affected by reasonably foreseeable events.
AA: Very high credit quality. AA ratings denote a very low expectation of credit risk. They indicate very strong capacity for timely payment of financial commitments. This capacity is not significantly vulnerable to foreseeable future developments.
A: High credit quality. A ratings denote a low expectation of credit risk. The capacity for timely payment of financial commitments is considered strong. This capacity may, nevertheless, be more vulnerable to adverse changes in circumstances or in economic conditions than is the case for higher ratings.
BBB: Good credit quality. BBB ratings indicate that there is currently a low expectation of credit risk. The capacity for timely payment of financial commitments is considered adequate, but adverse changes in circumstances and in economic conditions are more likely to impair this capacity. This is the lowest investment grade category.
BELOW INVESTMENT GRADE
BB: Speculative. BB ratings indicate that there is a possibility of credit risk developing, particularly as the result of adverse economic change over time. However, business or financial alternatives may be available to allow financial commitments to be met. Securities rated in this category are not investment grade.
B: Highly speculative. B ratings indicate that significant credit risk is present, but a limited margin of safety remains. Financial commitments are currently being met. However, capacity for continued payment is contingent upon a sustained, favorable business and economic environment.
CCC, CC and C: High default risk. Default is a real possibility. Capacity for meeting financial commitments is solely reliant upon sustained, favorable business or economic developments. A CC rating indicates that default of some kind appears probable. C ratings signal imminent default.
DDD, DD and D: Default. The ratings of obligations in this category are based on their prospects for achieving partial or full recovery in a reorganization or liquidation of the obligor. While expected recovery values are highly speculative and cannot be estimated with any precision, the following serve as general guidelines. DDD obligations have the highest potential for recovery, around 90%-100% of outstanding amounts and accrued interest. DD indicates potential recoveries in the range of 50%-90% and D the lowest recovery potential, i.e., below 50%.
Entities rated in this category have defaulted on some or all of their obligations. Entities rated DDD have the highest prospect for resumption of performance or continued operation with or without a formal reorganization process. Entities rated DD and D are generally undergoing a formal reorganization or liquidation process; those rated DD are likely to satisfy a higher portion of their outstanding obligations, while entities rated D have a poor prospect of repaying all obligations.
Plus (+) or minus (-) signs may be appended to a rating to denote relative status within major rating categories. Plus or minus signs are not used with the AAA, CC, C, DDD, DD or D categories.
MUNICIPAL NOTE RATINGS
MOODY'S
Moody's ratings for municipal short-term investment grade obligations are designated Municipal Investment Grade (MIG) and are divided into three levels -- MIG 1 through MIG 3. In addition, those short-term obligations that are of speculative quality are designated SG, or speculative grade. MIG ratings expire at the maturity of the obligation. Symbols used will be as follows:
INVESTMENT GRADE
MIG 1: This designation denotes superior credit quality. Excellent protection is afforded by established cash flows, highly reliable liquidity support, or demonstrated broad-based access to the market for refinancing.
MIG 2: This designation denotes strong credit quality. Margins of protection are ample, although not so large as in the preceding group.
MIG 3: This designation denotes acceptable credit quality. Liquidity and cash-flow protection may be narrow, and market access for refinancing is likely to be less well established.
BELOW INVESTMENT GRADE
SG: This designation denotes speculative-grade credit quality. Debt instruments in this category may lack sufficient margins of protection.
S&P
New municipal note issues due in three years or less, will usually be assigned the ratings below. Notes maturing beyond three years will most likely receive a bond rating of the type recited above.
SP-1: Issues carrying this designation have a strong capacity to pay principal and interest. Issues determined to possess a very strong capacity to pay debt service are given a "plus" (+) designation.
SP-2: Issues carrying this designation have a satisfactory capacity to pay principal and interest, with some vulnerability to adverse financial and economic changes over the terms of the notes.
SP-3: Issues carrying this designation have a speculative capacity to pay principal and interest.
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
File Nos. 002-60470 &
811-2790
FORM N-1A
PART C
OTHER INFORMATION
ITEM 23. EXHIBITS. The following exhibits are incorporated by reference to
the previously filed document indicated below, except as noted:
(a) Agreement and Declaration of Trust
(i) Agreement and Declaration of Trust of Franklin California Tax-Free Income Fund, a Delaware Statutory Trust, dated October 18, 2006
(ii) Certificate of Trust of Franklin California Tax-Free Income Fund dated October 18, 2006
(b) By-Laws
(i) By-Laws of Franklin California Tax-Free Income Fund, a Delaware Statutory Trust effective as of October 18, 2006
(c) Instruments Defining Rights of Security Holders
Not Applicable
(d) Investment Advisory Contracts
(i) Form of Management Agreement between Registrant and Franklin Advisers, Inc
(e) Underwriting Contracts
(i) Form of Distribution Agreement between Registrant and Franklin/Templeton Distributors, Inc.
(ii) Forms of Dealer Agreements between Franklin/Templeton Distributors, Inc. and Securities Dealers dated November 1, 2003 Filing: Post-Effective Amendment No. 32 to Registration Statement on Form N-1A File No. 002-60470 Filing Date: July 28, 2004
(iii) Form of Amendment to Selling Agreements between Franklin/Templeton Distributors, Inc. and Securities Dealers dated November 1, 2003
(f) Bonus or Profit Sharing Contracts
Not Applicable
(g) Custodian Agreements
(i) Master Custody Agreement between Registrant and Bank of New York dated February 16, 1996 Filing: Post-Effective Amendment No. 21 to Registration Statement on Form N-1A File No. 002-60470 Filing Date: July 19, 1996
(ii) Amendment dated May 7, 1997 to Master Custody Agreement between the Registrant and Bank of New York dated February 16, 1996 Filing: Post-Effective Amendment No. 23 to Registration Statement on Form N-1A File No. 002-60470 Filing Date: May 21, 1998
(iii) Amendment dated February 27, 1998, to the Master Custody Agreement between Registrant and Bank of New York dated February 16, 1996 Filing: Post-Effective Amendment No. 24 to Registration Statement on Form N-1A File No. 002-60470 Filing Date: October 30, 1998
(iv) Amendment dated July 2, 2007, to Exhibit A of the Master Custody Agreement between the Registrant and Bank of New York dated February 16, 1996
(v) Terminal Link Agreement between Registrant and Bank of New York dated February 16, 1996 Filing: Post-Effective Amendment No. 21 to Registration Statement on Form N-1A File No. 002-60470 Filing Date: July 19, 1996
(h) Other Material Contracts
(i) Form of Subcontract for Fund Administrative Services between Franklin Advisers, Inc. and Franklin Templeton Services, LLC
(i) Legal Opinion
(i) Legal Opinion, Securities Act of 1933, with respect to FCTFIF
- DE, dated July 27, 2007
(j) Other Opinions
(i) Consent of Independent Registered Public Accounting Firm
(k) Omitted Financial Statements
Not Applicable
(l) Initial Capital Agreements
(i) Letter of Understanding for Class C shares dated April 12, 1995 Filing: Post-Effective Amendment No. 20 to Registration Statement on Form N-1A File No. 002-60470 Filing Date: June 1, 1995
(m) Rule 12b-1 Plan
(i) Form of Class A Distribution Plan pursuant to Rule 12b-1 between Registrant and Franklin/Templeton Distributors, Inc.
(ii) Form of Class B Distribution Plan pursuant to Rule 12b-1 between Registrant and Franklin/Templeton Distributors, Inc.
(iii) Form of Class C Distribution Plan pursuant to Rule 12b-1 between Registrant and Franklin/Templeton Distributors, Inc
(n) Rule 18f-3 Plan
(i) Form of Multiple Class Plan
(p) Code of Ethics
(i) Code of Ethics dated May, 2007
(q) Power of Attorney
(i) Power of Attorney dated May 22, 2007 for Franklin California Tax-Free Income Fund, a Maryland corporation
(ii) Power of Attorney dated May 22, 2007 for Franklin California Tax-Free Income Fund, Inc., a Delaware Statutory Trust
ITEM 24. PERSONS CONTROLLED BY OR UNDER COMMON CONTROL WITH THE FUND
None
ITEM 25. INDEMNIFICATION
The Agreement and Declaration of Trust (the "Declaration") of FCTFIF - DE provides that any person who is or was a Trustee, officer, employee or other agent, including the underwriter, of such Trust shall be liable to such Trust and its shareholders only for (1) any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing, or (2) the person's own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such person (such conduct referred to herein as Disqualifying Conduct) and for nothing else. Except in these instances, these persons shall not be responsible or liable for any act or omission of any other agent of such Trust or its investment adviser or principal underwriter to the fullest extent that limitations of liability are permitted by the Delaware Statutory Trust Act (the "Delaware Act"). Moreover, except in these instances, none of these persons, when acting in their respective capacity as such, shall be personally liable to any other person, other than such Trust or its shareholders, for any act, omission or obligation of such Trust or any trustee thereof.
FCTFIF - DE shall indemnify, out of its assets, to the fullest extent permitted under applicable law, any of these persons who was or is a party, or is threatened to be made a party, to any Proceeding (as defined in the Declaration) because the person is or was an agent of such Trust. These persons shall be indemnified against any expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with the Proceeding if the person acted in good faith or, in the case of a criminal proceeding, had no reasonable cause to believe that the conduct was unlawful. The termination of any proceeding by judgment, settlement or its equivalent shall not in itself create a presumption that the person did not act in good faith or that the person had reasonable cause to believe that the person's conduct was unlawful. There shall nonetheless be no indemnification for a person's own Disqualifying Conduct.
Insofar as indemnification for liabilities arising under the Securities Act of 1933, as amended, may be permitted to Trustees, officers and controlling persons of the Fund pursuant to the foregoing provisions, or otherwise, the Fund has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Act and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the Fund of expenses incurred or paid by a Trustee, officer or controlling person of the Fund in the successful defense of any action, suit or proceeding) is asserted by such Trustee, officer or controlling person in connection with securities being registered, the Fund may be required, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court or appropriate jurisdiction the question whether such indemnification is against public policy as expressed in the Act and will be governed by the final adjudication of such issue.
ITEM 26. BUSINESS AND OTHER CONNECTIONS OF INVESTMENT ADVISER
The officers and directors of Franklin Advisers, Inc. (Advisers), the
Registrant's manager, also serve as officers and/or directors/trustees for
(1) Advisers' corporate parent, Franklin Resources, Inc., and/or (2) other
investment companies in
Franklin Templeton Investments. For additional information please see Part B
and Schedules A and D of Form ADV of Advisers (SEC File 801-26292),
incorporated herein by reference, which sets forth the officers and directors
of Advisers and information as to any business, profession, vocation or
employment of a substantial nature engaged in by those officers and directors
during the past two years.
ITEM 27. PRINCIPAL UNDERWRITERS
a) Franklin/Templeton Distributors, Inc. (Distributors), also acts as principal underwriter of shares of:
Franklin California Tax-Free Trust
Franklin Capital Growth Fund
Franklin Custodian Funds, Inc.
Franklin Federal Money Fund
Franklin Federal Tax-Free Income Fund
Franklin Global Trust
Franklin Gold and Precious Metals Fund
Franklin High Income Trust
Franklin Investors Securities Trust
Franklin Managed Trust
Franklin Money Fund
Franklin Municipal Securities Trust
Franklin Mutual Series Fund Inc.
Franklin Mutual Recovery Fund
Franklin New York Tax-Free Income Fund
Franklin New York Tax-Free Trust
Franklin Real Estate Securities Trust
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series
Franklin Tax-Exempt Money Fund
Franklin Tax-Free Trust
Franklin Templeton Fund Allocator Series
Franklin Templeton Global Trust
Franklin Templeton International Trust
Franklin Templeton Money Fund Trust
Franklin Value Investors Trust
Franklin Templeton Variable Insurance Products Trust
Institutional Fiduciary Trust
Templeton China World Fund
Templeton Developing Markets Trust
Templeton Funds, Inc.
Templeton Global Investment Trust
Templeton Global Opportunities Trust
Templeton Global Smaller Companies Fund
Templeton Growth Fund, Inc.
Templeton Income Trust
Templeton Institutional Funds, Inc.
b) The information required by this Item 27 with respect to each director and officer of Distributors is incorporated by reference to Part B of this N-1A and Schedule A of Form BD filed by Distributors with the Securities and Exchange Commission pursuant to the Securities Act of 1934 (SEC File No. 8-5889):
c) Not Applicable. Registrant's principal underwriter is an affiliated person of an affiliated person of the Registrant.
ITEM 28. LOCATION OF ACCOUNTS AND RECORDS
The accounts, books or other documents required to be maintained by Section 31(a) of the Investment Company Act of 1940 are kept by the Fund at One Franklin Parkway, San Mateo, CA 94403-1906 or its shareholder service agent, Franklin Templeton Investor Services, LLC, at 3344 Quality Drive, Rancho Cordova, CA 95670-7313.
ITEM 29. MANAGEMENT SERVICES
There are no management-related service contracts not discussed in Part A or
Part B.
ITEM 30. UNDERTAKINGS
Not Applicable
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Mateo and the State of California, on the 26th day of July, 2007.
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC.,
a Maryland corporation
(Registrant)
By:
/s/ DAVID P. GOSS David P. Goss Vice President |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
CHARLES B. JOHNSON* Director, Chief Executive Officer -
Charles B. Johnson Investment Management
Dated: July 26, 2007
JIMMY D. GAMBILL* Chief Executive Officer - Finance and
Jimmy D. Gambill Administration
Dated: July 26, 2007
GALEN VETTER* Chief Financial Officer and Chief
Galen Vetter Accounting Officer
Dated: July 26, 2007
HARRIS J. ASHTON* Director
Harris J. Ashton Dated: July 26, 2007
ROBERT F. CARLSON* Director
Robert F. Carlson Dated: July 26, 2007
SAM GINN* Director
Sam Ginn Dated: July 26, 2007
EDITH E. HOLIDAY* Director
Edith E. Holiday Dated: July 26, 2007
RUPERT H. JOHNSON, JR.* Director
Rupert H. Johnson, Jr. Dated: July 26, 2007
FRANK W.T. LAHAYE* Director
Frank W.T. LaHaye Dated: July 26, 2007
FRANK A. OLSON* Director
Frank A. Olson Dated: July 26, 2007
LARRY S. THOMPSON* Director
Larry D. Thompson Dated: July 26, 2007
JOHN B. WILSON* Director
John B. Wilson Dated: July 26, 2007
|
*By:
/s/ DAVID P. GOSS David P. Goss Attorney-in-Fact (Pursuant to Power of Attorney filed herewith) |
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933 and the Investment Company Act of 1940, the Registrant certifies that it meets all of the requirements for effectiveness of this Registration Statement pursuant to Rule 485(b) under the Securities Act of 1933 and has duly caused this Registration Statement to be signed on its behalf by the undersigned, thereunto duly authorized in the City of San Mateo and the State of California, on the 26th day of July, 2007.
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND,
a Delaware Statutory Trust
(Registrant)
By:
/s/ DAVID P. GOSS David P. Goss Vice President |
Pursuant to the requirements of the Securities Act of 1933, this Registration Statement has been signed below by the following persons in the capacities and on the dates indicated.
CHARLES B. JOHNSON* Trustee, Chief Executive Officer -
Charles B. Johnson Investment Management
Dated: July 26, 2007
JIMMY D. GAMBILL* Chief Executive Officer - Finance and
Jimmy D. Gambill Administration
Dated: July 26, 2007
GALEN VETTER* Chief Financial Officer and Chief
Galen Vetter Accounting Officer
Dated: July 26, 2007
HARRIS J. ASHTON* Trustee
Harris J. Ashton Dated: July 26, 2007
ROBERT F. CARLSON* Trustee
Robert F. Carlson Dated: July 26, 2007
SAM GINN* Trustee
Sam Ginn Dated: July 26, 2007
EDITH E. HOLIDAY* Trustee
Edith E. Holiday Dated: July 26, 2007
RUPERT H. JOHNSON, JR.* Trustee
Rupert H. Johnson, Jr. Dated: July 26, 2007
FRANK W.T. LAHAYE* Trustee
Frank W.T. LaHaye Dated: July 26, 2007
FRANK A. OLSON* Trustee
Frank A. Olson Dated: July 26, 2007
LARRY S. THOMPSON* Trustee
Larry D. Thompson Dated: July 26, 2007
JOHN B. WILSON* Trustee
John B. Wilson Dated: July 26, 2007
|
*By:
/s/ DAVID P. GOSS David P. Goss Attorney-in-Fact (Pursuant to Power of Attorney filed herewith) |
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
REGISTRATION STATEMENT
EXHIBIT INDEX
EXHIBIT NO. DESCRIPTION LOCATION
EX-99.(a)(i) Agreement and Declaration of Trust of Franklin Attached
California Tax-Free Income Fund, a Delaware
Statutory Trust, dated October 18, 2006
EX-99.(a)(ii) Certificate of Trust of Franklin California Attached
Tax-Free Income Fund, a Delaware Statutory
Trust, dated October 18, 2006
EX-99.(b)(i) By-Laws Attached
EX-99.(d)(i) Form of Management Agreement between Registrant Attached
and Franklin Advisers, Inc.
EX-99.(e)(i) Form of Distribution Agreement between Attached
Registrant and Franklin/Templeton Distributors,
Inc.
EX-99.(e)(ii) Forms of Dealer Agreements between *
Franklin/Templeton Distributors, Inc. and
Securities Dealers dated November 1, 2003
EX-99.(e)(iii) Form of Amendment to Selling Agreements between Attached
Franklin/Templeton Distributors, Inc. and
Securities Dealers dated November 1, 2003
EX-99.(g)(i) Master Custody Agreement between Registrant and *
Bank of New York dated February 16, 1996
EX-99.(g)(ii) Amendment dated May 7, 1997 to Master Custody *
Agreement between the Registrant and Bank of New
York dated February 16, 1996
EX-99.(g)(iii) Amendment dated February 27, 1998, to the Master *
Custody Agreement between Registrant and Bank of
New York dated February 16, 1996
EX-99.(g)(iv) Amendment dated July 2, 2007, to Exhibit A of Attached
the Master Custody Agreement between Registrant
and Bank of New York dated February 16, 1996
EX-99.(g)(v) Terminal Link Agreement between Registrant and
Bank of New York dated February 16, 1996
EX-99.(h)(i) Form of Subcontract for Fund Administrative Attached
Services between Franklin Advisers, Inc. and
Franklin Templeton Services, LLC
EX-99.(i)(i) Legal Opinion, Securities Act of 1933, with Attached
respect to FCTFIF - DE, dated July 27, 2007
EX-99.(j)(i) Consent of Independent Registered Public Attached
Accounting Firm
EX-99.(l)(i) Letter of Understanding for Class C shares dated *
April 12, 1995
EX-99.(m)(i) Form of Class A Distribution Plan pursuant to Attached
12b-1 Rule between Registrant and
Franklin/Templeton Distributors, Inc.
EX-99.(m)(ii) Form of Class B Distribution Plan pursuant to Attached
Rule 12b-1 between Registrant and
Franklin/Templeton Distributors, Inc.
EX-99.(m)(iii) Form of Class C Distribution Plan pursuant to Attached
Rule 12b-1 between Registrant and
Franklin/Templeton Distributors, Inc.
EX-99.(n)(i) Form of Multiple Class Plan Attached
EX-99.(p)(i) Code of Ethics dated May, 2007 Attached
EX-99.(q)(i) Power of Attorney dated May 22, 2007 for Attached
Franklin California Tax-Free Income Fund, Inc.,
a Maryland corporation
EX-99.(q)(ii) Power of Attorney dated May 22, 2007 for Attached
Franklin California Tax-Free Income Fund, a
Delaware Statutory Trust
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*Incorporated by Reference
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
A DELAWARE STATUTORY TRUST
TABLE OF CONTENTS
PAGE
ARTICLE I NAME; OFFICES; REGISTERED AGENT; DEFINITIONS.........2
Section 1. Name............................................2
Section 2. Offices of the Trust............................2
Section 3 Registered Agent and Registered Office..........2
Section 4. Definitions.....................................2
ARTICLE II. PURPOSE OF TRUST................................4
ARTICLE III. SHARES..........................................7
Section 1 Division of Beneficial Interest.................7
Section 2. Ownership of Shares.............................9
Section 3. Sale of Shares..................................9
Section 4. Status of Shares and Limitation of
Personal Liability..............................9
Section 5. Power of Board of Trustees to Make Tax
Status Election................................10
Section 6. Establishment and Designation of Series
and Classes....................................10
Section 7. Indemnification of Shareholders................14
ARTICLE IV. THE BOARD OF TRUSTEES..........................14
Section 1. Number, Election, Term, Removal and
Resignation....................................14
Section 2. Trustee Action by Written Consent
Without a Meeting..............................15
Section 3. Powers; Other Business Interests; Quorum
and Required Vote..............................15
Section 4. Payment of Expenses by the Trust...............17
Section 5 Payment of Expenses by Shareholders............18
Section 6. Ownership of Trust Property....................18
Section 7. Service Contracts..............................18
ARTICLE V. SHAREHOLDERS' VOTING POWERS AND MEETINGS.......19
Section 1. Voting Powers..................................19
Section 2. Quorum and Required Vote.......................19
Section 3. Shareholder Action by Written Consent
Without a Meeting............................. 20
Section 4. Record Dates...................................20
Section 5. Additional Provisions..........................22
ARTICLE VI. NET ASSET VALUE; DISTRIBUTIONS; REDEMPTIONS;
TRANSFERS......................................22
Section 1. Determination of Net Asset Value, Net
Income and Distributions.......................22
Section 2. Redemptions at the Option of a Shareholder.....24
Section 3. Redemptions at the Option of the Trust.........25
Section 4. Transfer of Shares.............................25
ARTICLE VII. LIMITATION OF LIABILITY AND INDEMNIFICATION
OF AGENT.......................................25
Section 1. Limitation of Liability........................25
Section 2. Indemnification................................26
Section 3. Insurance......................................28
Section 4. Derivative Actions.............................28
ARTICLE VIII. CERTAIN TRANSACTIONS...........................28
Section 1. Dissolution of Trust or Series.................28
Section 2. Merger or Consolidation; Conversion;
Reorganization.................................29
Section 3. Master Feeder Structure........................31
Section 4. Absence of Appraisal or Dissenters'
Rights.........................................31
ARTICLE IX. AMENDMENTS.....................................31
Section 1. Amendments Generally...........................31
ARTICLE X. MISCELLANEOUS..................................32
Section 1. References; Headings; Counterparts.............32
Section 2. Applicable Law.................................32
Section 3. Provisions in Conflict with Law or
Regulations....................................32
Section 4. Statutory Trust Only...........................32
Section 5. Use of the Names "Franklin," "Templeton,"
"Fiduciary Trust," and/or "Institutional
Fiduciary Trust"...............................33
|
AGREEMENT AND DECLARATION OF TRUST
OF
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
AGREEMENT AND DECLARATION OF TRUST made as of this 18th day of October, 2006, by the Trustees hereunder, and by the holders of Shares to be issued by Franklin California Tax-Free Income Fund (the "Trust") hereunder as hereinafter provided.
WITNESSETH:
WHEREAS this Trust is being formed to carry on the business of an open-end management investment company as defined in the 1940 Act; and
WHEREAS this Trust is authorized to divide its Shares into two or more Classes, to issue its Shares in separate Series, to divide Shares of any Series into two or more Classes and to issue Classes of the Trust or the Series, if any, all in accordance with the provisions hereinafter set forth; and
WHEREAS the Trustees have agreed to manage all property coming into their hands as trustees of a Delaware statutory trust in accordance with the provisions of the Delaware Statutory Trust Act, as amended from time to time, and the provisions hereinafter set forth;
NOW, THEREFORE, the Trustees hereby declare that:
(i) the Trustees will hold all cash, securities and other assets that they may from time to time acquire in any manner as Trustees hereunder IN TRUST and will manage and dispose of the same upon the following terms and conditions for the benefit of the holders from time to time of Shares created hereunder as hereinafter set forth; and
(ii) this Declaration of Trust and the By-Laws shall be binding in accordance with their terms on every Trustee, by virtue of having become a Trustee of the Trust, and on every Shareholder, by virtue of having become a Shareholder of the Trust, pursuant to the terms of this Declaration of Trust and the By-Laws.
ARTICLE I
NAME; OFFICES; REGISTERED AGENT; DEFINITIONS
Section 1. NAME. This Trust shall be known as "Franklin California Tax-Free Income Fund" and the Board of Trustees shall conduct the business of the Trust under that name, or any other name as it may from time to time designate.
Section 2. OFFICES OF THE TRUST. The Board may at any time establish offices of the Trust at any place or places where the Trust intends to do business.
Section 3. REGISTERED AGENT AND REGISTERED OFFICE. The name of the registered agent of the Trust and the address of the registered office of the Trust are as set forth in the Trust's Certificate of Trust.
Section 4. DEFINITIONS. Whenever used herein, unless otherwise required by the context or specifically provided:
(a) "1940 ACT" shall mean the Investment Company Act of 1940 and the rules and regulations thereunder, all as adopted or amended from time to time;
(b) "AFFILIATE" shall have the same meaning as "affiliated person" as such term is defined in the 1940 Act when used with reference to a specified Person, as defined below.
(c) "BOARD OF TRUSTEES" shall mean the governing body of the Trust, that is comprised of the number of Trustees of the Trust fixed from time to time pursuant to Article IV hereof, having the powers and duties set forth herein;
(d) "BY-LAWS" shall mean By-Laws of the Trust, as amended or restated from time to time in accordance with Article VIII therein. Such By-Laws may contain any provision not inconsistent with applicable law or this Declaration of Trust, relating to the governance of the Trust;
(e) "CERTIFICATE OF TRUST" shall mean the certificate of trust of the Trust to be filed with the office of the Secretary of State of the State of Delaware as required under the Delaware Statutory Trust Act, as amended from time to time, to form the Trust, as such certificate shall be amended or restated from time to time and filed with such office;
(f) "CLASS" shall mean each class of Shares of the Trust or of a Series of the Trust established and designated under and in accordance with the provisions of Article III hereof;
(g) "CODE" shall mean the Internal Revenue Code of 1986 and the rules and regulations thereunder, all as adopted or amended from time to time;
(h) "COMMISSION" shall have the meaning given that term in the 1940 Act;
(i) "DSTA" shall mean the Delaware Statutory Trust Act (12 DEL. C. ss. 3801, et SEQ.), as amended from time to time;
(j) "DECLARATION OF TRUST" shall mean this Agreement and Declaration of Trust, as amended or restated from time to time;
(k) "GENERAL LIABILITIES" shall have the meaning given it in Article III,
Section 6(b) of this Declaration Trust;
(l) "INTERESTED PERSON" shall have the meaning given that term in the 1940 Act;
(m) "INVESTMENT ADVISER" or "Adviser" shall mean a Person, as defined
below, furnishing services to the Trust pursuant to any investment
advisory or investment management contract described in Article IV,
Section 7(a) hereof;
(n) "NATIONAL FINANCIAL EMERGENCY" shall mean the whole or any part of any period during (i) which an emergency exists as a result of which disposal by the Trust of securities or other assets owned by the Trust is not reasonably practicable; (ii) which it is not reasonably practicable for the Trust fairly to determine the net asset value of its assets; or (iii) such other period as the Commission may by order permit for the protection of investors;
(o) "PERSON" shall mean a natural person, partnership, limited partnership, limited liability company, trust, estate, association, corporation, organization, custodian, nominee or any other individual or entity in its own or any representative capacity, in each case, whether domestic or foreign, and a statutory trust or a foreign statutory or business trust;
(p) "PRINCIPAL UNDERWRITER" shall have the meaning given that term in the 1940 Act;
(q) "SERIES" shall mean each Series of Shares established and designated under and in accordance with the provisions of Article III hereof;
(r) "SHARES" shall mean the transferable shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time, and shall include fractional and whole Shares;
(s) "SHAREHOLDER" shall mean a record owner of Shares pursuant to the By-Laws;
(t) "TRUST" shall mean Franklin California Tax-Free Income Fund, the Delaware statutory trust formed hereby and by filing of the Certificate of Trust with the office of the Secretary of State of the State of Delaware;
(u) "TRUST PROPERTY" shall mean any and all property, real or personal, tangible or intangible, which is owned or held by or for the account of the Trust, or one or more of any Series thereof, including, without limitation, the rights referenced in Article X, Section 5 hereof; and
(v) "TRUSTEE" or "TRUSTEES" shall mean each Person who signs this Declaration of Trust as a trustee and all other Persons who may, from time to time, be duly elected or appointed, qualified and serving on the Board of Trustees in accordance with the provisions hereof and the By-Laws, so long as such signatory or other Person continues in office in accordance with the terms hereof and the By-Laws. Reference herein to a Trustee or the Trustees shall refer to such Person or Persons in such Person's or Persons' capacity as a trustee or trustees hereunder and under the By-Laws.
ARTICLE II
PURPOSE OF TRUST
The purpose of the Trust is to conduct, operate and carry on the business of a registered management investment company registered under the 1940 Act, directly, or if one or more Series is established hereunder, through one or more Series, investing primarily in securities, and to exercise all of the powers, rights and privileges granted to, or conferred upon, a statutory trust formed under the DSTA, including, without limitation, the following powers:
(a) To hold, invest and reinvest its funds, and in connection therewith, to make any changes in the investment of the assets of the Trust, to hold part or all of its funds in cash, to hold cash uninvested, to subscribe for, invest in, reinvest in, purchase or otherwise acquire, own, hold, pledge, sell, assign, mortgage, transfer, exchange, distribute, write options on, lend or otherwise deal in or dispose of contracts for the future acquisition or delivery of fixed income or other securities, and securities or property of every nature and kind, including, without limitation, all types of bonds, debentures, stocks, shares, units of beneficial interest, preferred stocks, negotiable or non-negotiable instruments, obligations, evidences of indebtedness, money market instruments, certificates of deposit or indebtedness, bills, notes, mortgages, commercial paper, repurchase or reverse repurchase agreements, bankers' acceptances, finance paper, and any options, certificates, receipts, warrants, futures contracts or other instruments representing rights to receive, purchase or subscribe for the same, or evidencing or representing any other rights or interests therein or in any property or assets, and other securities of any kind, as the foregoing are issued, created, guaranteed, or sponsored by any and all Persons, including, without limitation, states, territories, and possessions of the United States and the District of Columbia and any political subdivision, agency, or instrumentality thereof, any foreign government or any political subdivision of the U.S. Government or any foreign government, or any international instrumentality, or by any bank or savings institution, or by any corporation or organization organized under the laws of the United States or of any state, territory, or possession thereof, or by any corporation or organization organized under any foreign law, or in "when issued" contracts for any such securities;
(b) To exercise any and all rights, powers and privileges with reference to or incident to ownership or interest, use and enjoyment of any of such securities and other instruments or property of every kind and description, including, but without limitation, the right, power and privilege to own, vote, hold, purchase, sell, negotiate, assign, exchange, lend, transfer, mortgage, hypothecate, lease, pledge or write options with respect to or otherwise deal with, dispose of, use, exercise or enjoy any rights, title, interest, powers or privileges under or with reference to any of such securities and other instruments or property, the right to consent and otherwise act with respect thereto, with power to designate one or more Persons, to exercise any of said rights, powers, and privileges in respect of any of said instruments, and to do any and all acts and things for the preservation, protection, improvement and enhancement in value of any of such securities and other instruments or property;
(c) To sell, exchange, lend, pledge, mortgage, hypothecate, lease or write options with respect to or otherwise deal in any property rights relating to any or all of the assets of the Trust or any Series, subject to any requirements of the 1940 Act;
(d) To vote or give assent, or exercise any rights of ownership, with respect to stock or other securities or property; and to execute and deliver proxies or powers of attorney to such Person or Persons as the Trustees shall deem proper, granting to such Person or Persons such power and discretion with relation to securities or property as the Trustees shall deem proper;
(e) To exercise powers and right of subscription or otherwise which in any manner arise out of ownership of securities and/or other property;
(f) To hold any security or property in a form not indicating that it is trust property, whether in bearer, unregistered or other negotiable form, or in its own name or in the name of a custodian or subcustodian or a nominee or nominees or otherwise or to authorize the custodian or a subcustodian or a nominee or nominees to deposit the same in a securities depository, subject in each case to proper safeguards according to the usual practice of investment companies or any rules or regulations applicable thereto;
(g) To consent to, or participate in, any plan for the reorganization, consolidation or merger of any corporation or issuer of any security which is held in the Trust; to consent to any contract, lease, mortgage, purchase or sale of property by such corporation or issuer; and to pay calls or subscriptions with respect to any security held in the Trust;
(h) To join with other security holders in acting through a committee, depositary, voting trustee or otherwise, and in that connection to deposit any security with, or transfer any security to, any such committee, depositary or trustee, and to delegate to them such power and authority with relation to any security (whether or not so deposited or transferred) as the Trustees shall deem proper, and to agree to pay, and to pay, such portion of the expenses and compensation of such committee, depositary or trustee as the Trustees shall deem proper;
(i) To compromise, arbitrate or otherwise adjust claims in favor of or against the Trust or any matter in controversy, including but not limited to claims for taxes;
(j) To enter into joint ventures, general or limited partnerships and any other combinations or associations;
(k) To endorse or guarantee the payment of any notes or other obligations of any Person; to make contracts of guaranty or suretyship, or otherwise assume liability for payment thereof;
(l) To purchase and pay for entirely out of Trust Property such insurance as the Board of Trustees may deem necessary or appropriate for the conduct of the business, including, without limitation, insurance policies insuring the assets of the Trust or payment of distributions and principal on its portfolio investments, and insurance policies insuring the Shareholders, Trustees, officers, employees, agents, Investment Advisers, Principal Underwriters, or independent contractors of the Trust, individually against all claims and liabilities of every nature arising by reason of holding Shares, holding, being or having held any such office or position, or by reason of any action alleged to have been taken or omitted by any such Person as Trustee, officer, employee, agent, Investment Adviser, Principal Underwriter, or independent contractor, to the fullest extent permitted by this Declaration of Trust, the By-Laws and by applicable law;
(m) To adopt, establish and carry out pension, profit-sharing, share bonus, share purchase, savings, thrift and other retirement, incentive and benefit plans, trusts and provisions, including the purchasing of life insurance and annuity contracts as a means of providing such retirement and other benefits, for any or all of the Trustees, officers, employees and agents of the Trust;
(n) To purchase or otherwise acquire, own, hold, sell, negotiate, exchange, assign, transfer, mortgage, pledge or otherwise deal with, dispose of, use, exercise or enjoy, property of all kinds;
(o) To buy, sell, mortgage, encumber, hold, own, exchange, rent or otherwise acquire and dispose of, and to develop, improve, manage, subdivide, and generally to deal and trade in real property, improved and unimproved, and wheresoever situated; and to build, erect, construct, alter and maintain buildings, structures, and other improvements on real property;
(p) To borrow or raise moneys for any of the purposes of the Trust, and to mortgage or pledge the whole or any part of the property and franchises of the Trust, real, personal, and mixed, tangible or intangible, and wheresoever situated;
(q) To enter into, make and perform contracts and undertakings of every kind for any lawful purpose, without limit as to amount;
(r) To issue, purchase, sell and transfer, reacquire, hold, trade and deal in stocks, Shares, bonds, debentures and other securities, instruments or other property of the Trust, from time to time, to such extent as the Board of Trustees shall, consistent with the provisions of this Declaration of Trust, determine; and to re-acquire and redeem, from time to time, its Shares or, if any, its bonds, debentures and other securities;
(s) To engage in and to prosecute, defend, compromise, abandon, or adjust, by arbitration, or otherwise, any actions, suits, proceedings, disputes, claims, and demands relating to the Trust, and out of the assets of the Trust to pay or to satisfy any debts, claims or expenses incurred in connection therewith, including those of litigation, and such power shall include without limitation the power of the Trustees or any appropriate committee thereof, in the exercise of their or its good faith business judgment, to dismiss any action, suit, proceeding, dispute, claim, or demand, derivative or otherwise, brought by any Person, including a Shareholder in the Shareholder's own name or the name of the Trust, whether or not the Trust or any of the Trustees may be named individually therein or the subject matter arises by reason of business for or on behalf of the Trust;
(t) To exercise and enjoy, in Delaware and in any other states, territories, districts and United States dependencies and in foreign countries, all of the foregoing powers, rights and privileges, and the enumeration of the foregoing powers shall not be deemed to exclude any powers, rights or privileges so granted or conferred; and
(u) In general, to carry on any other business in connection with or incidental to its trust purposes, to do everything necessary, suitable or proper for the accomplishment of such purposes or for the attainment of any object or the furtherance of any power hereinbefore set forth, either alone or in association with others, and to do every other act or thing incidental or appurtenant to, or growing out of, or connected with, its business or purposes, objects or powers.
The Trust shall not be limited to investing in obligations maturing before the possible dissolution of the Trust or one or more of its Series. Neither the Trust nor the Board of Trustees shall be required to obtain any court order to deal with any assets of the Trust or take any other action hereunder.
The foregoing clauses shall each be construed as purposes, objects and powers, and it is hereby expressly provided that the foregoing enumeration of specific purposes, objects and powers shall not be held to limit or restrict in any manner the powers of the Trust, and that they are in furtherance of, and in addition to, and not in limitation of, the general powers conferred upon the Trust by the DSTA and the other laws of the State of Delaware or otherwise; nor shall the enumeration of one thing be deemed to exclude another, although it be of like nature, not expressed.
ARTICLE III
SHARES
Section 1. DIVISION OF BENEFICIAL INTEREST.
(a) The beneficial interest in the Trust shall be divided into Shares,
each Share without a par value. The number of Shares in the Trust
authorized hereunder, and of each Series and Class as may be established
from time to time, is unlimited. The Board of Trustees may authorize the
division of Shares into separate Classes of Shares and into separate and
distinct Series of Shares and the division of any Series into separate
Classes of Shares in accordance with the 1940 Act. The different Series and
Classes shall be established and designated pursuant to Article III,
Section 6 hereof. If no separate Series or Classes of Series shall be
established, the Shares shall have the rights, powers and duties provided
for herein andin Article III, Section 6 hereof to the extent relevant and
not otherwise provided for herein, and all references to Series and Classes
shall be construed (as the context may require) to refer to the Trust.
(i) The fact that the Trust shall have one or more established and designated Classes of the Trust, shall not limit the authority of the Board of Trustees to establish and designate additional Classes of the Trust. The fact that one or more Classes of the Trust shall have initially been established and designated without any specific establishment or designation of a Series (i.e., that all Shares of the Trust are initially Shares of one or more Classes) shall not limit the authority of the Board of Trustees to later establish and designate a Series and establish and designate the Class or Classes of the Trust as Class or Classes, respectively, of such Series.
(ii) The fact that a Series shall have initially been established and designated without any specific establishment or designation of Classes (i.e., that all Shares of such Series are initially of a single Class) shall not limit the authority of the Board of Trustees to establish and designate separate Classes of said Series. The fact that a Series shall have more than one established and designated Class, shall not limit the authority of the Board of Trustees to establish and designate additional Classes of said Series.
(b) The Board of Trustees shall have the power to issue authorized, but unissued Shares of beneficial interest of the Trust, or any Series and Class thereof, from time to time for such consideration paid wholly or partly in cash, securities or other property, as may be determined from time to time by the Board of Trustees, subject to any requirements or limitations of the 1940 Act. The Board of Trustees, on behalf of the Trust, may acquire and hold as treasury shares, reissue for such consideration and on such terms as it may determine, or cancel, at its discretion from time to time, any Shares reacquired by the Trust. The Board of Trustees may classify or reclassify any unissued shares of beneficial interest or any shares of beneficial interest of the Trust or any Series or Class thereof, that were previously issued and are reacquired, into one or more Series or Classes that may be established and designated from time to time. Notwithstanding the foregoing, the Trust and any Series thereof may acquire, hold, sell and otherwise deal in, for purposes of investment or otherwise, the Shares of any other Series of the Trust or Shares of the Trust, and such Shares shall not be deemed treasury shares or cancelled.
(c) Subject to the provisions of Section 6 of this Article III, each Share shall entitle the holder to voting rights as provided in Article V hereof. Shareholders shall have no preemptive or other right to subscribe for new or additional authorized, but unissued Shares or other securities issued by the Trust or any Series thereof. The Board of Trustees may from time to time divide or combine the Shares of the Trust or any particular Series thereof into a greater or lesser number of Shares of the Trust or that Series, respectively. Such division or combination shall not materially change the proportionate beneficial interests of the holders of Shares of the Trust or that Series, as the case may be, in the Trust Property at the time of such division or combination that is held with respect to the Trust or that Series, as the case may be.
(d) Any Trustee, officer or other agent of the Trust, and any organization in which any such Person has an economic or other interest, may acquire, own, hold and dispose of Shares of beneficial interest in the Trust or any Series and Class thereof, whether such Shares are authorized but unissued, or already outstanding, to the same extent as if such Person were not a Trustee, officer or other agent of the Trust; and the Trust or any Series may issue and sell and may purchase such Shares from any such Person or any such organization, subject to the limitations, restrictions or other provisions applicable to the sale or purchase of such Shares herein and the 1940 Act.
Section 2. OWNERSHIP OF SHARES. The ownership of Shares shall be recorded on the books of the Trust kept by the Trust or by a transfer or similar agent for the Trust, which books shall be maintained separately for the Shares of the Trust and each Series and each Class thereof that has been established and designated. No certificates certifying the ownership of Shares shall be issued except as the Board of Trustees may otherwise determine from time to time. The Board of Trustees may make such rules not inconsistent with the provisions of the 1940 Act as it considers appropriate for the issuance of Share certificates, the transfer of Shares of the Trust and each Series and Class thereof, if any, and similar matters. The record books of the Trust as kept by the Trust or any transfer or similar agent, as the case may be, shall be conclusive as to who are the Shareholders of the Trust and each Series and Class thereof and as to the number of Shares of the Trust and each Series and Class thereof held from time to time by each such Shareholder.
Section 3. SALE OF SHARES. Subject to the 1940 Act and applicable law, the Trust may sell its authorized but unissued Shares of beneficial interest to such Persons, at such times, on such terms, and for such consideration as the Board of Trustees may from time to time authorize. Each sale shall be credited to the individual purchaser's account in the form of full or fractional Shares of the Trust or such Series thereof (and Class thereof, if any), as the purchaser may select, at the net asset value per Share, subject to Section 22 of the 1940 Act, and the rules and regulations adopted thereunder; provided, however, that the Board of Trustees may, in its sole discretion, permit the Principal Underwriter to impose a sales charge upon any such sale. Every Shareholder by virtue of having become a Shareholder shall be deemed to have expressly assented and agreed to the terms of this Declaration of Trust and to have become bound as a party hereto.
Section 4. STATUS OF SHARES AND LIMITATION OF PERSONAL LIABILITY. Shares shall be deemed to be personal property giving to Shareholders only the rights provided in this Declaration of Trust, the By-Laws, and under applicable law. Ownership of Shares shall not entitle the Shareholder to any title in or to the whole or any part of the Trust Property or right to call for a partition or division of the same or for an accounting, nor shall the ownership of Shares constitute the Shareholders as partners. Subject to Article VIII, Section 1 hereof, the death, incapacity, dissolution, termination, or bankruptcy of a Shareholder during the existence of the Trust and any Series thereof shall not operate to dissolve the Trust or any such Series, nor entitle the representative of any deceased, incapacitated, dissolved, terminated or bankrupt Shareholder to an accounting or to take any action in court or elsewhere against the Trust, the Trustees or any such Series, but entitles such representative only to the rights of said deceased, incapacitated, dissolved, terminated or bankrupt Shareholder under this Declaration of Trust. Neither the Trust nor the Trustees, nor any officer, employee or agent of the Trust, shall have any power to bind personally any Shareholder, nor, except as specifically provided herein, to call upon any Shareholder for the payment of any sum of money other than such as the Shareholder may at any time personally agree to pay. Each Share, when issued on the terms determined by the Board of Trustees, shall be fully paid and nonassessable. As provided in the DSTA, Shareholders shall be entitled to the same limitation of personal liability as that extended to stockholders of a private corporation organized for profit under the General Corporation Law of the State of Delaware.
Section 5. POWER OF BOARD OF TRUSTEES TO MAKE TAX STATUS ELECTION. The Board of Trustees shall have the power, in its discretion, to make such elections as to the tax status of the Trust and any Series as may be permitted or required under the Code, without the vote of any Shareholder.
Section 6. ESTABLISHMENT AND DESIGNATION OF SERIES AND CLASSES. The establishment and designation of any Series or Class shall be effective, without the requirement of Shareholder approval, upon the adoption of a resolution by not less than a majority of the then Board of Trustees, which resolution shall set forth such establishment and designation and may provide, to the extent permitted by the DSTA, for rights, powers and duties of such Series or Class (including variations in the relative rights and preferences as between the different Series and Classes) otherwise than as provided herein. Each such resolution shall be incorporated herein by reference upon adoption. Any such resolution may be amended by a further resolution of a majority of the Board of Trustees, and if Shareholder approval would be required to make such an amendment to the language set forth in this Declaration of Trust, such further resolution shall require the same Shareholder approval that would be necessary to make such amendment to the language set forth in this Declaration of Trust. Each such further resolution shall be incorporated herein by reference upon adoption.
Each Series shall be separate and distinct from any other Series, separate and distinct records on the books of the Trust shall be maintained for each Series, and the assets and liabilities belonging to any such Series shall be held and accounted for separately from the assets and liabilities of the Trust or any other Series. Each Class of the Trust shall be separate and distinct from any other Class of the Trust. Each Class of a Series shall be separate and distinct from any other Class of the Series. As appropriate, in a manner determined by the Board of Trustees, the liabilities belonging to any such Class shall be held and accounted for separately from the liabilities of the Trust, the Series or any other Class and separate and distinct records on the books of the Trust for the Class shall be maintained for this purpose. Subject to Article II hereof, each such Series shall operate as a separate and distinct investment medium, with separately defined investment objectives and policies.
Shares of each Series (and Class where applicable) established and designated pursuant to this Section 6, unless otherwise provided to the extent permitted by the DSTA, in the resolution establishing and designating such Series or Class, shall have the following rights, powers and duties:
(a) ASSETS HELD WITH RESPECT TO A PARTICULAR SERIES. All consideration received by the Trust for the issue or sale of Shares of a particular Series, together with all assets in which such consideration is invested or reinvested, all income, earnings, profits, and proceeds thereof from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds in whatever form the same may be, shall irrevocably be held with respect to that Series for all purposes, subject only to the rights of creditors with respect to that Series, and shall be so recorded upon the books of account of the Trust. Such consideration, assets, income, earnings, profits and proceeds thereof, from whatever source derived, including, without limitation, any proceeds derived from the sale, exchange or liquidation of such assets, and any funds or payments derived from any reinvestment of such proceeds, in whatever form the same may be, are herein referred to as "assets held with respect to" that Series. In the event that there are any assets, income, earnings, profits and proceeds thereof, funds or payments which are not readily identifiable as assets held with respect to any particular Series (collectively "General Assets"), the Board of Trustees, or an appropriate officer as determined by the Board of Trustees, shall allocate such General Assets to, between or among any one or more of the Series in such manner and on such basis as the Board of Trustees, in its sole discretion, deems fair and equitable, and any General Asset so allocated to a particular Series shall be held with respect to that Series. Each such allocation by or under the direction of the Board of Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes.
(b) LIABILITIES HELD WITH RESPECT TO A PARTICULAR SERIES OR CLASS. The assets of the Trust held with respect to a particular Series shall be charged with the liabilities, debts, obligations, costs, charges, reserves and expenses of the Trust incurred, contracted for or otherwise existing with respect to such Series. Such liabilities, debts, obligations, costs, charges, reserves and expenses incurred, contracted for or otherwise existing with respect to a particular Series are herein referred to as "liabilities held with respect to" that Series. Any liabilities, debts, obligations, costs, charges, reserves and expenses of the Trust which are not readily identifiable as being liabilities held with respect to any particular Series (collectively "General Liabilities") shall be allocated by the Board of Trustees, or an appropriate officer as determined by the Board of Trustees, to and among any one or more of the Series in such manner and on such basis as the Board of Trustees in its sole discretion deems fair and equitable. Each allocation of liabilities, debts, obligations, costs, charges, reserves and expenses by or under the direction of the Board of Trustees shall be conclusive and binding upon the Shareholders of all Series for all purposes. All Persons who have extended credit that has been allocated to a particular Series, or who have a claim or contract that has been allocated to any particular Series, shall look exclusively to the assets of that particular Series for payment of such credit, claim, or contract. In the absence of an express contractual agreement so limiting the claims of such creditors, claimants and contract providers, each creditor, claimant and contract provider shall be deemed nevertheless to have impliedly agreed to such limitation.
Subject to the right of the Board of Trustees in its discretion to allocate General Liabilities as provided herein, the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to a particular Series, whether such Series is now authorized and existing pursuant to this Declaration of Trust or is hereafter authorized and existing pursuant to this Declaration of Trust, shall be enforceable against the assets held with respect to that Series only, and not against the assets of any other Series or the Trust generally and none of the debts, liabilities, obligations and expenses incurred, contracted for or otherwise existing with respect to the Trust generally or any other Series thereof shall be enforceable against the assets held with respect to such Series. Notice of this limitation on liabilities between and among Series shall be set forth in the Certificate of Trust to be filed in the Office of the Secretary of State of the State of Delaware pursuant to the DSTA, and upon the giving of such notice in the Certificate of Trust, the statutory provisions of Section 3804 of the DSTA relating to limitations on liabilities between and among Series (and the statutory effect under Section 3804 of setting forth such notice in the Certificate of Trust) shall become applicable to the Trust and each Series.
Liabilities, debts, obligations, costs, charges, reserves and expenses related to the distribution of, and other identified expenses that should or may properly be allocated to, the Shares of a particular Class may be charged to and borne solely by such Class. The bearing of expenses solely by a particular Class of Shares may be appropriately reflected (in a manner determined by the Board of Trustees) and may affect the net asset value attributable to, and the dividend, redemption and liquidation rights of, such Class. Each allocation of liabilities, debts, obligations, costs, charges, reserves and expenses by or under the direction of the Board of Trustees shall be conclusive and binding upon the Shareholders of all Classes for all purposes. All Persons who have extended credit that has been allocated to a particular Class, or who have a claim or contract that has been allocated to any particular Class, shall look, and may be required by contract to look, exclusively to that particular Class for payment of such credit, claim, or contract.
(c) DIVIDENDS, DISTRIBUTIONS AND REDEMPTIONS. Notwithstanding any other provisions of this Declaration of Trust, including, without limitation, Article VI hereof, no dividend or distribution including, without limitation, any distribution paid upon dissolution of the Trust or of any Series with respect to, nor any redemption of, the Shares of any Series or Class of such Series shall be effected by the Trust other than from the assets held with respect to such Series, nor, except as specifically provided in Section 7 of this Article III, shall any Shareholder of any particular Series otherwise have any right or claim against the assets held with respect to any other Series or the Trust generally except, in the case of a right or claim against the assets held with respect to any other Series, to the extent that such Shareholder has such a right or claim hereunder as a Shareholder of such other Series. The Board of Trustees shall have full discretion, to the extent not inconsistent with the 1940 Act, to determine which items shall be treated as income and which items as capital; and each such determination and allocation shall be conclusive and binding upon the Shareholders.
(d) VOTING. All Shares of the Trust entitled to vote on a matter shall vote in the aggregate without differentiation between the Shares of the separate Series, if any, or separate Classes, if any; provided that (i) with respect to any matter that affects only the interests of some but not all Series, then only the Shares of such affected Series, voting separately, shall be entitled to vote on the matter, (ii) with respect to any matter that affects only the interests of some but not all Classes, then only the Shares of such affected Classes, voting separately, shall be entitled to vote on the matter; and (iii) notwithstanding the foregoing, with respect to any matter as to which the 1940 Act or other applicable law or regulation requires voting, by Series or by Class, then the Shares of the Trust shall vote as prescribed in such law or regulation.
(e) EQUALITY. Each Share of any particular Series shall be equal to each other Share of such Series (subject to the rights and preferences with respect to separate Classes of such Series).
(f) FRACTIONS. A fractional Share of a Series shall carry proportionately all the rights and obligations of a whole Share of such Series, including rights with respect to voting, receipt of dividends and distributions, redemption of Shares and dissolution of the Trust or that Series.
(g) EXCHANGE PRIVILEGE. The Board of Trustees shall have the authority to provide that the holders of Shares of any Series shall have the right to exchange said Shares for Shares of one or more other Series in accordance with such requirements and procedures as may be established by the Board of Trustees, and in accordance with the 1940 Act.
(h) COMBINATION OF SERIES OR CLASSES.
(i) The Board of Trustees shall have the authority, without the approval, vote or consent of the Shareholders of any Series, unless otherwise required by applicable law, to combine the assets and liabilities held with respect to any two or more Series into assets and liabilities held with respect to a single Series; provided that upon completion of such combination of Series, the interest of each Shareholder, in the combined assets and liabilities held with respect to the combined Series shall equal the interest of each such Shareholder in the aggregate of the assets and liabilities held with respect to the Series that were combined.
(ii) The Board of Trustees shall have the authority, without the approval, vote or consent of the Shareholders of any Series or Class, unless otherwise required by applicable law, to combine, merge or otherwise consolidate the Shares of two or more Classes of Shares of a Series with and/or into a single Class of Shares of such Series, with such designation, preference, conversion or other rights, voting powers, restrictions, limitations as to dividends, qualifications, terms and conditions of redemption and other characteristics as the Trustees may determine; provided, however, that the Trustees shall provide written notice to the affected Shareholders of any such transaction.
(iii) The transactions in (i) and (ii) above may be effected through share-for-share exchanges, transfers or sales of assets, Shareholder in-kind redemptions and purchases, exchange offers, or any other method approved by the Trustees.
(i) DISSOLUTION OR TERMINATION. Any particular Series shall be dissolved
upon the occurrence of the applicable dissolution events set forth in Article
VIII, Section 1 hereof. Upon dissolution of a particular Series, the Trustees
shall wind up the affairs of such Series in accordance with Article VIII Section
1 hereof and thereafter, rescind the establishment and designation thereof. The
Board of Trustees shall terminate any particular Class and rescind the
establishment and designation thereof: (i) upon approval by a majority of votes
cast at a meeting of the Shareholders of such Class, provided a quorum of
Shareholders of such Class are present, or by action of the Shareholders of such
Class by written consent without a meeting pursuant to Article V, Section 3; or
(ii) at the discretion of the Board of Trustees either (A) at any time there are
no Shares outstanding of such Class, or (B) upon prior written notice to the
Shareholders of such Class; provided, however, that upon the rescission of the
establishment and designation of any particular Series, every Class of such
Series shall thereby be terminated and its establishment and designation
rescinded. Each resolution of the Board of Trustees pursuant to this Section
6(i) shall be incorporated herein by reference upon adoption.
Section 7. INDEMNIFICATION OF SHAREHOLDERS. No shareholder as such shall be
subject to any personal liability whatsoever to any Person in connection with
Trust Property or the acts, obligations or affairs of the Trust. If any
Shareholder or former Shareholder shall be exposed to liability, charged with
liability, or held personally liable, for any obligations or liability of the
Trust, by reason of a claim or demand relating exclusively to his or her being
or having been a Shareholder of the Trust or a Shareholder of a particular
Series thereof, and not because of such Shareholder's actions or omissions, such
Shareholder or former Shareholder (or, in the case of a natural person, his or
her heirs, executors, administrators, or other legal representatives or, in the
case of a corporation or other entity, its corporate or other general successor)
shall be entitled to be held harmless from and indemnified out of the assets of
the Trust or out of the assets of such Series thereof, as the case may be,
against all loss and expense, including without limitation, attorneys' fees,
arising from such claim or demand; provided, however, such indemnity shall not
cover (i) any taxes due or paid by reason of such Shareholder's ownership of any
Shares and (ii) expenses charged to a Shareholder pursuant to Article IV,
Section 5 hereof.
ARTICLE IV
THE BOARD OF TRUSTEES
Section 1. NUMBER, ELECTION, TERM, REMOVAL AND RESIGNATION.
(a) The initial Board of Trustees shall be comprised of the Trustees
entering into this Declaration of Trust on the date first written above,
who shall hold office until the initial holder of a Share executes a
consent in writing to elect a Board of Trustees that holds office in
accordance with paragraph (c) of this Section 1. The initial Trustees shall
(i) execute and file or cause to be filed the Certificate of Trust with the
office of the Secretary of State of the State of Delaware and (ii) adopt
the By-Laws. In accordance with Section 3801 of the DSTA, each Trustee
shall become a Trustee and be bound by this Declaration of Trust and the
By-Laws when such Person signs this Declaration of Trust as a trustee
and/or is duly elected or appointed, qualified and serving on the Board of
Trustees in accordance with the provisions hereof and the By-Laws, so long
as such signatory or other Person continues in office in accordance with
the terms hereof.
(b) The number of Trustees constituting the entire Board of Trustees may be fixed from time to time by the vote of a majority of the then Board of Trustees; PROVIDED, HOWEVER, that the number of Trustees shall in no event be less than one (1) nor more than fifteen (15). The number of Trustees shall not be reduced so as to shorten the term of any Trustee then in office.
(c) Each Trustee shall hold office for the lifetime of the Trust or until such Trustee's earlier death, resignation, removal, retirement or inability otherwise to serve, or, if sooner than any of such events, until the next meeting of Shareholders called for the purpose of electing Trustees or consent of Shareholders in lieu thereof for the election of Trustees, and until the election and qualification of his or her successor.
(d) Any Trustee may be removed, with or without cause, by the Board of Trustees, by action of a majority of the Trustees then in office, or by vote of the Shareholders at any meeting called for that purpose.
(e) Any Trustee may resign at any time by giving written notice to the secretary of the Trust or to a meeting of the Board of Trustees. Such resignation shall be effective upon receipt, unless specified to be effective at some later time.
Section 2. TRUSTEE ACTION BY WRITTEN CONSENT WITHOUT A MEETING. To the extent not inconsistent with the provisions of the 1940 Act, any action that may be taken at any meeting of the Board of Trustees or any committee thereof may be taken without a meeting and without prior written notice if a consent or consents in writing setting forth the action so taken is signed by the Trustees having not less than the minimum number of votes that would be necessary to authorize or take that action at a meeting at which all Trustees on the Board of Trustees or any committee thereof, as the case may be, were present and voted. Written consents of the Trustees may be executed in one or more counterparts. A consent transmitted by electronic transmission (as defined in Section 3806 of the DSTA) by a Trustee shall be deemed to be written and signed for purposes of this Section. All such consents shall be filed with the secretary of the Trust and shall be maintained in the Trust's records.
Section 3. POWERS; OTHER BUSINESS INTERESTS; QUORUM AND REQUIRED VOTE.
(a) POWERS. Subject to the provisions of this Declaration of Trust,
the business of the Trust (including every Series thereof) shall be managed
by or under the direction of the Board of Trustees, and such Board of
Trustees shall have all powers necessary or convenient to carry out that
responsibility. The Board of Trustees shall have full power and authority
to do any and all acts and to make and execute any and all contracts and
instruments that it may consider necessary or appropriate in connection
with the operation and administration of the Trust (including every Series
thereof). The Board of Trustees shall not be bound or limited by present or
future laws or customs with regard to investments by trustees or
fiduciaries, but, subject to the other provisions of this Declaration of
Trust and the By-Laws, shall have full authority and absolute power and
control over the assets and the business of the Trust (including every
Series thereof) to the same extent as if the Board of Trustees was the sole
owner of such assets and business in its own right, including such
authority, power and control to do all acts and things as it, in its sole
discretion, shall deem proper to accomplish the purposes of this Trust.
Without limiting the foregoing, the Board of Trustees may, subject to the
requisite vote for such actions as set forth in this Declaration of Trust
and the By-Laws: (1) adopt By-Laws not inconsistent with applicable law or
this Declaration of Trust; (2) amend, restate and repeal such By-Laws,
subject to and in accordance with the provisions of such By-Laws; (3) fill
vacancies on the Board of Trustees in accordance with this Declaration of
Trust and the By-Laws; (4) elect and remove such officers and appoint and
terminate such agents as it considers appropriate, in accordance with this
Declaration of Trust and the By-Laws; (5) establish and terminate one or
more committees of the Board of Trustees pursuant to the By-Laws; (6) place
Trust Property in custody as required by the 1940 Act, employ one or more
custodians of the Trust Property and authorize such custodians to employ
sub-custodians and to place all or any part of such Trust Property with a
custodian or a custodial system meeting the requirements of the 1940 Act;
(7) retain a transfer agent, dividend disbursing agent, a shareholder
servicing agent or administrative services agent, or any number thereof or
any other service provider as deemed appropriate; (8) provide for the
issuance and distribution of shares of beneficial interest in the Trust or
other securities or financial instruments directly or through one or more
Principal Underwriters or otherwise; (9) retain one or more Investment
Adviser(s); (10) re-acquire and redeem Shares on behalf of the Trust and
transfer Shares pursuant to applicable law; (11) set record dates for the
determination of Shareholders with respect to various matters, in the
manner provided in Article V, Section 4 of this Declaration of Trust; (12)
declare and pay dividends and distributions to Shareholders from the Trust
Property, in accordance with this Declaration of Trust and the By-Laws;
(13) establish, designate and redesignate from time to time, in accordance
with the provisions of Article III, Section 6 hereof, any Series or Class
of the Trust or of a Series; (14) hire personnel as staff for the Board of
Trustees or, for those Trustees who are not Interested Persons of the
Trust, the Investment Adviser, or the Principal Underwriter, set the
compensation to be paid by the Trust to such personnel, exercise exclusive
supervision of such personnel, and remove one or more of such personnel, at
the discretion of the Board of Trustees; (15) retain special counsel, other
experts and/or consultants for the Board of Trustees, for those Trustees
who are not Interested Persons of the Trust, the Investment Adviser, or the
Principal Underwriter, and/or for one or more of the committees of the
Board of Trustees, set the compensation to be paid by the Trust to such
special counsel, other experts and/or consultants, and remove one or more
of such special counsel, other experts and/or consultants, at the
discretion of the Board of Trustees; (16) engage in and prosecute, defend,
compromise, abandon, or adjust, by arbitration, or otherwise, any actions,
suits, proceedings, disputes, claims, and demands relating to the Trust,
and out of the assets of the Trust to pay or to satisfy any debts, claims
or expenses incurred in connection therewith, including those of
litigation, and such power shall include, without limitation, the power of
the Trustees, or any appropriate committee thereof, in the exercise of
their or its good faith business judgment, to dismiss any action, suit,
proceeding, dispute, claim or demand, derivative or otherwise, brought by
any person, including a shareholder in its own name or in the name of the
Trust, whether or not the Trust or any of the Trustees may be named
individually therein or the subject matter arises by reason of business for
or on behalf of the Trust; and (17) in general delegate such authority as
it considers desirable to any Trustee or officer of the Trust, to any
committee of the Trust, to any agent or employee of the Trust or to any
custodian, transfer, dividend disbursing, shareholder servicing agent,
Principal Underwriter, Investment Adviser, or other service provider.
The powers of the Board of Trustees set forth in this Section 3(a) are without prejudice to any other powers of the Board of Trustees set forth in this Declaration of Trust and the By-Laws. Any determination as to what is in the best interests of the Trust or any Series or Class thereof and its Shareholders made by the Board of Trustees in good faith shall be conclusive. In construing the provisions of this Declaration of Trust, the presumption shall be in favor of a grant of power to the Board of Trustees.
(b) OTHER BUSINESS INTERESTS. The Trustees shall devote to the affairs of the Trust (including every Series thereof) such time as may be necessary for the proper performance of their duties hereunder, but neither the Trustees nor the officers, directors, shareholders, partners or employees of the Trustees, if any, shall be expected to devote their full time to the performance of such duties. The Trustees, or any Affiliate, shareholder, officer, director, partner or employee thereof, or any Person owning a legal or beneficial interest therein, may engage in, or possess an interest in, any business or venture other than the Trust or any Series thereof, of any nature and description, independently or with or for the account of others. None of the Trust, any Series thereof or any Shareholder shall have the right to participate or share in such other business or venture or any profit or compensation derived therefrom.
(c) QUORUM AND REQUIRED VOTE. At all meetings of the Board of Trustees, a majority of the Board of Trustees then in office shall be present in person in order to constitute a quorum for the transaction of business. A meeting at which a quorum is initially present may continue to transact business notwithstanding the departure of Trustees from the meeting, if any action taken is approved by at least a majority of the required quorum for that meeting. Subject to Article III, Sections 1 and 6 of the By-Laws and except as otherwise provided herein or required by applicable law, the vote of not less than a majority of the Trustees present at a meeting at which a quorum is present shall be the act of the Board of Trustees.
Section 4. PAYMENT OF EXPENSES BY THE TRUST. Subject to the provisions of Article III, Section 6 hereof, an authorized officer of the Trust shall pay or cause to be paid out of the principal or income of the Trust or any particular Series or Class thereof, or partly out of the principal and partly out of the income of the Trust or any particular Series or Class thereof, and charge or allocate the same to, between or among such one or more of the Series or Classes that may be established or designated pursuant to Article III, Section 6 hereof, as such officer deems fair, all expenses, fees, charges, taxes and liabilities incurred by or arising in connection with the maintenance or operation of the Trust or a particular Series or Class thereof, or in connection with the management thereof, including, but not limited to, the Trustees' compensation and such expenses, fees, charges, taxes and liabilities associated with the services of the Trust's officers, employees, Investment Adviser(s), Principal Underwriter, auditors, counsel, custodian, sub-custodian, transfer agent, dividend disbursing agent, shareholder servicing agent, and such other agents or independent contractors and such other expenses, fees, charges, taxes and liabilities as the Board of Trustees may deem necessary or proper to incur.
Section 5. PAYMENT OF EXPENSES BY SHAREHOLDERS. The Board of Trustees shall have the power, as frequently as it may determine, to cause any Shareholder to pay directly, in advance or arrears, an amount fixed from time to time by the Board of Trustees or an officer of the Trust for charges of the Trust's custodian or transfer, dividend disbursing, shareholder servicing or similar agent which are not customarily charged generally to the Trust, a Series or a Class, where such services are provided to such Shareholder individually, rather than to all Shareholders collectively, by setting off such amount due from such Shareholder from the amount of (i) declared but unpaid dividends or distributions owed such Shareholder, or (ii) proceeds from the redemption by the Trust of Shares from such Shareholder pursuant to Article VI hereof.
Section 6. OWNERSHIP OF TRUST PROPERTY. Legal title to all of the Trust Property shall at all times be vested in the Trust, except that the Board of Trustees shall have the power to cause legal title to any Trust Property to be held by or in the name of any Person as nominee, on such terms as the Board of Trustees may determine, in accordance with applicable law.
Section 7. SERVICE CONTRACTS.
(a) Subject to this Declaration of Trust, the By-Laws and the 1940 Act, the Board of Trustees may, at any time and from time to time, contract for exclusive or nonexclusive investment advisory or investment management services for the Trust or for any Series thereof with any corporation, trust, association or other organization, including any Affiliate; and any such contract may contain such other terms as the Board of Trustees may determine, including without limitation, delegation of authority to the Investment Adviser to determine from time to time without prior consultation with the Board of Trustees what securities and other instruments or property shall be purchased or otherwise acquired, owned, held, invested or reinvested in, sold, exchanged, transferred, mortgaged, pledged, assigned, negotiated, or otherwise dealt with or disposed of, and what portion, if any, of the Trust Property shall be held uninvested and to make changes in the Trust's or a particular Series' investments, or to engage in such other activities, including administrative services, as may specifically be delegated to such party.
(b) The Board of Trustees may also, at any time and from time to time, contract with any Person, including any Affiliate, appointing it or them as the exclusive or nonexclusive placement agent, distributor or Principal Underwriter for the Shares of beneficial interest of the Trust or one or more of the Series or Classes thereof, or for other securities or financial instruments to be issued by the Trust, or appointing it or them to act as the administrator, fund accountant or accounting agent, custodian, transfer agent, dividend disbursing agent and/or shareholder servicing agent for the Trust or one or more of the Series or Classes thereof.
(c) The Board of Trustees is further empowered, at any time and from time to time, to contract with any Persons, including any Affiliates, to provide such other services to the Trust or one or more of its Series, as the Board of Trustees determines to be in the best interests of the Trust, such Series and its Shareholders.
(d) None of the following facts or circumstances shall affect the validity of any of the contracts provided for in this Article IV, Section 7, or disqualify any Shareholder, Trustee, employee or officer of the Trust from voting upon or executing the same, or create any liability or accountability to the Trust, any Series thereof or the Shareholders, provided that the establishment of and performance of each such contract is permissible under the 1940 Act, and provided further that such Person is authorized to vote upon such contract under the 1940 Act:
(i) the fact that any of the Shareholders, Trustees, employees or officers of the Trust is a shareholder, director, officer, partner, trustee, employee, manager, Adviser, placement agent, Principal Underwriter, distributor, or Affiliate or agent of or for any Person, or for any parent or Affiliate of any Person, with which any type of service contract provided for in this Article IV, Section 7 may have been or may hereafter be made, or that any such Person, or any parent or Affiliate thereof, is a Shareholder or has an interest in the Trust, or
(ii) the fact that any Person with which any type of service contract provided for in this Article IV, Section 7 may have been or may hereafter be made also has such a service contract with one or more other Persons, or has other business or interests.
(e) Every contract referred to in this Section 7 is required to comply with this Declaration of Trust, the By-Laws, the 1940 Act, other applicable law and any stipulation by resolution of the Board of Trustees.
ARTICLE V
SHAREHOLDERS' VOTING POWERS AND MEETINGS
Section 1. VOTING POWERS. Subject to the provisions of Article III, Section 6 hereof, the Shareholders shall have the power to vote only (i) on such matters required by this Declaration of Trust, the By-Laws, the 1940 Act, other applicable law and any registration statement of the Trust filed with the Commission, the registration of which is effective; and (ii) on such other matters as the Board of Trustees may consider necessary or desirable. Subject to Article III hereof, the Shareholder of record (as of the record date established pursuant to Section 4 of this Article V) of each Share shall be entitled to one vote for each full Share, and a fractional vote for each fractional Share. Shareholders shall not be entitled to cumulative voting in the election of Trustees or on any other matter.
Section 2. QUORUM AND REQUIRED VOTE.
(a) Forty percent (40%) of the outstanding Shares entitled to vote at a Shareholders' meeting, which are present in person or represented by proxy, shall constitute a quorum at the Shareholders' meeting, except when a larger quorum is required by this Declaration of Trust, the By-Laws, applicable law or the requirements of any securities exchange on which Shares are listed for trading, in which case such quorum shall comply with such requirements. When a separate vote by one or more Series or Classes is required, forty percent (40%) of the outstanding Shares of each such Series or Class entitled to vote at a Shareholders' meeting of such Series or Class, which are present in person or represented by proxy, shall constitute a quorum at the Shareholders' meeting of such Series or Class, except when a larger quorum is required by this Declaration of Trust, the By-Laws, applicable law or the requirements of any securities exchange on which Shares of such Series or Class are listed for trading, in which case such quorum shall comply with such requirements.
(b) Subject to the provisions of Article III, Section 6(d), when
a quorum is present at any meeting, a majority of the votes cast shall
decide any questions and a plurality shall elect a Trustee, except
when a larger vote is required by any provision of this Declaration of
Trust or the By-Laws or by applicable law. Pursuant to Article III,
Section 6(d) hereof, where a separate vote by Series and, if
applicable, by Class is required, the preceding sentence shall apply
to such separate votes by Series and Classes.
(c) Abstentions and broker non-votes will be treated as votes present at a Shareholders' meeting; abstentions and broker non-votes will not be treated as votes cast at such meeting. Abstentions and broker non-votes, therefore (i) will be included for purposes of determining whether a quorum is present; and (ii) will have no effect on proposals that require a plurality for approval, or on proposals requiring an affirmative vote of a majority of votes cast for approval.
Section 3. SHAREHOLDER ACTION BY WRITTEN CONSENT WITHOUT A MEETING. Any action which may be taken at any meeting of Shareholders may be taken without a meeting if a consent or consents in writing setting forth the action so taken is or are signed by the holders of a majority of the Shares entitled to vote on such action (or such different proportion thereof as shall be required by law, the Declaration of Trust or the By-Laws for approval of such action) and is or are received by the secretary of the Trust either: (i) by the date set by resolution of the Board of Trustees for the shareholder vote on such action; or (ii) if no date is set by resolution of the Board, within 30 days after the record date for such action as determined by reference to Article V, Section 4(b) hereof. The written consent for any such action may be executed in one or more counterparts, each of which shall be deemed an original, and all of which when taken together shall constitute one and the same instrument. A consent transmitted by electronic transmission (as defined in the DSTA) by a Shareholder or by a Person or Persons authorized to act for a Shareholder shall be deemed to be written and signed for purposes of this Section. All such consents shall be filed with the secretary of the Trust and shall be maintained in the Trust's records. Any Shareholder that has given a written consent or the Shareholder's proxyholder or a personal representative of the Shareholder or its respective proxyholder may revoke the consent by a writing received by the secretary of the Trust either: (i) before the date set by resolution of the Board of Trustees for the shareholder vote on such action; or (ii) if no date is set by resolution of the Board, within 30 days after the record date for such action as determined by reference to Article V, Section 4(b) hereof.
Section 4. RECORD DATES.
(a) For purposes of determining the Shareholders entitled to notice of, and to vote at, any meeting of Shareholders, the Board of Trustees may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Trustees, and which record date shall not be more than one hundred and twenty (120) days nor less than ten (10) days before the date of any such meeting. A determination of Shareholders of record entitled to notice of or to vote at a meeting of Shareholders shall apply to any adjournment of the meeting; provided, however, that the Board of Trustees may fix a new record date for the adjourned meeting and shall fix a new record date for any meeting that is adjourned for more than sixty (60) days from the date set for the original meeting. For purposes of determining the Shareholders entitled to vote on any action without a meeting, the Board of Trustees may fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted by the Board of Trustees, and which record date shall not be more than thirty (30) days after the date upon which the resolution fixing the record date is adopted by the Board of Trustees.
(b) If the Board of Trustees does not so fix a record date:
(i) the record date for determining Shareholders entitled to notice of, and to vote at, a meeting of Shareholders shall be at the close of business on the day next preceding the day on which notice is given or, if notice is waived, at the close of business on the day next preceding the day on which the meeting is held.
(ii) the record date for determining Shareholders entitled to vote on any action by consent in writing without a meeting of Shareholders, (1) when no prior action by the Board of Trustees has been taken, shall be the day on which the first signed written consent setting forth the action taken is delivered to the Trust, or (2) when prior action of the Board of Trustees has been taken, shall be at the close of business on the day on which the Board of Trustees adopts the resolution taking such prior action.
(c) For the purpose of determining the Shareholders of the Trust or any Series or Class thereof who are entitled to receive payment of any dividend or of any other distribution of assets of the Trust or any Series or Class thereof (other than in connection with a dissolution of the Trust or a Series, a merger, consolidation, conversion, reorganization, or any other transactions, in each case that is governed by Article VIII of the Declaration of Trust), the Board of Trustees may:
(i) from time to time fix a record date, which record date shall not precede the date upon which the resolution fixing the record date is adopted, and which record date shall not be more than sixty (60) days before the date for the payment of such dividend and/or such other distribution;
(ii) adopt standing resolutions fixing record dates and related payment dates at periodic intervals of any duration for the payment of such dividend and/or such other distribution; and/or
(iii) delegate to an appropriate officer or officers of the Trust the determination of such periodic record and/or payments dates with respect to such dividend and/or such other distribution.
Nothing in this Section shall be construed as precluding the Board of Trustees from setting different record dates for different Series or Classes.
Section 5. ADDITIONAL PROVISIONS. The By-Laws may include further provisions for Shareholders' votes, meetings and related matters.
ARTICLE VI.
NET ASSET VALUE; DISTRIBUTIONS;
REDEMPTIONS; TRANSFERS
Section 1. DETERMINATION OF NET ASSET VALUE, NET INCOME AND DISTRIBUTIONS.
(a) Subject to Article III, Section 6 hereof, the Board of Trustees shall have the power to determine from time to time the offering price for authorized, but unissued, Shares of beneficial interest of the Trust or any Series or Class thereof, respectively, that shall yield to the Trust or such Series or Class not less than the net asset value thereof, in addition to any amount of applicable sales charge to be paid to the Principal Underwriter or the selling broker or dealer in connection with the sale of such Shares, at which price the Shares of the Trust or such Series or Class, respectively, shall be offered for sale, subject to any other requirements or limitations of the 1940 Act.
(b) Subject to Article III, Section 6 hereof, the Board of Trustees may, subject to the 1940 Act, prescribe and shall set forth in the By-Laws, this Declaration of Trust or in a resolution of the Board of Trustees such bases and time for determining the net asset value per Share of the Trust or any Series or Class thereof, or net income attributable to the Shares of the Trust or any Series or Class thereof or the declaration and payment of dividends and distributions on the Shares of the Trust or any Series or Class thereof, as it may deem necessary or desirable, and such dividends and distributions may vary between the Classes to reflect differing allocations of the expenses of the Trust between such Classes to such extent and for such purposes as the Trustees may deem appropriate.
(c) The Shareholders of the Trust or any Series or Class, if any, shall be entitled to receive dividends and distributions, when, if and as declared by the Board of Trustees with respect thereto, provided that with respect to Classes, such dividends and distributions shall comply with the 1940 Act. The right of Shareholders to receive dividends or other distributions on Shares of any Class may be set forth in a plan adopted by the Board of Trustees and amended from time to time pursuant to the 1940 Act. No Share shall have any priority or preference over any other Share of the Trust with respect to dividends or distributions paid in the ordinary course of business or distributions upon dissolution of the Trust made pursuant to Article VIII, Section 1 hereof; provided however, that
(i) if the Shares of the Trust are divided into Series thereof, no Share of a particular Series shall have any priority or preference over any other Share of the same Series with respect to dividends or distributions paid in the ordinary course of business or distributions upon dissolution of the Trust or of such Series made pursuant to Article VIII, Section 1 hereof;
(ii) if the Shares of the Trust are divided into Classes thereof, no Share of a particular Class shall have any priority or preference over any other Share of the same Class with respect to dividends or distributions paid in the ordinary course of business or distributions upon dissolution of the Trust made pursuant to Article VIII, Section 1 hereof; and
(iii) if the Shares of a Series are divided into Classes thereof, no Share of a particular Class of such Series shall have any priority or preference over any other Share of the same Class of such Series with respect to dividends or distributions paid in the ordinary course of business or distributions upon dissolution of such Series made pursuant to Article VIII, Section 1 hereof.
All dividends and distributions shall be made ratably among all Shareholders of the Trust, a particular Class of the Trust, a particular Series, or a particular Class of a Series from the Trust Property held with respect to the Trust, such Series or such Class, respectively, according to the number of Shares of the Trust, such Series or such Class held of record by such Shareholders on the record date for any dividend or distribution; provided however, that
(iv) if the Shares of the Trust are divided into Series thereof, all dividends and distributions from the Trust Property and, if applicable, held with respect to such Series, shall be distributed to each Series thereof according to the net asset value computed for such Series and within such particular Series, shall be distributed ratably to the Shareholders of such Series according to the number of Shares of such Series held of record by such Shareholders on the record date for any dividend or distribution; and
(v) if the Shares of the Trust or of a Series are divided into Classes thereof, all dividends and distributions from the Trust Property and, if applicable, held with respect to the Trust or such Series, shall be distributed to each Class thereof according to the net asset value computed for such Class and within such particular Class, shall be distributed ratably to the Shareholders of such Class according to the number of Shares of such Class held of record by such Shareholders on the record date for any dividend or distribution.
Dividends and distributions may be paid in cash, in kind or in Shares.
(d) Before payment of any dividend there may be set aside out of any funds of the Trust, or the applicable Series thereof, available for dividends such sum or sums as the Board of Trustees may from time to time, in its absolute discretion, think proper as a reserve fund to meet contingencies, or for equalizing dividends, or for repairing or maintaining any property of the Trust, or any Series thereof, or for such other lawful purpose as the Board of Trustees shall deem to be in the best interests of the Trust, or the applicable Series, as the case may be, and the Board of Trustees may abolish any such reserve in the manner in which the reserve was created.
Section 2. REDEMPTIONS AT THE OPTION OF A SHAREHOLDER. Unless otherwise provided in the prospectus of the Trust relating to the Shares, as such prospectus may be amended from time to time:
(a) The Trust shall purchase such Shares as are offered by any Shareholder for redemption upon the presentation of a proper instrument of transfer together with a request directed to the Trust or a Person designated by the Trust that the Trust purchase such Shares and/or in accordance with such other procedures for redemption as the Board of Trustees may from time to time authorize. If certificates have been issued to a Shareholder, any request for redemption by such Shareholder must be accompanied by surrender of any outstanding certificate or certificates for such Shares in form for transfer, together with such proof of the authenticity of signatures as may reasonably be required on such Shares and accompanied by proper stock transfer stamps, if applicable.
(b) The Trust shall pay for such Shares the net asset value thereof (excluding any applicable redemption fee or sales load), in accordance with this Declaration of Trust, the By-Laws, the 1940 Act and other applicable law. Payments for Shares so redeemed by the Trust shall be made in cash, except payment for such Shares may, at the option of the Board of Trustees, or such officer or officers as it may duly authorize in its complete discretion, be made in kind or partially in cash and partially in kind. In case of any payment in kind, the Board of Trustees, or its authorized officers, shall have absolute discretion as to what security or securities of the Trust or the applicable Series shall be distributed in kind and the amount of the same; and the securities shall be valued for purposes of distribution at the value at which they were appraised in computing the then current net asset value of the Shares, provided that any Shareholder who cannot legally acquire securities so distributed in kind shall receive cash to the extent permitted by the 1940 Act. Shareholders shall bear the expenses of in-kind transactions, including, but not limited to, transfer agency fees, custodian fees and costs of disposition of such securities.
(c) Payment by the Trust for such redemption of Shares shall be made by the Trust to the Shareholder within seven days after the date on which the redemption request is received in proper form and/or such other procedures authorized by the Board of Trustees are complied with; provided, however, that if payment shall be made other than exclusively in cash, any securities to be delivered as part of such payment shall be delivered as promptly as any necessary transfers of such securities on the books of the several corporations whose securities are to be delivered practicably can be made, which may not necessarily occur within such seven-day period. In no case shall the Trust be liable for any delay of any corporation or other Person in transferring securities selected for delivery as all or part of any payment in kind.
(d) The obligations of the Trust set forth in this Section 2 are
subject to the provision that such obligations may be suspended or
postponed by the Board of Trustees (1) during any time the New York Stock
Exchange (the "Exchange") is closed for other than weekends or holidays;
(2) if permitted by the rules of the Commission, during periods when
trading on the Exchange is restricted; or (3) during any National Financial
Emergency. The Board of Trustees may, in its discretion, declare that the
suspension relating to a National Financial Emergency shall terminate, as
the case may be, on the first business day on which the Exchange shall have
reopened or the period specified above shall have expired (as to which, in
the absence of an official ruling by the Commission, the determination of
the Board of Trustees shall be conclusive).
(e) The right of any Shareholder of the Trust or any Series or Class thereof to receive dividends or other distributions on Shares redeemed and all other rights of such Shareholder with respect to the Shares so redeemed, except the right of such Shareholder to receive payment for such Shares, shall cease at the time the purchase price of such Shares shall have been fixed, as provided above.
Section 3. REDEMPTIONS AT THE OPTION OF THE TRUST. At the option of the Board of Trustees the Trust may, from time to time, without the vote of the Shareholders, but subject to the 1940 Act, redeem Shares or authorize the closing of any Shareholder account, subject to such conditions as may be established from time to time by the Board of Trustees.
Section 4. TRANSFER OF SHARES. Shares shall be transferable in accordance with the provisions of the By-Laws.
ARTICLE VII.
LIMITATION OF LIABILITY
AND INDEMNIFICATION OF AGENT
Section 1. LIMITATION OF LIABILITY.
(a) For the purpose of this Article, "Agent" means any Person who is or was a Trustee, officer, employee or other agent of the Trust or is or was serving at the request of the Trust as a trustee, director, officer, employee or other agent of another foreign or domestic corporation, partnership, joint venture, trust or other enterprise; "Proceeding" means any threatened, pending or completed action or proceeding, whether civil, criminal, administrative or investigative; and "Expenses" include without limitation attorneys' fees and any expenses of establishing a right to indemnification under this Article.
(b) An Agent shall be liable to the Trust and to any Shareholder for any act or omission that constitutes a bad faith violation of the implied contractual covenant of good faith and fair dealing, for such Agent's own willful misfeasance, bad faith, gross negligence or reckless disregard of the duties involved in the conduct of such Agent (such conduct referred to herein as "Disqualifying Conduct"), and for nothing else.
(c) Subject to subsection (b) of this Section 1 and to the fullest extent that limitations on the liability of Agents are permitted by the DSTA, the Agents shall not be responsible or liable in any event for any act or omission of any other Agent of the Trust or any Investment Adviser or Principal Underwriter of the Trust.
(d) No Agent, when acting in its respective capacity as such, shall be personally liable to any Person, other than the Trust or a Shareholder to the extent provided in subsections (b) and (c) of this Section 1, for any act, omission or obligation of the Trust or any Trustee thereof.
(e) Each Trustee, officer and employee of the Trust shall, in the performance of his or her duties, be fully and completely justified and protected with regard to any act or any failure to act resulting from reliance in good faith upon the books of account or other records of the Trust, upon an opinion of counsel, or upon reports made to the Trust by any of its officers or employees or by the Investment Adviser, the Principal Underwriter, any other Agent, selected dealers, accountants, appraisers or other experts or consultants selected with reasonable care by the Trustees, officers or employees of the Trust, regardless of whether such counsel or expert may also be a Trustee. The officers and Trustees may obtain the advice of counsel or other experts with respect to the meaning and operation of this Declaration of Trust, the By-Laws, applicable law and their respective duties as officers or Trustees. No such officer or Trustee shall be liable for any act or omission in accordance with such advice, records and/or reports and no inference concerning liability shall arise from a failure to follow such advice, records and/or reports. The officers and Trustees shall not be required to give any bond hereunder, nor any surety if a bond is required by applicable law.
(f) The failure to make timely collection of dividends or interest, or to
take timely action with respect to entitlements, on the Trust's securities
issued in emerging countries, shall not be deemed to be negligence or other
fault on the part of any Agent, and no Agent shall have any liability for such
failure or for any loss or damage resulting from the imposition by any
government of exchange control restrictions which might affect the liquidity of
the Trust's assets or from any war or political act of any foreign government to
which such assets might be exposed, except, in the case of a Trustee or officer,
for liability resulting from such Trustee's or officer's Disqualifying Conduct.
(g) The limitation on liability contained in this Article applies to events
occurring at the time a Person serves as an Agent whether or not such Person is
an Agent at the time of any Proceeding in which liability is asserted.
(h) No amendment or repeal of this Article shall adversely affect any right or protection of an Agent that exists at the time of such amendment or repeal.
Section 2. INDEMNIFICATION.
(a) INDEMNIFICATION BY TRUST. The Trust shall indemnify, out of Trust Property, to the fullest extent permitted under applicable law, any Person who was or is a party or is threatened to be made a party to any Proceeding by reason of the fact that such Person is or was an Agent of the Trust, against Expenses, judgments, fines, settlements and other amounts actually and reasonably incurred in connection with such Proceeding if such Person acted in good faith or in the case of a criminal proceeding, had no reasonable cause to believe the conduct of such Person was unlawful. The termination of any Proceeding by judgment, order, settlement, conviction or plea of nolo contendere or its equivalent shall not of itself create a presumption that the Person did not act in good faith or that the Person had reasonable cause to believe that the Person's conduct was unlawful.
(b) EXCLUSION OF INDEMNIFICATION. Notwithstanding any provision to the contrary contained herein, there shall be no right to indemnification for any liability arising by reason of the Agent's Disqualifying Conduct. In respect of any claim, issue or matter as to which that Person shall have been adjudged to be liable in the performance of that Person's duty to the Trust or the Shareholders, indemnification shall be made only to the extent that the court in which that action was brought shall determine, upon application or otherwise, that in view of all the circumstances of the case, that Person was not liable by reason of that Person's Disqualifying Conduct.
(c) REQUIRED APPROVAL. Any indemnification under this Article shall be made by the Trust if authorized in the specific case on a determination that indemnification of the Agent is proper in the circumstances by (i) a final decision on the merits by a court or other body before whom the proceeding was brought that the Agent was not liable by reason of Disqualifying Conduct (including, but not limited to, dismissal of either a court action or an administrative proceeding against the Agent for insufficiency of evidence of any Disqualifying Conduct) or, (ii) in the absence of such a decision, a reasonable determination, based upon a review of the facts, that the Agent was not liable by reason of Disqualifying Conduct, by (1) the vote of a majority of a quorum of the Trustees who are not (x) "interested persons" of the Trust as defined in Section 2(a)(19) of the 1940 Act, (y) parties to the proceeding, or (z) parties who have any economic or other interest in connection with such specific case (the "disinterested, non-party Trustees"); or (2) by independent legal counsel in a written opinion.
(d) ADVANCEMENT OF EXPENSES. Expenses incurred by an Agent in defending any Proceeding may be advanced by the Trust before the final disposition of the Proceeding on receipt of an undertaking by or on behalf of the Agent to repay the amount of the advance if it shall be determined ultimately that the Agent is not entitled to be indemnified as authorized in this Article; provided, that at least one of the following conditions for the advancement of expenses is met: (i) the Agent shall provide a security for his undertaking, (ii) the Trust shall be insured against losses arising by reason of any lawful advances, or (iii) a majority of a quorum of the disinterested, non-party Trustees of the Trust, or an independent legal counsel in a written opinion, shall determine, based on a review of readily available facts (as opposed to a full trial-type inquiry), that there is reason to believe that the Agent ultimately will be found entitled to indemnification.
(e) OTHER CONTRACTUAL RIGHTS. Nothing contained in this Article shall affect any right to indemnification to which Persons other than Trustees and officers of the Trust or any subsidiary thereof may be entitled by contract or otherwise.
(f) FIDUCIARIES OF EMPLOYEE BENEFIT PLAN. This Article does not apply
to any Proceeding against any trustee, investment manager or other
fiduciary of an employee benefit plan in that Person's capacity as such,
even though that Person may also be an Agent of the Trust as defined in
Section 1 of this Article. Nothing contained in this Article shall limit
any right to indemnification to which such a trustee, investment manager,
or other fiduciary may be entitled by contract or otherwise which shall be
enforceable to the extent permitted by applicable law other than this
Article.
Section 3. INSURANCE. To the fullest extent permitted by applicable law, the Board of Trustees shall have the authority to purchase with Trust Property, insurance for liability and for all Expenses reasonably incurred or paid or expected to be paid by an Agent in connection with any Proceeding in which such Agent becomes involved by virtue of such Agent's actions, or omissions to act, in its capacity or former capacity with the Trust, whether or not the Trust would have the power to indemnify such Agent against such liability.
Section 4. DERIVATIVE ACTIONS. Subject to the requirements set forth in
Section 3816 of the DSTA, a Shareholder or Shareholders may bring a derivative
action on behalf of the Trust only if the Shareholder or Shareholders first make
a pre-suit demand upon the Board of Trustees to bring the subject action unless
an effort to cause the Board of Trustees to bring such action is excused. A
demand on the Board of Trustees shall only be excused if a majority of the Board
of Trustees, or a majority of any committee established to consider the merits
of such action, has a material personal financial interest in the action at
issue. A Trustee shall not be deemed to have a material personal financial
interest in an action or otherwise be disqualified from ruling on a Shareholder
demand by virtue of the fact that such Trustee receives remuneration from his or
her service on the Board of Trustees of the Trust or on the boards of one or
more investment companies with the same or an affiliated investment adviser or
underwriter.
ARTICLE VIII.
CERTAIN TRANSACTIONS
Section 1. DISSOLUTION OF TRUST OR SERIES. The Trust and each Series shall have perpetual existence, except that the Trust (or a particular Series) shall be dissolved:
(a) With respect to the Trust, (i) upon the vote of the holders of not less than a majority of the Shares of the Trust cast, or (ii) at the discretion of the Board of Trustees either (A) at any time there are no Shares outstanding of the Trust, or (B) upon prior written notice to the Shareholders of the Trust; or
(b) With respect to a particular Series, (i) upon the vote of the
holders of not less than a majority of the Shares of such Series cast, or
(ii) at the discretion of the Board of Trustees either (A) at any time
there are no Shares outstanding of such Series, or (B) upon prior written
notice to the Shareholders of such Series; or
(c) With respect to the Trust (or a particular Series), upon the occurrence of a dissolution or termination event pursuant to any other provision of this Declaration of Trust (including Article VIII, Section 2) or the DSTA; or
(d) With respect to any Series, upon any event that causes the dissolution of the Trust.
Upon dissolution of the Trust (or a particular Series, as the case may
be), the Board of Trustees shall (in accordance with Section 3808 of the
DSTA) pay or make reasonable provision to pay all claims and obligations of
the Trust and/or each Series (or the particular Series, as the case may be),
including all contingent, conditional or unmatured claims and obligations
known to the Trust, and all claims and obligations which are known to the
Trust, but for which the identity of the claimant is unknown. If there are
sufficient assets held with respect to the Trust and/or each Series of the
Trust (or the particular Series, as the case may be), such claims and
obligations shall be paid in full and any such provisions for payment shall
be made in full. If there are insufficient assets held with respect to the
Trust and/or each Series of the Trust (or the particular Series, as the case
may be), such claims and obligations shall be paid or provided for according
to their priority and, among claims and obligations of equal priority,
ratably to the extent of assets available therefor. Any remaining assets
(including, without limitation, cash, securities or any combination thereof)
held with respect to the Trust and/or each Series of the Trust (or the
particular Series, as the case may be) shall be distributed to the
Shareholders of the Trust and/or each Series of the Trust (or the particular
Series, as the case may be) ratably according to the number of Shares of the
Trust and/or such Series thereof (or the particular Series, as the case may
be) held of record by the several Shareholders on the date for such
dissolution distribution; provided, however, that if the Shares of the Trust
or a Series are divided into Classes thereof, any remaining assets
(including, without limitation, cash, securities or any combination thereof)
held with respect to the Trust or such Series, as applicable, shall be
distributed to each Class of the Trust or such Series according to the net
asset value computed for such Class and within such particular Class, shall
be distributed ratably to the Shareholders of such Class according to the
number of Shares of such Class held of record by the several Shareholders on
the date for such dissolution distribution. Upon the winding up of the Trust
in accordance with Section 3808 of the DSTA and its termination, any one (1)
Trustee shall execute, and cause to be filed, a certificate of cancellation,
with the office of the Secretary of State of the State of Delaware in
accordance with the provisions of Section 3810 of the DSTA.
Section 2. MERGER OR CONSOLIDATION; CONVERSION; REORGANIZATION.
(a) MERGER OR CONSOLIDATION. Pursuant to an agreement of merger or
consolidation, the Board of Trustees, by vote of a majority of the
Trustees, may cause the Trust to merge or consolidate with or into one or
more statutory trusts or "other business entities" (as defined in Section
3801 of the DSTA) formed or organized or existing under the laws of the
State of Delaware or any other state of the United States or any foreign
country or other foreign jurisdiction. Any such merger or consolidation
shall not require the vote of the Shareholders unless such vote is required
by the 1940 Act; provided however, that the Board of Trustees shall provide
at least thirty (30) days' prior written notice to the Shareholders of such
merger or consolidation. By reference to Section 3815(f) of the DSTA, any
agreement of merger or consolidation approved in accordance with this
Section 2(a) may, without a Shareholder vote, unless required by the 1940
Act, the requirements of any securities exchange on which Shares are listed
for trading or any other provision of this Declaration of Trust or the
By-Laws, effect any amendment to this Declaration of Trust or the By-Laws
or effect the adoption of a new governing instrument if the Trust is the
surviving or resulting statutory trust in the merger or consolidation,
which amendment or new governing instrument shall be effective at the
effective time or date of the merger or consolidation. In all respects not
governed by the DSTA, the 1940 Act, other applicable law or the
requirements of any securities exchange on which Shares are listed for
trading, the Board of Trustees shall have the power to prescribe additional
procedures necessary or appropriate to accomplish a merger or
consolidation, including the power to create one or more separate statutory
trusts to which all or any part of the assets, liabilities, profits or
losses of the Trust may be transferred and to provide for the conversion of
Shares into beneficial interests in such separate statutory trust or
trusts. Upon completion of the merger or consolidation, if the Trust is the
surviving or resulting statutory trust, any one (1) Trustee shall execute,
and cause to be filed, a certificate of merger or consolidation in
accordance with Section 3815 of the DSTA.
(b) CONVERSION. The Board of Trustees, by vote of a majority of the
Trustees, may cause (i) the Trust to convert to an "other business entity"
(as defined in Section 3801 of the DSTA) formed or organized under the laws
of the State of Delaware as permitted pursuant to Section 3821 of the DSTA;
(ii) the Shares of the Trust or any Series to be converted into beneficial
interests in another statutory trust (or series thereof) created pursuant
to this Section 2 of this Article VIII, or (iii) the Shares to be exchanged
under or pursuant to any state or federal statute to the extent permitted
by law. Any such statutory conversion, Share conversion or Share exchange
shall not require the vote of the Shareholders unless such vote is required
by the 1940 Act; provided however, that the Board of Trustees shall provide
at least thirty (30) days' prior written notice to the Shareholders of the
Trust of any conversion of Shares of the Trust pursuant to Subsections
(b)(i) or (b)(ii) of this Section 2 or exchange of Shares of the Trust
pursuant to Subsection (b)(iii) of this Section 2, and at least thirty (30)
days' prior written notice to the Shareholders of a particular Series of
any conversion of Shares of such Series pursuant to Subsection (b)(ii) of
this Section 2 or exchange of Shares of such Series pursuant to Subsection
(b)(iii) of this Section 2. In all respects not governed by the DSTA, the
1940 Act, other applicable law or the requirements of any securities
exchange on which Shares are listed for trading, the Board of Trustees
shall have the power to prescribe additional procedures necessary or
appropriate to accomplish a statutory conversion, Share conversion or Share
exchange, including the power to create one or more separate statutory
trusts to which all or any part of the assets, liabilities, profits or
losses of the Trust may be transferred and to provide for the conversion of
Shares of the Trust or any Series thereof into beneficial interests in such
separate statutory trust or trusts (or series thereof).
(c) REORGANIZATION. The Board of Trustees, by vote of a majority of the Trustees, may cause the Trust to sell, convey and transfer all or substantially all of the assets of the Trust ("sale of Trust assets") or all or substantially all of the assets associated with any one or more Series ("sale of such Series' assets"), to another trust, statutory trust, partnership, limited partnership, limited liability company, corporation or other association organized under the laws of any state, or to one or more separate series thereof, or to the Trust to be held as assets associated with one or more other Series of the Trust, in exchange for cash, shares or other securities (including, without limitation, in the case of a transfer to another Series of the Trust, Shares of such other Series) with such sale, conveyance and transfer either (a) being made subject to, or with the assumption by the transferee of, the liabilities associated with the Trust or the liabilities associated with the Series the assets of which are so transferred, as applicable, or (b) not being made subject to, or not with the assumption of, such liabilities. Any such sale, conveyance and transfer shall not require the vote of the Shareholders unless such vote is required by the 1940 Act; provided however, that the Board of Trustees shall provide at least thirty (30) days' prior written notice to the Shareholders of the Trust of any such sale of Trust assets, and at least thirty (30) days prior written notice to the Shareholders of a particular Series of any sale of such Series' assets. Following such sale of Trust assets, the Board of Trustees shall distribute such cash, shares or other securities ratably among the Shareholders of the Trust (giving due effect to the assets and liabilities associated with and any other differences among the various Series the assets associated with which have been so sold, conveyed and transferred, and due effect to the differences among the various Classes within each such Series). Following a sale of such Series' assets, the Board of Trustees shall distribute such cash, shares or other securities ratably among the Shareholders of such Series (giving due effect to the differences among the various Classes within each such Series). If all of the assets of the Trust have been so sold, conveyed and transferred, the Trust shall be dissolved; and if all of the assets of a Series have been so sold, conveyed and transferred, such Series and the Classes thereof shall be dissolved. In all respects not governed by the DSTA, the 1940 Act or other applicable law, the Board of Trustees shall have the power to prescribe additional procedures necessary or appropriate to accomplish such sale, conveyance and transfer, including the power to create one or more separate statutory trusts to which all or any part of the assets, liabilities, profits or losses of the Trust may be transferred and to provide for the conversion of Shares into beneficial interests in such separate statutory trust or trusts.
Section 3. MASTER FEEDER STRUCTURE. If permitted by the 1940 Act, the Board of Trustees, by vote of a majority of the Trustees, and without a Shareholder vote, may cause the Trust or any one or more Series to convert to a master feeder structure (a structure in which a feeder fund invests all of its assets in a master fund, rather than making investments in securities directly) and thereby cause existing Series of the Trust to either become feeders in a master fund, or to become master funds in which other funds are feeders.
Section 4. ABSENCE OF APPRAISAL OR DISSENTERS' RIGHTS. No Shareholder shall be entitled, as a matter of right, to relief as a dissenting Shareholder in respect of any proposal or action involving the Trust or any Series or any Class thereof.
ARTICLE IX.
AMENDMENTS
Section 1. AMENDMENTS GENERALLY. This Declaration of Trust may be
restated and/or amended at any time by an instrument in writing signed by
not less than a majority of the Board of Trustees and, to the extent
required by this Declaration of Trust, the 1940 Act or the requirements of
any securities exchange on which Shares are listed for trading, by approval
of such amendment by the Shareholders in accordance with Article III,
Section 6 hereof and Article V hereof. Any such restatement and/or
amendment hereto shall be effective immediately upon execution and approval
or upon such future date and time as may be stated therein. The Certificate
of Trust shall be restated and/or amended at any time by the Board of
Trustees, without Shareholder approval, to correct any inaccuracy contained
therein. Any such restatement and/or amendment of the Certificate of Trust
shall be executed by at least one (1) Trustee and shall be effective
immediately upon its filing with the office of the Secretary of State of
the State of Delaware or upon such future date as may be stated therein.
ARTICLE X.
MISCELLANEOUS
Section 1. REFERENCES: HEADINGS: COUNTERPARTS. In this Declaration of Trust and in any restatement hereof and/or amendment hereto, references to this instrument, and all expressions of similar effect to "herein," "hereof" and "hereunder," shall be deemed to refer to this instrument as so restated and/or amended. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. Any references herein to specific sections of the DSTA, the Code or the 1940 Act shall refer to such sections as amended from time to time or any successor sections thereof. This instrument may be executed in any number of counterparts, each of which shall be deemed an original.
Section 2. APPLICABLE LAW. This Declaration of Trust is created under and is to be governed by and construed and administered according to the laws of the State of Delaware and the applicable provisions of the 1940 Act and the Code. The Trust shall be a Delaware statutory trust pursuant to the DSTA, and without limiting the provisions hereof, the Trust may exercise all powers which are ordinarily exercised by such a statutory trust.
Section 3. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of this Declaration of Trust are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the 1940 Act, the Code, the DSTA, or with other applicable laws and regulations, the conflicting provision shall be deemed not to have constituted a part of this Declaration of Trust from the time when such provisions became inconsistent with such laws or regulations; provided, however, that such determination shall not affect any of the remaining provisions of this Declaration of Trust or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of this Declaration of Trust shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of this Declaration of Trust in any jurisdiction.
Section 4. STATUTORY TRUST ONLY. It is the intention of the Trustees to create hereby a statutory trust pursuant to the DSTA, and thereby to create the relationship of trustee and beneficial owners within the meaning of the DSTA between, respectively, the Trustees and each Shareholder. It is not the intention of the Trustees to create a general or limited partnership, limited liability company, joint stock association, corporation, bailment, or any form of legal relationship other than a statutory trust pursuant to the DSTA. Nothing in this Declaration of Trust shall be construed to make the Shareholders, either by themselves or with the Trustees, partners or members of a joint stock association.
Section 5. USE OF THE NAMES "FRANKLIN," "TEMPLETON," "FIDUCIARY TRUST," AND/OR "INSTITUTIONAL FIDUCIARY TRUST". The Board of Trustees expressly agrees and acknowledges that the names "Franklin," "Templeton," "Fiduciary Trust," and "Institutional Fiduciary Trust" are the sole property of Franklin Resources, Inc. ("FRI"). FRI has granted to the Trust a non-exclusive license to use such names as part of the name of the Trust now and in the future. The Board of Trustees further expressly agrees and acknowledges that the non-exclusive license granted herein may be terminated by FRI if the Trust ceases to use FRI or one of its Affiliates as Investment Adviser or to use other Affiliates or successors of FRI for such purposes. In such event, the nonexclusive license may be revoked by FRI and the Trust shall cease using the names "Franklin," "Templeton," "Fiduciary Trust," "Institutional Fiduciary Trust" or any name misleadingly implying a continuing relationship between the Trust and FRI or any of its Affiliates, as part of its name unless otherwise consented to by FRI or any successor to its interests in such names.
The Board of Trustees further understands and agrees that so long as FRI and/or any future advisory Affiliate of FRI shall continue to serve as the Trust's Investment Adviser, other registered open- or closed-end investment companies ("funds") as may be sponsored or advised by FRI or its Affiliates shall have the right permanently to adopt and to use the names "Franklin", "Templeton," "Fiduciary Trust" and/or "Institutional Fiduciary Trust" in their names and in the names of any series or Class of shares of such funds.
IN WITNESS WHEREOF, the Trustees of Franklin California Tax-Free Income Fund named below do hereby make and enter into this Agreement and Declaration of Trust as of the date first written above.
/s/ HARRIS J. ASHTON /s/ EDITH E. HOLIDAY Harris J. Ashton, Trustee Edith E. Holiday, Trustee /s/ CHARLES B. JOHNSON /s/ RUPERT H. JOHNSON Charles B. Johnson, Trustee Rupert H. Johnson, Jr., Trustee /s/ FRANK A. OLSON Frank A. Olson, Trustee |
CERTIFICATE OF TRUST OF
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
This Certificate of Trust of Franklin California Tax-Free Income Fund, a statutory trust (the "Trust"), executed by the undersigned trustees, and filed under and in accordance with the provisions of the Delaware Statutory Trust Act (12 DEL. C. ss. 3801 et seq.) (the "Act"), sets forth the following:
FIRST: The name of the statutory trust formed hereby is Franklin California Tax-Free Income Fund.
SECOND: The address of the registered office of the Trust in the State of Delaware is 300 Delaware Avenue, Suite 800, Wilmington, New Castle County, Delaware 19801. The name of the Trust's registered agent at such address is SR Services, LLC.
THIRD: The Trust formed hereby is or will become an investment company registered under the Investment Company Act of 1940, as amended (15 U.S.C. ss.ss. 80a-1 et seq.).
FOURTH: Pursuant to Section 3804 of the Act, the debts, liabilities, obligations, costs, charges, reserves and expenses incurred, contracted for or otherwise existing with respect to a particular series, whether such series is now authorized and existing pursuant to the governing instrument of the Trust or is hereafter authorized and existing pursuant to said governing instrument, shall be enforceable against the assets associated with such series only, and not against the assets of the Trust generally or any other series thereof, and, except as otherwise provided in the governing instrument of the Trust, none of the debts, liabilities, obligations, costs, charges, reserves and expenses incurred, contracted for or otherwise existing with respect to the Trust generally or any other series thereof shall be enforceable against the assets of such series.
FIFTH: The Trust is formed effective as of October 18, 2006.
SIXTH: This Certificate of Trust may be signed in one or more counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.
IN WITNESS WHEREOF, the undersigned, being all of the trustees of Franklin California Tax-Free Income Fund, have duly executed this Certificate of Trust as of the 18th day of October, 2006.
/s/ HARRIS J. ASHTON /s/ EDITH E. HOLIDAY Harris J. Ashton, Trustee Edith E. Holiday, Trustee /s/ CHARLES B. JOHNSON /s/ RUPERT H. JOHNSON, JR. Charles B. Johnson, Trustee Rupert H. Johnson, Jr., Trustee /s/ FRANK A. OLSON Frank A. Olson, Trustee |
BY-LAWS
of
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
A Delaware Statutory Trust
(Effective as of October 18, 2006)
These By-Laws may contain any provision not inconsistent with applicable law or the Declaration of Trust, relating to the governance of the Trust. Unless otherwise specified in these By-Laws, capitalized terms used in these By-Laws shall have the meanings assigned to them in the Declaration of Trust. Every Shareholder by virtue of having become a Shareholder shall be bound by these By-Laws.
ARTICLE I
DEFINITIONS
Section 1. Whenever used herein the following terms shall have the following meanings:
(a) "1940 ACT" shall mean the Investment Company Act of 1940 and the rules and regulations thereunder, all as adopted or amended from time to time;
(b) "BOARD OF TRUSTEES" OR "BOARD" shall mean the governing body of the Trust, that is comprised of the number of Trustees of the Trust fixed from time to time pursuant to Article IV of the Declaration of Trust, having the powers and duties set forth therein;
(c) "BY-LAWS" shall mean these by-laws of the Trust, as amended or restated from time to time in accordance with Article VIII hereof;
(d) "CERTIFICATE OF TRUST" shall mean the certificate of trust to be filed with the office of the Secretary of State of the State of Delaware as required under the DSTA to form the Trust, as amended or restated from time to time and filed with such office;
(e) "CLASS" shall mean each class of Shares of the Trust or of a Series of the Trust established and designated under and in accordance with the provisions of Article III of the Declaration of Trust;
(f) "CODE" shall mean the Internal Revenue Code of 1986 and the rules and regulations thereunder, all as adopted or amended from time to time;
(g) "COMMISSION" shall have the meaning given that term in the 1940 Act;
(h) "DSTA" shall mean the Delaware Statutory Trust Act (12 DEL. C. ss.3801, ET SEQ.), as amended from time to time;
(i) "DECLARATION OF TRUST" shall mean the Agreement and Declaration of Trust of the Trust, as amended or restated from time to time;
(j) "INVESTMENT ADVISER" or "ADVISER" shall mean a Person, as defined below, furnishing services to the Trust pursuant to any investment advisory or investment management contract described in Article IV, Section 7(a) of the Declaration of Trust;
(k) "PERSON" shall mean a natural person, partnership, limited partnership, limited liability company, trust, estate, association, corporation, organization, custodian, nominee or any other individual or entity in its own or any representative capacity, in each case, whether domestic or foreign, and a statutory trust or a foreign statutory trust;
(l) "SERIES" shall refer to each Series of Shares established and designated under and in accordance with the provisions of Article III of the Declaration of Trust;
(m) "SHARES" shall mean the transferable shares of beneficial interest into which the beneficial interest in the Trust shall be divided from time to time, and shall include fractional and whole shares;
(n) "SHAREHOLDER" shall mean a record owner of Shares;
(o) "TRUST" shall refer to the Delaware statutory trust formed pursuant to the Declaration of Trust and the filing of the Certificate of Trust with the office of the Secretary of State of the State of Delaware; and
(p) "TRUSTEE" or "TRUSTEES" shall refer to each signatory to the Declaration of Trust as a trustee and all other Persons who may, from time to time, be duly elected or appointed, qualified and serving on the Board of Trustees in accordance with the provisions hereof and the Declaration of Trust, so long as such signatory or other Person continues in office in accordance with the terms hereof and of the Declaration of Trust. Reference herein to a Trustee or the Trustees shall refer to such Person or Persons in such Person's or Persons' capacity as a trustee or trustees hereunder and under the Declaration of Trust.
ARTICLE II
MEETINGS OF SHAREHOLDERS
Section 1. PLACE OF MEETINGS. Meetings of Shareholders shall be held at any place within or outside the State of Delaware designated by the Board. In the absence of any such designation by the Board, Shareholders' meetings shall be held at the offices of the Trust.
Section 2. MEETINGS.
(a) CALL OF MEETINGS. Any meeting of Shareholders may be called at any time by the Board, by the chairperson of the Board or by the president of the Trust for the purpose of taking action upon any matter deemed by the Board to be necessary or desirable. To the extent permitted by the 1940 Act, a meeting of the Shareholders for the purpose of electing Trustees may also be called by the chairperson of the Board, or shall be called by the president or any vice-president of the Trust at the request of the Shareholders holding not less than ten (10) percent of the Shares, provided that the Shareholders requesting such meeting shall have paid the Trust the reasonably estimated cost of preparing and mailing the notice thereof, which an authorized officer of the Trust shall determine and specify to such Shareholders. No meeting shall be called upon the request of Shareholders to consider any matter which is substantially the same as a matter voted upon at any meeting of the Shareholders held during the preceding twelve (12) months, unless requested by the holders of a majority of all Shares entitled to be voted at such meeting.
Section 3. NOTICE OF SHAREHOLDERS' MEETING. Notice
of any meeting of Shareholders shall be given to each Shareholder
entitled to vote at such meeting in accordance with Section 4 of
this Article II not less than ten (10) nor more than one hundred
and twenty (120) days before the date of the meeting. The notice
shall specify (i) the place, date and hour of the meeting, and
(ii) the general nature of the business to be transacted and to
the extent required by the 1940 Act, the purpose or purposes
thereof.
Section 4. MANNER OF GIVING NOTICE. Notice of any meeting of Shareholders shall be given either personally or by United States mail, courier, cablegram, telegram, facsimile or electronic mail, or other form of communication permitted by then current law, charges prepaid, addressed to the Shareholder or to the group of Shareholders at the same address as may be permitted pursuant to applicable laws, or as Shareholders may otherwise consent, at the address of that Shareholder appearing on the books of the Trust or its transfer or other duly authorized agent or provided in writing by the Shareholder to the Trust for the purpose of notice. Notice shall be deemed to be given when delivered personally, deposited in the United States mail or with a courier, or sent by cablegram, telegram, facsimile or electronic mail. If no address of a Shareholder appears on the Trust's books or has been provided in writing by a Shareholder, notice shall be deemed to have been duly given without a mailing, or substantial equivalent thereof, if such notice shall be available to the Shareholder on written demand of the Shareholder at the offices of the Trust.
If any notice addressed to a Shareholder at the address of that Shareholder appearing on the books of the Trust or that has been provided in writing by that Shareholder to the Trust for the purpose of notice, is returned to the Trust marked to indicate that the notice to the Shareholder cannot be delivered at that address, all future notices or reports shall be deemed to have been duly given without further mailing, or substantial equivalent thereof, if such notices shall be available to the Shareholder on written demand of the Shareholder at the offices of the Trust.
Section 5. ADJOURNED MEETING; NOTICE. Any Shareholders' meeting, whether or not a quorum is present, may be adjourned from time to time for any reason whatsoever by vote of the holders of Shares entitled to vote holding not less than a majority of the Shares present in person or by proxy at the meeting, or by the chairperson of the Board, the president of the Trust, in the absence of the chairperson of the Board, or any vice president or other authorized officer of the Trust, in the absence of the president. Any adjournment may be made with respect to any business which might have been transacted at such meeting and any adjournment will not delay or otherwise affect the effectiveness and validity of any business transacted at the Shareholders' meeting prior to adjournment.
When any Shareholders' meeting is adjourned to another time or place, written notice need not be given of the adjourned meeting if the time and place thereof are announced at the meeting at which the adjournment is taken, unless after the adjournment, a new record date is fixed for the adjourned meeting, or unless the adjournment is for more than sixty (60) days after the date of the original meeting, in which case, the Board of Trustees shall set a new record date as provided in Article V of the Declaration of Trust and give written notice to each Shareholder of record entitled to vote at the adjourned meeting in accordance with the provisions of Sections 3 and 4 of this Article II. At any adjourned meeting, any business may be transacted that might have been transacted at the original meeting.
Section 6. VOTING.
(a) The Shareholders entitled to vote at any meeting of Shareholders and the Shareholder vote required to take action shall be determined in accordance with the provisions of the Declaration of Trust. Unless determined by the inspector of the meeting to be advisable, the vote on any question need not be by written ballot.
(b) Unless otherwise determined by the Board at the time it approves an action to be submitted to the Shareholders for approval, Shareholder approval of an action shall remain in effect until such time as the approved action is implemented or the Shareholders vote to the contrary. Notwithstanding the foregoing, an agreement of merger, consolidation, conversion or reorganization may be terminated or amended notwithstanding prior approval if so authorized by such agreement of merger, consolidation, conversion or reorganization pursuant to Section 3815 of the DSTA and/or pursuant to the Declaration of Trust, these By-Laws and Section 3806 of the DSTA.
Section 7. WAIVER OF NOTICE BY CONSENT OF ABSENT SHAREHOLDERS. Attendance by a Shareholder, in person or by proxy, at a meeting shall constitute a waiver of notice of that meeting with respect to that Shareholder, except when the Shareholder attends the meeting for the express purpose of objecting, at the beginning of the meeting, to the transaction of any business because the meeting is not lawfully called or convened. Whenever notice of a Shareholders' meeting is required to be given to a Shareholder under the Declaration of Trust or these By-Laws, a written waiver thereof, executed before or after the time notice is required to be given, by such Shareholder or his or her attorney thereunto authorized, shall be deemed equivalent to such notice. The waiver of notice need not specify the purpose of, or the business to be transacted at, the meeting.
Section 8. PROXIES. Every Shareholder entitled to vote for Trustees or on any other matter that may properly come before the meeting shall have the right to do so either in person ore by on or more agents authorized by a written proxy executed by the Shareholder and filed with the secretary of the Trust; PROVIDED, that an alternative to the execution of a written proxy may be permitted as described in the next paragraph of this Section 8. A proxy shall be deemed executed if the Shareholder's name is placed on the proxy (whether by manual signature, typewriting, telegraphic or electronic transmission (as defined in Section 3806 of the DSTA) or otherwise) by the Shareholder or the Shareholder's attorney-in-fact. A valid proxy that does not state that it is irrevocable shall continue in full force and effect unless revoked by the Shareholder executing it, or using one of the permitted alternatives to execution, described in the next paragraph, by a written notice delivered to the secretary of the Trust prior to the exercise of the proxy or by the Shareholder's attendance and vote in person at the meeting; PROVIDED, HOWEVER, that no proxy shall be valid after the expiration of eleven (11) months from the date of the proxy unless otherwise expressly provided in the proxy. The revocability of a proxy that states on its face that it is irrevocable shall be governed by the provisions of the General Corporation Law of the State of Delaware.
With respect to any Shareholders' meeting, the Board, or, in case the Board does not act, the president, any vice president or the secretary, may permit proxies by electronic transmission (as defined in Section 3806 of the DSTA), telephonic, computerized, telecommunications or other reasonable alternative to the execution of a written instrument authorizing the holder of the proxy to act. A proxy with respect to Shares held in the name of two or more Persons shall be valid if executed, or a permitted alternative to execution is used, by any one of them unless, at or prior to the exercise of the proxy, the secretary of the Trust receives a specific written notice to the contrary from any one of them. A proxy purporting to be by or on behalf of a Shareholder shall be deemed valid unless challenged at or prior to its exercise and the burden of proving invalidity shall rest with the challenger.
Section 9. INSPECTORS. Before any meeting of Shareholders, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust, may appoint any person other than nominees for office to act as inspector at the meeting or any adjournment. If any person appointed as inspector fails to appear or fails or refuses to act, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust, shall appoint a person to fill the vacancy. Such appointments may be made by such officers in person or by telephone.
The inspector shall:
(a) determine the number of Shares and the voting power of each, the Shares represented at the meeting, the existence of a quorum and the authenticity, validity and effect of proxies;
(b) receive votes or ballots;
(c) hear and determine all challenges and questions in any way arising in connection with the right to vote;
(d) count and tabulate all votes;
(e) determine when the polls shall close;
(f) determine the result of voting; and
(g) do any other acts that may be proper to conduct the election or vote with fairness to all Shareholders.
ARTICLE III
TRUSTEES
Section 1. VACANCIES.
(a) Whenever a vacancy in the Board shall occur (by reason of death, resignation, removal, retirement, an increase in the authorized number of Trustees or other cause), until such vacancy is filled as provided herein or the number of authorized Trustees constituting the Board of Trustees is decreased pursuant to Article IV, Section 1 of the Declaration of Trust, the Trustee(s) then in office, regardless of the number and even if less than a quorum, shall have all the powers granted to the Board and shall discharge all the duties imposed upon the Board by the Declaration of Trust and these By-Laws as though such number constitutes the entire Board.
(b) Vacancies in the Board of Trustees may be filled by not less than a majority vote of the Trustee(s) then in office, regardless of the number and even if less than a quorum and a meeting of Shareholders shall be called for the purpose of electing Trustees if required by the 1940 Act. Notwithstanding the above, whenever and for so long as the Trust is a participant in or otherwise has in effect a plan under which the Trust may be deemed to bear expenses of distributing its Shares as that practice is described in Rule 12b-1 under the 1940 Act, then the selection and nomination of each of the Trustees who is not an "interested person" (as that term is defined in the 1940 Act ) of the Trust, any Adviser or the principal underwriter of the Trust (such Trustees are referred to herein as "disinterested Trustees"), shall be, and is, committed to the discretion of the disinterested Trustees remaining in office. In the event that all Trustee offices become vacant, an authorized officer of the Investment Adviser shall serve as the sole remaining Trustee effective upon the vacancy in the office of the last Trustee. In such case, an authorized officer of the Investment Adviser, as the sole remaining Trustee, shall, as soon as practicable, fill all of the vacancies on the Board; provided, however, that the percentage of Trustees who are disinterested Trustees shall be no less than that permitted by the 1940 Act. Upon the qualification of such Trustees, the authorized officer of the Investment Adviser shall resign as Trustee and a meeting of the Shareholders shall be called, as required by the 1940 Act, for the election of Trustees. An appointment of a Trustee may be made by the Trustees then in office in anticipation of a vacancy to occur by reason of retirement, resignation, or removal of a Trustee, or an increase in number of Trustees effective at a later date, provided that said appointment shall become effective only at the time or after the expected vacancy occurs.
Section 2. PLACE OF MEETINGS AND MEETINGS BY TELEPHONE. All meetings of the Board may be held at any place within or outside the State of Delaware that is designated from time to time by the Board, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust. In the absence of such a designation, regular meetings shall be held at the offices of the Trust. Any meeting, regular or special, may be held, with respect to one or more participating Trustees, by conference telephone or similar communication equipment, so long as all Trustees participating in the meeting can hear one another, and all such Trustees shall be deemed to be present in person at such meeting.
Section 3. REGULAR MEETINGS. Regular meetings of the Board shall be held at such time and place as shall from time to time be fixed by the Board, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust. Regular meetings may be held without notice.
Section 4. SPECIAL MEETINGS. Special meetings of the Board for any purpose or purposes may be called at any time by any Trustee, the chairperson of the Board, or in the absence of the chairperson of the Board, the president of the Trust, or in the absence of the president, any vice president or other authorized officer of the Trust.
Notice of the purpose, time and place of special meetings (or of the time and place for each regular meeting for which notice is given) shall be given personally, sent by first-class mail, courier, cablegram or telegram, charges prepaid, or by facsimile or electronic mail, addressed to each Trustee at that Trustee's address as has been provided to the Trust for purposes of notice; PROVIDED, that, in case of a national, regional or local emergency or disaster, which prevents such notice, such notice may be given by any means available or need not be given if no means are available. In case the notice is mailed, it shall be deemed to be duly given if deposited in the United States mail at least seven (7) days before the time the meeting is to be held. In case the notice is given personally or is given by courier, cablegram, telegram, facsimile or electronic mail, it shall be deemed to be duly given if delivered at least twenty-four (24) hours before the time of the holding of the meeting. The notice need not specify the place of the meeting if the meeting is to be held at the offices of the Trust.
Section 5. WAIVER OF NOTICE. Whenever notice is required to be given to a Trustee under this Article, a written waiver of notice signed by the Trustee, whether before or after the time notice is required to be given, shall be deemed equivalent to notice. The waiver of notice need not specify the purpose of, or the business to be transacted at, the meeting. All such waivers shall be filed with the records of the Trust or made a part of the minutes of the meeting. Attendance of a Trustee at a meeting shall constitute a waiver of notice of such meeting, except when the Trustee attends the meeting for the express purpose of objecting at the beginning of the meeting to the transaction of any business because the meeting is not lawfully called or convened.
Section 6. ADJOURNMENT. A majority of the Trustees present at a meeting of the Board, whether or not a quorum is present, may adjourn such meeting to another time and place. Any adjournment will not delay or otherwise affect the effectiveness and validity of any business transacted at the meeting prior to adjournment. At any adjourned meeting at which a quorum is present, any business may be transacted which might have been transacted at the meeting as originally called.
Section 7. NOTICE OF ADJOURNMENT. Notice of the time and place of an adjourned meeting need not be given if the time and place thereof are announced at the meeting at which the adjournment is taken. If the adjournment is for more than thirty (30) days after the date of the original meeting, notice of the adjourned meeting shall be given to each Trustee.
Section 8. COMPENSATION OF TRUSTEES. Trustees may receive from the Trust reasonable compensation for their services and reimbursement of reasonable expenses as may be determined by the Board. This Section 8 shall not be construed to preclude any Trustee from serving the Trust in any other capacity as an officer, agent, employee, or otherwise and receiving compensation and reimbursement of expenses for those services.
Section 9. CHAIRMAN OF THE BOARD. The Board of Trustees may elect a Chairman for the purpose of presiding at meetings of the Board of Trustees (the "Chairman"). The Chairman shall exercise and perform such other powers and duties as may be from time to time assigned to the Chairman by the Board of Trustees or prescribed by these By-Laws. The Chairman may delegate his or her powers and duties to the trustees or officers of the Trust that he or she deems appropriate, provided that such delegation is consistent with applicable legal and regulatory requirements.
ARTICLE IV
COMMITTEES
Section 1. COMMITTEES OF TRUSTEES. The Board may, by majority vote, designate one or more committees of the Board, each consisting of two (2) or more Trustees, to serve at the pleasure of the Board. The Board may, by majority vote, designate one or more Trustees as alternate members of any such committee who may replace any absent member at any meeting of the committee. Any such committee, to the extent provided by the Board, shall have such authority as delegated to it by the Board from time to time, except with respect to:
(a) the approval of any action which under the Declaration of Trust, these By-Laws or applicable law also requires Shareholder approval or requires approval by a majority of the entire Board or certain members of the Board;
(b) the filling of vacancies on the Board or on any committee thereof; provided however, that such committee may nominate Trustees to fill such vacancies, subject to the Trust's compliance with the 1940 Act and the rules thereunder;
(c) the amendment, restatement or repeal of the Declaration of Trust or these By-Laws or the adoption of a new Declaration of Trust or new By-Laws;
(d) the amendment or repeal of any resolution of the Board; or
(e) the designation of any other committee of the Board or the members of such committee.
Section 2. MEETINGS AND ACTION OF BOARD COMMITTEES. Meetingsand actions of any committee of the Board shall, to the extent applicable, be held and taken in the manner provided in Article IV of the Declaration of Trust and Article III of these By-Laws, with such changes in the context thereof as are necessary to substitute the committee and its members for the Board and its members, except that the time of regular meetings of any committee may be determined either by the Board or by the committee. Special meetings of any committee may also be called by resolution of the Board or such committee, and notice of special meetings of any committee shall also be given to all alternate members who shall have the right to attend all meetings of the committee. The Board may from time to time adopt other rules for the governance of any committee.
Section 3. ADVISORY COMMITTEES. The Board may appoint one or more advisory committees comprised of such number of individuals appointed by the Board who may meet at such time, place and upon such notice, if any, as determined by the Board. Such advisory committees shall have no power to require the Trust to take any specific action.
ARTICLE V
OFFICERS
Section 1. OFFICERS. The officers of the Trust shall be a Chief Executive Officer - Investment Management, a Chief Executive Officer - Finance and Administration, a President, a Secretary, a Chief Financial Officer and Chief Accounting Officer, and a Treasurer. The Trust may also have, at the discretion of the Board, one or more vice presidents, one or more assistant vice presidents, one or more assistant secretaries, one or more assistant treasurers, and such other officers, who shall have such authority and perform such duties as are provided in the Declaration of Trust, these By-Laws or as the Board, or to the extent permitted by the Board, as the president, may from time to time determine. Any number of offices may be held by the same person, except the offices of president and vice president.
Section 2. APPOINTMENT OF OFFICERS. The officers of the Trust shall be appointed by the Board, or to the extent permitted by the Board, by the president, and each shall serve at the pleasure of the Board, or to the extent permitted by the Board, at the pleasure of the president, subject to the rights, if any, of an officer under any contract of employment.
REMOVAL AND RESIGNATION OF OFFICERS. Subject to the rights, if any, of an officer under any contract of employment, any officer may be removed, either with or without cause, by the Board at any regular or special meeting of the Board, or, to the extent permitted by the Board, by the president.
Any officer may resign at any time by giving written notice to the Trust. Such resignation shall take effect upon receipt unless specified to be effective at some later time and unless otherwise specified in such notice, the acceptance of the resignation shall not be necessary to make it effective. Any resignation is without prejudice to the rights, if any, of the Trust under any contract to which the officer is a party.
Section 4. VACANCIES IN OFFICES. A vacancy in any office because of death, resignation, removal, incapacity or other cause shall be filled in the manner prescribed in these By-Laws for regular appointment to that office.
Section 5. PRESIDENT. Subject to such supervisory powers, if any, as may be given by the Board of Trustees to the chairman of the board, if there be such an officer, the president shall, subject to the control of the Board of Trustees, have general supervision, direction and control of the business and the officers of the Trust.
Section 6. VICE PRESIDENTS. In the absence, resignation, removal, incapacity or death of the president, the vice presidents, if any, in order of their rank as fixed by the Board or if not ranked, a vice president designated by the Board, shall exercise all the powers and perform all the duties of, and be subject to all the restrictions upon, the president until the president's return, his incapacity ceases or a new president is appointed. Each vice president shall have such other powers and perform such other duties as from time to time may be prescribed by the Board or the president, or as provided in the Declaration of Trust or these By-Laws.
Section 7. SECRETARY. The secretary shall keep or cause to be kept at the offices of the Trust or such other place as the Board may direct a book of minutes of all meetings and actions (including consents) of the Board, committees of the Board and Shareholders. The secretary shall keep a record of the time and place of such meetings, whether regular or special, and if special, how authorized, the notice given, the names of those present at Board meetings or committee meetings, the number of Shares present or represented by proxy at Shareholders' meetings, and the proceedings.
The secretary shall cause to be kept at the offices of the Trust or at the office of the Trust's transfer or other duly authorized agent, a share register or a duplicate share register showing the names of all Shareholders and their addresses, the number, Series and Classes (if applicable) of Shares held by each, the number and date of certificates, if any, issued for such Shares and the number and date of cancellation of every certificate surrendered for cancellation.
The secretary shall give or cause to be given notice of all meetings of the Shareholders and of the Board required by the Declaration of Trust, these By-Laws or by applicable law to be given and shall have such other powers and perform such other duties as may be prescribed by the Board or the president of the Trust, or as provided in the Declaration of Trust or these By-Laws.
Section 8. TREASURER. The Treasurer shall be responsible for the general supervision over the care and custody of the funds, securities, and other valuable effects of the Trust and shall deposit the same or cause the same to be deposited in the name of the Trust in such depositories as the Board of Trustees may designate; shall disburse the funds of the Trust as may be ordered by the Board of Trustees; shall have supervision over the accounts of all receipts and disbursements of the Trust; disburse the funds of the Trust; shall have the power and authority to perform the duties usually incident of his office and those duties as may be assigned to him from time to time by the Board or by the Chief Financial Officer and Chief Accounting Officer; and shall render to the Chief Financial Officer and Chief Accounting Officer and the Board, whenever they request it, an account of all of his transactions as Treasurer.
Section 9. CHIEF EXECUTIVE OFFICER - INVESTMENT MANAGEMENT. The Chief Executive Officer - Investment Management shall be the principal executive officer with respect to the portfolio investments of the Trust, and shall have such other powers and duties as may be prescribed by the Board of Trustees or these By-Laws.
Section 10. CHIEF EXECUTIVE OFFICER - FINANCE AND ADMINISTRATION. The Chief Executive Officer - Finance and Administration shall be the principal executive officer with respect to the financial accounting and administration of the Trust, and shall have such other powers and duties as may be prescribed by the Board of Trustees or these By-Laws.
Section 11. CHIEF FINANCIAL OFFICER AND CHIEF ACCOUNTING OFFICER. The Chief Financial Officer and Chief Accounting Officer shall, whenever required by the Board of Trustees, render or cause to be rendered financial statements of the Trust; supervise the investment of its funds as ordered or authorized by the Board, taking proper vouchers therefor; provide assistance to the Audit Committee of the Board and report to such Committee as necessary; be designated as principal accounting officer/principal financial officer for purposes of ss. 32 of the 1940 Act, ss. 302 of the Sarbanes Oxley Act of 2002 and ss. 6 of the Securities Act of 1933; shall keep and maintain or cause to be kept and maintained adequate and correct books and records of accounts of the properties and business transactions of the Trust (and every series and class thereof), including accounts of assets, liabilities, receipts, disbursements, gains, losses, capital retained earnings and shares; shall have the power and authority to perform the duties usually incident of his office and those duties as may be assigned to him from time to time by the Board; and shall render to the Chief Executive Officer -- Finance and Administration and the Board, whenever they request it, an account of all of his transactions as Chief Financial Officer and Chief Accounting Officer and of the financial condition of the Trust.
ARTICLE VI
RECORDS AND REPORTS
Section 1. MAINTENANCE AND INSPECTION OF SHARE REGISTER. The Trust shall keep at its offices or at the office of its transfer or other duly authorized agent, records of its Shareholders, that provide the names and addresses of all Shareholders and the number, Series and Classes, if any, of Shares held by each Shareholder. Such records may be inspected during the Trust's regular business hours by any Shareholder, or its duly authorized representative, upon reasonable written demand to the Trust, for any purpose reasonably related to such Shareholder's interest as a Shareholder.
Section 2. MAINTENANCE AND INSPECTION OF DECLARATION OF TRUST AND BY-LAWS. The Trust shall keep at its offices the original or a copy of the Declaration of Trust and these By-Laws, as amended or restated from time to time, where they may be inspected during the Trust's regular business hours by any Shareholder, or its duly authorized representative, upon reasonable written demand to the Trust, for any purpose reasonably related to such Shareholder's interest as a Shareholder.
Section 3. MAINTENANCE AND INSPECTION OF OTHER RECORDS. The accounting books and records and minutes of proceedings of the Shareholders, the Board, any committee of the Board or any advisory committee shall be kept at such place or places designated by the Board or, in the absence of such designation, at the offices of the Trust. The minutes shall be kept in written form and the accounting books and records shall be kept either in written form or in any other form capable of being converted into written form.
If information is requested by a Shareholder, the Board, or, in case the Board does not act, the president, any vice president or the secretary, shall establish reasonable standards governing, without limitation, the information and documents to be furnished and the time and the location, if appropriate, of furnishing such information and documents. Costs of providing such information and documents shall be borne by the requesting Shareholder. The Trust shall be entitled to reimbursement for its direct, out-of-pocket expenses incurred in declining unreasonable requests (in whole or in part) for information or documents.
The Board, or, in case the Board does not act, the president, any vice president or the secretary, may keep confidential from Shareholders for such period of time as the Board or such officer, as applicable, deems reasonable any information that the Board or such officer, as applicable, reasonably believes to be in the nature of trade secrets or other information that the Board or such officer, as the case may be, in good faith believes would not be in the best interests of the Trust to disclose or that could damage the Trust or its business or that the Trust is required by law or by agreement with a third party to keep confidential.
Section 4. INSPECTION BY TRUSTEES. Every Trustee shall have the absolute right during the Trust's regular business hours to inspect all books, records, and documents of every kind and the physical properties of the Trust. This inspection by a Trustee may be made in person or by an agent or attorney and the right of inspection includes the right to copy and make extracts of documents.
ARTICLEL VII
GENERAL MATTERS
Section 1. CHECKS, DRAFTS, EVIDENCE OF INDEBTEDNESS. All checks, drafts, or other orders for payment of money, notes or other evidences of indebtedness issued in the name of or payable to the Trust shall be signed or endorsed by such person or persons and in such manner as the Board from time to time shall determine.
Section 2. CONTRACTS AND INSTRUMENTS; HOW EXECUTED. The Board, except as otherwise provided in the Declaration of Trust and these By-Laws, may authorize any officer or officers or agent or agents, to enter into any contract or execute any instrument in the name of and on behalf of the Trust or any Series thereof and this authority may be general or confined to specific instances.
Section 3. CERTIFICATES FOR SHARES. A certificate or certificates for Shares may be issued to Shareholders at the discretion of the Board. All certificates shall be signed in the name of the Trust by the Trust's president or vice president, and by the Trust's treasurer or an assistant treasurer or the secretary or any assistant secretary, certifying the number of Shares and the Series and Class thereof, if any, owned by the Shareholder. Any or all of the signatures on the certificate may be facsimile. In case any officer or transfer or other duly authorized agent who has signed or whose facsimile signature has been placed on a certificate shall have ceased to be such officer or transfer or other duly authorized agent before such certificate is issued, it may be issued by the Trust with the same effect as if such person were an officer or transfer or other duly authorized agent at the date of issue. Notwithstanding the foregoing, the Trust may adopt and use a system of issuance, recordation and transfer of its shares by electronic or other means.
Section 4. LOST CERTIFICATES. Except as provided in this Section 4, no new certificates for Shares shall be issued to replace an old certificate unless the latter is surrendered to the Trust and cancelled at the same time. The Board may, in case any Share certificate or certificate for any other security is lost, stolen, or destroyed, authorize the issuance of a replacement certificate on such terms and conditions as the Board may require, including a provision for indemnification of the Board and the Trust secured by a bond or other adequate security sufficient to protect the Trust and the Board against any claim that may be made against either, including any expense or liability on account of the alleged loss, theft, or destruction of the certificate or the issuance of the replacement certificate.
Section 5. REPRESENTATION OF SHARES OF OTHER ENTITIES HELD BY TRUST. The Trust's president or any vice president or any other person authorized by the Board or by any of the foregoing designated officers, is authorized to vote or represent on behalf of the Trust, or any Series thereof, any and all shares of any corporation, partnership, trust, or other entity, foreign or domestic, standing in the name of the Trust or such Series thereof. The authority granted may be exercised in person or by a proxy duly executed by such authorized person.
Section 6. TRANSFERS OF SHARES. Shares are transferable, if authorized by the Declaration of Trust, only on the record books of the Trust by the Person in whose name such Shares are registered, or by his or her duly authorized attorney-in-fact or representative. Shares represented by certificates shall be transferred on the books of the Trust upon surrender for cancellation of certificates for the same number of Shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Trust or its agents may reasonably require. Upon receipt of proper transfer instructions from the registered owner of uncertificated Shares, such uncertificated Shares shall be transferred on the record books to the Person entitled thereto, or certificated Shares shall be made to the Person entitled thereto and the transaction shall be recorded upon the books of the Trust. The Trust, its transfer agent or other duly authorized agents may refuse any requested transfer of Shares, or request additional evidence of authority to safeguard the assets or interests of the Trust or of its Shareholders, in their sole discretion. In all cases of transfer by an attorney-in-fact, the original power of attorney, or an official copy thereof duly certified, shall be deposited and remain with the Trust, its transfer agent or other duly authorized agent. In case of transfers by executors, administrators, guardians or other legal representatives, duly authenticated evidence of their authority shall be presented to the Trust, its transfer agent or other duly authorized agent, and may be required to be deposited and remain with the Trust, its transfer agent or other duly authorized agent.
Section 7. HOLDERS OF RECORD. The record books of the Trust askept by the Trust, its transfer agent or other duly authorized agent, as the case may be, shall be conclusive as to the identity of the Shareholders of the Trust and as to the number, Series and Classes, if any, of Shares held from time to time by each such Shareholder. The Trust shall be entitled to treat the holder of record of any Share as the owner thereof and, accordingly, shall not be bound to recognize any equitable or other claim to or interest in such Share on the part of any other Person, whether or not the Trust shall have express or other notice thereof.
Section 8. FISCAL YEAR The fiscal year of the Trust, and each Series thereof, shall be determined by the Board.
Section 9. HEADINGS; REFERENCES. Headings are placed herein for convenience of reference only and shall not be taken as a part hereof or control or affect the meaning, construction or effect of this instrument. Whenever the singular number is used herein, the same shall include the plural; and the neuter, masculine and feminine genders shall include each other, as applicable. Any references herein to specific sections of the DSTA, the Code or the 1940 Act shall refer to such sections as amended from time to time or any successor sections thereof.
Section 10. PROVISIONS IN CONFLICT WITH LAW OR REGULATIONS.
(a) The provisions of these By-Laws are severable, and if the Board of Trustees shall determine, with the advice of counsel, that any of such provisions is in conflict with the Declaration of Trust, the 1940 Act, the Code, the DSTA, or with other applicable laws and regulations, the conflicting provision shall be deemed not to have constituted a part of these By-Laws from the time when such provisions became inconsistent with such laws or regulations; PROVIDED, HOWEVER, that such determination shall not affect any of the remaining provisions of these By-Laws or render invalid or improper any action taken or omitted prior to such determination.
(b) If any provision of these By-Laws shall be held invalid or unenforceable in any jurisdiction, such invalidity or unenforceability shall attach only to such provision in such jurisdiction and shall not in any manner affect such provision in any other jurisdiction or any other provision of these By-Laws in any jurisdiction.
ARTICLE VIII
AMENDMENTS
Section 1. AMENDMENT BY SHAREHOLDERS. These By-Laws may be amended, restated or repealed or new By-Laws may be adopted by the affirmative vote of a majority of votes cast at a Shareholders' meeting called for that purpose and where a quorum of Shareholders of the Trust is present.
Section 2. AMENDMENT BY TRUSTEES. These By-Laws may
also be amended, restated or repealed or new By-Laws may be adopted
by the Board, by a vote of the Board as set forth in Article IV,
Section 3(c) of the Declaration of Trust.
Section 3. OTHER AMENDMENT. Subject to the 1940 Act, these By-Laws may also be amended pursuant to Article VIII, Section 2(a) of the Declaration of Trust and Section 3815(f) of the DSTA.
Adopted: as of October 18, 2006
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
INVESTMENT MANAGMENT AGREEMENT
THIS INVESTMENT MANAGEMENT AGREEMENT made between FRANKLIN CALIFONIA TAX-FREE INCOME FUND, a Delaware statutory trust, hereinafter called the "Trust" and FRANKLIN ADVISERS, INC., a California corporation (the "Adviser").
WHEREAS, the Trust has been organized and intends to operate as an investment company registered under the Investment Company Act of 1940, as amended (the "1940 Act"), for the purpose of investing and reinvesting its assets in securities, as set forth in its Agreement and Declaration of Trust, its By-Laws and its Registration Statement under the 1940 Act and the Securities Act of 1933, as amended, all as heretofore and hereafter amended and supplemented; and the Trust desires to avail itself of the services, information, advice, assistance and facilities of an investment manager and to have an investment manager perform various management, statistical, research, investment advisory and other services; and,
WHEREAS, the Adviser is registered as an investment adviser under the Investment Advisers Act of 1940, as amended, is engaged in the business of rendering management, investment advisory, counseling and supervisory services to investment companies and other investment counseling clients, and desires to provide these services to the Trust.
NOW THEREFORE, in consideration of the terms and conditions hereinafter set forth, it is mutually agreed as follows:
1. Employment of the Adviser. The Trust hereby employs the Adviser to manage the investment and reinvestment of the Trust's assets and to administer its affairs, subject to the direction of the Board of Trustees and the officers of the Trust, for the period and on the terms hereinafter set forth. The Adviser hereby accepts such employment and agrees during such period to render the services and to assume the obligations herein set forth for the compensation herein provided. The Adviser shall for all purposes herein be deemed to be an independent contractor and shall, except as expressly provided or authorized (whether herein or otherwise), have no authority to act for or represent the Trust in any way or otherwise be deemed an agent of the Trust.
2. Obligations of and Services to be Provided by the Adviser. The Adviser undertakes to provide the services hereinafter set forth and to assume the following obligations:
A. Investment Management Services.
(a) The Adviser shall manage the Trust's assets subject to and in accordance with the investment objectives and policies of the Trust and any directions which the Trust's Board of Trustees may issue from time to time. In pursuance of the foregoing, the Adviser shall make all determinations with respect to the investment of the Trust's assets and the purchase and sale of its investment securities, and shall take such steps as may be necessary to implement the same. Such determinations and services shall include determining the manner in which any voting rights, rights to consent to corporate action and any other rights pertaining to the Trust's investment securities shall be exercised. The Adviser shall render or cause to be rendered regular reports to the Trust, at regular meetings of its Board of Trustees and at such other times as may be reasonably requested by the Trust's Board of Trustees, of (i) the decisions made with respect to the investment of the Trust's assets and the purchase and sale of its investment securities, (ii) the reasons for such decisions and (iii) the extent to which those decisions have been implemented.
(b) The Adviser, subject to and in accordance with any directions which the Trust's Board of Trustees may issue from time to time, shall place, in the name of the Trust, orders for the execution of the Trust's securities transactions. When placing such orders, the Adviser shall seek to obtain the best net price and execution for the Trust, but this requirement shall not be deemed to obligate the Adviser to place any order solely on the basis of obtaining the lowest commission rate if the other standards set forth in this section have been satisfied. The parties recognize that there are likely to be many cases in which different brokers are equally able to provide such best price and execution and that, in selecting among such brokers with respect to particular trades, it is desirable to choose those brokers who furnish research, statistical, quotations and other information to the Trust and the Adviser in accordance with the standards set forth below. Moreover, to the extent that it continues to be lawful to do so and so long as the Board of Trustees determines that the Trust will benefit, directly or indirectly, by doing so, the Adviser may place orders with a broker who charges a commission for that transaction which is in excess of the amount of commission that another broker would have charged for effecting that transaction, provided that the excess commission is reasonable in relation to the value of "brokerage and research services" (as defined in Section 28(e)(3) of the Securities Exchange Act of 1934, as amended) provided by that broker.
Accordingly, the Trust and the Adviser agree that the Adviser shall select brokers for the execution of the Trust's transactions from among:
(i) Those brokers and dealers who provide quotations and other services to the Trust, specifically including the quotations necessary to determine the Trust's net assets, in such amount of total brokerage as may reasonably be required in light of such services; and
(ii) Those brokers and dealers who supply research, statistical and other data to the Adviser or its affiliates which the Adviser or its affiliates may lawfully and appropriately use in their investment management capacities, which relate directly to securities, actual or potential, of the Trust, or which place the Adviser in a better position to make decisions in connection with the management of the Trust's assets and securities, whether or not such data may also be useful to the Adviser and its affiliates in managing other portfolios or advising other clients, in such amount of total brokerage as may reasonably be required.
(c) When the Adviser has determined that the Trust should tender securities pursuant to a "tender offer solicitation," Franklin/Templeton Distributors, Inc. ("Distributors") shall be designated as the "tendering dealer" so long as it is legally permitted to act in such capacity under the federal securities laws and rules thereunder and the rules of any securities exchange or association of which Distributors may be a member. Neither the Adviser nor Distributors shall be obligated to make any additional commitments of capital, expense or personnel beyond that already committed (other than normal periodic fees or payments necessary to maintain its corporate existence and membership in the National Association of Securities Dealers, Inc.) as of the date of this Agreement. This Agreement shall not obligate the Adviser or Distributors (i) to act pursuant to the foregoing requirement under any circumstances in which they might reasonably believe that liability might be imposed upon them as a result of so acting, or (ii) to institute legal or other proceedings to collect fees which may be considered to be due from others to it as a result of such a tender, unless the Trust shall enter into an agreement with the Adviser and/or Distributors to reimburse them for all such expenses connected with attempting to collect such fees, including legal fees and expenses and that portion of the compensation due to their employees which is attributable to the time involved in attempting to collect such fees.
(d) The Adviser shall render regular reports to the Trust, not more frequently than quarterly, of how much total brokerage business has been placed by the Adviser, on behalf of the Trust, with brokers falling into each of the categories referred to above and the manner in which the allocation has been accomplished.
(e) The Adviser agrees that no investment decision will be made or influenced by a desire to provide brokerage for allocation in accordance with the foregoing, and that the right to make such allocation of brokerage shall not interfere with the Adviser's paramount duty to obtain the best net price and execution for the Trust.
(f) Decisions on proxy voting shall be made by the Adviser unless the Board of Trustees determines otherwise. Pursuant to its authority, the Adviser shall have the power to vote, either in person or by proxy, all securities in which the Trust may be invested from time to time, and shall not be required to seek or take instructions from the Trust with respect thereto. The Adviser shall not be expected or required to take any action other than the rendering of investment-related advice with respect to lawsuits involving securities presently or formerly held in the Trust, or the issuers thereof, including actions involving bankruptcy. Should the Adviser undertake litigation against an issuer on behalf of the Trust, the Trust agrees to pay its portion of any applicable legal fees associated with the action or to forfeit any claim to any assets the Adviser may recover and, in such case, agrees to hold the Adviser harmless for excluding the Trust from such action. In the case of class action suits involving issuers held in the Trust, the Adviser may include information about the Trust for purposes of participating in any settlements.
B. Provision of Information Necessary for Preparation of Securities Registration Statements, Amendments and Other Materials. The Adviser, its officers and employees will make available and provide accounting and statistical information required by the Trust in the preparation of registration statements, reports and other documents required by federal and state securities laws and with such information as the Trust may reasonably request for use in the preparation of such documents or of other materials necessary or helpful for the underwriting and distribution of the Trust's shares.
C. Other Obligations and Services. The Adviser shall make its officers and employees available to the Board of Trustees and officers of the Trust for consultation and discussions regarding the administration and management of the Trust and its investment activities.
D. Delegation of Services. The Adviser may, at its expense, select and contract with one or more investment advisers registered under the Investment Advisers Act of 1940 ("Sub-Advisers") to perform some or all of the services for the Trust for which it is responsible under this Agreement. The Adviser will compensate any Sub-Adviser for its services to the Trust. The Adviser may terminate the services of any Sub-Adviser at any time in its sole discretion, and shall at such time assume the responsibilities of such Sub-Adviser unless and until a successor Sub-Adviser is selected and the requisite approval of the Trust's shareholders is obtained. The Adviser will continue to have responsibility for all advisory services furnished by any Sub-Adviser.
3. Expenses of the Trust. It is understood that the Trust will pay all of its own expenses other than those expressly assumed by the Adviser herein, which expenses payable by the Trust shall include:
A. Fees and expenses paid to the Adviser as provided herein;
B. Expenses of all audits by independent public accountants;
C. Expenses of transfer agent, registrar, custodian, dividend disbursing agent and shareholder record-keeping services, including the expenses of issue, repurchase or redemption of its shares;
D. Expenses of obtaining quotations for calculating the value of the Trust's net assets;
E. Salaries and other compensations of executive officers of the Trust who are not officers, directors, stockholders or employees of the Adviser or its affiliates;
F. Taxes levied against the Trust;
G. Brokerage fees and commissions in connection with the purchase and sale of securities for the Trust;
H. Costs, including the interest expense, of borrowing money;
I. Costs incident to meetings of the Board of Trustees and shareholders of the Trust, reports to the Trust's shareholders, the filing of reports with regulatory bodies and the maintenance of the Trust's and the Trust's legal existence;
J. Legal fees, including the legal fees related to the registration and continued qualification of the Trust's shares for sale;
K. Trustees' fees and expenses to trustees who are not directors, officers, employees or stockholders of the Adviser or any of its affiliates;
L. Costs and expense of registering and maintaining the registration of the Trust and its shares under federal and any applicable state laws; including the printing and mailing of prospectuses to its shareholders;
M. Trade association dues;
N. The Trust's pro rata portion of fidelity bond, errors and omissions, and trustees and officer liability insurance premiums; and
O. The Trust's portion of the cost of any proxy voting service used on its behalf.
4. Compensation of the Adviser. The Trust shall pay a management fee in cash to the Adviser based upon a percentage of the value of the Trust's net assets, calculated as set forth below, as compensation for the services rendered and obligations assumed by the Adviser, during the preceding month, on the first business day of the month in each year.
A. For purposes of calculating such fee, the value of the net assets of the Trust shall be determined in the same manner as that Trust uses to compute the value of its net assets in connection with the determination of the net asset value of its shares, all as set forth more fully in the Trust's current prospectus and statement of additional information. The rate of the monthly management fee shall be as follows:
5/96 of 1% (0.625% annually) of the value of net assets up to and including $100 million; and 1/24 of 1% (0.500% annually) of the value of net assets over $100 million and not over $250 million; and 9/240 of 1% (0.450% annually) of the value of net assets over $250 million; and not over $10 billion; and 11/300 of 1% (0.440% annually) of the value of net assets over $10 billion and not over $12.5 billion; and 7/200 of 1% (0.420% annually) of the value of net assets over $12.5 billion and not over $15 billion; and 1/30 of 1% (0.400% annually) of the value of net assets over $15 billion and not over $17.5 billion 19/600 of 1% (0.380% annually) of the value of net assets over from $17.5 billion and not over $20 billion; and 3/100 of 1% (0.360% annually) of the value of net assets in excess of $20 billion.
B. The management fee payable by the Trust shall be reduced or eliminated to the extent that Distributors has actually received cash payments of tender offer solicitation fees less certain costs and expenses incurred in connection therewith and to the extent necessary to comply with the limitations on expenses which may be borne by the Trust as set forth in the laws, regulations and administrative interpretations of those states in which the Trust's shares are registered. The Adviser may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in purchase price of its services. The Adviser shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of the Trust's expenses, as if such waiver or limitation were fully set forth herein.
C. If this Agreement is terminated prior to the end of any month, the accrued management fee shall be paid to the date of termination.
5. Activities of the Adviser. The services of the Adviser to the Trust hereunder are not to be deemed exclusive, and the Adviser and any of its affiliates shall be free to render similar services to others. Subject to and in accordance with the Agreement and Declaration of Trust and By-Laws of the Trust and Section 10(a) of the 1940 Act, it is understood that trustees, officers, agents and shareholders of the Trust are or may be interested in the Adviser or its affiliates as directors, officers, agents or stockholders; that directors, officers, agents or stockholders of the Adviser or its affiliates are or may be interested in the Trust as trustees, officers, agents, shareholders or otherwise; that the Adviser or its affiliates may be interested in the Trust as shareholders or otherwise; and that the effect of any such interests shall be governed by said Agreement and Declaration of Trust, By-Laws and the 1940 Act.
6. Liabilities of the Adviser.
A. In the absence of willful misfeasance, bad faith, gross negligence, or reckless disregard of obligations or duties hereunder on the part of the Adviser, the Adviser shall not be subject to liability to the Trust or to any shareholder of the Trust for any act or omission in the course of, or connected with, rendering services hereunder or for any losses that may be sustained in the purchase, holding or sale of any security by the Trust.
B. Notwithstanding the foregoing, the Adviser agrees to reimburse the Trust for any and all costs, expenses, and counsel and trustees' fees reasonably incurred by the Trust in the preparation, printing and distribution of proxy statements, amendments to its Registration Statement, holdings of meetings of its shareholders or trustees, the conduct of factual investigations, any legal or administrative proceedings (including any applications for exemptions or determinations by the Securities and Exchange Commission) which the Trust incurs as the result of action or inaction of the Adviser or any of its affiliates or any of their officers, directors, employees or stockholders where the action or inaction necessitating such expenditures (i) is directly or indirectly related to any transactions or proposed transaction in the stock or control of the Adviser or its affiliates (or litigation related to any pending or proposed or future transaction in such shares or control) which shall have been undertaken without the prior, express approval of the Trust's Board of Trustees; or, (ii) is within the control of the Adviser or any of its affiliates or any of their officers, directors, employees or stockholders. The Adviser shall not be obligated pursuant to the provisions of this Subparagraph 6.B., to reimburse the Trust for any expenditures related to the institution of an administrative proceeding or civil litigation by the Trust or a shareholder seeking to recover all or a portion of the proceeds derived by any stockholder of the Adviser or any of its affiliates from the sale of his shares of the Adviser, or similar matters. So long as this Agreement is in effect, the Adviser shall pay to the Trust the amount due for expenses subject to this Subparagraph 6.B. within thirty (30) days after a bill or statement has been received by the Adviser therefore. This provision shall not be deemed to be a waiver of any claim the Trust may have or may assert against the Adviser or others for costs, expenses or damages heretofore incurred by the Trust or for costs, expenses or damages the Trust may hereafter incur which are not reimbursable to it hereunder.
C. No provision of this Agreement shall be construed to protect any trustee or officer of the Trust, or director or officer of the Adviser, from liability in violation of Sections 17(h) and (i) of the 1940 Act.
7. Renewal and Termination.
A. This Agreement shall become effective on the date written below and shall continue in effect for two (2) years thereafter, unless sooner terminated as hereinafter provided and shall continue in effect thereafter for periods not exceeding one (1) year so long as such continuation is approved at least annually (i) by a vote of a majority of the outstanding voting securities of the Trust or by a vote of the Board of Trustees of the Trust, and (ii) by a vote of a majority of the Trustees of the Trust who are not parties to the Agreement (other than as Trustees of the Trust) or "interested persons" of any such party, cast in person at a meeting called for the purpose of voting on the Agreement.
B. This Agreement:
(i) may at any time be terminated without the payment of any penalty either by vote of the Board of Trustees of the Trust or by vote of a majority of the outstanding voting securities of the Trust on sixty (60) days' written notice to the Adviser;
(ii) shall immediately terminate with respect to the Trust in the event of its assignment; and
(iii) may be terminated by the Adviser on sixty (60) days' written notice to the Trust.
C. As used in this Paragraph the terms "assignment," "interested person" and "vote of a majority of the outstanding voting securities" shall have the meanings set forth for such terms in the 1940 Act.
D. Any notice under this Agreement shall be given in writing addressed and delivered, or mailed post-paid, to the other party at any office of such party.
8. Severability. If any provision of this Agreement shall be held or made invalid by a court decision, statute, rule or otherwise, the remainder of this Agreement shall not be affected thereby.
9. Governing Law. This Agreement shall be governed by and construed in accordance with the laws of the State of California.
IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed and effective on the xx day of
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
By: _______________________________
Karen L. Skidmore
Title: Vice President & Secretary
FRANKLIN ADVISERS, INC.
By: ________________________________
Edward B. Jamieson
Title: President & Chief Investment Officer
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
One Franklin Parkway
San Mateo, California 94404-1906
Franklin/Templeton Distributors, Inc.
One Franklin Parkway
San Mateo, California 94404-1906
Re: Distribution Agreement
Gentlemen:
We, FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, (the "Fund") are a Delaware statutory trust operating as an open-end management investment company or "mutual fund", which is registered under the Investment Company Act of 1940, as amended (the "1940 Act") and whose shares are registered under the Securities Act of 1933, as amended (the "1933 Act"). We desire to issue one or more series or classes of our authorized but unissued shares of capital stock or beneficial interest (the "Shares") to authorized persons in accordance with applicable Federal and State securities laws. The Fund's Shares may be made available in one or more separate series, each of which may have one or more classes.
You have informed us that your company is registered as a broker-dealer under the provisions of the Securities Exchange Act of 1934, as amended and that your company is a member of the National Association of Securities Dealers, Inc. You have indicated your desire to act as the exclusive selling agent and distributor for the Shares. We have been authorized to execute and deliver this Distribution Agreement ("Agreement") to you by a resolution of our Board of Trustees ("Board") passed at a meeting at which a majority of Board members, including a majority who are not otherwise interested persons of the Fund and who are not interested persons of our investment adviser, its related organizations or with you or your related organizations, were present and voted in favor of the said resolution approving this Agreement.
1. APPOINTMENT OF UNDERWRITER. Upon the execution of this Agreement and in consideration of the agreements on your part herein expressed and upon the terms and conditions set forth herein, we hereby appoint you as the exclusive sales agent for our Shares and agree that we will deliver such Shares as you may sell. You agree to use your best efforts to promote the sale of Shares, but are not obligated to sell any specific number of Shares.
However, the Fund and each series retain the right to make direct sales of its Shares without sales charges consistent with the terms of the then current prospectus and statement of additional information and applicable law, and to engage in other legally authorized transactions in its Shares which do not involve the sale of Shares to the general public. Such other transactions may include, without limitation, transactions between the Fund or any series or class and its shareholders only, transactions involving the reorganization of the Fund or any series, and transactions involving the merger or combination of the Fund or any series with another corporation or trust.
2. INDEPENDENT CONTRACTOR. You will undertake and discharge your obligations hereunder as an independent contractor and shall have no authority or power to obligate or bind us by your actions, conduct or contracts except that you are authorized to promote the sale of Shares. You may appoint sub-agents or distribute through dealers or otherwise as you may determine from time to time, but this Agreement shall not be construed as authorizing any dealer or other person to accept orders for sale or repurchase on our behalf or otherwise act as our agent for any purpose.
3. OFFERING PRICE. Shares shall be offered for sale at a price equivalent to the net asset value per share of that series and class plus any applicable percentage of the public offering price as sales commission or as otherwise set forth in our then current prospectus. On each business day on which the New York Stock Exchange is open for business, we will furnish you with the net asset value of the Shares of each available series and class which shall be determined in accordance with our then effective prospectus. All Shares will be sold in the manner set forth in our then effective prospectus and statement of additional information, and in compliance with applicable law.
4. COMPENSATION.
A. SALES COMMISSION. You shall be entitled to charge a sales commission on the sale or redemption, as appropriate, of each series and class of each Fund's Shares in the amount of any initial, deferred or contingent deferred sales charge as set forth in our then effective prospectus. You may allow any sub-agents or dealers such commissions or discounts from and not exceeding the total sales commission as you shall deem advisable, so long as any such commissions or discounts are set forth in our current prospectus to the extent required by the applicable Federal and State securities laws. You may also make payments to sub-agents or dealers from your own resources, subject to the following conditions: (a) any such payments shall not create any obligation for or recourse against the Fund or any series or class, and (b) the terms and conditions of any such payments are consistent with our prospectus and applicable federal and state securities laws and are disclosed in our prospectus or statement of additional information to the extent such laws may require.
B. DISTRIBUTION PLANS. You shall also be entitled to compensation for your services as provided in any Distribution Plan adopted as to any series and class of any Fund's Shares pursuant to Rule 12b-1 under the 1940 Act.
The compensation provided in the Class B Distribution Plan applicable to Class B Shares (the "Class B Plan") is divided into a distribution fee and a service fee, each of which fees is in compensation for different services to be rendered to the Fund. Subject to the termination provisions in the Class B Plan, the distribution fee with respect to the sale of a Class B Share shall be earned when such Class B Share is sold and shall be payable from time to time as provided in the Class B Plan. The distribution fee payable to you as provided in the Class B Plan shall be payable without offset, defense or counterclaim (it being understood by the parties hereto that nothing in this sentence shall be deemed a waiver by the Fund of any claim the Fund may have against you). You may direct the Fund to cause our custodian to pay such distribution fee to Lightning Finance Company Limited ("LFL") or other persons providing funds to you to cover expenses referred to in Section 2(a) of the Class B Plan and to cause our custodian to pay the service fee to you to cover expenses referred to in Section 2(b) of the Class B Plan.
We understand that you intend to assign your right to receive certain distribution fees with respect to Class B Shares to LFL in exchange for funds that you will use to cover expenses referred to in Section 2(a) of the Class B Plan. In recognition that we will benefit from your arrangement with LFL, we agree that, in addition to the provisions of Section 7(iii) of the Class B Plan, we will not pay to any person or entity, other than LFL, any such assigned distribution fees related to Class B Shares sold by you prior to the termination of either the Agreement or the Class B Plan. We agree that the preceding sentence shall survive termination of the Agreement.
The compensation provided in the Class C Distribution Plan applicable to Class C Shares (the "Class C Plan") is divided into a distribution fee and a service fee, each of which fees is in compensation for different services to be rendered to the Fund. Subject to the termination provisions in the Class C Plan, the distribution fee with respect to the sale of a Class C Share shall be earned when such Class C Share is sold and shall be payable from time to time as provided in the Class C Plan shall be payable without offset, defense or counterclaim (it being understood by the parties hereto that nothing in this sentence shall be deemed a waiver by the Fund of any claim the Fund may have against you). You may direct the Fund to cause our custodian to pay such distribution fee to Lightning Finance Company Limited ("LFL") or other persons providing funds to you to cover expenses referred to in Section 2(a) of the Class C Plan and to cause our custodian to pay the service fee to you to cover expenses referred to in Section 2(b) of the Class C Plan.
We understand that you intend to assign your right to receive certain distribution fees with respect to Class C Shares to LFL in exchange for funds that you will use to cover expenses referred to in Section 2(a) of the Class C Plan. In recognition that we will benefit from your arrangement with LFL, we agree that, in addition to the provisions of Section 7(iii) of the Class C Plan, we will not pay to any person or entity, other than LFL, any such assigned distribution fees related to Class C Shares sold by you prior to the termination of either the Agreement or the Class C Plan. We agree that the preceding sentence shall survive termination of the Agreement.
C. With respect to the sales commission on the redemption of Shares of each series and class of Fund as provided in Subsection 4.A. above, we will cause our shareholder services agent (the "Transfer Agent") to withhold from redemption proceeds payable to holders of the Shares all contingent deferred sales charges properly payable by such holders in accordance with the terms of our then current prospectuses and statements of additional information (each such sales charge, a "CDSC"). Upon receipt of an order for redemption, the Transfer Agent shall direct our custodian to transfer such redemption proceeds to a general trust account. We shall then cause the Transfer Agent to pay over to you or your assigns from the general trust account such CDSCs properly payable by such holders as promptly as possible after the settlement date for each such redemption of Shares. CDSCs shall be payable without offset, defense or counterclaim (it being understood that nothing in this sentence shall be deemed a waiver by us of any claim we may have against you.) You may direct that the CDSCs payable to you be paid to any other person.
5. TERMS AND CONDITIONS OF SALES. Shares shall be offered for sale only in those jurisdictions where they have been properly registered or are exempt from registration, and only to those groups of people which the Board may from time to time determine to be eligible to purchase such shares.
6. ORDERS AND PAYMENT FOR SHARES. Orders for Shares shall be directed to the Fund's shareholder services agent, for acceptance on behalf of the Fund. At or prior to the time of delivery of any of our Shares you will pay or cause to be paid to the custodian of the Fund's assets, for our account, an amount in cash equal to the net asset value of such Shares. Sales of Shares shall be deemed to be made when and where accepted by the Fund's shareholder services agent. The Fund's custodian and shareholder services agent shall be identified in its prospectus.
7. PURCHASES FOR YOUR OWN ACCOUNT. You shall not purchase our Shares for your own account for purposes of resale to the public, but you may purchase Shares for your own investment account upon your written assurance that the purchase is for investment purposes and that the Shares will not be resold except through redemption by us.
8. SALE OF SHARES TO AFFILIATES. You may sell our Shares at net asset value to certain of your and our affiliated persons pursuant to the applicable provisions of the federal securities statutes and rules or regulations thereunder (the "Rules and Regulations"), including Rule 22d-1 under the 1940 Act, as amended from time to time.
9. ALLOCATION OF EXPENSES. We will pay the expenses:
(a) Of the preparation of the audited and certified financial statements of our company to be included in any Post-Effective Amendments ("Amendments") to our Registration Statement under the 1933 Act or 1940 Act, including the prospectus and statement of additional information included therein;
(b) Of the preparation, including legal fees, and printing of all Amendments or supplements filed with the Securities and Exchange Commission, including the copies of the prospectuses included in the Amendments and the first 10 copies of the definitive prospectuses or supplements thereto, other than those necessitated by your (including your "Parent's") activities or Rules and Regulations related to your activities where such Amendments or supplements result in expenses which we would not otherwise have incurred;
(c) Of the preparation, printing and distribution of any reports or communications which we send to our existing shareholders; and
(d) Of filing and other fees to Federal and State securities regulatory authorities necessary to continue offering our Shares.
You will pay the expenses:
(a) Of printing the copies of the prospectuses and any supplements thereto and statements of additional information which are necessary to continue to offer our Shares;
(b) Of the preparation, excluding legal fees, and printing of all Amendments and supplements to our prospectuses and statements of additional information if the Amendment or supplement arises from your (including your "Parent's") activities or Rules and Regulations related to your activities and those expenses would not otherwise have been incurred by us;
(c) Of printing additional copies, for use by you as sales literature, of reports or other communications which we have prepared for distribution to our existing shareholders; and
(d) Incurred by you in advertising, promoting and selling our Shares.
10. FURNISHING OF INFORMATION. We will furnish to you such information with respect to each series and class of Shares, in such form and signed by such of our officers as you may reasonably request, and we warrant that the statements therein contained, when so signed, will be true and correct. We will also furnish you with such information and will take such action as you may reasonably request in order to qualify our Shares for sale to the public under the Blue Sky Laws of jurisdictions in which you may wish to offer them. We will furnish you with annual audited financial statements of our books and accounts certified by independent public accountants, with semi-annual financial statements prepared by us, with registration statements and, from time to time, with such additional information regarding our financial condition as you may reasonably request.
11. CONDUCT OF BUSINESS. Other than our currently effective prospectus, you will not issue any sales material or statements except literature or advertising which conforms to the requirements of Federal and State securities laws and regulations and which have been filed, where necessary, with the appropriate regulatory authorities. You will furnish us with copies of all such materials prior to their use and no such material shall be published if we shall reasonably and promptly object.
You shall comply with the applicable Federal and State laws and regulations where our Shares are offered for sale and conduct your affairs with us and with dealers, brokers or investors in accordance with the Conduct Rules of the National Association of Securities Dealers, Inc.
12. REDEMPTION OR REPURCHASE WITHIN SEVEN DAYS. If Shares are tendered to us for redemption or repurchase by us within seven business days after your acceptance of the original purchase order for such Shares, you will immediately refund to us the full sales commission (net of allowances to dealers or brokers) allowed to you on the original sale, and will promptly, upon receipt thereof, pay to us any refunds from dealers or brokers of the balance of sales commissions reallowed by you. We shall notify you of such tender for redemption within 10 days of the day on which notice of such tender for redemption is received by us.
13. OTHER ACTIVITIES. Your services pursuant to this Agreement shall not be deemed to be exclusive, and you may render similar services and act as an underwriter, distributor or dealer for other investment companies in the offering of their shares.
14. TERM OF AGREEMENT. This Agreement shall become effective on the date of its execution, and shall remain in effect for a period of two (2) years. The Agreement is renewable annually thereafter, with respect to the Fund or, if the Fund has more than one series, with respect to each series, for successive periods not to exceed one year (i) by a vote of (a) a majority of the outstanding voting securities of the Fund or, if the Fund has more than one series, of each series, or (b) by a vote of the Board, AND (ii) by a vote of a majority of the members of the Board who are not parties to the Agreement or interested persons of any parties to the Agreement (other than as members of the Board), cast in person at a meeting called for the purpose of voting on the Agreement.
This Agreement may at any time be terminated by the Fund or by any series without the payment of any penalty, (i) either by vote of the Board or by vote of a majority of the outstanding voting securities of the Fund or any series on 90 days' written notice to you; or (ii) by you on 90 days' written notice to the Fund; and shall immediately terminate with respect to the Fund and each series in the event of its assignment.
15. SUSPENSION OF SALES. We reserve the right at all times to suspend or limit the public offering of Shares upon two days' written notice to you.
16. MISCELLANEOUS. This Agreement shall be subject to the laws of the State of California and shall be interpreted and construed to further promote the operation of the Fund as an open-end investment company but shall not supersede or revise any Distribution Plan between the parties adopted pursuant to Rule 12b-1 under the 1940 Act. As used herein, the terms "net asset value," "offering price," "investment company," "open-end investment company," "assignment," "principal underwriter," "interested person," "Parent," "affiliated person," and "majority of the outstanding voting securities" shall have the meanings set forth in the 1933 Act or the 1940 Act and the Rules and Regulations thereunder and the term "assignment" shall have the meaning as set forth in the 1940 Act and the Rules and Regulations thereunder.
Nothing herein shall be deemed to protect you against any liability to us or to our securities holders to which you would otherwise be subject by reason of willful misfeasance, bad faith or gross negligence in the performance of your duties hereunder, or by reason of your reckless disregard of your obligations and duties hereunder.
If the foregoing meets with your approval, please acknowledge your acceptance by signing each of the enclosed copies, whereupon this will become a binding agreement as of the date set forth below.
Very truly yours,
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
By: ________________________
Karen L. Skidmore
Vice President & Secretary
Accepted:
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: _________________________
Peter D. Jones
President
AMENDMENT TO SELLING AGREEMENT REGARDING RULE 22C-2
You have entered into a Selling Agreement (the "Selling Agreement") with FRANKLIN TEMPLETON DISTRIBUTORS, INC. ("Distributors") to distribute shares of certain registered investment companies, and separate series of such companies, for which Distributors serves as the principal underwriter (together the "Funds" and each a "Fund"). Pursuant to Section 18 of the Selling Agreement, Distributors hereby provides notice to you of this Amendment to the Selling Agreement. Your placing of an order for Shares (as defined in Appendix A) of a Fund or acceptance of payment of any kind after your receipt of this notice shall constitute your acceptance of this Amendment, which shall go into effect as of the compliance date for Rule 22c-2 under the Investment Company Act of 1940 (the "1940 Act") established by the Securities and Exchange Commission.
To the extent you are a "financial intermediary" (as that term is defined in Appendix A) with respect to the Funds, you agree as follows:
1.1 AGREEMENT TO PROVIDE INFORMATION. You agree to provide Distributors, upon written request, the taxpayer identification number ("TIN") of any or all Shareholder(s) (as defined in Appendix A) of the account and the amount, date, name or other identifier of any investment professional(s) associated with the Shareholder(s) or account (if known), and transaction type (purchase, redemption, transfer, or exchange) of every purchase, redemption, transfer, or exchange of Fund Shares held through an account maintained by you during the period covered by the request.
1.1.1 PERIOD COVERED BY REQUEST. Requests must set forth a specific period, not to exceed ninety (90) days from the date of the request, for which transaction information is sought. Distributors may request transaction information older than ninety (90) days from the date of the request as it deems necessary to investigate compliance with policies established by it for the purpose of eliminating or reducing any dilution of the value of the outstanding Shares issued by the Funds.
1.1.2 FORM AND TIMING OF RESPONSE. You agree to transmit the requested information that is on your books and records to Distributors or its designee promptly, but in any event not later than five (5) business days, after receipt of a request. If the requested information is not on your books and records, you agree to: (i) provide or arrange to provide Distributors or its designee the requested information regarding Shareholders who hold an account with an indirect intermediary; or (ii) prohibit further purchases of Fund Shares by such indirect intermediary on behalf of itself or other persons. Responses required by this paragraph must be communicated in writing and in a format mutually agreed upon by the parties. To the extent practicable, the format for any transaction information provided to Distributors should be consistent with the NSCC Standardized Data Reporting Format.
1.1.3 LIMITATIONS ON USE OF INFORMATION. Distributors agrees not to use the information received for marketing or any other similar purpose without your prior written consent.
1.2 AGREEMENT TO RESTRICT TRADING. You agree to execute written instructions from Distributors or its designee to restrict or prohibit further purchases or exchanges of Shares by a Shareholder who has been identified by Distributors or its designee as having engaged in transactions in Shares (directly or indirectly through an account established by you) that violate policies established by the Funds for the purpose of eliminating or reducing any dilution of the value of the outstanding Shares issued by the Funds.
1.2.1 FORM OF INSTRUCTIONS. Instructions must include the TIN and the specific restriction(s) to be executed. If the TIN is not known, the instructions must include an equivalent identifying number of the Shareholder(s) or account(s) or other agreed upon information to which the instruction relates.
1.2.2 TIMING OF RESPONSE. You agree to execute instructions as soon as reasonably practicable, but not later than five (5) business days after your receipt of the instructions.
AMENDMENT TO SELLING AGREEMENT REGARDING RULE 22C-2
1.2.3 CONFIRMATION. You must provide written confirmation to Distributors or its designee that instructions have been executed. You agree to provide confirmation as soon as reasonably practicable, but not later than ten (10) business days after the instructions have been executed.
1.3 EXCEPTED FUNDS. This Agreement shall not apply to any "excepted fund" as defined in Appendix A.
FRANKLIN TEMPLETON DISTRIBUTORS, INC.
By:
Date:
AMENDMENT TO SELLING AGREEMENT REGARDING RULE 22C-2
APPENDIX A
"Financial Intermediary" means:
(i) any broker, dealer, bank, or other person that holds securities issued by a Fund, in nominee name;
(ii) a unit investment trust or fund that invests in a Fund in reliance on section 12(d)(1)(E) of the 1940 Act (15 U.S.C. 80a-12(d)(1)(E)); and
(iii) in the case of a participant-directed employee benefit plan that owns the securities issued by a Fund, a retirement plan's administrator under section 3(16)(A) of the Employee Retirement Income Security Act of 1974 (29 U.S.C. 1002 (16)(A)) or any person that maintains the plan's participant records.
Notwithstanding the above, "financial intermediary" does not include any person that the Fund treats as an individual investor with respect to the Fund's policies established for the purpose of eliminating or reducing any dilution of the value of the outstanding securities issued by the Fund.
"Excepted Fund" means:
(i) any Fund that is regulated as a money market fund under Rule 2a-7 under the 1940 Act;
(ii) any Fund that issues securities that are listed on a national securities exchange; and
(iii) any Fund that affirmatively permits short-term trading of its securities, if its prospectus clearly and prominently discloses that the Fund permits short-term trading of its securities and that such trading may result in additional costs for the Fund.
"Shareholder" means:
(i) a beneficial owner of securities held in nominee name;
(ii) a participant in a participant-directed employee benefit plan;
(iii) a holder of interests in a fund or unit investment trust that has invested in a Fund in reliance on section 12(d)(1)(E) of the 1940 Act; and
(iv) a holder of interests in a variable annuity or variable life insurance contract issued by a financial intermediary and for which one or more Funds serve as underlying investments.
"Shareholder" does not include a fund investing pursuant to section 12(d)(1)(G) of the 1940 Act, a trust established pursuant to section 529 of the Internal Revenue Code (26 U.S.C. 529), or a holder of an interest in such a trust.
"Shares" means the interests of Fund Shareholders corresponding to the redeemable securities of record issued by the Fund under the 1940 Act that are held by a financial intermediary.
MASTER CUSTODY AGREEMENT
EXHIBIT A
The following is a list of the Investment Companies and their respective
Series for which the Custodian shall serve under the Master Custody Agreement
dated as of February 16, 1996.
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INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
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Franklin California Tax-Free Income Maryland Corporation
Fund, Inc.
Franklin California Tax-Free Trust Massachusetts Business Franklin California Insured Tax-Free Income Fund
Trust Franklin California Intermediate-Term Tax-Free
Income Fund
Franklin California Limited-Term Tax-Free Income Fund
Franklin California Tax-Exempt Money Fund
Franklin Capital Growth Fund Delaware Statutory Trust
Franklin Custodian Funds, Inc. Maryland Corporation Franklin Dynatech Fund
Franklin Growth Fund
Franklin Income Fund
Franklin U.S. Government Securities Fund
Franklin Utilities Fund
Franklin Federal Tax- Free Income Fund California Corporation
Franklin Floating Rate Master Trust Delaware Statutory Trust Franklin Floating Rate Master Series
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INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
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Franklin Global Trust Delaware Statutory Trust Fiduciary Large Capitalization Growth and Income Fund
Fiduciary Small Capitalization Growth and Income Fund
Franklin Global Real Estate Fund
Franklin International Smaller Companies Growth Fund
Franklin Templeton Core Fixed Income Fund
Franklin Templeton Core Plus Fixed Income Fund
Franklin Templeton Emerging Market Debt
Opportunities Fund
Franklin Templeton High Income Fund
Franklin Gold and Precious Metals Fund Delaware Statutory Trust
Franklin High Income Trust Delaware Statutory Trust Franklin High Income Fund
Franklin Investors Securities Trust Massachusetts Business Franklin Adjustable U.S. Government Securities Fund
Trust Franklin Balanced Fund
Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Floating Rate Daily Access Fund
Franklin Limited Maturity U.S. Govt Securities Fund
Franklin Low Duration Total Return Fund
Franklin Real Return Fund
Franklin Total Return Fund
Franklin Managed Trust Delaware Statutory Trust Franklin Rising Dividends Fund
Franklin Money Fund California Corporation
Franklin Municipal Securities Trust Delaware Statutory Trust Franklin California High Yield Municipal Fund
Franklin Tennessee Municipal Bond Fund
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INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
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Franklin Mutual Series Fund Inc. Maryland Corporation Mutual Beacon Fund
Mutual Discovery Fund
Mutual European Fund
Mutual Financial Services Fund
Mutual Qualified Fund
Mutual Shares Fund
Franklin New York Tax-Free Income Fund Delaware Statutory Trust
Franklin New York Tax-Free Trust Massachusetts Business Franklin New York Insured Tax-Free Income Fund
Trust Franklin New York Intermediate-Term Tax-Free Income
Fund
Franklin New York Limited-Term Tax-Free Income
Fund
Franklin New York Tax-Exempt Money Fund
Franklin Real Estate Securities Trust Delaware Statutory Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio Delaware Statutory Trust
Franklin Strategic Series Delaware Statutory Trust Franklin Aggressive Growth Fund
Franklin Biotechnology Discovery Fund
Franklin Flex Cap Growth Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Small-Mid Cap Growth Fund
Franklin Small Cap Growth Fund II
Franklin Strategic Income Fund
Franklin Technology Fund
Franklin U.S. Long-Short Fund
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INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
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Franklin Tax-Exempt Money Fund California Corporation
Franklin Tax-Free Trust Delaware Staturory Trust Franklin Alabama Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Double Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Federal Limited-Term Tax-Free Income Fund
Franklin Florida Insured Tax-Free Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin High Yield Tax-Free Income Fund
Franklin Insured Tax-Free Income Fund
Franklin Kentucky Tax-Free Income Fund
Franklin Louisiana Tax-Free Income Fund
Franklin Maryland Tax-Free Income Fund
Franklin Massachusetts Insured Tax-Free Income Fund
Franklin Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free Income Fund
Franklin Missouri Tax-Free Income Fund
Franklin New Jersey Tax-Free Income Fund
Franklin North Carolina Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income Fund
Franklin Oregon Tax-Free Income Fund
Franklin Pennsylvania Tax-Free Income Fund
Franklin Virginia Tax-Free Income Fund
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INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
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Franklin Templeton Fund Allocator Series Delaware Statutory Trust Franklin Templeton Conservative Target Fund
Franklin Templeton Corefolio Allocation Fund
Franklin Templeton Founding Funds Allocation Fund
Franklin Templeton Growth Target Fund
Franklin Templeton Moderate Target Fund
Franklin Templeton Perspectives Allocation Fund
Franklin Templeton 2015 Retirement Target Fund
Franklin Templeton 2025 Retirement Target Fund
Franklin Templeton 2035 Retirement Target Fund
Franklin Templeton 2045 Retirement Target Fund
Franklin Templeton Money Fund Trust Delaware Statutory Trust Franklin Templeton Money Fund
Franklin Templeton Variable Insurance Delaware Statutory Trust Franklin Flex Cap Growth Securities Fund
Products Trust Franklin Global Communications Securities Fund
Franklin Global Real Estate Securities Fund
Franklin Growth and Income Securities Fund
Franklin High Income Securities Fund
Franklin Income Securities Fund
Franklin Large Cap Growth Securities Fund
Franklin Large Cap Value Securities Fund
Franklin Money Market Fund
Franklin Rising Dividends Securities Fund
Franklin Small-Mid Cap Growth Securities Fund
Franklin Small Cap Value Securities Fund
Franklin Strategic Income Securities Fund
Franklin Templeton VIP Founding Funds
Allocation Fund
Franklin U.S. Government Fund
Franklin Zero Coupon Fund - 2010
Mutual Discovery Securities Fund
Mutual Shares Securities Fund
Templeton Global Income Securities Fund
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INVESTMENT COMPANY ORGANIZATION SERIES --- (IF APPLICABLE)
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Franklin Value Investors Trust Massachusetts Business Franklin All Cap Value Fund
Trust Franklin Balance Sheet Investment Fund
Franklin Large Cap Value Fund
Franklin MicroCap Value Fund
Franklin MidCap Value Fund
Franklin Small Cap Value Fund
Institutional Fiduciary Trust Massachusetts Business Franklin Cash Reserves Fund
Trust Money Market Portfolio
The Money Market Portfolios Delaware Statutory Trust The Money Market Portfolio
Templeton Global Investment Trust Delaware Statutory Trust Templeton Income Fund
CLOSED END FUNDS:
Franklin Mutual Recovery Fund Delaware Statutory Trust
Franklin Templeton Limited Duration Delaware Statutory Trust
Income Trust
Franklin Universal Trust Massachusetts Business
Trust
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BONY Master Custody Exhibit A Revised as of 7/2/07
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SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
This Subcontract for Fund Administrative Services ("Subcontract") is made as of July 2, 2007 between FRANKLIN ADVISERS, INC., a California corporation, hereinafter called the "Investment Manager," and FRANKLIN TEMPLETON SERVICES, LLC (the "Administrator").
In consideration of the mutual agreements herein made, the Administrator and the Investment Manager understand and agree as follows:
I. Prime Contract.
This Subcontract is made in order to assist the Investment Manager in fulfilling certain of the Investment Manager's obligations under each investment management and investment advisory agreement ("Agreement") between the Investment Manager and each Investment Company listed on Exhibit A, ("Investment Company") for itself or on behalf of each of its series listed on Exhibit A (each, a "Fund"). This Subcontract is subject to the terms of each Agreement, which is incorporated herein by reference.
II. Subcontractual Provisions.
(1) The Administrator agrees, during the life of this Agreement, to provide the following services to each Fund:
(a) providing office space, telephone, office equipment and supplies for the Fund;
(b) providing trading desk facilities for the Fund, unless these facilities are provided by the Fund's investment adviser;
(c) authorizing expenditures and approving bills for payment on behalf of the Fund;
(d) supervising preparation of periodic reports to shareholders, notices of dividends, capital gains distributions and tax credits; and attending to routine correspondence and other communications with individual shareholders when asked to do so by the Fund's shareholder servicing agent or other agents of the Fund;
(e) coordinating the daily pricing of the Fund's investment portfolio, including collecting quotations from pricing services engaged by the Fund; providing fund accounting services, including preparing and supervising publication of daily net asset value quotations, periodic earnings reports and other financial data; and coordinating trade settlements;
(f) monitoring relationships with organizations serving the Fund, including custodians, transfer agents, public accounting firms, law firms, printers and other third party service providers;
(g) supervising compliance by the Fund with recordkeeping requirements under the federal securities laws, including the 1940 Act and the rules and regulations thereunder, and under other applicable state and federal laws; and maintaining books and records for the Fund (other than those maintained by the custodian and transfer agent);
(h) preparing and filing of tax reports including the Fund's income tax returns, and monitoring the Fund's compliance with subchapter M of the Internal Revenue Code, as amended, and other applicable tax laws and regulations;
(i) monitoring the Fund's compliance with: 1940 Act and other federal securities laws, and rules and regulations thereunder; state and foreign laws and regulations applicable to the operation of investment companies; the Fund's investment objectives, policies and restrictions; and the Code of Ethics and other policies adopted by the Investment Company's Board of Trustees or Directors ("Board") or by the Fund's investment adviser and applicable to the Fund;
(j) providing executive, clerical and secretarial personnel needed to carry out the above responsibilities;
(k) preparing and filing regulatory reports, including without limitation Forms N-1A and NSAR, proxy statements, information statements and U.S. and foreign ownership reports; and
(l) providing support services incidental to carrying out these duties.
Nothing in this Agreement shall obligate the Investment Company or any Fund to pay any compensation to the officers of the Investment Company. Nothing in this Agreement shall obligate the Administrator to pay for the services of third parties, including attorneys, auditors, printers, pricing services or others, engaged directly by the Fund to perform services on behalf of the Fund.
(2) The Investment Manager agrees to pay to the Administrator as compensation for such services a monthly fee equal on an annual basis to 0.15% of the first $200 million of the average daily net assets of each Fund during the month preceding each payment, reduced as follows: on such net assets in excess of $200 million up to $700 million, a monthly fee equal on an annual basis to 0.135%; on such net assets in excess of $700 million up to $1.2 billion, a monthly fee equal on an annual basis to 0.1%; and on such net assets in excess of $1.2 billion, a monthly fee equal on an annual basis to 0.075%.
From time to time, the Administrator may waive all or a portion of its fees provided for hereunder and such waiver shall be treated as a reduction in the purchase price of its services. The Administrator shall be contractually bound hereunder by the terms of any publicly announced waiver of its fee, or any limitation of each affected Fund's expenses, as if such waiver or limitation were fully set forth herein.
(3) This Subcontract shall become effective on the date written above and
shall continue in effect as to each Investment Company and each Fund so long as
(1) the Agreement applicable to the Investment Company or Fund is in effect and
(2) this Subcontract is not terminated. This Subcontract will terminate as to
any Investment Company or Fund immediately upon the termination of the Agreement
applicable to the Investment Company or Fund, and may in addition be terminated
by either party at any time, without the payment of any penalty, on sixty (60)
days' written notice to the other party.
(4) In the absence of willful misfeasance, bad faith or gross negligence on the part of the Administrator, or of reckless disregard of its duties and obligations hereunder, the Administrator shall not be subject to liability for any act or omission in the course of, or connected with, rendering services hereunder.
IN WITNESS WHEREOF, the parties hereto have caused this Subcontract to be executed by their duly authorized officers.
FRANKLIN ADVISERS, INC.
By: _____________________________
Edward B. Jamieson
President & Chief Investment Officer
FRANKLIN TEMPLETON SERVICES, LLC
By: _____________________________
Jimmy D. Gambill
President
SUBCONTRACT FOR FUND ADMINISTRATIVE SERVICES
between
Franklin Advisers, Inc.
and
Franklin Templeton Services, LLC
EXHIBIT A
-------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES---(if applicable)
-------------------------------------------------------------------------------------------------
Franklin California Tax-Free Income Fund,
Inc.
Franklin California Tax-Free Trust Franklin California Insured Tax-Free
Income Fund
Franklin California Tax-Exempt Money
Fund
Franklin California Intermediate-Term
Tax-Free Income Fund
Franklin Capital Growth Fund
Franklin Custodian Funds, Inc. Franklin Dynatech Fund
Franklin Income Fund
Franklin Utilities Fund
Franklin U.S. Government Securities Fund
Franklin Federal Tax- Free Income Fund
Franklin Gold and Precious Metals Fund
Franklin High Income Trust Franklin High Income Fund
Franklin Investors Securities Trust Franklin Convertible Securities Fund
Franklin Equity Income Fund
Franklin Limited Maturity U.S. Gov. Securities Fund
-------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES---(if applicable)
-------------------------------------------------------------------------------------------------
Franklin Municipal Securities Trust Franklin California High Yield Municipal Fund
Franklin Tennessee Municipal Bond Fund
Franklin New York Tax-Free Trust Franklin New York Tax-Exempt Money Fund
Franklin New York Insured Tax-Free Income Fund
Franklin New York Intermediate-Term
Tax-Free Income Fund
Franklin New York Tax-Free Income Fund
Franklin Real Estate Securities Trust Franklin Real Estate Securities Fund
Franklin Strategic Mortgage Portfolio
Franklin Strategic Series Franklin Flex Cap Growth Fund
Franklin Global Communications Fund
Franklin Global Health Care Fund
Franklin Natural Resources Fund
Franklin Small-Mid Cap Growth Fund
Franklin Strategic Income Fund
Franklin Tax-Exempt Money Fund
-------------------------------------------------------------------------------------------------
INVESTMENT COMPANY SERIES---(if applicable)
-------------------------------------------------------------------------------------------------
Franklin Tax-Free Trust Franklin Alabama Tax-Free Income Fund
Franklin Arizona Tax-Free Income Fund
Franklin Colorado Tax-Free Income Fund
Franklin Connecticut Tax-Free Income Fund
Franklin Double Tax-Free Income Fund
Franklin Federal Intermediate-Term Tax-Free
Income Fund
Franklin Florida Tax-Free Income Fund
Franklin Georgia Tax-Free Income Fund
Franklin High Yield Tax-Free Income
Fund Franklin Insured Tax-Free Income
Fund Franklin Kentucky Tax-Free
Income Fund Franklin Louisiana
Tax-Free Income Fund Franklin
Maryland Tax-Free Income Fund
Franklin Massachusetts Insured
Tax-Free Income Fund Franklin
Michigan Insured Tax-Free Income Fund
Franklin Minnesota Insured Tax-Free
Income Fund Franklin Missouri
Tax-Free Income Fund Franklin New
Jersey Tax-Free Income Fund Franklin
North Carolina Tax-Free Income Fund
Franklin Ohio Insured Tax-Free Income
Fund Franklin Oregon Tax-Free Income
Fund Franklin Pennsylvania Tax-Free
Income Fund Franklin Virginia
Tax-Free Income Fund
Franklin Templeton Global Trust Franklin Templeton Hard Currency Fund
Franklin Templeton International Trust Templeton Foreign Smaller Companies Fund
CLOSED END FUNDS:
Franklin Universal Trust
-------------------------------------------------------------------------------------------------
|
Stradley Ronon Stevens & Young, LLP 2600 One Commerce Square Philadelphia, PA 19103 Telephone: (215) 564-8000 Facsimile: (215) 564-8120
July 27, 2007
Board of Trustees of
Franklin California Tax-Free Income Fund
One Franklin Parkway
San Mateo, California 94403-1906
Subject: Post-Effective Amendment No. 35 to the Registration
Statement on Form N-1A relating to Franklin California
Tax-Free Income Fund, a Delaware statutory trust (THE
"TRUST") - REGISTRATION NO. 002-60470; FILE NO. 811-02790
|
Ladies and Gentlemen:
We have acted as counsel to Franklin California Tax-Free Income Fund, a Delaware statutory trust (the "Trust"), in connection with the preparation and filing with the U.S. Securities and Exchange Commission of Post-Effective Amendment No. 35 (the "Amendment") to the Registration Statement on Form N-1A under the Securities Act of 1933, as amended (the "1933 Act"), and the Investment Company Act of 1940, as amended, of the Trust. Pursuant to Rule 414 under the 1933 Act, the Amendment is being filed, in part, in connection with the Trust's adopting as its own the Registration Statement on Form N-1A of Franklin California Tax-Free Income Fund, Inc., a Maryland corporation (the "Fund").
We have reviewed the Trust's Agreement and Declaration of Trust, By-laws and resolutions adopted by the Trust's Board of Trustees, the Agreement and Plan of Reorganization dated July 27, 2007, the form of which was approved by the Fund's shareholders at a meeting held on March 21, 2007 (the "Agreement"), and such other legal and factual matters as we have deemed appropriate.
This opinion is based exclusively on the Delaware Statutory Trust Act and does not extend to the securities or "blue sky" laws of the State of Delaware or other States.
We have assumed the following for purposes of this opinion:
1. The shares of the Trust will be issued in accordance with the Trust's Agreement and Declaration of Trust, By-laws, the Agreement and resolutions of the Trust's Board of Trustees relating to the creation, authorization and issuance of shares.
2. The Trust's shares will be issued against payment therefor as described in the Trust's then-current Prospectus, Statement of Additional Information relating thereto, or the Agreement, and that such payment will have been at least equal to the applicable offering price.
On the basis of the foregoing, it is our opinion that, when issued and paid for upon the terms provided in the Agreement or the Amendment, the shares of the Trust to be issued pursuant to the Amendment will be validly issued, fully paid and non-assessable.
We hereby consent to the filing of this opinion with the U.S. Securities and Exchange Commission as an exhibit to the Amendment.
Very truly yours,
Stradley Ronon Stevens & Young, LLP
By: /s/ KRISTIN H. IVES
Kristin H. Ives, a Partner
|
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We hereby consent to the incorporation by reference in this Registration Statement on Form N-1A of our report dated May 18, 2007, relating to the financial statements and financial highlights, which appears in the March 31, 2007 Annual Report to the Shareholders of Franklin California Tax-Free Income Fund, which are also incorporated by reference into the Registration Statement. We also consent to the references to us under the headings "Financial Highlights" and "Independent Registered Public Accounting Firm" in such Registration Statement.
/s/ PricewaterhouseCoopers LLP San Francisco, California July 26, 2007 |
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
Preamble to Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "Act") by Franklin California Tax-Free Income Fund (the "Trust") for the use of the Class A shares, which Plan shall take effect on the date the shares of the Fund are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Trust (the "Board"), including a majority of the trustees who are not interested persons of the Trust and who have no direct or indirect financial interest in the operation of the Plan (the "independent trustees"), cast in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Trust and Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement between the Trust and Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of Advisers, under the Investment Management Agreement, and of Distributors, under the Underwriting Agreement, was fair and not excessive; however, the Board also recognized that uncertainty may exist from time to time with respect to whether payments to be made by the Trust to Advisers, Distributors, or others or by Advisers or Distributors to others may be deemed to constitute distribution expenses of the Trust. Accordingly, the Board determined that the Plan should provide for such payments and that adoption of the Plan would be prudent and in the best interest of the Trust and its shareholders. Such approval included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Trust and its shareholders.
DISTRIBUTION PLAN
1. The Fund shall reimburse Distributors or others for all expenses incurred by Distributors or others in the promotion and distribution of the shares of the Trust, including but not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of Distributors' overhead expenses attributable to the distribution of Trust shares, as well as any distribution or service fees paid to securities dealers or their firms or others who have executed a servicing agreement with the Trust, Distributors or its affiliates, which form of agreement has been approved from time to time by the Board, including the independent trustees.
2. The maximum amount which may be reimbursed by the Trust to Distributors or others pursuant to Paragraph 1 herein shall be 0.10% per annum of the average daily net assets of the Trust. Said reimbursement shall be made quarterly by the Trust to Distributors or others.
3. In addition to the payments which the Trust is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Trust, Advisers, Distributors or other parties on behalf of the Trust, Advisers or Distributors make payments that are deemed to be payments by the Trust for the financing of any activity primarily intended to result in the sale of shares issued by the Trust within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to the Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies reimbursed to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued.
5. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by a vote of the Board, including the independent trustees, cast in person at a meeting called for the purpose of voting on the Plan.
6. The Plan, and any agreements entered into pursuant to this Plan, may be terminated at any time, without penalty, by vote of a majority of the outstanding voting securities of the Trust or by vote of a majority of the independent trustees, on not more than sixty (60) days' written notice, or by Distributors on not more than sixty (60) days' written notice, and shall terminate automatically in the event of any act that constitutes an assignment of the Investment Management Agreement between the Trust and Advisers.
7. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 2 hereof without approval by a majority of the Trust's outstanding voting securities.
8. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by a vote of the independent trustees cast in person at a meeting called for the purpose of voting on any such amendment.
9. So long as the Plan is in effect, the selection and nomination of the Trust's independent trustees shall be committed to the discretion of such independent trustees.
This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Trust and Distributors as evidenced by their execution hereof.
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
By: ____________________________
Karen L. Skidmore
Title: Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By ____________________________
Peter D. Jones
Title: President
CLASS B DISTRIBUTION PLAN
I. Investment Company: FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
II. Fund: FRANKLIN CALIFORNIA TAX-FREE INCOME FUND - CLASS B
III. Maximum Per Annum Rule 12b-1 Fees for Class B Shares (as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.50%
B. Service Fee: 0.15%
Preamble to Class B Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act") by the Investment Company named above ("Investment Company") for the Class B shares (the "Class") of the Fund named above ("Fund"), which Plan shall take effect as of the date Class B shares are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Investment Company (the "Board"), including a majority of the Board members who are not interested persons (as defined in the 1940 Act) of the Investment Company and who have no direct, or indirect financial interest in the operation of the Plan (the "independent Board members"), cast in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Investment Company and Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement between the Investment Company and Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of Advisers, under the Investment Management Agreement, and of Distributors, under the Underwriting Agreement, was fair and not excessive. The Board's approval included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with a third party in order to finance the distribution activities of the Class pursuant to which Distributors may assign its rights to the fees payable hereunder to such third party. The Board further recognizes that it has an obligation to act in good faith and in the best interests of the Fund and its shareholders when considering the continuation or termination of the Plan and any payments to be made thereunder.
Distribution Plan
1. (a) The Fund shall pay to Distributors a monthly fee not to exceed the above-stated maximum distribution fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Board from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay (i) to Distributors for payment to dealers or others, or (ii) directly to others, an amount not to exceed the above-stated maximum service fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Investment Company's Board from time to time, as a service fee pursuant to servicing agreements which have been approved from time to time by the Board, including the independent Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1(a) above shall be treated as compensation for Distributors' distribution-related services including compensation for amounts advanced to securities dealers or their firms or others selling shares of the Class who have executed an agreement with the Investment Company, Distributors or its affiliates, which form of agreement has been approved from time to time by the Board, including the independent Board members, with respect to the sale of Class shares. In addition, such monies may be used to compensate Distributors for other expenses incurred to assist in the distribution and promotion of shares of the Class. Payments made to Distributors under the Plan may be used for, among other things, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a pro-rated portion of Distributors' overhead expenses attributable to the distribution of Class shares, as well as for additional distribution fees paid to securities dealers or their firms or others who have executed agreements with the Investment Company, Distributors or its affiliates, or for certain promotional distribution charges paid to broker-dealer firms or others, or for participation in certain distribution channels. None of such payments are the legal obligation of Distributors or its designee.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to pay dealers or others for, among other things, furnishing personal services and maintaining shareholder accounts, which services include, among other things, assisting in establishing and maintaining customer accounts and records; assisting with purchase and redemption requests; arranging for bank wires; monitoring dividend payments from the Fund on behalf of customers; forwarding certain shareholder communications from the Fund to customers; receiving and answering correspondence; and aiding in maintaining the investment of their respective customers in the Class. Any amounts paid under this paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which form of agreement has been approved from time to time by the Board. None of such payments are the legal obligation of Distributors or its designee.
3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors or other parties on behalf of the Fund, Advisers or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Class shares issued by the Fund within the context of Rule 12b-1 under the Act, then such payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to Rules of the Conduct Rules of the National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies paid to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or more designees (each an "Assignee"), its rights to all or a designated portion of the fees to which it is entitled under paragraph 1 of this Plan from time to time (but not Distributors' duties and obligations pursuant hereto or pursuant to any distribution agreement in effect from time to time, if any, between Distributors and the Fund), free and clear of any offsets or claims the Fund may have against Distributors. Each such Assignee's ownership interest in a Transfer of a specific designated portion of the fees to which Distributors is entitled is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant to this Section 5(a) shall not reduce or extinguish any claims of the Fund against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion directly to each Assignee. In such event, Distributors shall provide the Fund with a monthly calculation of the amount to which each Assignee is entitled (the "Monthly Calculation"). In such event, the Fund shall, upon receipt of such notice and Monthly Calculation from Distributors, make all payments required directly to the Assignee in accordance with the information provided in such notice and Monthly Calculation upon the same terms and conditions as if such payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct the Fund to pay all or a portion of the fees to which Distributors is entitled from time to time to a depository or collection agent designated by any Assignee, which depository or collection agent may be delegated the duty of dividing such fees between the Assignee's 12b-1 Portion and the balance (such balance, when distributed to Distributors by the depository or collection agent, the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1 Portion may be subject to offsets or claims the Fund may have against Distributors.
6. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by the Board, including the independent Board members, cast in person at a meeting called for the purpose of voting on the Plan. In determining whether there is a reasonable likelihood that the continuation of the Plan will benefit the Fund and its shareholders, the Board may, but is not obligated to, consider that Distributors has incurred substantial cost and has entered into an arrangement with a third party in order to finance the distribution activities for the Class.
7. This Plan and any agreements entered into pursuant to this Plan may be
terminated with respect to the shares of the Class, without penalty, at any time
by vote of a majority of the independent Board members of the Investment
Company, or by vote of a majority of outstanding Shares of such Class. Upon
termination of this Plan with respect to the Class, the obligation of the Fund
to make payments pursuant to this Plan with respect to such Class shall
terminate, and the Fund shall not be required to make payments hereunder beyond
such termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the independent Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) and the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, either the payments described in paragraph 1(a) or 1(b) or in
respect of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 1 hereof without approval by a majority of the outstanding voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by the independent Board members cast in person at a meeting called for the purpose of voting on any such amendment.
10. So long as the Plan is in effect, the selection and nomination of the Fund's independent Board members shall be committed to the discretion of such independent Board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Investment Company and Distributors as evidenced by their execution hereof.
Date:
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
By: _________________________________
Karen L. Skidmore
Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By:__________________________
Peter D. Jones
President
CLASS C DISTRIBUTION PLAN
I. Investment Company: Franklin California Tax-Free Income
Fund
II. Fund: Franklin California Tax-Free Income Fund
- Class C
III. Maximum Per Annum Rule 12b-1 Fees for Class C Shares (as a percentage of average daily net assets of the class)
A. Distribution Fee: 0.50% B. Service Fee: 0.15%
Preamble to Class C Distribution Plan
The following Distribution Plan (the "Plan") has been adopted pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended (the "1940 Act") by the Investment Company named above ("Investment Company") for the Class C shares (the "Class") of the Fund named above ("Fund"), which Plan shall take effect as of the date Class C shares are first offered (the "Effective Date of the Plan"). The Plan has been approved by a majority of the Board of Trustees of the Investment Company (the "Board"), including a majority of the Board members who are not interested persons (as defined in the 1940 Act) of the Investment Company and who have no direct, or indirect financial interest in the operation of the Plan (the "independent Board members"), cast in person at a meeting called for the purpose of voting on such Plan.
In reviewing the Plan, the Board considered the schedule and nature of payments and terms of the Investment Management Agreement between the Investment Company and Franklin Advisers, Inc. ("Advisers") and the terms of the Underwriting Agreement between the Investment Company and Franklin/Templeton Distributors, Inc. ("Distributors"). The Board concluded that the compensation of Advisers, under the Investment Management Agreement, and of Distributors, under the Underwriting Agreement, was fair and not excessive. The Board's approval included a determination that in the exercise of their reasonable business judgment and in light of their fiduciary duties, there is a reasonable likelihood that the Plan will benefit the Fund and its shareholders.
The Board recognizes that Distributors has entered into an arrangement with a third party in order to pay for the distribution activities of the Class pursuant to which Distributors may sell, transfer, convey and assign its rights to the fees payable hereunder to such third party. The Board further recognizes that it has an obligation to act in good faith and in the best interests of the Fund and its shareholders when considering the continuation or termination of the Plan and any payments to be made thereunder.
Distribution Plan
1. (a) The Fund shall pay to Distributors a quarterly fee not to exceed the above-stated maximum distribution fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Board from time to time.
(b) In addition to the amounts described in (a) above, the Fund shall pay (i) to Distributors for payment to dealers or others, or (ii) directly to others, an amount not to exceed the above-stated maximum service fee per annum of the Class' average daily net assets represented by shares of the Class, as may be determined by the Investment Company's Board from time to time, as a service fee pursuant to servicing agreements which have been approved from time to time by the Board, including the independent Board members.
2. (a) The monies paid to Distributors pursuant to Paragraph 1(a) above shall be treated as compensation for Distributors' distribution-related services including compensation for amounts advanced to securities dealers or their firms or others selling shares of the Class who have executed an agreement with the Investment Company, Distributors or its affiliates, which form of agreement has been approved from time to time by the Board, including the independent Board members, with respect to the sale of Class shares. In addition, Distributors may use such monies paid to it pursuant to Paragraph 1(a) above to assist in the distribution and promotion of shares of the Class. Payments made to Distributors under the Plan may be used for, among other things, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a pro-rated portion of Distributors' overhead expenses attributable to the distribution of Class shares, as well as for additional distribution fees paid to securities dealers or their firms or others who have executed agreements with the Investment Company, Distributors or its affiliates, or for certain promotional distribution charges paid to broker-dealer firms or others, or for participation in certain distribution channels.
(b) The monies to be paid pursuant to paragraph 1(b) above shall be used to pay dealers or others for, among other things, furnishing personal services and maintaining shareholder accounts, which services include, among other things, assisting in establishing and maintaining customer accounts and records; assisting with purchase and redemption requests; arranging for bank wires; monitoring dividend payments from the Fund on behalf of customers; forwarding certain shareholder communications from the Fund to customers; receiving and answering correspondence; and aiding in maintaining the investment of their respective customers in the Class. Any amounts paid under this paragraph 2(b) shall be paid pursuant to a servicing or other agreement, which form of agreement has been approved from time to time by the Board.
3. In addition to the payments which the Fund is authorized to make pursuant to paragraphs 1 and 2 hereof, to the extent that the Fund, Advisers, Distributors or other parties on behalf of the Fund, Advisers or Distributors make payments that are deemed to be payments by the Fund for the financing of any activity primarily intended to result in the sale of Class shares issued by the Fund within the context of Rule 12b-1 under 1940 Act, then such payments shall be deemed to have been made pursuant to the Plan.
In no event shall the aggregate asset-based sales charges which include payments specified in paragraphs 1 and 2, plus any other payments deemed to be made pursuant to the Plan under this paragraph, exceed the amount permitted to be paid pursuant to Rules of the Conduct Rules of the National Association of Securities Dealers, Inc.
4. Distributors shall furnish to the Board, for its review, on a quarterly basis, a written report of the monies paid to it and to others under the Plan, and shall furnish the Board with such other information as the Board may reasonably request in connection with the payments made under the Plan in order to enable the Board to make an informed determination of whether the Plan should be continued.
5. (a) Distributors may assign, transfer or pledge ("Transfer") to one or more designees (each an "Assignee"), its rights to all or a designated portion of the fees to which it is entitled under paragraph 1 of this Plan from time to time (but not Distributors' duties and obligations pursuant hereto or pursuant to any distribution agreement in effect from time to time, if any, between Distributors and the Fund), free and clear of any offsets or claims the Fund may have against Distributors. Each such Assignee's ownership interest in a Transfer of a specific designated portion of the fees to which Distributors is entitled is hereafter referred to as an "Assignee's 12b-1 Portion." A Transfer pursuant to this Section 5(a) shall not reduce or extinguish any claims of the Fund against Distributors.
(b) Distributors shall promptly notify the Fund in writing of each such Transfer by providing the Fund with the name and address of each such Assignee.
(c) Distributors may direct the Fund to pay any Assignee's 12b-1 Portion directly to each Assignee. In such event, Distributors shall provide the Fund with a monthly calculation of the amount to which each Assignee is entitled (the "Monthly Calculation"). In such event, the Fund shall, upon receipt of such notice and Monthly Calculation from Distributors, make all payments required directly to the Assignee in accordance with the information provided in such notice and Monthly Calculation upon the same terms and conditions as if such payments were to be paid to Distributors.
(d) Alternatively, in connection with a Transfer, Distributors may direct the Fund to pay all or a portion of the fees to which Distributors is entitled from time to time to a depository or collection agent designated by any Assignee, which depository or collection agent may be delegated the duty of dividing such fees between the Assignee's 12b-1 Portion and the balance (such balance, when distributed to Distributors by the depository or collection agent, the "Distributors' 12b-1 Portion"), in which case only Distributors' 12b-1 Portion may be subject to offsets or claims the Fund may have against Distributors.
6. The Plan shall continue in effect for a period of more than one year only so long as such continuance is specifically approved at least annually by the Board, including the independent Board members, cast in person at a meeting called for the purpose of voting on the Plan. In determining whether there is a reasonable likelihood that the continuation of the Plan will benefit the Fund and its shareholders, the Board may, but is not obligated to, consider that Distributors has incurred substantial costs and has entered into an arrangement with a third party which third party has agreed to purchase from Distributors the entitlement of Distributors to receive the payments described in Paragraph 1(a) above, which purchase will generate the cash flow needed to pay for the distribution activities for the Class.
7. The Plan, and any agreements entered into pursuant to this Plan,
may be terminated with respect to the shares of the Class at any time, without
penalty, by vote of a majority of the outstanding voting securities of such
Class or by vote of a majority of the independent Board members of the
Investment Company, on not more than sixty (60) days' written notice, and shall
terminate automatically in the event of any act that constitutes an assignment
of the Management Agreement between the Fund and the Adviser. Upon termination
of this Plan with respect to the Class, the obligation of the Fund to make
payments pursuant to this Plan with respect to such Class shall terminate, and
the Fund shall not be required to make payments hereunder beyond such
termination date with respect to expenses incurred in connection with Class
shares sold prior to such termination date, provided, in each case that each of
the requirements of a Complete Termination of this Plan in respect of such
Class, as defined below, are met. For purposes of this Section 7, a "Complete
Termination" of this Plan in respect of the Class shall mean a termination of
this Plan in respect of such Class, provided that: (i) the independent Board
members of the Investment Company shall have acted in good faith and shall have
determined that such termination is in the best interest of the Investment
Company and the shareholders of the Fund and the Class; (ii) the Investment
Company does not alter the terms of the contingent deferred sales charges
applicable to Class shares outstanding at the time of such termination; and
(iii) unless Distributors at the time of such termination was in material breach
under the distribution agreement in respect of the Fund, the Fund shall not, in
respect of such Fund, pay to any person or entity, other than Distributors or
its designee, the payments described in either paragraph 1(a) or 1(b) in respect
of the Class shares sold by Distributors prior to such termination.
8. The Plan, and any agreements entered into pursuant to this Plan, may not be amended to increase materially the amount to be spent for distribution pursuant to Paragraph 1 hereof without approval by a majority of the outstanding voting securities of the Class of the Fund.
9. All material amendments to the Plan, or any agreements entered into pursuant to this Plan, shall be approved by the independent Board members cast in person at a meeting called for the purpose of voting on any such amendment.
10. So long as the Plan is in effect, the selection and nomination of the Fund's independent Board members shall be committed to the discretion of such independent Board members.
This Plan and the terms and provisions thereof are hereby accepted and agreed to by the Investment Company and Distributors as evidenced by their execution hereof.
Dated as of:
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
By: _________________________
Karen L. Skidmore
Title: Vice President & Secretary
FRANKLIN/TEMPLETON DISTRIBUTORS, INC.
By: _______________________
Peter D. Jones
President
MULTIPLE CLASS PLAN
on behalf of
FRANKLIN CALIFORNIA TAX-FREE INCOME FUND
This Multiple Class Plan (the "Plan") has been adopted unanimously by the Board members of FRANKLIN CALIFORNIA TAX-FREE INCOME FUND (the "Fund"). The Board has determined that the Plan, including the expense allocation methods among the classes, is in the best interests of each class of the Fund and the Fund as a whole. The Plan sets forth the provisions relating to the establishment of multiple classes of shares of the Fund.
1. The Fund shall publicly offer three classes of shares, to be known as Class A Shares, Class C Shares, and Advisor Class Shares. The sale to new investors of a fourth class of shares, known as Class B Shares, has been discontinued. Class B Shares continue to be available only for reinvestment of dividends by existing Class B shareholders of the Fund, or in connection with an exchange into the Fund by existing Class B shareholders of other funds within Franklin Templeton Investment.
2. Class A Shares shall carry a front-end sales charge ranging from 0 % - 4.25 %. Class B Shares, Class C Shares and the Advisor Class Shares shall not be subject to any front-end sales charges.
3. Class A Shares shall not be subject to a contingent deferred sales charge ("CDSC"), except in the following limited circumstances. On investments of $1 million or more, a contingent deferred sales charge of 1.00% of the lesser of the then-current net asset value or the original net asset value at the time of purchase applies to redemptions of those investments within the contingency period of 18 months from the calendar month following their purchase. The CDSC is waived in certain circumstances, as described in the Fund's prospectus and statement of additional information ("SAI").
Class B Shares shall be subject to a CDSC with the following CDSC schedule: (a) Class B Shares redeemed within 2 years of their purchase shall be assessed a CDSC of 4% on the lesser of the then-current net asset value or the original net asset value at the time of purchase; (b) Class B Shares redeemed within the third and fourth years of their purchase shall be assessed a CDSC of 3% on the lesser of the then-current net asset value or the original net asset value at the time of purchase; (c) Class B Shares redeemed within 5 years of their purchase shall be assessed a CDSC of 2% on the lesser of the then-current net asset value or the original net asset value at the time of purchase; and (d) Class B Shares redeemed within 6 years of their purchase shall be assessed a CDSC of 1% on the lesser of the then-current net asset value or the original net asset value at the time of purchase. The CDSC is waived in certain circumstances described in the Fund's prospectus and SAI.
Class C Shares redeemed within 12 months of their purchase shall be assessed a CDSC of 1.00% on the lesser of the then-current net asset value or the original net asset value at the time of purchase. The CDSC is waived in certain circumstances as described in the Fund's prospectus and SAI.
Advisor Class Shares shall not be subject to any CDSC.
4. The distribution plan adopted by the Fund pursuant to Rule 12b-1 under the Investment Company Act of 1940, as amended, (the "Rule 12b-1 Plan") associated with the Class A Shares may be used to compensate Franklin/Templeton Distributors, Inc. (the "Distributor") or others for expenses incurred in the promotion and distribution of the Class A Shares. Such expenses include, but are not limited to, the printing of prospectuses and reports used for sales purposes, expenses of preparing and distributing sales literature and related expenses, advertisements, and other distribution-related expenses, including a prorated portion of the Distributor's overhead expenses attributable to the distribution of the Class A Shares, as well as any distribution or shareholder servicing fees paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Fund for the Class A Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class B Shares has two components. The first component is an asset-based sales charge to be retained by the Distributor to compensate Distributor for amounts advanced to securities dealers or their firms or others with respect to the sale of Class B Shares. In addition, such payments may be retained by the Distributor to be used in the promotion and distribution of Class B Shares in a manner similar to that described above for Class A Shares. The second component is a shareholder servicing fee to be paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Fund for the Class B Shares, the Distributor or its affiliates.
The Rule 12b-1 Plan associated with the Class C Shares has two components. The first component is a shareholder servicing fee, to be paid to securities firms or others who provide personal assistance to shareholders in servicing their accounts and have executed a servicing agreement with the Fund for the Class C shares, the Distributor or its affiliates. The second component is an asset-based sales charge to be retained by the Distributor during the first year after the sale of shares and, in subsequent years, to be paid to dealers or retained by the Distributor to be used in the promotion and distribution of Class C Shares, in a manner similar to that described above for Class A Shares.
No Rule 12b-1 Plan has been adopted on behalf of the Advisor Class Shares and, therefore, the Advisor Class Shares shall not be subject to deductions relating to Rule 12b-1 fees.
The Rule 12b-1 Plans for the Class A, Class B and Class C Shares shall operate in accordance with Rule 2830(d) of the Conduct Rules of the National Association of Securities Dealers, Inc.
5. The only difference in expenses as between Class A, Class B, Class C and Advisor Class Shares shall relate to differences in Rule 12b-1 plan expenses, as described in the applicable Rule 12b-1 Plans; however, to the extent that the Rule 12b-1 Plan expenses of one Class are the same as the Rule 12b-1 Plan expenses of another Class, such classes shall be subject to the same expenses.
6. There shall be no conversion features associated with the Class A, Class C and Advisor Class Shares. Each Class B Share, however, shall be converted automatically, and without any action or choice on the part of the holder of the Class B Shares, into Class A Shares on the conversion date specified, and in accordance with the terms and conditions approved by the Franklin California Tax-Free Income Fund's Board members and as described, in the Fund's prospectus and SAI relating to the Class B Shares, as such prospectus and SAI may be amended from time to time; provided, however, that the Class B Shares shall be converted automatically into Class A Shares to the extent and on the terms permitted by the Investment Company Act of 1940, as amended (the "1940 Act"), and the rules and regulations adopted thereunder.
7. Shares of Class A, Class B, Class C and Advisor Class may be exchanged for shares of another investment company within the Franklin Templeton Investments according to the terms and conditions stated in each fund's prospectus and SAI, as it may be amended from time to time, to the extent permitted by the 1940 Act and the rules and regulations adopted thereunder.
8. Each class will vote separately with respect to any Rule 12b-1 Plan related to, or which now or in the future may affect, that class.
9. On an ongoing basis, the Board members of the Fund, pursuant to their fiduciary responsibilities under the 1940 Act and otherwise, will monitor the Fund for the existence of any material conflicts between the interests of the various classes of shares. The Board members, including a majority of the Board members who are not "interested persons" (as defined in the 1940 Act) of the Fund, its investment manager or the Distributor and who have no direct, or indirect financial interest in the operation of the Rule 12b-1 Plans (the "independent Board members"), shall take such action as is reasonably necessary to eliminate any such conflict that may develop. Franklin Advisers, Inc. and Franklin/Templeton Distributors, Inc. shall be responsible for alerting the Board to any material conflicts that arise.
10. All material amendments to this Plan must be approved by a majority of the Board members, including a majority the independent Board members.
11. I, Karen L. Skidmore, Vice President and Secretary of the Franklin California Tax-Free Income Fund, do hereby certify that this Multiple Class Plan was adopted on behalf of the Fund, by the Board of Trustees of the Investment Company on October 17, 2006.
Karen L. Skidmore Vice President & Secretary
FRANKLIN TEMPLETON INVESTMENTS
CODE OF ETHICS
(PURSUANT TO RULE 17J-1 OF THE INVESTMENT COMPANY ACT OF 1940
AND RULE 204A-1 OF THE INVESTMENT ADVISERS ACT OF 1940)
AND
INSIDER TRADING COMPLIANCE POLICY AND PROCEDURES
REVISED MAY 2007
TABLE OF CONTENTS
CODE OF ETHICS...............................................................3
PART 1 - STATEMENT OF PRINCIPLES.............................................3
PART 2 - PURPOSE OF THE CODE AND CONSEQUENCES OF NON-COMPLIANCE..............5
PART 3 - COMPLIANCE REQUIREMENTS.............................................6
PART 4 - REPORTING REQUIREMENTS FOR CODE OF ETHICS PERSONS
(EXCLUDING INDEPENDENT DIRECTORS OF THE FUNDS AND OF FRI)..........17
PART 5 - PRE-CLEARANCE REQUIREMENTS APPLICABLE TO ACCESS PERSONS
(EXCLUDING INDEPENDENT DIRECTORS OF THE FUNDS AND PORTFOLIO
PERSONS)...........................................................20
PART 6 - REQUIREMENTS FOR INDEPENDENT DIRECTORS OF THE FUNDS................24
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE...............................26
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON INVESTMENTS
INSIDER TRADING POLICY.............................................28
PART 9 - FOREIGN COUNTRY SUPPLEMENTS (CANADA)...............................29
APPENDIX A: COMPLIANCE PROCEDURES AND DEFINITIONS...........................31
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER................32
II. DEFINITIONS OF IMPORTANT TERMS........................................39
APPENDIX B: ACKNOWLEDGEMENT FORM AND SCHEDULES..............................42
ACKNOWLEDGEMENT FORM........................................................43
SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS CODE OF ETHICS
ADMINISTRATION DEPT. CONTACT INFO...............................44
SCHEDULE B: QUARTERLY TRANSACTIONS REPORT...................................45
SCHEDULE C: INITIAL & ANNUAL DISCLOSURE OF BROKERAGE ACCOUNTS,
SECURITIES HOLDINGS AND DISCRETIONARY AUTHORITY.................46
SCHEDULE D: NOTIFICATION OF SECURITIES ACCOUNT.............................48
SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST..........49
SCHEDULE F: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES
ISSUED IN LIMITED OFFERINGS PRIVATE PLACEMENTS).................50
SCHEDULE G: REQUEST FOR APPROVAL TO SERVE AS A DIRECTOR.....................52
APPENDIX C: INVESTMENT ADVISOR AND BROKER-DEALER AND OTHER SUBSIDIARIES
OF FRANKLIN RESOURCES, INC. - APRIL 2006....................................53
APPENDIX D: FRANKLIN RESOURCES, INC. CODE OF ETHICS AND BUSINESS CONDUCT...54
INSIDER TRADING COMPLIANCE POLICY AND PROCEDURES............................64
A. LEGAL REQUIREMENT.....................................................65
B. WHO IS AN INSIDER?....................................................65
C. WHAT IS MATERIAL INFORMATION?.........................................65
D. WHAT IS NON-PUBLIC INFORMATION?.......................................66
E. BASIS FOR LIABILITY...................................................66
F. PENALTIES FOR INSIDER TRADING.........................................67
G. INSIDER TRADING PROCEDURES............................................67
H. GENERAL ACCESS CONTROL PROCEDURES.....................................69
FAIR DISCLOSURE POLICIES AND PROCEDURES.....................................70
A. WHAT IS REGULATION FD? ..............................................70
B. FTI'S CORPORATE POLICY FOR REGULATION FD..............................70
C. GENERAL PROVISIONS OF REGULATION FD...................................70
D PERSONS TO WHOM SELECTIVE DISCLOSURE MAY NOT BE MADE:.................71
E. EXCLUSIONS FROM REGULATION FD.........................................71
F. METHODS OF PUBLIC DISCLOSURE:.........................................72
G. TRAINING..............................................................72
H. REPORTING CONSEQUENCES................................................72
I. QUESTIONS.............................................................72
J. FREQUENTLY ASKED QUESTIONS............................................72
K. SUPPLEMENTAL INFORMATION - SECs DIVISION OF CORPORATE FINANCE.........74
APPENDIX E. CHINESE WALL POLICY.............................................79
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CODE OF ETHICS
The Code of Ethics (the "Code") and Policy Statement on Insider Trading (the "Insider Trading Policy"), including any supplemental memoranda is applicable to all officers, directors, employees and certain designated temporary employees (collectively, "Code of Ethics Persons") of Franklin Resources, Inc. ("FRI"), all of its subsidiaries, and the funds in the Franklin Templeton Group of Funds (the "Funds") (collectively, "Franklin Templeton Investments"). The subsidiaries listed in Appendix C of the Code, together with Franklin Resources, Inc. and the Funds, have adopted the Code and Insider Trading Policy.
The Code summarizes the values, principles and business practices that guide Franklin Templeton Investments' business conduct, provides a set of basic principles for Code of Ethics Persons regarding the conduct expected of them and also establishes certain reporting requirements applicable to Supervised and Access Persons (defined below). It is the responsibility of all Code of Ethics Persons to maintain an environment that fosters fairness, respect and integrity. Code of Ethics Persons are expected to seek the advice of a supervisor or the Code of Ethics Administration Department with any questions on the Code and/or the Insider Trading Policy.
In addition to this Code, the policies and procedures prescribed under the CODE OF ETHICS AND BUSINESS CONDUCT adopted by Franklin Resources, Inc. are additional requirements that apply to certain Code of Ethics Persons. Please see Appendix D for the full text of the Code of Ethics and Business Conduct. Executive Officers, Directors and certain other designated employees of FRI will also be subject to additional requirements with respect to the trading of the securities of FRI (i.e. BEN shares).
PART 1 - STATEMENT OF PRINCIPLES
All Code of Ethics Persons are required to conduct themselves in a lawful, honest and ethical manner in their business practices. Franklin Templeton Investments' policy is that the interests of its Funds' shareholders and clients are paramount and come before the interests of any Code Of Ethics Person.
The personal investing activities of Code of Ethics Persons must be conducted in a manner to avoid actual OR potential conflicts of interest with Fund shareholders and other clients of any Franklin Templeton adviser.
Code of Ethics Persons shall use their positions with Franklin Templeton Investments and any investment opportunities they learn of because of their positions with Franklin Templeton Investments in a manner consistent with applicable Federal Securities Laws and their fiduciary duties to use such opportunities and information for the benefit of the Funds' shareholders and clients.
Information concerning the identity of security holdings and financial circumstances of Funds and other clients is confidential and all Code of Ethics Persons must vigilantly safeguard this sensitive information.
Lastly, Code of Ethics Persons shall not, in connection with the purchase or sale of a security, including any option to purchase or sell, and any security convertible into or exchangeable for, any security that is "held or to be acquired" by a Fund:
A. employ any device, scheme or artifice to defraud a Fund;
B. make to a Fund any untrue statement of a material fact or omit to state to a Fund a material fact necessary in order to make the statements made, in light of the circumstances under which they are made, not misleading;
C. engage in any act, practice, or course of business which operates or would operate as a fraud or deceit upon a Fund; or
D. engage in any manipulative practice with respect to a Fund.
A security is "held or to be acquired" if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or its investment adviser for purchase by the Fund.
PART 2 - PURPOSE OF THE CODE AND CONSEQUENCES OF NON-COMPLIANCE
It is important that you read and understand the Code because its purpose is to help all of us comply with the law and to preserve and protect the outstanding reputation of Franklin Templeton Investments.
Any violation of the Code or Insider Trading Policy including engaging in a prohibited transaction or failure to file required reports may result in disciplinary action, up to and including termination of employment and/or referral to appropriate governmental agencies.
All Code of Ethics Persons must report violations of the Code and the Insider Trading Policy whether committed by themselves or by others promptly to their supervisor or the Code of Ethics Administration Department. If you have any questions or concerns about compliance with the Code or Insider Trading Policy you are encouraged to speak with your supervisor or the Code of Ethics Administration Department. In addition, you may call the Compliance and Ethics Hotline at 1-800-636-6592. Calls to the Compliance and Ethics Hotline may be made anonymously. Franklin Templeton Investments will treat the information set forth in a report of any suspected violation of the Code or Insider Trading Policy in a confidential manner and will conduct a prompt and appropriate evaluation and investigation of any matter reported. Code of Ethics Persons are expected to cooperate in investigations of reported violations. To facilitate employee reporting of violations of the Code or Insider Trading Policy, Franklin Templeton Investments will not allow retaliation against anyone who has made a report in good faith.
PART 3 - COMPLIANCE REQUIREMENTS
3.1 WHO IS COVERED BY THE CODE AND HOW DOES IT WORK?
The Statement of Principles contained in the Code and the policies and procedures prescribed under the CODE OF ETHICS AND BUSINESS CONDUCT contained in Appendix D must be observed by ALL Code of Ethics Persons. All officers, directors, employees and certain designated temporary employees of Franklin Templeton Investments are Code of Ethics Persons. However, depending on which of the categories described below that you are placed, there are different types of restrictions and reporting requirements placed on your personal investing activities. The category in which you will be placed generally depends on your job function, although unique circumstances may result in your placement in a different category. If you have any questions regarding which category you are a member of and the attendant responsibilities, please contact the Code of Ethics Administration Department.
(1) SUPERVISED PERSONS: Supervised persons are an adviser's partners, officers, directors (or other persons occupying a similar status or performing similar functions), and employees, as well as any other person who provides advice on behalf of the adviser and are subject to the supervision and control of the adviser.
(2) ACCESS PERSONS: Access Persons are those persons who: have access to nonpublic information regarding Funds' or clients' securities transactions; or are involved in making securities recommendations to Funds or clients; or have access to recommendations that are nonpublic; or have access to nonpublic information regarding the portfolio holdings of Reportable Funds. Examples of "ACCESS TO NONPUBLIC INFORMATION" include having access to trading systems, portfolio accounting systems, research databases or settlement information. Thus, Access Persons are those people who are in a position to exploit information about Funds' or clients' securities transactions or holdings. Administrative, technical and clerical personnel may be deemed Access Persons if their functions or duties give them access to such nonpublic information.
The following are some of the departments, which would typically (but not exclusively) include Access Persons. Please note however that whether you are an Access Person is based on an analysis of the types of information that you have access to and the determination will be made on a case-by-case basis:
o fund accounting;
o futures associates;
o global compliance;
o portfolio administration;
o private client group/high net worth; and
o anyone else designated by the Director of Global Compliance
and/or the Chief Compliance Officer.
In addition, you are an Access Person if you are any of the following:
o an officer or director of the Funds;
o an officer or director of an investment advisor or broker-dealer
subsidiary of Franklin Templeton Investments; or
o a person that controls those entities
NOTE: UNDER THIS DEFINITION, AN INDEPENDENT DIRECTOR OF FRI WOULD NOT BE
CONSIDERED AN ACCESS PERSON.
(3) PORTFOLIO PERSONS: Portfolio Persons are a subset of Access Persons and are those employees of Franklin Templeton Investments, who, in connection with his or her regular functions or duties, makes or participates in the decision to purchase or sell a security by a Fund or any other client or if his or her functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include:
o portfolio managers;
o research analysts;
o traders;
o employees serving in equivalent capacities (such as Futures
Associates);
o employees supervising the activities of Portfolio Persons; and
o anyone else designated by the Director of Global Compliance
and/or the Chief Compliance Officer.
(4) NON-ACCESS PERSONS: If you are an employee or temporary employee of Franklin Templeton Investments AND you do not fit into any of the above categories, you are a Non-Access Person. Because you do not receive nonpublic information about Fund/Client portfolios, you are subject only to the prohibited transaction provisions described in 3.4 of the Code, the Statement of Principles and the Insider Trading Policy and the policies and procedures prescribed under the FRI Code of Ethics and Business Conduct. The independent directors of FRI are Non-Access Persons.
You will be notified about which of the category(ies) you are considered to be a member of at the time you become affiliated with Franklin Templeton Investments and also if you become a member of a different category.
As described further below, the Code prohibits certain types of transactions and requires pre-clearance and reporting of others. Non-Access Persons and Supervised Persons do not have to pre-clear their security transactions, and, in most cases, do not have to report their transactions. Independent Directors of the Funds also need not pre-clear or report on any securities transactions unless they knew, or should have known that, during the 15-day period before or after the transaction, the security was purchased or sold or considered for purchase or sale by a Fund. HOWEVER, PERSONAL INVESTING ACTIVITIES OF ALL CODE OF ETHICS PERSONS ARE TO BE CONDUCTED IN COMPLIANCE WITH THE PROHIBITED TRANSACTIONS PROVISIONS CONTAINED IN SECTION 3.4, THE STATEMENT OF PRINCIPLES, THE INSIDER TRADING POLICY, THE FRI CODE OF ETHICS AND BUSINESS CONDUCT CODE AND ALL OTHER APPLICABLE POLICIES AND PROCEDURES.
3.2 WHAT ACCOUNTS AND TRANSACTIONS ARE COVERED?
The Code covers:
1. SECURITIES ACCOUNTS/TRANSACTIONS IN WHICH YOU HAVE DIRECT OR INDIRECT BENEFICIAL OWNERSHIP.
You are considered to have "beneficial ownership" of a security if you, directly or indirectly, through any contract, arrangement, relationship or otherwise, have or share a direct or indirect economic interest in a security. There is a presumption that you have an economic interest in securities held or acquired by a member of your immediate family sharing the same household. Thus, a transaction by or for the account of your spouse, or other immediate family member living in your home would be treated as though the transaction were your own.
2. TRANSACTIONS FOR AN ACCOUNT IN WHICH YOU HAVE AN ECONOMIC INTEREST (OTHER THAN THE ACCOUNT OF AN UNRELATED CLIENT FOR WHICH ADVISORY FEES ARE RECEIVED) AND HAVE OR SHARE INVESTMENT CONTROL
For example, if you invest in a corporation that invests in securities and you have or share control over its investments, that corporation's securities transactions would generally be treated as though they were your own.
3. SECURITIES IN WHICH YOU DO NOT HAVE AN ECONOMIC INTEREST (THAT ARE HELD BY A PARTNERSHIP, CORPORATION, TRUST OR SIMILAR ENTITY HOWEVER, YOU EITHER HAVE CONTROL OF SUCH ENTITY, OR HAVE OR SHARE CONTROL OVER ITS INVESTMENTS.
For example, if you were the trustee of a trust or foundation but you did not have an economic interest in the entity (i.e., you are not the trustor (settlor) or beneficiary) the securities transactions would be treated as though they were your own if you had voting or investment control of the trust's assets or you had or shared control over its investments.
ACCORDINGLY, EACH TIME THE WORDS "YOU" OR "YOUR" ARE USED IN THIS DOCUMENT, THEY APPLY NOT ONLY TO YOUR PERSONAL TRANSACTIONS AND ACCOUNTS, BUT TO ALL THE TYPES OF ACCOUNTS AND TRANSACTIONS DESCRIBED ABOVE. If you have any questions as to whether a particular account or transaction is covered by the Code, please contact the Code of Ethics Administration Department 650-312-3693 (ext. 23693) for guidance.
3.3 WHAT SECURITIES ARE EXEMPT FROM THE CODE OF ETHICS?
You do not need to pre-clear OR report transactions in the following types of securities:
(1) direct obligations of the U.S. government (i.e. securities issued or guaranteed by the U.S. government such as Treasury bills, notes and bonds including U.S. savings bonds and derivatives thereof);
(2) money market instruments - banker's acceptances, bank certificates of deposits, commercial paper, repurchase agreements and other high quality short-term debt instruments;
(3) shares of money market funds;
(4) shares issued by unit investment trusts that are invested exclusively in one or more open-end funds, none of which are Reportable Funds.
(5) shares issued by U.S. registered open-end fund (I.E. mutual funds) other than Reportable Funds"
Transactions in the types of securities listed above are also exempt from:
(i) the prohibited transaction provisions contained in Section 3.4; (ii) the
additional requirements applicable to Portfolio Persons and (iii) the applicable
reporting requirements contained in Part 4.
3.4 PROHIBITED TRANSACTIONS AND TRANSACTIONS REQUIRING PRE-APPROVAL FOR CODE OF ETHICS PERSONS
A. INTENT" IS IMPORTANT
The transactions described below comprise a non-exclusive listing of those transactions that have been determined by the courts and the SEC to be prohibited by law. These types of transactions are a violation of the Statement of Principles and are prohibited. It should be noted that pre-clearance, which is a cornerstone of our compliance efforts, cannot detect inappropriate or illegal transactions, which are by their definition dependent upon intent. Therefore, personnel of the Code of Ethics Administration Department can assist you with compliance with the Code, however, they CANNOT guarantee any particular transaction complies with the Code or any applicable law. The fact that your proposed transaction receives pre-clearance may not provide a full and complete defense to an accusation of a violation of the Code or of any laws. For example, if you executed a transaction for which you received pre-clearance, or if the transaction was exempt from pre-clearance (e.g., a transaction for 500 shares or less), that would not preclude a subsequent finding that front-running or scalping occurred because such activity is dependent upon your intent. In other words, your intent may not be able to be detected or determined when a particular transaction request is analyzed for pre-clearance, but can only be determined after a review of all the facts.
In the final analysis, adherence to the principles of the Code remains the responsibility of EACH person effecting personal securities transactions.
B. CODE OF ETHICS PERSONS - PROHIBITIONS AND REQUIREMENTS
1. FRONT RUNNING: TRADING AHEAD OF A FUND OR CLIENT
You shall not front-run any trade of a Fund or client. The term "front run" means knowingly trading before a contemplated transaction by a Fund or client of any Franklin Templeton adviser, whether or not your trade and the Fund's or client's trade take place in the same market. Front running is prohibited whether or not you realize a profit from such a transaction. Thus, you may not:
(a) purchase a security if you intend, or know of Franklin Templeton Investments' intention, to purchase that security or a related security on behalf of a Fund or client, or
(b) sell a security if you intend, or know of Franklin Templeton Investments' intention, to sell that security or a related security on behalf of a Fund or client.
2. SCALPING
You shall not purchase a security (or its economic equivalent) with the intention of recommending that the security be purchased for a Fund or client, or sell short a security (or its economic equivalent) with the intention of recommending that the security be sold for a Fund or client. Scalping is prohibited whether or not you realize a profit from such a transaction.
3. TRADING PARALLEL TO A FUND OR CLIENT
You shall not either buy a security if you know that the same or a related security is being bought contemporaneously by a Fund or client, or sell a security if you know that the same or a related security is being sold contemporaneously by a Fund or client.
4. TRADING AGAINST A FUND OR CLIENT
You shall not:
(a) buy a security if you know that a Fund or client is selling the same or a related security; or has sold the security or
(b) sell a security if you know that a Fund or client is buying the same or a related security, or has bought the security.
Refer to Section I.A., "Pre-clearance Standards," of Appendix A of the Code for more details regarding the pre-clearance of personal securities transactions.
5. USING PROPRIETARY INFORMATION FOR PERSONAL TRANSACTIONS
You shall not buy or sell a security based on Proprietary Information/1 without disclosing such information and receiving written authorization from the Code of Ethics Administration Department. If you wish to purchase or sell a security about which you obtained such information, you must provide a written report of all of the information you obtained regarding the security to the Appropriate Analyst(s)/2. You may then receive permission to purchase or sell such security if the Appropriate Analyst(s) confirms to the Code of Ethics Administration Department that there is no intention to engage in a transaction regarding the security within the next seven (7) calendar days on behalf of an Associated Client/3 and you subsequently pre-clear a request to purchase or sell such security.
6. CERTAIN TRANSACTIONS IN SECURITIES OF FRANKLIN RESOURCES, INC., AND AFFILIATED CLOSED-END FUNDS
You shall not effect a short sale of the securities, including "short sales
against the box" of Franklin Resources, Inc., or any of the Franklin Templeton
Investments' closed-end funds, or any other security issued by Franklin
Templeton Investments. This prohibition would also apply to effecting
economically equivalent transactions, including, but not limited to purchasing
and selling call or put options and swap transactions or other derivatives.
Officers and directors of Franklin Templeton Investments who are covered by
Section 16 of the Securities Exchange Act of 1934, are reminded that their
obligations under Section 16 are in addition to their obligations under this
Code and other additional requirements with respect to pre-clearance and Rule
144 affiliate policies and procedures.
7. SHORT TERM TRADING OR "MARKET TIMING" IN THE FUNDS.
Franklin Templeton Investments seeks to discourage short-term or excessive trading, often referred to as "market timing." Code of Ethics Persons must be familiar with the "Market Timing Trading Policy" described in the prospectus of each Fund in which they invest and must not engage in trading activity that might violate the purpose or intent of that policy. Accordingly, all directors, officers and employees of Franklin Templeton Investments must comply with the purpose and intent of each fund's Market Timing Trading Policy and must not engage in any short-term or excessive trading in Funds. The Trade Control Team of each Fund's transfer agent will monitor trading activity by directors, officers and employees and will report to the Code of Ethics Administration Department, trading patterns or behaviors that may constitute short-term or excessive trading. Given the importance of this issue, if the Code of Ethics Administration Department determines that you engaged in this type of activity, you will be subject to discipline, up to and including termination of employment and a permanent suspension of your ability to purchase shares of any Funds. This policy applies to Franklin Templeton funds including those Funds purchased through a 401(k) plan and to funds that are sub-advised by an investment adviser subsidiary of Franklin Resources, Inc., but does not apply to purchases and sales of Franklin Templeton money fund shares.
8. SERVICE AS A DIRECTOR
Code of Ethics Persons (excluding Independent Directors of FRI) may not serve as a director, trustee, or in a similar capacity for any public or private company (excluding not-for-profit companies, charitable groups and eleemosynary organizations) unless you receive approval from the CEO of Franklin Resources, Inc. and it is determined that your service is consistent with the interests of the Funds and clients of Franklin Templeton Investments. You must notify the Code of Ethics Administration Department, of your interest in serving as a director, including your reasons for electing to take on the directorship by completing Schedule G. The Code of Ethics Administration Department will process the request through the Franklin Resources, Inc. CEO. If approved by the CEO of Franklin Resources, Inc. procedures applicable to serving as an outside director will be furnished to you by the Code of Ethics Administration Department. FRI Independent Directors are subject to the FRI Corporate Governance Guidelines with respect to services on another company's board.
C. ACCESS PERSONS (EXCLUDING INDEPENDENT DIRECTORS OF THE FUNDS) AND
PORTFOLIO PERSONS - ADDITIONAL PROHIBITIONS AND REQUIREMENTS.
1. SECURITIES SOLD IN A PUBLIC OFFERING
Access Persons shall not buy securities in any initial public offering, or a secondary offering by an issuer except for offerings of securities made by closed-end funds that are either advised or sub-advised by a Franklin Templeton Investments adviser. Although exceptions are rarely granted, they will be considered on a case-by-case basis and only in accordance with procedures contained in section I.B. of Appendix A.
2. INTERESTS IN PARTNERSHIPS AND SECURITIES ISSUED IN LIMITED OFFERING
(PRIVATE PLACEMENTS)
Access Persons shall not invest in limited partnerships (including interests in limited liability companies, business trusts or other forms of "hedge funds") or other securities in a Limited Offering (private placement) without pre-approval from the Code of Ethics Administration Department. In order to seek consideration for pre-approval you must:
(a) complete the Limited Offering (Private Placement) Checklist (Schedule F)
(b) provide supporting documentation (e.g., a copy of the offering memorandum); and
(c) obtain approval of the appropriate Chief Investment Officer; and
(d) submit all documents to the Code of Ethics Administration Department.
Approvals for such investments will be determined by the Director of Global Compliance or the Chief Compliance Officer. Under no circumstances will approval be granted for investments in "hedge funds" that are permitted to invest in registered open-end investment companies ("mutual funds") or registered closed-end investment companies.
D. PORTFOLIO PERSONS - ADDITIONAL PROHIBITIONS AND REQUIREMENTS
1. SHORT SALES OF SECURITIES
Portfolio Persons shall not sell short ANY security held by Associated Clients, including "short sales against the box." This prohibition also applies to effecting economically equivalent transactions, including, but not limited to, sales of uncovered call options, purchases of put options while not owning the underlying security and short sales of bonds that are convertible into equity positions.
2. SHORT SWING TRADING
Portfolio Persons shall not profit from the purchase and sale or sale and purchase within sixty (60) calendar days of any security in all his/her personal accounts taken in aggregate, including derivatives. Portfolio Persons are responsible for transactions that may occur in margin and option accounts and all such transactions must comply with this restriction./4
This restriction does NOT apply to:
(a) trading within a sixty (60) calendar day period if you do not realize a profit and if you do not violate any other provisions of this Code; AND
(b) profiting on the purchase and sale or sale and purchase within sixty
(60) calendar days of the following securities:
o securities that are direct obligations of the U.S. Government, such Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof;
o high quality short-term instruments ("money market instruments") including but not limited to (i) bankers' acceptances, (ii) U.S. bank certificates of deposit; (iii) commercial paper; and (iv) repurchase agreements;
o shares of any registered open-end investment companies including Exchange Traded Funds (ETF), Holding Company Depository Receipts (Hldrs) and shares of Franklin Templeton Funds subject to the short term trading (market timing) policies described in each Fund's prospectus.
Calculation of profits during the sixty (60) calendar day holding period generally will be based on "last-in, first-out" ("LIFO"). Portfolio Persons may elect to calculate their sixty (60) calendar day profits on either a LIFO or FIFO ("first-in, first-out") basis only if there has not been any activity in such security by their Associated Clients during the previous sixty (60) calendar days.
3. DISCLOSURE OF INTEREST IN A SECURITY AND METHOD OF DISCLOSURE
As a Portfolio Person, you must promptly disclose your direct or indirect beneficial interest in a security whenever you learn that the security is under consideration for purchase or sale by an Associated Client and you;
(a) Have or share investment control of the Associated Client;
(b) Make any recommendation or participate in the determination of which recommendations shall be made on behalf of the Associated Client; or
(c) Have functions or duties that relate to the determination of which recommendation shall be made to the Associated Client.
In such instances, you must initially disclose that beneficial interest orally to the primary portfolio manager (or other Appropriate Analyst) of the Associated Client(s) or the appropriate Chief Investment Officer. Following that oral disclosure, you must send a written acknowledgement of that interest on Schedule E (or on a form containing substantially similar information) that has been signed by the primary portfolio manager, with a copy of the Code of Ethics Administration Department.
PART 4 - REPORTING REQUIREMENTS FOR CODE OF ETHICS PERSONS (EXCLUDING
INDEPENDENT DIRECTORS OF THE FUNDS AND OF FRI)
Reference to Access Persons in this Part 4 do not apply to the Independent Directors of the Funds and of FRI. Reporting requirements applicable to Independent Directors of the Funds are separately described in Part 6.
4.1 REPORTING OF BENEFICIAL OWNERSHIP AND SECURITIES TRANSACTIONS
Compliance with the following personal securities transaction reporting procedures is essential to meeting our responsibilities with respect to the Funds and other clients as well as complying with regulatory requirements. You are expected to comply with both the letter and spirit of these requirements by completing and filing all reports required under the Code in a timely manner. If you have any questions about which reporting requirements apply to you, please contact the Code of Ethics Administration Department.
4.2 INITIAL REPORTS
A. ACKNOWLEDGEMENT FORM (SUPERVISED PERSONS, ACCESS PERSONS AND
PORTFOLIO PERSONS)
All Supervised Persons, Access Persons and Portfolio Persons must complete and return an executed Acknowledgement Form to the Code of Ethics Administration Department no later than ten (10) calendar days after the date the person is notified by a member of the Code of Ethics Administration Department.
B. SCHEDULE C - INITIAL & ANNUAL DISCLOSURE OF BROKERAGE ACCOUNTS,
SECURITIES HOLDINGS AND DISCRETIONARY AUTHORITY (ACCESS PERSONS AND
PORTFOLIO PERSONS)
In addition, all Access Persons and Portfolio Persons must also file Schedule C
(Initial & Annual Disclosure of Brokerage Accounts, Securities Holdings and
Discretionary Authority) with the Code of Ethics Administration Department no
later than ten (10) calendar days after becoming an Access or Portfolio Person.
The submitted information must be current as of a date not more than forty-five
(45) days prior to becoming an Access or Portfolio Person.
4.3 QUARTERLY TRANSACTION REPORTS
A. ACCESS PERSONS AND PORTFOLIO PERSONS
You must report ALL securities transactions except for those (1) in any account over which you had no direct or indirect influence or control; (2) effected pursuant to an Automatic Investment Plan (however, any transaction that overrides the preset schedule or allocations of the automatic investment plan must be included in a quarterly transaction report.); or (3) that would duplicate information contained in broker confirmations or statements provided no later than thirty (30) days after the end of each calendar quarter. You must provide the Code of Ethics Administration Department no later than thirty (30) calendar days after the end of each calendar quarter, with either; (i) copies of all broker's confirmations and statements (which may be sent under separate cover by the broker) showing all your securities transactions and holdings in such securities, or (ii) a completed Schedule B (Transactions Report). Please use Schedule B only when your securities transactions do not generate a statement or do not take place in a brokerage account. Brokerage statements and confirmations submitted must include all transactions in securities in which you have, or by reason of the transaction acquire any direct or indirect beneficial ownership, including transactions in a discretionary account and transactions for any account in which you have any economic interest AND have or share investment control. Please remember that you must report all securities acquired by gift, inheritance, vesting,/5 stock splits, merger or reorganization of the issuer of the security.
Failure to timely report transactions is a violation of Rule 17j-1, Rule 204A-1, as well as the Code, and will be reported to the Director of Global Compliance and/or the Fund's Board of Directors and may also result in disciplinary action, up to and including, termination.
4.4 ANNUAL REPORTS
A. SECURITIES ACCOUNTS AND SECURITIES HOLDINGS REPORTS (ACCESS PERSONS
AND PORTFOLIO PERSONS)
You must file a report of all personal securities accounts and securities holdings on Schedule C (Initial, Annual Disclosure of Brokerage Accounts, Securities Holdings and Discretionary Authority), with the Code of Ethics Administration Department, annually by February 1st. You must report the name and description of each securities account in which you have a direct or indirect beneficial interest, including securities accounts of your immediate family residing in the same household. You must provide information on any account that is covered under Section 3.2 of the Code.
This report should include ALL of your securities holdings, including any security acquired by a transaction, gift, inheritance, vesting, merger or reorganization of the issuer of the security, in which you have any direct or indirect beneficial ownership, including securities holdings in a discretionary account. Your securities holding information must be current as of a date no more than forty-five (45) days before the report is submitted. You may attach copies of year-end brokerage statements to Schedule C in lieu of listing each of your security positions on the Schedule.
B. ACKNOWLEDGEMENT FORM (SUPERVISED PERSONS, ACCESS PERSONS AND PORTFOLIO PERSONS)
Supervised Persons, Access Persons and Portfolio Persons, will be asked to certify by February 1st annually that they have complied with and will comply with the CODE and Insider Trading Policy by filing the Acknowledgment Form with the Code of Ethics Administration Department.
4.5 BROKERAGE ACCOUNTS AND CONFIRMATIONS OF SECURITIES TRANSACTIONS (ACCESS PERSONS AND PORTFOLIO PERSONS)
Before or at a time contemporaneous with opening a brokerage account with a registered broker-dealer, or a bank, or placing an initial order for the purchase or sale of securities with that broker-dealer or bank, you must:
(1) notify the Code of Ethics Administration Department, in writing, by completing Schedule D (Notification of Securities Account) or by providing substantially similar information; and
(2) notify the institution with which you open the account, in writing, of your association with Franklin Templeton Investments.
The Code of Ethics Administration Department will request, in writing, that the institution send duplicate copies of confirmations and statements for all transactions effected in the account simultaneously with their mailing of such confirmation and statement to you.
If you have an existing account on the effective date of this Code or upon becoming an Access or Portfolio Person, you must comply within ten (10) days with conditions (1) and (2) above.
PART 5 - PRE-CLEARANCE REQUIREMENTS (APPLICABLE TO ACCESS PERSONS (EXCLUDING
INDEPENDENT DIRECTORS OF THE FUNDS) AND PORTFOLIO PERSONS
References to Access Persons in this Part 5 do not apply to the Independent Directors of the Funds. Pre-clearance requirements applicable to Independent Directors of the Funds are separately described in Part 6.
PRIOR APPROVAL (PRE-CLEARANCE) OF SECURITIES TRANSACTIONS
A. LENGTH OF APPROVAL
You shall not buy or sell any security without first contacting a member of the Code of Ethics Administration Department either electronically or by phone and obtaining his or her approval, unless your proposed transaction is covered by paragraph B below. Approval for a proposed transaction will remain valid until the close of the business day following the day pre-clearance is granted but may be extended in special circumstances, shortened or rescinded, as explained in the section entitled Pre-clearance Standards in Appendix A.
B. SECURITIES NOT REQUIRING PRE-CLEARANCE
You do not need to request pre-clearance for the types of securities or transactions listed below. However, all other provisions of the Code apply, including, but not limited to: (i) the prohibited transaction provisions contained in Part 3.4 such as front-running; (ii) the additional compliance requirements applicable to Portfolio Persons contained in Part 4, (iii) the applicable reporting requirements contained in Part 4; and (iv) insider trading prohibitions described in the Insider Trading Policy.
If you have any questions, contact the Code of Ethics Administration Department before engaging in the transaction. If you have any doubt whether you have or might acquire direct or indirect beneficial ownership or have or share investment control over an account or entity in a particular transaction, or whether a transaction involves a security covered by the Code, you should consult with the Code of Ethics Administration Department before engaging in the transaction.
You need NOT pre-clear the following types of transactions or securities:
(1) FRANKLIN RESOURCES, INC., AND CLOSED-END FUNDS OF FRANKlIN TEMPLETON GROUP OF FUNDS. Purchases and sales of securities of Franklin Resources, Inc. and closed-end funds of Franklin Templeton Group of Fund as these securities cannot be purchased on behalf of our advisory clients./6
(2) SHARES OF OPEN-END INVESTMENT COMPANIES (INCLUDING REPORTABLE FUNDS)
(3) SMALL QUANTITIES (NOT APPLICABLE TO OPTION TRANSACTIONS).
o Transactions of 500 shares or less of any security regardless of
where it is traded in any 30-day period; or
o Transactions of 1000 shares or less of the top 50 securities by
volume during the previous calendar quarter on the NYSE or NASDAQ
NMS (does not include Small Cap or OTC) in any 30-day period. You
can find this list at http://intranet/leglcomp/codeofethics/
top50.xls.
o Transactions in municipal bonds with a face value of $100,000 or
less in any 30-day period.
o OPTION TRANSACTIONS AND MUNICIPAL BOND TRANSACTIONS: THE SMALL
QUANTITIES RULE IS NOT APPLICABLE TO OPTION AND MUNICIPAL BOND
TRANSACTIONS. ALL OPTION AND MUNICIPAL BOND TRANSACTIONS MUST BE
PRE-CLEARED EXCEPT FOR EMPLOYER STOCK OPTIONS AS NOTED IN EMPLOYER
STOCK OPTION PROGRAMS BELOW.
PLEASE NOTE THAT YOU MAY NOT EXECUTE ANY TRANSACTION, REGARDLESS OF QUANTITY, IF YOU LEARN THAT THE FUNDS OR CLIENTS ARE ACTIVE IN THE SECURITY. IT WILL BE PRESUMED THAT YOU HAVE KNOWLEDGE OF FUND OR CLIENT ACTIVITY IN THE SECURITY IF, AMONG OTHER THINGS, YOU ARE DENIED APPROVAL TO GO FORWARD WITH A TRANSACTION REQUEST.
(4) DIVIDEND REINVESTMENT PLANS: Transactions made pursuant to dividend reinvestment plans ("DRIPs") do not require pre-clearance regardless of quantity or Fund activity.
(5) GOVERNMENT OBLIGATIONS. Transactions in securities issued or guaranteed by the governments of the United States, Canada, the United Kingdom, France, Germany, Switzerland, Italy and Japan, or their agencies or instrumentalities, or derivatives thereof.
(6) PAYROLL DEDUCTION PLANS. Securities purchased by an Access Person's spouse pursuant to a payroll deduction program, provided the Access Person has previously notified the Code of Ethics Administration Department in writing that their spouse will be participating in the payroll deduction program.
(7) EMPLOYER STOCK OPTION PROGRAMS. Transactions involving the exercise and/or purchase by an Access Person or an Access Person's spouse of securities pursuant to a program sponsored by a company employing the Access Person or Access Person's spouse.
(8) PRO RATA DISTRIBUTIONS. Purchases effected by the exercise of rights issued pro rata to all holders of a class of securities or the sale of rights so received.
(9) TENDER OFFERS. Transactions in securities pursuant to a bona fide tender offer made for any and all such securities to all similarly situated shareholders in conjunction with mergers, acquisitions, reorganizations and/or similar corporate actions. However, tenders pursuant to offers for less than all outstanding securities of a class of securities of an issuer must be pre-cleared.
(10) SECURITIES PROHIBITED FOR PURCHASE BY THE FUNDS AND OTHER CLIENTS. Transactions in any securities that are prohibited investments for all Funds and clients advised by the entity employing the Access Person.
(11) NO INVESTMENT CONTROL. Transactions effected for an account or entity over which you do not have or share investment control (i.e., an account where someone else exercises complete investment control).
(12) NO BENEFICIAL OWNERSHIP. Transactions in which you do not acquire or dispose of direct or indirect beneficial ownership (i.e., an account where in you have no financial interest).
(13) ETFS AND HOLDRS. Transactions in Exchange-Traded Funds and Holding Company Depository Receipts.
(14) VARIABLE RATE DEMAND OBLIGATION/NOTE TRANSACTIONS.
C. DISCRETIONARY ACCOUNTS
You need not pre-clear transactions in any discretionary account for which a registered broker-dealer, a registered investment adviser, or other investment manager acting in a similar fiduciary capacity, exercises sole investment discretion, if the following conditions are met:/7
(1) The terms of each account relationship ("Agreement") must be in writing and filed with the Code of Ethics Administration Department prior to any transactions.
(2) Any amendment to each Agreement must be filed with the Code of Ethics Administration Department prior to its effective date.
(3) The Access Person certifies to the Code of Ethics Administration Department at the time such account relationship commences, and annually thereafter, as contained in Schedule C of the Code that such Access Person does not have direct or indirect influence or control over the account, other than the right to terminate the account.
(4) Additionally, any discretionary account that you open or maintain with a registered broker-dealer, a registered investment adviser, or other investment manager acting in a similar fiduciary capacity must provide duplicate copies of confirmations and statements for all transactions effected in the account simultaneously with their delivery to you. If your discretionary account acquires securities that are not reported to the Code of Ethics Administration Department by a duplicate confirmation, such transaction must be reported to the Code of Ethics Administration Department on Schedule B (Quarterly Transactions Report) no later than thirty (30) days after the end of the calendar quarter after you are notified of the acquisition./8
However, if prior to making ANY request you advised the discretionary account manager to enter into or refrain from a specific transaction or class of transactions, you must first consult with the Code of Ethics Administration Department and obtain approval prior to making such request.
PART 6 - REQUIREMENTS FOR INDEPENDENT DIRECTORS OF THE FUNDS
6.1 PRE-CLEARANCE REQUIREMENTS
Independent Directors of the Funds shall pre-clear or report on any securities transactions if they knew or should have known that during the 15-day period before or after the transaction the security was purchased or sold or considered for purchase or sale by the Fund. Such pre-clearance and reporting requirements shall not apply to securities transactions conducted in an account where an Independent Director has granted full investment discretion to a brokerage firm, bank or investment advisor or conducted in a trust account in which the trustee has full investment discretion.
6.2 REPORTING REQUIREMENTS
A. INITIAL REPORTS
1. ACKNOWLEDGEMENT FORM
Independent Directors of the Funds must complete and return an executed Acknowledgement Form to the Code of Ethics Administration Department no later than ten (10) calendar days after the date the person becomes an Independent Director of the Fund.
2. DISCLOSURE OF SECURITIES HOLDINGS, BROKERAGE ACCOUNTS AND DISCRETIONARY AUTHORITY
Independent Directors of the Funds are not required to disclose any securities holdings, brokerage accounts, including brokerage accounts where he/she has granted discretionary authority to a brokerage firm, bank or investment adviser.
B. QUARTERLY TRANSACTION REPORTS
Independent Directors of the Funds are not required to file any quarterly transaction reports unless he/she knew or should have known that, during the 15-day period before or after a transaction, the security was purchased or sold, or considered for purchase or sale, by a Fund or by Franklin Templeton Investments on behalf of a Fund.
C. ANNUAL REPORTS
Independent Directors of the Funds will be asked to certify by February 1st annually that they have complied with and will comply with the Code and Insider Trading Policy by filing the Acknowledgment Form with the Code of Ethics Administration Department.
PART 7 - PENALTIES FOR VIOLATIONS OF THE CODE
The Code is designed to assure compliance with applicable laws and to maintain shareholder confidence in Franklin Templeton Investments.
In adopting this Code, it is the intention of the Boards of Directors/Trustees of the subsidiaries listed in Appendix C of this Code, together with Franklin Resources, Inc., and the Funds, to attempt to achieve 100% compliance with all requirements of the Code - but recognize that this may not be possible. Certain incidental failures to comply with the Code are not necessarily a violation of the law or the Code. Such violations of the Code not resulting in a violation of law or the Code will be referred to the Director of Global Compliance and/or the Chief Compliance Officer and/or the relevant management personnel, and disciplinary action commensurate with the violation, if warranted, will be imposed. Additionally, if you violate any of the enumerated prohibited transactions contained in Parts 3 and 4 of the Code, you will be expected to give up ANY profits realized from these transactions to Franklin Resources, Inc. for the benefit of the affected Funds or other clients. If Franklin Resources, Inc. cannot determine which Funds or clients were affected the proceeds will be donated to a charity chosen either by you or by Franklin Resources, Inc. Please refer to the following page for guidance on the types of sanctions that would likely be imposed for violations of the Code.
Failure to disgorge profits when requested or even a pattern of violations that individually do not violate the law or the Code, but which taken together demonstrate a lack of respect for the Code, may result in more significant disciplinary action, up to and including termination of employment. A violation of the Code resulting in a violation of the law will be severely sanctioned, with disciplinary action potentially including, but not limited to, referral of the matter to the board of directors of the affected Fund, senior management of the appropriate investment adviser, principal underwriter or other Franklin subsidiary and/or the board of directors of Franklin Resources, Inc., termination of employment and referral of the matter to the appropriate regulatory agency for civil and/or criminal investigation.
CODE OF ETHICS SANCTION GUIDELINES
PLEASE BE AWARE THAT THESE GUIDELINES REPRESENT ONLY A REPRESENTATIVE
SAMPLING OF THE POSSIBLE SANCTIONS THAT MAY BE TAKEN AGAINST YOU IN THE EVENT
OF A VIOLATION OF THE CODE.
----------------------------------------------------------------------------
VIOLATION SANCTION IMPOSED
----------------------------------------------------------------------------
o Failure to pre-clear but otherwise Reminder Memo
would have been approved (i.e., no
conflict with the fund's transactions).
----------------------------------------------------------------------------
o Failure to pre-clear but otherwise 30 Day Personal Securities
would have been approved (i.e., no Trading Suspension
conflict with the fund's transactions)
twice within twelve (12) calendar
months
o Failure to pre-clear and the transaction
would have been disapproved
----------------------------------------------------------------------------
o Failure to pre-clear but otherwise Greater Than 30 Day Personal
would have been approved (i.e., no Securities Trading Suspension
conflict with the fund's transactions) (e.g., 60 or 90 Days)
three times or more within twelve (12)
calendar months
o Failure to pre-clear and the transaction
would have been disapproved twice or more
within twelve (12) calendar months
----------------------------------------------------------------------------
o Profiting from short-swing trades Profits are donated to The
(profiting on purchase & sale or sale & United Way (or charity of
purchase within sixty (60) days) employee's choice)
----------------------------------------------------------------------------
o Repeated violations of the Code of Ethics Fines levied after discussion
even if each individual violation might with the General Counsel and
be considered DE MINIMIS appropriate CIO.
----------------------------------------------------------------------------
o Failure to return initial or annual Sanction may include but not
disclosure forms limited to a reminder memo,
o Failure to timely report transactions suspension of personal trading,
monetary sanctions, reporting
to the Board of Directors,
placed on unpaid administrative
leave or termination of
employment
----------------------------------------------------------------------------
o Insider Trading Violation and/or Subject to review by the
violation of the CODE OF ETHICS AND appropriate supervisor in
BUSINESS CONDUCT contained in Appendix D consultation with the Franklin
Resources Inc., General Counsel
for consideration of
appropriate disciplinary action
up to and including termination
of employment and reporting to
the appropriate regulatory
agency.
----------------------------------------------------------------------------
|
PART 8 - A REMINDER ABOUT THE FRANKLIN TEMPLETON INVESTMENTS INSIDER TRADING
POLICY
The Insider Trading Policy (see the attached Insider Trading Compliance Policy and Procedures) deals with the problem of insider trading in securities that could result in harm to a Fund, a client, or members of the public. It applies to all Code of Ethics Persons. The guidelines and requirements described in the Insider Trading Policy go hand-in-hand with the Code. If you have any questions or concerns about compliance with the Code and the Insider Trading Policy you are encouraged to speak with the Code of Ethics Administration Department.
PART 9 - FOREIGN COUNTRY SUPPLEMENTS (CANADA)
The Investment Funds Institute of Canada ("IFIC") has implemented a Model Code of Ethics for Personal Investing (the "IFIC Code") to be adopted by all IFIC members. Certain provisions in the IFIC Code differ from the provisions of Franklin Templeton Investments Code of Ethics (the "FTI Code"). This Supplementary Statement of Requirements for Canadian Employees (the "Canadian Supplement") describes certain further specific requirements that govern the activities of Franklin Templeton Investments Corp. ("FTIC"). It is important to note that the Canadian Supplement does not replace the FTI Code but adds certain restrictions on trading activities, which must be read in conjunction with the Code.
All capitalized terms in this Canadian Supplement, unless defined in this Canadian Supplement, have the meaning set forth in the FTI Code.
INITIAL PUBLIC AND SECONDARY OFFERINGS
Access Persons cannot buy securities in any initial public offering, or a
secondary offering by an issuer. Public offerings of securities made by
Franklin Templeton Investments, including open-end and closed-end mutual
funds, real estate investment trusts and securities of Franklin Resources,
Inc., are excluded from this prohibition.
INTERESTS IN PARTNERSHIPS AND SECURITIES ISSUED IN PRIVATE PLACEMENTS Access Persons and Portfolio Persons cannot acquire limited partnership interests or other securities in private placements unless they obtain approval of the appropriate Chief Investment Officer and Director of Global Compliance after he or she consults with an executive officer of Franklin Resources, Inc. Purchases of limited partnership interests or other securities in private placements will not be approved, unless in addition to the requirements for the approval of other trades and such other requirements as the executive officer of Franklin Resources, Inc. may require, the Director of Global Compliance is satisfied that the issuer is a "private company" as defined in the SECURITIES ACT (Ontario) and the Access Person has no reason to believe that the issuer will make a public offering of its securities in the foreseeable future.
ADDITIONAL REQUIREMENTS TO OBTAIN APPROVAL FOR PERSONAL TRADES
Prior to an Access Person obtaining approval for a personal trade he or she
must advise the Code of Ethics Administration Department that he or she:
o Does not possess material non-public information relating to the
security;
o Is not aware of any proposed trade or investment program relating to
that security by any of the Franklin Templeton Group of Funds;
o Believes that the proposed trade has not been offered because of the
Access Person's position in Franklin Templeton Investments and is
available to any market participant on the same terms;
o Believes that the proposed trade does not contravene any of the
prohibited activities set out in Section 3.4 of the FTI Code, and in the
case of Portfolio Persons does not violate any of the additional
requirements set out in Part 4 3.4D of the FTI Code; and
o Will provide any other information requested by the Code of Ethics
Administration Department concerning the proposed personal trade.
An Access Person may contact the Code of Ethics Administration Department by fax, phone or e-mail to obtain his or her approval.
NOTE: THE METHOD OF OBTAINING APPROVAL IS PRESENTLY SET OUT IN PART 5 OF THE FTI CODE AND PROVIDES THAT AN ACCESS PERSON MAY CONTACT THE CODE OF ETHICS ADMINISTRATION DEPARTMENT BY E-MAIL OR PHONE. THE ADDITIONAL REQUIREMENT DESCRIBED ABOVE MAKES IT CLEAR THAT AN ACCESS PERSON MAY CONTINUE TO CONTACT THE CODE OF ETHICS ADMINISTRATION DEPARTMENT IN THE SAME MANNER AS BEFORE. THE ACCESS PERSON WILL HAVE DEEMED TO HAVE CONFIRMED COMPLIANCE WITH THE ABOVE REQUIREMENTS PRIOR TO OBTAINING APPROVAL FROM THE CODE OF ETHICS ADMINISTRATION DEPARTMENT.
APPOINTMENT OF INDEPENDENT REVIEW PERSON
FTIC shall appoint an independent review person who will be responsible for
approval of all personal trading rules and other provisions of the FTI Code
with respect to FTIC and for monitoring the administration of the FTI Code
from time to time with respect to FTIC employees. The Code of Ethics
Administration Department Manager will provide a written report to the
Independent Review Person, at least annually, summarizing:
o Compliance with the FTI Code for the period under review
o Violations of the FTI Code for the period under review
o Sanctions imposed by Franklin Templeton Investments for the period
under review
o Changes in procedures recommended by the FTI Code
o Any other information requested by the Independent Review Person
APPENDIX A: COMPLIANCE PROCEDURES AND DEFINITIONS
This appendix sets forth the responsibilities and obligations of the Compliance Officers of each entity that has adopted the Code, the Code of Ethics Administration Department, and the Legal Department, under the Code and Insider Trading Policy.
I. RESPONSIBILITIES OF EACH DESIGNATED COMPLIANCE OFFICER
A. PRE-CLEARANCE STANDARDS
1. GENERAL PRINCIPLES
The Director of Global Compliance, the Chief Compliance Officer and/or the Code of Ethics Administration Department, shall permit an Access Person to go forward with a proposed security/9 transaction only if he or she determines that, considering all of the facts and circumstances known to them, the transaction does not violate Federal Securities Laws, or this Code and there is no likelihood of harm to a Fund or client.
2. ASSOCIATED CLIENTS
Unless there are special circumstances that make it appropriate to disapprove a personal securities transaction request, the Code of Ethics Administration Department shall consider only those securities transactions of the "Associated Clients" of the Access Person, including open and executed orders and recommendations, in determining whether to approve such a request. "Associated Clients" are those Funds or clients whose securities holdings and/or trading information would be available to the Access Person during the course of his or her regular functions or duties. As of November 2004, there are five groups of Associated Clients: (i) the Franklin Mutual Series Funds and clients advised by Franklin Mutual Advisers, LLC ("Mutual Clients"); (ii) the Franklin Group of Funds and the clients advised by the various Franklin investment advisers ("Franklin Clients"); (iii) the Templeton Group of Funds and the clients advised by the various Templeton investment advisers ("Templeton Clients"); (iv) the Bissett Group of Funds and the clients advised by Franklin Templeton Investments Corp.; and (v) the Fiduciary Group of funds and the clients advised by the various Fiduciary investment advisers. Other Associated Clients will be added to this list as they are established. Thus, for example, persons who have access to the trading information of Mutual Clients generally will be pre-cleared solely against the securities transactions of the Mutual Clients, including open and executed orders and recommendations. Similarly, persons who have access to the trading information of Franklin Clients, Templeton Clients, Bissett clients, or Fiduciary clients, generally will be pre-cleared solely against the securities transactions of Franklin Clients, Templeton Clients, Bissett clients or Fiduciary clients respectively.
Certain officers of Franklin Templeton Investments, as well as certain employees in the Legal, Global Compliance, Fund Accounting, Investment Operations and other personnel who generally have access to trading information of the Funds and clients of Franklin Templeton Investments during the course of their regular functions and duties, will have their personal securities transactions pre-cleared against executed transactions, open orders and recommendations of all Associated Clients.
3. SPECIFIC STANDARDS
(a) SECURITIES TRANSACTIONS BY FUNDS OR CLIENTS
No clearance shall be given for any transaction in any security on any day during which an Associated Client of the Access Person has executed a buy or sell order in that security, until seven (7) calendar days after the order has been executed. Notwithstanding a transaction in the previous seven days, clearance may be granted to sell if all Associated Clients have disposed of the security.
(b) SECURITIES UNDER CONSIDERATION
OPEN ORDERS
No clearance shall be given for any transaction in any security on any day which an Associated Client of the Access Person has a pending buy or sell order for such security, until seven (7) calendar days after the order has been executed or if the order is immediately withdrawn.
RECOMMENDATIONS
No clearance shall be given for any transaction in any security on any day on which a recommendation for such security was made by a Portfolio Person, until seven (7) calendar days after the recommendation was made and no orders have subsequently been executed or are pending.
(c) LIMITED OFFERING (PRIVATE PLACEMENT)
In considering requests by Access Persons for approval of limited partnerships and other limited offering, the Director of Global Compliance or Chief Compliance Officer shall take into account, among other factors, whether the investment opportunity should be reserved for a Fund or other client, and whether the investment opportunity is being offered to the Access Person by virtue of his or her position with Franklin Templeton Investments. If the Access Person receives clearance for the transaction, an investment in the same issuer may only be made for a Fund or client if an executive officer of Franklin Resources, Inc., who has been informed of the Portfolio Person's pre-existing investment and who has no interest in the issuer, approves the transaction. Please see Schedule F.
(d) DURATION OF CLEARANCE
If the Code of Ethics Administration Department approves a proposed securities transaction, the order for the transaction must be placed and effected by the close of the next business day following the day approval was granted. The Director of Global Compliance and/or the Chief Compliance Officer may, in his or her discretion, extend the clearance period up to seven (7) calendar days, beginning on the date of the approval, for a securities transaction of any Access Person who demonstrates that special circumstances make the extended clearance period necessary and appropriate./10 The Director of Global Compliance or the Chief Compliance Officer may, in his or her discretion, after consultation with an executive officer of Franklin Resources, Inc., renew the approval for a particular transaction for up to an additional seven (7) calendar days upon a showing of special circumstances by the Access Person. The Director of Global Compliance or the Chief Compliance Officer may shorten or rescind any approval or renewal of approval under this paragraph if he or she determines it is appropriate to do so.
B. WAIVERS BY THE DIRECTOR OF GLOBAL COMPLIANCE AND/OR THE CHIEF COMPLIANCE OFFICER
The Director of Global Compliance and/or the Chief Compliance Officer may, in his or her discretion, after consultation with an executive officer of Franklin Resources, Inc., waive compliance by any Access Person with the provisions of the Code, if he or she finds that such a waiver:
(1) is necessary to alleviate undue hardship or in view of unforeseen circumstances or is otherwise appropriate under all the relevant facts and circumstances;
(2) will not be inconsistent with the purposes and objectives of the Code;
(3) will not adversely affect the interests of advisory clients of Franklin Templeton Investments, the interests of Franklin Templeton Investments or its affiliates; and
(4) will not result in a transaction or conduct that would violate provisions of applicable laws or regulations.
Any waiver shall be in writing, shall contain a statement of the basis for it, and the Director of Global Compliance or the Chief Compliance Officer, shall promptly send a copy to the General Counsel of Franklin Resources, Inc.
C. CONTINUING RESPONSIBILITIES OF THE CODE OF ETHICS ADMINISTRATION DEPARTMENT
PRE-CLEARANCE RECORDKEEPING
The Code of Ethics Administration Department shall keep a record of all requests for pre-clearance regarding the purchase or sale of a security, including the date of the request, the name of the Access Person, the details of the proposed transaction, and whether the request was approved or denied. The Code of Ethics Administration Department shall keep a record of any waivers given, including the reasons for each exception and a description of any potentially conflicting Fund or client transactions.
INITIAL, ANNUAL HOLDINGS REPORTS AND QUARTERLY TRANSACTION REPORTS
The Code of Ethics Administration Department shall also collect the signed Acknowledgment Forms from Supervised and Access Persons as well as reports, on Schedules B, C, D, E, F, G of the Code, as applicable. In addition, the Code of Ethics Administration Department shall keep records of all confirmations, and other information with respect to an account opened and maintained with the broker-dealer by any Access Person of Franklin Templeton Investments. The Code of Ethics Administration Department shall preserve those acknowledgments and reports, the records of consultations and waivers, and the confirmations, and other information for the period required by the applicable regulation.
The Code of Ethics Administration Department shall review brokerage transaction confirmations, account statements, Schedules B, C, D, E, F and G for compliance with the Code. The reviews shall include, but are not limited to;
(1) Comparison of brokerage confirmations, Schedule Bs, and/or brokerage statements to pre-clearance requests or, if a private placement, the Private Placement Checklist;
(2) Comparison of brokerage statements and/or Schedule Cs to current securities holding information, securities account information and discretionary authority information;
(3) Conducting periodic "back-testing" of Access Person transactions, Schedule Cs and/or Schedule Es in comparison to fund and client transactions;
The Code of Ethics Administration Department shall evidence review by initialing and dating the appropriate document or log. Violations of the Code detected by the Code of Ethics Administration Department during his or her reviews shall be promptly brought to the attention of the Director of Global Compliance and/or the Chief Compliance Officer with periodic reports to each appropriate Chief Compliance Officer.
D. PERIODIC RESPONSIBILITIES OF THE CODE OF ETHICS ADMINISTRATION
DEPARTMENT
The Code of Ethics Administration Department or designated group shall consult with FRI's General Counsel and seek the assistance of the Human Resources Department, as the case may be, to assure that:
1. Adequate reviews and audits are conducted to monitor compliance with the reporting, pre-clearance, prohibited transaction and other requirements of the Code.
2. All Code of Ethics Persons are adequately informed and receive appropriate education and training as to their duties and obligations under the Code.
3. All new Supervised and Access Persons of Franklin Templeton Investments are required to complete the Code of Ethics Computer Based Training program. Onsite training will be conducted on an "as needed" basis.
4. There are adequate educational, informational and monitoring efforts to ensure that reasonable steps are taken to prevent and detect unlawful insider trading by Supervised and Access Persons and to control access to inside information.
5. Written compliance reports are submitted to the Board of Directors of each relevant Fund at least quarterly. Additionally, written compliance reports are submitted to the Board of Directors of Franklin Resources, Inc., and the Board of each relevant Fund at least annually. Such reports will describe any issues arising under the Code or procedures since the last report, including, but not limited to, information about material violations of the Code or procedures and sanctions imposed in response to the material violations.
6. The Global Compliance Department will certify at least annually to the Fund's board of directors that Franklin Templeton Investments has adopted procedures reasonably necessary to prevent Supervised and Access Persons from violating the Code, and
7. Appropriate records are kept for the periods required by law. Types of records include pre-clearance requests and approvals, brokerage confirmations, brokerage statements, initial and annual Code of Ethics certifications.
E. APPROVAL BY FUND'S BOARD OF DIRECTORS
(1) BASIS FOR APPROVAL
The Board of Directors/Trustees must base its approval of the Code on a determination that the Code contains provisions reasonably necessary to prevent Code of Ethics Persons from engaging in any conduct prohibited by Rule 17j-1 or Rule 204A-1. The Code of Ethics Administration Department maintains a detailed list of violations and will amend the Code of Ethics and procedures in an attempt to reduce such violations.
(2) NEW FUNDS
At the time a new fund is organized, the Code Of Ethics Administration Department will provide the Fund's board of directors, a certification that the investment adviser and principal underwriter has adopted procedures reasonably necessary to prevent Code of Ethics Persons from violating the Code. Such certification will state that the Code contains provisions reasonably necessary to prevent Code of Ethics Persons from violating the Code.
(3) MATERIAL CHANGES TO THE CODE OF ETHICS
The Global Compliance Department will provide the Fund's board of directors a written description of all material changes to the Code no later than six months after adoption of the material change by Franklin Templeton Investments.
II. DEFINITIONS OF IMPORTANT TERMS
For purposes of the Code of Ethics and Insider Trading Policy, the terms below have the following meanings:
1934 ACT - The Securities Exchange Act of 1934, as amended.
1940 ACT - The Investment Company Act of 1940, as amended.
ACCESS PERSON - (1) Each director, trustee, general partner or officer of a Fund or investment adviser in Franklin Templeton Investments; (2) any Advisory Representative; and (3) any director, trustee, general partner or officer of a principal underwriter of the Funds, who has access to information concerning recommendations made to a Fund or client with regard to the purchase or sale of a security.
ADVISERS ACT - The Investment Advisers Act of 1940, as amended.
ADVISORY REPRESENTATIVE - Any director, trustee, general partner, officer or employee of a Fund or investment adviser of Franklin Templeton Investments (or of any company in a control relationship to such Fund or investment adviser) who in connection with his or her regular functions or duties makes any recommendation, who participates in the determination of which recommendation shall be made; or who, obtains any information concerning which securities are being recommended prior to the effective dissemination of such recommendations.
AFFILIATED PERSON - it has the same meaning as Section 2(a)(3) of the Investment Company Act of 1940. An "affiliated person" of an investment company includes directors, officers, employees, and the investment adviser. In addition, it includes any person owning 5% of the company's voting securities, any person in which the investment company owns 5% or more of the voting securities, and any person directly or indirectly controlling, controlled by, or under common control with the company.
APPROPRIATE ANALYST - With respect to any Access Person, any securities analyst or portfolio manager making investment recommendations or investing funds on behalf of an Associated Client and who may be reasonably expected to recommend or consider the purchase or sale of a security.
ASSOCIATED CLIENT - A Fund or client whose trading information would be available to the Access Person during the course of his or her regular functions or duties.
AUTOMATIC INVESTMENT PLAN-A program in which regular periodic purchases (or withdrawals) are made automatically in (or from) investment accounts in accordance with a predetermined schedule and allocations. An automatic investment plan includes a dividend reinvestment plan.
BENEFICIAL OWNERSHIP - Has the same meaning as in Rule 16a-1(a)(2) under the 1934 Act. Generally, a person has a beneficial ownership in a security if he or she, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, has or shares a direct or indirect pecuniary interest in the security. There is a presumption of a pecuniary interest in a security held or acquired by a member of a person's immediate family sharing the same household.
EXCHANGE TRADED FUNDS AND HOLDING COMPANY DEPOSITORY RECEIPTS - An
Exchange-Traded Fund or "ETF" is a basket of securities that is designed
to generally track an index--broad stock or bond market, stock industry
sector, or international stock. Holding Company Depository Receipts
"Holdrs" are securities that represent an investor's ownership in the
common stock or American Depository Receipts of specified companies in a
particular industry, sector or group.
FUNDS -U.S. registered investment companies in the Franklin Templeton Group of Funds.
HELD OR TO BE ACQUIRED - A security is "held or to be acquired" if within the most recent 15 days it (i) is or has been held by a Fund, or (ii) is being or has been considered by a Fund or its investment adviser for purchase by the Fund.
INITIAL PUBLIC OFFERING - An offering of securities registered under the Securities Act of 1933, the issuer of which immediately before the registration was not subject to the reporting requirements of sections 13 or 15(d) of the Securities Exchange Act of 1934.
LIMITED OFFERING- An offering that is exempt from registration under the Securities Act of 1933 pursuant to section 4(2) of section 4(6).
PORTFOLIO PERSON - Any employee of Franklin Templeton Investments, who, in connection with his or her regular functions or duties, makes or participates in the decision to purchase or sell a security by a Fund in Franklin Templeton Group of Funds, or any other client or if his or her functions relate to the making of any recommendations about those purchases or sales. Portfolio Persons include portfolio managers, research analysts, traders, persons serving in equivalent capacities (such as Management Trainees), persons supervising the activities of Portfolio Persons, and anyone else designated by the Director of Global Compliance.
PROPRIETARY INFORMATION - Information that is obtained or developed during the ordinary course of employment with Franklin Templeton Investments, whether by you or someone else, and is not available to persons outside of Franklin Templeton Investments. Examples of such Proprietary Information include, among other things, internal research reports, research materials supplied to Franklin Templeton Investments by vendors and broker-dealers not generally available to the public, minutes of departmental/research meetings and conference calls, and communications with company officers (including confidentiality agreements). Examples of non-Proprietary Information include mass media publications (e.g., The Wall Street Journal, Forbes, and Fortune), certain specialized publications available to the public (e.g., Morningstar, Value Line, Standard and Poors), and research reports available to the general public.
REPORTABLE FUND - Any fund for which an Franklin Templeton Investments' U.S.
registered investment adviser ("FTI Adviser") serves as an investment
adviser or a sub-adviser or any fund whose investment adviser or
principal underwriter controls a FTI Adviser, is controlled by a FTI
adviser or is under common control with a FTI Adviser.
SECURITY - Any stock, note, bond, evidence of indebtedness, participation or interest in any profit-sharing plan or limited or general partnership, investment contract, certificate of deposit for a security, fractional undivided interest in oil or gas or other mineral rights, any put, call, straddle, option, or privilege on any security (including a certificate of deposit), guarantee of, or warrant or right to subscribe for or purchase any of the foregoing, and in general any interest or instrument commonly known as a security. For purposes of the Code, security does not include:
1. direct obligations of the U.S. government (i.e. securities issued or
guaranteed by the U.S. government such as Treasury bills, notes and
bonds including U.S. savings bonds and derivatives thereof);
2. money market instruments - banker's acceptances, bank certificates of
deposits, commercial paper, repurchase agreement and other high
quality short-term debt instruments;
3. shares of money market funds;
4. shares issued by open-end funds other than Reportable Funds; and
5. Shares issued by unit investment trusts that are invested exclusively
in one or more open-end funds, none of which are Reportable Funds.
SUPERVISED PERSONS- Supervised persons are an advisers' partners, officers, directors (or other persons occupying a similar status or performing similar functions), and employees, as well as any other persons who provide advice on behalf of the adviser and are subject to the supervision and control of the adviser.
APPENDIX B: ACKNOWLEDGMENT FORM AND SCHEDULES
INITIAL AND ANNUAL
ACKNOWLEDGMENT FORM
CODE OF ETHICS AND INSIDER TRADING COMPLIANCE POLICY AND PROCEDURES
INSTRUCTIONS: Print form, complete, sign and date. Submit completed form to Code of Ethics Administration Department via:
Inter-office: Code of Ethics Administration SM-920/2 Fax: (650) 312-5646
U.S. Mail: Franklin Templeton Investments E-mail: Preclear-Code of Ethics Attn: Code of Ethics Administration Dept. (internal) P.O. Box 25050 Lpreclear@frk.com (external) San Mateo, CA 94402-5050
TO: CODE OF ETHICS ADMINISTRATION DEPARTMENT
I HEREBY ACKNOWLEDGE RECEIPT OF A COPY OF THE FRANKLIN TEMPLETON INVESTMENT'S CODE OF ETHICS ("CODE") AND INSIDER TRADING COMPLIANCE POLICY AND PROCEDURES, AS AMENDED, WHICH I HAVE READ AND UNDERSTAND. I WILL COMPLY FULLY WITH ALL PROVISIONS OF THE CODE AND THE INSIDER TRADING POLICY TO THE EXTENT THEY APPLY TO ME DURING THE PERIOD OF MY EMPLOYMENT. IF THIS IS AN ANNUAL CERTIFICATION, I CERTIFY THAT I HAVE COMPLIED WITH ALL PROVISIONS OF THE CODE AND THE INSIDER TRADING POLICY TO THE EXTENT THEY APPLIED TO ME OVER THE PAST YEAR. ADDITIONALLY, I AUTHORIZE ANY BROKER-DEALER, BANK, OR INVESTMENT ADVISER WITH WHOM I HAVE SECURITIES ACCOUNTS AND ACCOUNTS IN WHICH I HAVE DIRECT OR INDIRECT BENEFICIAL OWNERSHIP, TO PROVIDE BROKERAGE CONFIRMATIONS AND STATEMENTS AS REQUIRED FOR COMPLIANCE WITH THE CODE. I FURTHER UNDERSTAND AND ACKNOWLEDGE THAT ANY VIOLATION OF THE CODE OR INSIDER TRADING POLICY, INCLUDING ENGAGING IN A PROHIBITED TRANSACTION OR FAILURE TO FILE REPORTS AS REQUIRED (SEE SCHEDULES B, C, D, E, F AND G), MAY SUBJECT ME TO DISCIPLINARY ACTION UP TO AND INCLUDING TERMINATION OF EMPLOYMENT.
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NAME (PRINT) SIGNATURE DATE SUBMITTED
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TITLE DEPARTMENT NAME LOCATION
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NON ACCESS PERSON ACCESS PERSON SUPERVISED PERSON PORTFOLIO PERSON
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[ ] [ ] [ ] [ ]
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YEAR END
INITIAL DISCLOSURE ANNUAL DISCLOSURE (FOR COMPLIANCE USE ONLY)
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[ ] [ ] [ ]
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SCHEDULE A: LEGAL AND COMPLIANCE OFFICERS CODE OF ETHICS ADMINISTRATION DEPT.
CONTACT INFO/11
LEGAL OFFICER
Craig Tyle
Executive Vice President & General Counsel
Franklin Templeton Investments
One Franklin Parkway
San Mateo, CA 94403-1906
Tel: (650) 312-4161
Fax: (650) 312-2221
Email: ctyle@frk.com
COMPLIANCE OFFICERS
DIRECTOR, GLOBAL COMPLIANCE
James M. Davis
Franklin Templeton Investments
One Franklin Parkway
San Mateo, CA 94403-1906
Tel: (650) 312-2832
Fax: (650) 312-5676
Email: jdavis@frk.com
CHIEF COMPLIANCE OFFICER
Monica Poon
Franklin Templeton Investments
One Franklin Parkway
San Mateo, CA 94403-1906
Tel: (650) 312-4631
Fax: (650) 312-5676
Email: mpoon@frk.com
CODE OF ETHICS ADMINISTRATION DEPARTMENT
Maria Abbott, Manager
Darlene James
Simon Li
Tadao Hayashi
Global Compliance Department
Franklin Templeton Investments
One Franklin Parkway
San Mateo, CA 94403-1906
Tel: (650) 312-3693
Fax: (650) 312-5646
Email: Preclear-Code of Ethics (internal)
Lpreclear@frk.com (external)
SCHEDULE B: QUARTERLY TRANSACTIONS REPORT
INSTRUCTIONS: Print form, complete, sign and date. Submit completed form to the Code of Ethics Administration Department via:
Inter-office: Code of Ethics Administration SM-920/2 Fax: (650)312-5646
U.S. Mail: Franklin Templeton Investments E-mail: Preclear-Code of Ethics
Attn: Code of Ethics (internal)
Administration Dept Lpreclear@frk.com (external)
P.O. Box 25050
San Mateo, CA 94402-5050
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This report of personal securities transactions not reported by duplicate confirmations and brokerage statements pursuant to Section 4.3 of the Code is required pursuant to Rule 204A-1of the Investment Advisers Act of 1940 and Rule 17j-1(d) of the Investment Company Act of 1940. The report must be completed and submitted to the Code of Ethics Administration Department no later than thirty (30) calendar days after the end of the calendar quarter in which you completed such as transaction. Refer to Section 4.3 of the Code for further instructions.
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SECURITY NAME
DESCRIPTION/TICKER
SYMBOL OR CUSIP PRE-CLEARED
NUMBER/TYPE OF THROUGH
SECURITY (INTEREST QUANTITY BROKER DEALER/ COMPLIANCE
TRADE BUY, SELL RATE AND MATURITY (NUMBER OF PRINCIPAL BANK AND DEPARTMENT
DATE OR OTHER DATE, IF APPLICABLE) SHARES) PRICE AMOUNT ACCOUNT NUMBER (DATE OR N/A)
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THIS REPORT SHALL NOT BE CONSTRUED AS AN ADMISSION THAT I HAVE ANY DIRECT OR INDIRECT BENEFICIAL
OWNERSHIP IN THE SECURITIES DESCRIBED ABOVE.
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NAME (PRINT) SIGNATURE
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DATE REPORT SUBMITTED QUARTER ENDED
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SCHEDULE C: INITIAL & ANNUAL DISCLOSURE OF BROKERAGE ACCOUNTS, SECURITIES
HOLDINGS AND DISCRETIONARY AUTHORITY
INSTRUCTIONS: Print form, complete, sign and date. Submit completed form to the Code of Ethics Administration via:
Inter-office: Code of Ethics Administration SM-920/2 Fax: (650)312-5646
U.S. Mail: Franklin Templeton Investments E-mail: Preclear-Code of Ethics Attn: Code of Ethics Administration Dept (internal) P.O. Box 25050 Lpreclear@frk.com (external) San Mateo, CA 94402-5050 ------------------------------------------------------------------------------ |
This report shall set forth the name and/or description of each securities account and holding in which you have a direct or indirect beneficial interest, including securities accounts and holdings of a spouse, minor children or other immediate family member living in your home, trusts, foundations, and any account for which trading authority has been delegated to you, other than authority to trade for a Fund or other client of Franklin Templeton Investments or by you to an unaffiliated registered broker-dealer, registered investment adviser, or other investment manager acting in a similar fiduciary capacity, who exercises sole investment discretion. In lieu of listing each securities account and holding below, you may attach copies of current brokerage statements, sign below and return the Schedule C along with the brokerage statements to the Code of Ethics Administration Department within 10 days of becoming an Access Person if an initial report or by February 1st of each year, if an annual report. The information in this Schedule C or any attached brokerage statements must be current as of a date no more than 45 days prior to the date you become an Access Person or the date you submit your annual report. Refer to Part 4 of the Code for additional filing instructions.
Securities that are EXEMPT from being reported on the Schedule C include: (i) securities that are direct obligations of the U.S. Government, such as Treasury bills, notes and bonds, and U.S. Savings Bonds and derivatives thereof; (ii) high quality short-term instruments ("money market instruments") including but not limited to bankers' acceptances, U.S. bank certificates of deposit; commercial paper; and repurchase agreements; (iii) shares of money market funds; shares issued by open-end funds other than Reportable Funds (Any fund for which a Franklin Templeton Investments' U.S. registered investment adviser ("FTI Adviser") serves as an investment adviser or a sub-adviser or any fund whose investment adviser or principal underwriter is controlled by an FTI adviser or is under common control with a FTI adviser; and shares issued by unit investment trusts that are invested in one or more open-end funds none of which are Reportable Funds.
[ ] I DO NOT HAVE ANY BROKERAGE ACCOUNTS.
[ ] I DO NOT HAVE ANY SECURITIES HOLDINGS.
[ ] I HAVE ATTACHED STATEMENTS CONTAINING ALL MY BROKERAGE ACCOUNTS AND
SECURITIES HOLDINGS.
[ ] I HAVE LISTED MY BROKERAGE ACCOUNTS CONTAINING NO SECURITIES HOLDINGS.
[ ] I HAVE LISTED MY SECURITIES HOLDINGS NOT HELD IN A BROKERAGE ACCOUNT.
SECURITY
ADDRESS DESCRIPTON/TITLE
NAME OF OF BROKERAGE TICKER/SYMBOL QUANTITY
ACCOUNT NAME(S) BROKERAGE FIRM, BANK OR OR CUSIP # NUMBER OF
(REGISTRATION SHOWN FIRM, BANK INVESTMENT ADVISOR (INTEREST RATE SHARES & CHECK THIS
ON BROKERAGE OR INVESTMENT (STREET/CITY/ ACCOUNT & MATURITY IF PRINCIPAL BOX IF
STATEMENT) ADVISER STATE/ZIP CODE) NUMBER APPROPRIATE) AMOUNT DISCRETIONARY
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TO THE BEST OF MY KNOWLEDGE, I HAVE DISCLOSED ALL OF MY SECURITIES ACCOUNTS AND/OR HOLDINGS IN WHICH I HAVE A DIRECT OR INDIRECT BENEFICIAL INTEREST, INCLUDING SECURITIES ACCOUNTS AND/OR HOLDINGS OF A SPOUSE, MINOR CHILDREN OR OTHER IMMEDIATE MEMBER LIVING IN MY HOME, TRUSTS, FOUNDATIONS, AND ANY ACCOUNT FOR WHICH TRADING AUTHORITY HAS BEEN DELEGATED TO ME OR BY ME TO AN UNAFFILIATED REGISTERED BROKER-DEALER, REGISTERED INVESTMENT ADVISER, OR OTHER INVESTMENT MANAGER ACTING IN A SIMILAR FIDUCIARY CAPACITY, WHO EXERCISES SOLE INVESTMENT DISCRETION.
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DATE REPORTED
NAME (PRINT) SIGNATURE SUBMITTED
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INITIAL DISCLOSURE ANNUAL
DISCLOSURE
(CHECK THIS
BOX IF (CHECK THIS
YOU'RE A NEW BOX IF ANNUAL YEAR END
ACCESS PERSON) CERTIFICATION) (FOR COMPLIANCE USE ONLY)
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Inter-office: Code of Ethics Administration SM-920/2 Fax: (650) 312-5646
U.S. Mail: Franklin Templeton Investments E-mail: Preclear-Code of Ethics
Attn: Code of Ethics Administration (internal)
Dept. Lpreclear@frk.com
P.O. Box 25050 (external)
San Mateo, CA 94402-5050
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All Access Persons, PRIOR TO OPENING A BROKERAGE ACCOUNT OR PLACING AN INITIAL ORDER IN THE NEW ACCOUNT, are required to notify the Code of Ethics Administration Department and the executing broker-dealer in writing. This includes accounts in which the Access Person has or will have a financial interest in (e.g., a spouse's account) or discretionary authority (e.g., a trust account for a minor child) and for Reportable Form.
UPON RECEIPT OF THE NOTIFICATION OF SECURITIES ACCOUNT FORM, THE CODE OF ETHICS ADMINISTRATION DEPARTMENT WILL CONTACT THE BROKER-DEALER IDENTIFIED BELOW AND REQUEST THAT DUPLICATE CONFIRMATIONS AND STATEMENTS OF YOUR BROKERAGE ACCOUNT ARE SENT TO FRANKLIN TEMPLETON INVESTMENTS.
ACCOUNT INFORMATION:
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NAME ON THE ACCOUNT ACCOUNT NUMBER
IF OTHER THAN EMPLOYEE, OR SOCIAL DATE
RELATIONSHIP I.E., SPOUSE) SECURITY NUMBER ESTABLISHED
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BROKERAGE FIRM
ADDRESS
NAME OF OUR REPRESENTATIVE (CITY/STATE/
BROKERAGE FIRM (OPTIONAL) ZIP CODE)
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ARE YOU A
REGISTERED
REPRESENTATIVE?
INTEROFFICE NASD LICENSED, I.E., ARE YOU AN
MAIL CODE SERIES (6,7) ACCESS PERSON
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[ ] YES [ ] NO [ ] YES [ ]NO
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PHONE EXTENSION SIGNATURE DATE
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SCHEDULE E: NOTIFICATION OF DIRECT OR INDIRECT BENEFICIAL INTEREST
Inter-office: Code of Ethics Administration SM-920/2 Fax: (650)312-5646
U.S. Mail: Franklin Templeton Investments E-mail: Preclear-Code of Ethics
Attn: Code of Ethics Administration (internal)
Dept. Lpreclear@frk.com
P.O. Box 2505 (external)
San Mateo, CA 94402-5050
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If you have any beneficial ownership in a security and it is recommended to the Appropriate Analyst that the security be considered for purchase or sale by an Associated Client, or if a purchase or sale of that security for an Associated Client is carried out, you must disclose your beneficial ownership to Code of Ethics Administration Department and the Appropriate Analyst in writing on Schedule E (or an equivalent form containing similar information) before the purchase or sale of the security, or before or simultaneously with the recommendation to purchase or sell a security. The Appropriate Analyst or the fund's primary portfolio manager must review and sign Schedule E and send a copy of the Code of Ethics Administration Department.
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DATE AND
METHOD PRIMARY
OWNERSHIP METHOD OF LEARNED THAT PORTFOLIO
TYPE ACQUISITION SECURITY'S UNDER MANAGER OR NAME OF DATE OF
SECURITY (DIRECT OR YEAR (PURCHASE/GIFT CONSIDERATION PORTFOLIO PERSON VERBAL
DESCRIPTION INDIRECT) ACQUIRED OTHER) BY FUNDS ANALYST NOTIFIED NOTIFICATION
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EMPLOYEE'S NAME (PRINT) SIGNATURE DATE
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PRIMARY PM OR ANALYST'S NAME (PRINT) SIGNATURE DATE
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SCHEDULE F: CHECKLIST FOR INVESTMENTS IN PARTNERSHIPS AND SECURITIES ISSUED IN
LIMITED OFFERINGS (PRIVATE PLACEMENTS)
INSTRUCTIONS: Print form, complete, sign and date and obtain CIO's signatures. Submit completed form to Code of Ethics Administration Dept. via:
Inter-office: Code of Ethics Administration SM-920/2 Fax: (650) 312-5646
U.S. Mail: Franklin Templeton Investments E-mail: Preclear-Code of Ethics
Attn: Code of Ethics Administration (internal)
Dept. Lpreclear@frk.com
P.O. Box 2505 (external)
San Mateo, CA 94402-5050
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In deciding whether to approve a transaction, the Director of Global Compliance
or the Chief Compliance Officer shall take into account, among other factors,
whether the investment opportunity should be reserved for a Fund or other
client, and whether the investment opportunity is being offered to the Access
Person by virtue of his or her position with the Franklin Templeton Investments.
IF THE ACCESS PERSON RECEIVES CLEARANCE FOR THE TRANSACTION, NO INVESTMENT IN
THE SAME ISSUER MAY BE MADE FOR A FUND OR CLIENT UNLESS AN EXECUTIVE OFFICER OF
FRANKLIN RESOURCES, INC., WITH NO INTEREST IN THE ISSUER, APPROVES THE
TRANSACTION.
IN ORDER TO EXPEDITE YOUR REQUEST, PLEASE PROVIDE THE FOLLOWING INFORMATION:
PLEASE ATTACH PAGES OF THE OFFERING MEMORANDUM (OR OTHER DOCUMENTS) SUMMARIZING THE INVESTMENT OPPORTUNITY, INCLUDING:
i) Name of the partnership/hedge fund/issuer;
ii) Name of the general partner, location & telephone number;
iii) Summary of the offering; including the total amount the offering/
issuer;
iv) Percentage your investment will represent of the total offering;
v) Plan of distribution; and
vi) Investment objective and strategy,
PLEASE RESPOND TO THE FOLLOWING QUESTIONS:
a) Was this investment opportunity presented to you in your capacity as a portfolio manager? If no, please explain the relationship, if any, you have to the issuer or principals of the issuer.
b) Is this investment opportunity suitable for any fund/client that you advise?/12 If yes, why isn't the investment being made on behalf of the fund/client? If no, why isn't the investment opportunity suitable for the fund/clients?
c) Do any of the fund/clients that you advise presently hold securities of the issuer of this proposed investment (e.g., common stock, preferred stock, corporate debt, loan participations, partnership interests, etc),? If yes, please provide the names of the funds/clients and security description.
d) Do you presently have or will you have any managerial role with the company/issuer as a result of your investment? If yes, please explain in detail your responsibilities, including any compensation you will receive.
e) Will you have any investment control or input to the investment decision making process?
f) Will you receive reports of portfolio holdings? If yes, when and how frequently will these be provided?
REMINDER: PERSONAL SECURITIES TRANSACTIONS THAT DO NOT GENERATE BROKERAGE CONFIRMATIONS (E.G., INVESTMENTS IN PRIVATE PLACEMENTS) MUST BE REPORTED TO THE CODE OF ETHICS ADMINISTRATION DEPARTMENT ON SCHEDULE B NO LATER THAN 30 CALENDAR DAYS AFTER THE END OF THE CALENDAR QUARTER THE TRANSACTION TOOK PLACE.
DATE RECEIVED:___________ DATE FORWARDED TO FRI EXECUTIVE OFFICER:____________
APPROVED BY:
DATE ENTERED IN LOTUS NOTES: _________ DATE ENTERED IN EXAMINER: __________
PRECLEARED: [ ] [ ] (ATTACH EMAIL) IS THE ACCESS PERSON REGISTERED? [ ] [ ]
YES NO YES NO
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|
SCHEDULE G: REQUEST FOR APPROVAL TO SERVE AS A DIRECTOR
INSTRUCTIONS: Print form, complete, sign and date. Submit completed form to Code of Ethics Administration Department via:
Inter-office: Code of Ethics Administration SM-920/2 Fax: (650) 312-5646
U.S. Mail: Franklin Templeton Investments E-mail: Preclear-Code of Ethics Attn: Code of Ethics Administration Dept. (internal) P.O. Box 25050 Lpreclear@frk.com San Mateo, CA 94402-5050 (external) ---------------------------------------------------------------------------- EMPLOYEE: ---------------------------------------------------------------------------- DEPARTMENT: EXTENSION: ---------------------------------------------------------------------------- JOB TITLE: SITE/LOCATION: ---------------------------------------------------------------------------- SUPERVISOR: SUP. EXTENSION: ---------------------------------------------------------------------------- ---------------------------------------------------------------------------- Company Name: ---------------------------------------------------------------------------- Nature of company's business: ---------------------------------------------------------------------------- Is this a public or private company? ---------------------------------------------------------------------------- Title/Position: ---------------------------------------------------------------------------- Justification for servicing as a director with the company: ---------------------------------------------------------------------------- Estimate of hours to be devoted to the company: ---------------------------------------------------------------------------- Compensation received: [ ] Yes [ ] No ---------------------------------------------------------------------------- If compensated, how? ---------------------------------------------------------------------------- Starting date: ---------------------------------------------------------------------------- NASD Registered/Licensed? [ ] Yes [ ] No |
Signatory Name ____________________ Signatory Title: _____________________
Signature: ___________________________ Date: ______________________
Franklin Advisers, Inc. IA Templeton Global Advisors Ltd. IA
(Bahamas)
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Franklin Advisory Services, IA Franklin Templeton Italia FBD/FIA
LLC Societa di Gestione del
Risparmio per Axioni (Italy)
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Franklin Investment Advisory IA Franklin Templeton Investment FBD
Services, LLC Services GmbH (Germany)
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Franklin Templeton Portfolio IA Fiduciary Trust International Trust
Advisors, Inc. of the South Co
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Franklin Mutual Advisers, LLC IA Franklin Templeton Investments IA/FIA
Corp. (Ontario)
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Franklin/Templeton BD Templeton Asset Management IA/FIA
Distributors, Inc. Ltd. (Singapore)
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Franklin Templeton Services, FA Fiduciary Trust Company Trust Co.
LLC International
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Franklin Templeton FBD Fiduciary International, Inc IA
International Services S.A.
(Luxembourg)
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Franklin Templeton FIA Fiduciary Investment IA
Investments Australia Limited Management International Inc
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Franklin Templeton Investor TA Franklin Templeton FIA
Services, LLC Institutional Asia Limited (Hong Kong)
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Franklin Templeton IA Fiduciary Trust International IA/FIA
Alternative Strategies, Inc. Limited (UK)
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Franklin Templeton IA Franklin Templeton Investment FIA
Institutional, LLC Trust Management, Ltd (Korea)
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Fiduciary Financial Services, BD Franklin Templeton Asset FBD/FIA
Corp. Management (India) Private
Limited (India)
-----------------------------------------------------------------------------
Franklin Templeton Asset FIA
Management S.A. (France)
-----------------------------------------------------------------------------
Franklin Templeton FBD/IA
Investments (Asia) Limited
(Hong Kong)
-----------------------------------------------------------------------------
Franklin Templeton Investment IA/FIA
Management Limited (UK)
-----------------------------------------------------------------------------
Templeton/Franklin Investment BD
Services, Inc
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Templeton Investment Counsel, IA
LLC
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Templeton Asset Management, IA/FIA
Ltd.
-----------------------------------------------------------------------------
Franklin Templeton FIA
Investments Japan Ltd.
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Codes: IA: US registered investment adviser
BD: US registered broker-dealer
FIA: Foreign equivalent investment adviser
FBD: Foreign equivalent broker-dealer
TA: US registered transfer agent
FA: Fund Administrator
BM: Business manager to the funds
REA: Real estate adviser
Trust: Trust company
|
APPENDIX D: FRANKLIN RESOURCES, INC. CODE OF ETHICS AND BUSINESS CONDUCT
This Code of Ethics and Business Conduct (the "Code") has been adopted by the Board of Directors (the "Board") of Franklin Resources, Inc. in connection with its oversight of the management and business affairs of Franklin Resources, Inc.
1. PURPOSE AND OVERVIEW
(a) APPLICATION. The Code is applicable to all officers, directors, employees and temporary employees (each, a "Covered Person") of Franklin Resources, Inc. and all of its U.S. and non-U.S. subsidiaries and affiliates (collectively, the "Company").
(b) PURPOSE. The Code summarizes the values, principles and business practices that guide the business conduct of the Company and also provides a set of basic principles to guide Covered Persons regarding the minimum ethical requirements expected of them. The Code supplements the Company's existing employee policies, including those specified in the respective U.S. and non-U.S. employee handbooks and also supplements various other codes of ethics, policies and procedures that have been adopted by the Company. All Covered Persons are expected to become familiar with the Code and to apply these principles in the daily performance of their jobs.
(c) OVERRIDING RESPONSIBILITIES. It is the responsibility of all Covered Persons to maintain a work environment that fosters fairness, respect and integrity. The Company requires all Covered Persons to conduct themselves in a lawful, honest and ethical manner in all of the Company's business practices.
(d) QUESTIONS. All Covered Persons are expected to seek the advice of a supervisor, a manager, the Human Resources Department, the Company's General Counsel or the Global Compliance Department for additional guidance or if there is any question about issues discussed in this Code.
(e) VIOLATIONS. If any Covered Person observes possible unethical or illegal
conduct, such concerns or complaints should be reported as set forth in
Section 16 below.
(f) DEFINITION OF EXECUTIVE OFFICER. For the purposes of this Code, the term "Executive Officer" shall mean those officers, as shall be determined by the Board of Directors of Franklin Resources, Inc. from time to time, who are subject to the reporting obligations of Section 16(a) of the Securities Exchange Act of 1934.
(g) DEFINITION OF DIRECTOR. For purposes of this Code, the term "Director" shall mean members of the Board of Directors of Franklin Resources, Inc.
2. COMPLIANCE WITH LAWS, RULES AND REGULATIONS.
(a) COMPLIANCE. All Covered Persons of the Company are required to comply with all of the applicable laws, rules and regulations of the United States and other countries, and the states, counties, cities and other jurisdictions, in which the Company conducts its business. Local laws may in some instances be less restrictive than the principles set forth in this Code. In those situations, Covered Persons should comply with the Code, even if the conduct would otherwise be legal under applicable laws. On the other hand, if local laws are more restrictive than the Code, Covered Persons should comply with applicable laws.
(b) INSIDER TRADING. Such Global Compliance includes, without limitation, compliance with the Company's insider trading policy, which prohibits Covered Persons from trading securities either personally or on behalf of others, while in possession of material non-public information or communicating material non-public information to others in violation of the law. Securities include common stocks, bonds, options, futures and other financial instruments. Material information includes any information that a reasonable investor would consider important in a decision to buy, hold, or sell securities. These laws provide substantial civil and criminal penalties for individuals who fail to comply. The policy is described in more detail in the various employee handbooks and compliance policies. In addition, the Company has implemented trading restrictions to reduce the risk, or appearance, of insider trading.
(c) QUESTIONS REGARDING STOCK TRADING. All questions regarding insider trading or reports of impropriety regarding stock transactions should be made to the Global Compliance Department. See also Section 16 below.
3. CONFLICTS OF INTEREST.
(a) AVOIDANCE OF CONFLICTS. All Covered Persons are required to conduct themselves in a manner and with such ethics and integrity so as to avoid a conflict of interest, either real or apparent.
(b) CONFLICT OF INTEREST DEFINED. A conflict of interest is any circumstance where an individual's personal interest interferes or even appears to interfere with the interests of the Company. All Covered Persons have a duty to avoid financial, business or other relationships that might be opposed to the interests of the Company or might cause a conflict with the performance of their duties.
(c) POTENTIAL CONFLICT SITUATIONS. A conflict can arise when a Covered Person takes actions or has interests that may make it difficult to perform his or her Company related work objectively and effectively. Conflicts also may arise when a Covered Person or a member of his or her family, receives improper personal benefits as a result of his or her position in the Company.
(d) EXAMPLES OF POTENTIAL CONFLICTS. Some of the areas where a conflict could arise include:
(i) Employment by a competitor, regardless of the nature of the employment, while employed by the Company.
(ii) Placement of business with any company in which a Covered Person, or any member of the Covered Person's family, has a substantial ownership interest or management responsibility.
(iii) Making endorsements or testimonials for third parties.
(iv) Processing a transaction on the Covered Person's personal account(s), or his or her friend or family members' account(s), through the Company's internal systems without first submitting the transaction request to the Company's Customer Service Center.
(v) Disclosing the Company's confidential information to a third party without the prior consent of senior management.
(e) QUESTIONS REGARDING CONFLICTS. All questions regarding conflicts of interest and whether a particular situation constitutes a conflict of interest should be directed to the Global Compliance Department. See also Section 16 below.
4. GIFTS AND ENTERTAINMENT.
(a) RATIONALE. The Company's aim is to deter providers of gifts from seeking or receiving special favors from Covered Persons. Gifts of more than a nominal value can cause Covered Persons to feel placed in a position of "obligation" and/or give the appearance of a conflict of interest.
(b) NO CONDITIONAL GIFTS. Covered Persons may not at any time accept any item that is conditioned upon the Company doing business with the entity or person giving the gift.
(c) NO CASH GIFTS. Cash gifts of any amount should never be accepted.
(d) NO NON-CASH GIFTS OVER $100. Covered Persons, including members of their immediate families, may not, directly or indirectly, take, accept or receive bonuses, fees, commissions, gifts, gratuities, or any other similar form of consideration, from any person, firm, corporation or association with which the Company does or seeks to do business if the value of such item is in excess of $100.00 on an annual basis.
(e) NO SOLICITATION FOR GIFTS. Covered Persons should not solicit any third party for any gift, gratuity, entertainment or any other item regardless of its value.
(f) PERMITTED ENTERTAINMENT. Covered Persons, including members of their immediate families, may accept or participate in "reasonable entertainment" provided by any person, firm, corporation or association with which the Company does or seeks to do business. "Reasonable entertainment" would include, among other things, an occasional meal, a ticket to a sporting event or the theater, or comparable entertainment, which is neither so frequent nor so excessive as to raise any question of propriety; attended by the entity or person providing the entertainment, meal, or tickets; not more frequent than once per quarter; and not preconditioned on a "quid pro quo" business relationship.
(g) NO EXCESSIVE ENTERTAINMENT. Covered Persons are prohibited from accepting "excessive entertainment" without the prior written approval of the Company's Chief Executive Officer or the Office of the Chairman. "Excessive entertainment" is entertainment that has a value greater than $1000.00 or is provided more frequently than once per quarter.
(h) WHAT TO DO. Covered Persons presented with a gift with a value in excess of $100.00 or entertainment valued greater than $1000.00 should politely decline and explain that the Company policy makes it impossible to accept such a gift. Covered Persons are encouraged to be guided by their own sense of ethical responsibility, and if they are presented with such a gift from an individual or company, they should notify their manager so the gift can be returned.
(i) PERMITTED COMPENSATION. The Company recognizes that this Section 4 does not prohibit Directors who do not also serve in management positions within the Company from accepting compensation, bonuses, fees and other similar consideration paid in the normal course of business as a result of their outside business activity, employment or directorships.
(j) QUESTIONS REGARDING GIFTS AND ENTERTAINMENT. All questions regarding gifts and entertainment should be directed to the Global Compliance Department. See also Section 16 below.
5. OUTSIDE EMPLOYMENT.
(a) RESTRICTIONS. Subject to any departmental restrictions, Covered Persons are permitted to engage in outside employment if it is free of any actions that could be considered a conflict of interest. Outside employment must not adversely affect a Covered Person's job performance at the Company, and outside employment must not result in absenteeism, tardiness or a Covered Person's inability to work overtime when requested or required. Covered Persons may not engage in outside employment, which requires or involves using Company time, materials or resources. (b) SELF-EMPLOYMENT. For purposes of this policy, outside employment includes self-employment.
(c) REQUIRED APPROVALS. Due to the fiduciary nature of the Company's business, all potential conflicts of interest that could result from a Covered Person's outside employment should be discussed with the Covered Person's manager and the Human Resources Department, prior to entering into additional employment relationships.
(d) OUTSIDE DIRECTORS EXEMPT. The Company recognizes that this Section 5 is not applicable to Directors who do not also serve in management positions within the Company.
6. CONFIDENTIALITY.
(a) CONFIDENTIALITY OBLIGATION. Covered Persons are responsible for maintaining the confidentiality of information entrusted to them by the Company or its customers, except when disclosure is authorized or legally mandated. The sensitive nature of the investment business requires that the Company keep its customers' confidence and trust. Covered Persons must be continuously sensitive to the confidential and privileged nature of the information to which they have access concerning the Company, and must exercise the utmost discretion when discussing any work-related matters with third parties. Each Covered Person must safeguard the Company's confidential information and not disclose it to a third party without the prior consent of senior management.
(b) WHAT IS CONFIDENTIAL INFORMATION. "Confidential information" includes but is not limited to information, knowledge, ideas, documents or materials that are owned, developed or possessed by the Company or that in some other fashion are related to confidential or proprietary matters of the Company, its business, customers, shareholders, Covered Persons or brokers. It includes all business, product, marketing, financial, accounting, personnel, operations, supplier, technical and research information. It also includes computer systems, software, documentation, creations, inventions, literary works, developments, discoveries and trade secrets. Confidential information includes any non-public information of the Company that might be of use to competitors, or harmful to the Company or its customers, if disclosed.
(c) ACKNOWLEDGMENT. All employees of the Company are expected to sign an acknowledgment regarding the confidentiality policy set forth above at the time they become employed with the Company.
(d) LENGTH OF CONFIDENTIALITY OBLIGATIONS. Covered Persons are expected to comply with the confidentiality policy not only for the duration of their employment or service with the Company, but also after the end of their employment or service with the Company.
(e) CONFIDENTIALITY UNDER THE CODE. All reports and records prepared or maintained pursuant to this Code shall be considered confidential and shall be maintained and protected accordingly.
7. OWNERSHIP OF INTELLECTUAL PROPERTY.
(a) COMPANY OWNERSHIP. The Company owns all of the work performed by Covered Persons at and/or for the Company, whether partial or completed. All Covered Persons shall be obligated to assign to the Company all "intellectual property" that is created or developed by Covered Persons, alone or with others, while working for the Company.
(b) WHAT IS INTELLECTUAL PROPERTY. "Intellectual Property" includes all trademarks and service marks, trade secrets, patents and patent subject matter and inventor rights in the United States and foreign countries and related applications. It includes all United States and foreign copyrights and subject matter and all other literary property and author rights, whether or not copyrightable. It includes all creations, not limited to inventions, discoveries, developments, works of authorship, ideas and know-how. It does not matter whether or not the Company can protect them by patent, copyright, trade secrets, trade names, trade or service marks or other intellectual property right. It also includes all materials containing any intellectual property. These materials include but are not limited to computer tapes and disks, printouts, notebooks, drawings, artwork and other documentation. To the extent applicable, non-trade secret intellectual property constitutes a "work made for hire" owned by the Company, even if it is not a trade secret.
(c) EXCEPTIONS. The Company will not be considered to have a proprietary interest in a Covered Person's work product if: (i) the work product is developed entirely on the Covered Person's own time without the use or aid of any Company resources, including without limitation, equipment, supplies, facilities or trade secrets; (ii) the work product does not result from the Covered Person's employment with the Company; and (iii) at the time a Covered Person conceives or reduces the creation to practice, it is not related to the Company's business nor the Company's actual or expected research or development.
(d) REQUIRED DISCLOSURE. All Covered Persons must disclose to the Company all intellectual property conceived or developed while working for the Company. If requested, a Covered Person must sign all documents necessary to memorialize the Company's ownership of intellectual property under this policy. These documents include but are not limited to assignments and patent, copyright and trademark applications.
8. CORPORATE OPPORTUNITIES. Covered Persons are prohibited from (i) taking for themselves opportunities that are discovered through the use of Company property, information or position, (ii) using Company property, information or position for personal gain, and/or (iii) competing with the Company.
9. FAIR DEALING. Each Covered Person should endeavor to deal fairly with the Company's customers, suppliers, competitors and Covered Persons and not to take unfair advantage of anyone through manipulation, concealment, abuse of privileged information, misrepresentation of material facts or any other unfair dealing practice.
10. PROTECTION AND USE OF COMPANY PROPERTY. All Covered Persons should protect the Company's assets and ensure they are used for legitimate business purposes during employment with the Company. Improper use includes unauthorized personal appropriation or use of the Company's assets, data or resources, including computer equipment, software and data.
11. STANDARDS OF BUSINESS CONDUCT.
(a) RESPECTFUL WORK ENVIRONMENT. The Company is committed to fostering a work environment in which all individuals are treated with respect and dignity. Each individual should be permitted to work in a business-like atmosphere that promotes equal employment opportunities.
(b) PROHIBITED CONDUCT. The following conduct will not be tolerated and could result in disciplinary action, including termination:
(i) Any act which causes doubt about a Covered Person's integrity, such as the falsifying of Company records and documents, competing in business with the Company, divulging trade secrets, or engaging in any criminal conduct.
(ii) Any act which may create a dangerous situation, such as carrying weapons, firearms or explosives on Company premises or surrounding areas, assaulting another individual, or disregarding property and safety standards.
(iii) The use, sale, purchase, transfer, possession, or attempted sale, purchase or transfer of alcohol or drugs while at work. Reporting to work while under the influence of alcohol or drugs, or otherwise in a condition not fit for work.
(iv) Insubordination, including refusal to perform a job assignment or to follow a reasonable request of a Covered Person's manager, or discourteous conduct toward customers, associates, or supervisors.
(v) Harassment of any form including threats, intimidation, abusive behavior and/or coercion of any other person in the course of doing business.
(vi) Falsification or destruction of any timekeeping record, intentionally clocking in on another Covered Person's attendance or timekeeping record, the knowledge of another Covered Person tampering with their attendance record or tampering with one's own attendance record.
(vii) Failure to perform work, which meets the standards/expectations of the Covered Person's position.
(viii) Excessive absenteeism, chronic tardiness, or consecutive absence of 3 or more days without notification or authorization.
(ix) Any act of dishonesty or falsification of any Company records or documents, including obtaining employment based on false, misleading, or omitted information.
(c) DISCIPLINARY ACTION. A Covered Person or the Company may terminate the employment or service relationship at will, at any time, without cause or advance notice. Thus, the Company does not strictly adhere to a progressive disciplinary system since each incident of misconduct may have a different set of circumstances or differ in its severity. The Company will take such disciplinary action as it deems appropriate and commensurate with any misconduct of the Covered Person.
12. DISCLOSURE IN REPORTS AND DOCUMENTS.
(a) FILINGS AND PUBLIC MATERIALS. As a public company, it is important that the Company's filings with the Securities and Exchange Commission (the "SEC") and other Federal, State, domestic and international regulatory agencies are full, fair, accurate, timely and understandable. The Company also makes many other filings with the SEC and other domestic and international regulatory agencies on behalf of the funds that its subsidiaries and affiliates manage. Further, the Company prepares mutual fund account statements, client investment performance information, prospectuses and advertising materials that are sent out to its mutual fund shareholders and clients.
(b) DISCLOSURE AND REPORTING POLICY. The Company's policy is to comply with all applicable disclosure, financial reporting and accounting regulations applicable to the Company. The Company maintains the highest commitment to its disclosure and reporting requirements, and expects all Covered Persons to record information accurately and truthfully in the books and records of the Company.
(c) INFORMATION FOR FILINGS. Depending on his or her position with the Company, a Covered Person, may be called upon to provide necessary information to assure that the Company's public reports and regulatory filings are full, fair, accurate, timely and understandable. The Company expects all Covered Persons to be diligent in providing accurate information to the inquiries that are made related to the Company's public disclosure requirements.
(d) DISCLOSURE CONTROLS AND PROCEDURES AND INTERNAL CONTROL OVER FINANCIAL REPORTING. Covered Persons are required to cooperate and comply with the Company's disclosure controls and procedures and internal controls over financial reporting so that the Company's reports and documents filed with the SEC and other Federal, State, domestic and international regulatory agencies comply in all material respects with applicable laws, and rules and regulations, and provide full, fair, accurate, timely and understandable disclosure.
13. RELATIONSHIPS WITH GOVERNMENT PERSONNEL. Covered persons should be aware that practices that may be acceptable in the commercial business environment (such as providing certain transportation, meals, entertainment and other things of nominal value) may be entirely unacceptable and even illegal when they relate to government employees or others who act on the government's behalf. Therefore, Covered Persons are required to comply with the relevant laws and regulations governing relations between government employees and customers and suppliers in every country where the Company conducts business. Covered persons are prohibited from giving money or gifts to any official or any employee of a governmental entity if doing so could reasonably be construed as having any connection with the Company's business relationship. Any proposed payment or gift to a government official or employee must be reviewed in advance by the Global Compliance Department, even if such payment is common in the country of payment.
14. POLITICAL CONTRIBUTIONS. Election laws in many jurisdictions generally prohibit political contributions by corporations to candidates. Many local laws also prohibit corporate contributions to local political campaigns. In accordance with these laws, the Company does not make direct contributions to any candidates for Federal, State or local offices where applicable laws make such contributions illegal. Contributions to political campaigns must not be, or appear to be, made with or reimbursed by the Company's funds or resources. The Company's funds and resources include (but are not limited to) the Company's facilities, office supplies, letterhead, telephones and fax machines. Employees may make personal political contributions as they see fit in accordance with all applicable laws.
15. ACCOUNTABILITY FOR ADHERENCE TO THE CODE.
(a) HONESTY AND INTEGRITY. The Company is committed to uphold ethical standards in all of its corporate and business activities. All Covered Persons are expected to perform their work with honesty, truthfulness and integrity and to comply with the general principles set forth in the Code. Covered Persons are also expected to perform their work with honesty and integrity in any areas not specifically addressed by the Code.
(b) DISCIPLINARY ACTIONS. A violation of the Code may result in appropriate disciplinary action including the possible termination from employment with the Company. Nothing in this Code restricts the Company from taking any disciplinary action on any matters pertaining to the conduct of a Covered Person, whether or not expressly set forth in the Code.
(c) ANNUAL CERTIFICATIONS. Directors and Executive Officers will be required to certify annually, on a form to be provided by the Global Compliance Department, that they have received, read and understand the Code and have complied with the requirements of the Code.
(d) TRAINING AND EDUCATIONAL REQUIREMENTS.
(i) ORIENTATION. New Covered Persons will receive a copy of the Code during the orientation process conducted by representatives of the Human Resources Department and shall acknowledge that they have received, read and understand the Code and will comply with the requirements of the Code.
(ii) CONTINUING EDUCATION. Covered Persons shall be required to complete such additional training and continuing education requirements regarding the Code and matters related to the Code as the Company shall from time to time establish.
16. REPORTING VIOLATIONS OF THE CODE.
(a) QUESTIONS AND CONCERNS. Described in this Code are procedures generally available for addressing ethical issues that may arise. As a general matter, if a Covered Person has any questions or concerns about compliance with this Code he or she is encouraged to speak with his or her supervisor, manager, representatives of the Human Resources Department, the Company's General Counsel or the Global Compliance Department.
(b) COMPLIANCE AND ETHICS HOT-LINE. If a Covered Person does not feel comfortable talking to any of the persons listed above for any reason, he or she should call the Compliance and Ethics Hot-Line at 1-800-636-6592. Calls to the Compliance and Ethics Hot-Line may be made anonymously.
(c) RESPONSIBILITY TO REPORT VIOLATIONS OF THE CODE AND LAW. As part of its commitment to ethical and lawful conduct, the Company expects Covered Persons to promptly report any suspected violations of this Code or law. Failure to report knowledge of a violation or other misconduct may result in disciplinary action.
(d) CONFIDENTIALITY AND INVESTIGATION. The Company will treat the information set forth in a report of any suspected violation of the Code or law in a confidential manner and will conduct a prompt and appropriate evaluation and investigation of any matter reported. Covered Persons are expected to cooperate in any investigations of reported violations.
(e) PROTECTION OF COVERED PERSONS. By law, the Company may not discharge, demote, suspend, threaten, harass, or in any other manner discriminate against an employee in the terms and conditions of employment because of any lawful act done by the employee to provide information or otherwise assist in an investigation regarding any conduct which the employee reasonably believes constitutes a violation of any rule or regulation of the SEC or any provision of Federal law relating to fraud against shareholders when the information or assistance is provided to or the investigation is conducted, by, among others, a person(s) working for the Company with the authority to investigate, discover or terminate misconduct. To encourage Covered Persons to report violations of illegal or unethical conduct, the Company will not allow retaliation to be taken against any Covered Person who has made a report under this section in good faith.
(f) ACCOUNTING/AUDITING COMPLAINTS. The law requires that the Company's Audit Committee have in place procedures for the receipt, retention and treatment of complaints concerning accounting, internal accounting controls, or auditing matters and procedures for Covered Persons to anonymously submit their concerns regarding questionable accounting or auditing matters.
(g) Complaints concerning accounting, internal accounting controls or auditing
matters will be directed to the attention of the Audit Committee, or the
appropriate members of that committee. For direct access to the Company's
Audit Committee, please address complaints regarding accounting, internal
accounting controls, or auditing matters to:
Audit Committee
Franklin Resources, Inc.
One Franklin Parkway
San Mateo, California 94403
Complaints or concerns regarding accounting or auditing matters may also be made to the Compliance and Ethics Hot-Line at 1-800-636-6592. Calls to the Compliance and Ethics Hot-Line may be made anonymously.
17. WAIVERS OF THE CODE.
(a) WAIVERS BY DIRECTORS AND EXECUTIVE OFFICERS. Any change in or waiver of this Code for Directors or Executive Officers of the Company may be made only by the Board or a committee thereof in the manner described in Section 17(d) below, and any such waiver (including any implicit waiver) shall be promptly disclosed to shareholders as required by the corporate governance listing standards of the New York Stock Exchange and other applicable laws, rules and regulations.
(b) WAIVERS BY OTHER COVERED PERSONS. Any requests for waivers of this Code for
Covered Persons other than Directors and Executive Officers of the Company
may be made to the Global Compliance Department in the manner described in
Section 17(e) below.
(c) DEFINITION OF WAIVER. For the purposes of the Code, the term "waiver" shall mean a material departure from a provision of the Code. An "implicit waiver" shall mean the failure of the Company to take action within a reasonable period of time regarding a material departure from a provision of the Code that has been made known to an Executive Officer.
(d) MANNER FOR REQUESTING DIRECTOR AND EXECUTIVE OFFICER WAIVERS.
(i) REQUEST AND CRITERIA. If a Director or Executive Officer wishes to request a waiver of this Code, the Director or Executive Officer may submit to the Director of Global Compliance or the Global Compliance Department a written request for a waiver of the Code only if he/she can demonstrate that such a waiver:
(A) is necessary to alleviate undue hardship or in view of unforeseen circumstances or is otherwise appropriate under all the relevant facts and circumstances;
(B) will not be inconsistent with the purposes and objectives of the Code;
(C) will not adversely affect the interests of clients of the Company or the interests of the Company; and
(D) will not result in a transaction or conduct that would violate provisions of applicable laws or regulations.
(ii) DISCRETIONARY WAIVER AND RESPONSE. The Global Compliance Department will forward the waiver request to the Board or a committee thereof for consideration. Any decision to grant a waiver from the Code shall be at the sole and absolute discretion of the Board or committee thereof, as appropriate. The Secretary of the Company will advise the Global Compliance Department in writing of the Board's decision regarding the waiver, including the grounds for granting or denying the waiver request. The Global Compliance Department shall promptly advise the Director or Executive Officer in writing of the Board's decision.
(e) MANNER FOR REQUESTING OTHER COVERED PERSON WAIVERS.
(i) REQUEST AND CRITERIA. If a Covered Person who is a non-director and non-Executive Officer wishes to request a waiver of this Code, the Covered Person may submit to the Global Compliance Department a written request for a waiver of the Code only if he/she can demonstrate that such a waiver would satisfy the same criteria set forth in Section 17(d).
(ii) DISCRETIONARY WAIVER AND RESPONSE. The Global Compliance Department shall forward the waiver request to the General Counsel of the Company for consideration. The decision to grant a waiver request shall be at the sole and absolute discretion of the General Counsel of the Company. The General Counsel will advise the Global Compliance Department in writing of his/her decision regarding the waiver, including the grounds for granting or denying the waiver request. The Global Compliance Department shall promptly advise the Covered Person in writing of the General Counsel's decision.
18. INTERNAL USE. The Code is intended solely for the internal use by the Company and does not constitute an admission, by or on behalf of the Company, as to any fact, circumstance, or legal conclusion.
19. OTHER POLICIES AND PROCEDURES. The "Code of Ethics and Policy Statement on Insider Trading" under Rule 17j-1 pursuant to the Investment Company Act and other policies and procedures adopted by the Company are additional requirements that apply to Covered Persons.
INSIDER TRADING COMPLIANCE POLICY AND PROCEDURES
A. LEGAL REQUIREMENT
Pursuant to the Insider Trading and Securities Fraud Enforcement Act of
1988, No officer, director, employee, consultant acting in a similar capacity,
or other person associated with Franklin Templeton Investments may trade, either
personally or on behalf of clients, including all client assets managed by the
entities in Franklin Templeton Investments, on material non-public information
or communicating material non-public information to others in violation of the
law. This conduct is frequently referred to as "insider trading." Franklin
Templeton Investment's Insider Trading Compliance Policy and Procedures applies
to every officer, director, employee or other person associated with Franklin
Templeton Investments and extends to activities within and outside their duties
with Franklin Templeton Investments. Every officer, director and employee must
read and retain this policy statement. Any questions regarding Franklin
Templeton Investments Insider Trading Compliance Policy and Procedures or the
Compliance Procedures should be referred to the Legal Department.
The term "insider trading" is not defined in the federal securities laws, but generally is used to refer to the use of material non-public information to trade in securities (whether or not one is an "insider") or to communications of material non-public information to others.
While the law concerning insider trading is not static, it is generally understood that the law prohibits:
(1) trading by an insider, while in possession of material non-public information; or
(2) trading by a non-insider, while in possession of material non-public information, where the information either was disclosed to the non-insider in violation of an insider's duty to keep it confidential or was misappropriated; or
(3) communicating material non-public information to others.
The elements of insider trading and the penalties for such unlawful conduct are discussed below. If, after reviewing this policy statement, you have any questions, you should consult the Legal Department.
B. WHO IS AN INSIDER?
The concept of "insider" is broad. It includes officers, directors and
employees of a company. In addition, a person can be a "temporary insider"
if he or she enters into a special confidential relationship in the conduct
of a company's affairs and as a result is given access to information solely
for the company's purposes. A temporary insider can include, among others, a
company's outside attorneys, accountants, consultants, bank lending officers,
and the employees of such organizations. In addition, an investment adviser
may become a temporary insider of a company it advises or for which it
performs other services. According to the U.S. Supreme Court, the company
must expect the outsider to keep the disclosed non-public information
confidential and the relationship must at least imply such a duty before the
outsider will be considered an insider.
C. WHAT IS MATERIAL INFORMATION?
Trading on inside information is not a basis for liability unless the
information is material. "Material information" generally is defined as
information for which there is a substantial likelihood that a reasonable
investor would consider it important in making his or her investment
decisions, or information that is reasonably certain to have a substantial
effect on the price of the company's securities. Information that officers,
directors and employees should consider material includes, but is not limited
to: dividend changes, earnings estimates, changes in previously released
earnings estimates, significant merger or acquisition proposals or
agreements, major litigation, liquidation problems, and extraordinary
management developments.
Material information does not have to relate to a company's business. For example, in CARPENTER V. U.S., 108 U.S. 316 (1987), the Supreme Court considered as material certain information about the contents of a forthcoming newspaper column that was expected to affect the market price of a security. In that case, a WALL STREET JOURNAL reporter was found criminally liable for disclosing to others the dates that reports on various companies would appear in the WALL STREET JOURNAL and whether those reports would be favorable or not.
D. WHAT IS NON-PUBLIC INFORMATION? Information is non-public until it has been effectively communicated to the marketplace. One must be able to point to some fact to show that the information is generally public. For example, information found in a report filed with the Securities and Exchange Commission ("SEC"), or appearing in Dow Jones, Reuters Economic Services, THE WALL STREET JOURNAL or other publications of general circulation would be considered public.
E. BASIS FOR LIABILITY
1. FIDUCIARY DUTY THEORY In 1980, the Supreme Court found that there is no general duty to disclose before trading on material non-public information, but that such a duty arises only where there is a fiduciary relationship. That is, there must be a relationship between the parties to the transaction such that one party has a right to expect that the other party will not disclose any material non-public information or refrain from trading. CHIARELLA V. U.S., 445 U.S. 22 (1980).
In DIRKS V. SEC, 463 U.S. 646 (1983), the Supreme Court stated alternate theories under which non-insiders can acquire the fiduciary duties of insiders. They can enter into a confidential relationship with the company through which they gain information (E.G., attorneys, accountants), or they can acquire a fiduciary duty to the company's shareholders as "tippees" if they are aware or should have been aware that they have been given confidential information by an insider who has violated his fiduciary duty to the company's shareholders.
However, in the "tippee" situation, a breach of duty occurs only if the insider personally benefits, directly or indirectly, from the disclosure. The benefit does not have to be pecuniary but can be a gift, a reputational benefit that will translate into future earnings, or even evidence of a relationship that suggests a quid pro quo.
2. MISAPPROPRIATION THEORY Another basis for insider trading liability is the "misappropriation" theory, under which liability is established when trading occurs on material non-public information that was stolen or misappropriated from any other person. In U.S. V. CARPENTER, SUPRA, the Court found, in 1987, a columnist defrauded THE WALL STREET JOURNAL when he stole information from the WALL STREET JOURNAL and used it for trading in the securities markets. It should be noted that the misappropriation theory can be used to reach a variety of individuals not previously thought to be encompassed under the fiduciary duty theory.
F. PENALTIES FOR INSIDER TRADING
Penalties for trading on or communicating material non-public
information are severe, both for individuals involved in such unlawful
conduct and their employers A violation of the Code resulting in a violation
of the law will be severely sanctioned, with disciplinary action including
but not limited to termination. Please refer to Part 7 - Penalties for
Violations of the Code.
A person can be subject to some or all of the penalties below even if he or
she does not personally benefit from the violation. Penalties include:
o civil injunctions;
o treble damages;
o disgorgement of profits;
o jail sentences;
o fines for the person who committed the violation of up to three
times the profit gained or loss avoided, whether or not the
person actually benefited; and
o fines for the employer or other controlling person of up to the
greater of $1,000,000 or three times the amount of the profit
gained or loss avoided.
In addition, any violation of this policy statement can result in serious sanctions by the Franklin Templeton Investments, including dismissal of any person involved.
G. INSIDER TRADING PROCEDURES
All employees shall comply with the following procedures.
1. IDENTIFYING INSIDE INFORMATION Before trading for yourself or others, including investment companies or private accounts managed by the Franklin Templeton Investments, in the securities of a company about which you may have potential inside information, ask yourself the following questions:
o Is the information material?
o Is this information that an investor would consider important in making his or her investment decisions?
o Is this information that would substantially affect the market price of the securities if generally disclosed?
o Is the information non-public?
o To whom has this information been provided?
o Has the information been effectively communicated to the marketplace (e.g., published in REUTERS, THE WALL STREET JOURNAL or other publications of general circulation)?
If, after consideration of these questions, you believe that the information may be material and non-public, or if you have questions as to whether the information is material and non-public, you should take the following steps:
(i) Report the matter immediately to the designated Compliance Officer, or if he or she is not available, to the Legal Department.
(ii) Do not purchase or sell the securities on behalf of yourself or others, including investment companies or private accounts managed by Franklin Templeton Investments.
(iii) Do not communicate the information inside or outside Franklin Templeton Investments, other than to the Compliance Officer or the Legal Department.
(iv) The Compliance Officer shall immediately contact the Legal Department for advice concerning any possible material, non-public information.
(v) After the Legal Department has reviewed the issue and consulted with the Compliance Officer, you will be instructed either to continue the prohibitions against trading and communication noted in (ii) and (iii), or you will be allowed to trade and communicate the information.
(vi) In the event the information in your possession is determined by the Legal Department or the Compliance Officer to be material and non-public, it may not be communicated to anyone, including persons within Franklin Templeton Investments, except as provided in (i) above. In addition, care should be taken so that the information is secure. For example, files containing the information should be sealed and access to computer files containing material non-public information should be restricted to the extent practicable. Securities for which there is material, non-public information shall be placed on the personal trading restricted list for a timeframe determined by the Compliance Officer.
2. RESTRICTING ACCESS TO OTHER SENSITIVE INFORMATION All Franklin Templeton Investments personnel also are reminded of the need to be careful to protect from disclosure other types of sensitive information that they may obtain or have access to as a result of their employment or association with Franklin Templeton Investments.
H. GENERAL ACCESS CONTROL PROCEDURES Franklin Templeton Investments has established a process by which access to company files that may contain sensitive or non-public information such as the Bargain List and the Source of Funds List is carefully limited. Since most of Franklin Templeton Investments files, which contain sensitive information, are stored in computers, personal identification numbers, passwords and/or code access numbers are distributed to Franklin Templeton Investments computer Access Persons only. This activity is monitored on an ongoing basis. In addition, access to certain areas likely to contain sensitive information is normally restricted by access codes.
A. WHAT IS REGULATION FD?
Regulation FD under the Securities Exchange Act of 1934, as amended, prohibits certain persons associated with FRI, its affiliates, and its subsidiaries (FRI together with its affiliates and subsidiaries, collectively, "FTI"), closed-end funds advised by an investment advisory subsidiary of FRI ("FTI Closed-End Funds") and certain persons associated with the FTI investment advisers to the FTI Closed-End Funds, from selectively disclosing material nonpublic information about FRI or the FTI Closed-End Funds or their respective securities to certain securities market professionals and security holders. Regulation FD is designed to promote the full and fair disclosure of information by issuers such as FRI and the FTI Closed-End Funds.
The scope of Regulation FD is limited. Regulation FD applies to FRI and FTI Closed-End Funds, but does not apply to open-end investment companies managed by FTI investment advisers. Regulation FD also does not apply to all communications about the FRI or FTI Closed-End Funds with outside persons. Rather, Regulation FD applies only to communications to securities market professionals and to any security holder of the FRI or FTI Closed-End Funds under circumstances in which it is reasonably foreseeable that such security holder will trade on the basis of the information. In addition, Regulation FD does not apply to all employees and officers. It only applies to certain senior officials of FRI (directors, executive officers, investor relations or public relations officers, or other persons of similar functions) of FIR and the FTI investment advisers to the FTI Closed-End Funds and any other officer, employee or agent of FRI and the FTI Closed-End Funds. Consequently, Regulation FD and the Franklin Templeton Investments Fair Disclosure Policies and Procedures (the "Policies and Procedures") will not apply to a variety of legitimate, ordinary-course business communications with customers, vendors, government regulators, etc. or to disclosures made to the public media. Irrespective of Regulation FD, all FRI personnel must comply with the "Franklin Templeton Investment Insider Trading Compliance Policy and Procedures" and should be aware that disclosure of material nonpublic information to another person may constitute a form of illegal insider trading called "tipping."
B. FTI'S CORPORATE POLICY FOR REGULATION FD
FTI is committed to being fully compliant with Regulation FD. It is not the intention of these Policies and Procedures, however, to interfere with legitimate, ordinary-course business communications or disclosures made to the public media or governmental agencies and excluded from Regulation FD. FTI believes it is in its best interest to maintain an active and open dialogue with securities market professionals, security holders and investors regarding FRI and the FTI Closed-End Funds. In compliance with Regulation FD, FTI will continue to provide current and potential security holders access to key information reasonably required for making an informed decision on whether to invest in shares of FRI or FTI Closed-End Funds. FTI personnel will make appropriate announcements and conduct interviews about FRI and FTI Closed-End Funds with the media, in accordance with Corporate Communication's policies and procedures regarding such announcements or interviews and in compliance with Regulation FD.
C. GENERAL PROVISIONS OF REGULATION FD
WHENEVER:
1) AN ISSUER, OR PERSON ACTING ON ITS BEHALF (i.e. any senior official of FRI or the FTI investment adviser to an FTI Closed-End Fund, or any other officer, employee or agent of FRI or an FTI Closed-End Fund who regularly communicates with securities professionals or security holders of FRI or the FTI Closed-End Fund, or any employee directed to make a disclosure by a member of senior management)
2) DISCLOSES ANY MATERIAL NON-PUBLIC INFORMATION (see below under Frequently Asked Questions for a discussion of "materially" and "non- public" information.
3) TO CERTAIN SPECIFIED PERSONS (generally, securities market professionals or security holders of FRI or an FTI Closed-End Fund under circumstances in which it is reasonably foreseeable that such security holders will trade on the basis of the information)
THEN:
(4) THE ISSUER SHALL MAKE PUBLIC DISCLOSURE OF THAT SAME INFORMATION:
o simultaneously (for intentional disclosures), or
o promptly (for non-intentional disclosures). In the case of non-intentional disclosures, "promptly" means as soon as reasonably practicable (but in no event longer than 24 hours (or the commencement of the next day's trading on the NYSE, whichever is later), after a senior official of FRI or the FTI investment adviser to the applicable FTI Closed-End Fund learns that there has been a non-intentional disclosure and knows, or is reckless in not knowing, that the information is both material and non-public.
D. PERSONS TO WHOM SELECTIVE DISCLOSURE MAY NOT BE MADE:
(1) BROKER-DEALERS and their associated persons;
(2) INVESTMENT ADVISERS, certain institutional investment managers and their associated persons,
(3) INVESTMENT COMPANIES, hedge funds and their affiliated persons, and
(4) HOLDERS OF SECURITIES OF FRI OR AN FTI CLOSED-END FUND, under circumstances in which it is reasonably foreseeable that the person would purchase or sell such securities on the basis of the information.
Regulation FD is designed to cover sell-side analysts, buy-side analysts, large institutional investment managers, and other market professionals who may be likely to trade on the basis of selectively disclosed information.
E. EXCLUSIONS FROM REGULATION FD
CERTAIN DISCLOSURES ARE EXCLUDED FROM THE COVERAGE OF REGULATION FD:
(1) communications to "temporary insiders" who owe a duty of trust or confidence to the issuer (i.e. attorneys, investment bankers, or accountants);
(2) communications to any person who expressly agrees to maintain the information in confidence (e.g., disclosures by a public company to private investors in private offerings following an agreement to maintain the confidentiality of the information received);
(3) communications to an entity whose primary business is the issuance of credit ratings provided the information is disclosed solely for the purpose of developing a credit rating and the entity's ratings are publicly available; and
(4) communications made in connection with most offerings of securities registered under the Securities Act of 1933.
F. METHODS OF PUBLIC DISCLOSURE:
Regulation FD provides that an issuer's disclosure obligation may be met by any
method or combination of methods of disclosure reasonably designed to provide
broad, non-exclusionary distribution of the information to the public.
Acceptable methods of public disclosure include:
o Furnishing or filing with the SEC a Form 8-K (not applicable to
closed-end investment companies);
o press releases distributed through a widely circulated news or wire
service; or
o announcements made through press conferences or conference calls that
interested members of the public may attend or listen to either in
person, by telephonic transmission, or by other electronic
transmission (including use of the Internet), of which the public has
adequate advance notice and means of access.
Posting of new information on issuer's own website is NOT by itself a sufficient method of public disclosure. It may be used in combination with other methods.
G. TRAINING
Appropriate training will be provided to certain employees identified as
follows:
o Corporate Communications Department
o Portfolio managers of FTI Closed-End Funds and their assistants;
o Managers and supervisors of Customer Service Representatives.
As a part of this training, each employee will be notified that they should not communicate on substantive matters involving FRI or the FTI Closed-End Funds except in accordance with these Policies and Procedures.
H. REPORTING CONSEQUENCES
FTI personnel must promptly report to their supervisor or the Code of Ethics
Administration Department any violations of these Policies and Procedures. Any
violation of these Policies and Procedures may result in disciplinary action,
up to and including termination of employment and/or referral to appropriate
governmental agencies.
I. QUESTIONS
All inquiries regarding these Policies and Procedures should be addressed to
Barbara Green, Vice President, Deputy General Counsel and Secretary of FRI
(650-525-7188), or Jim Davis, Director of Global Compliance (650-312-2832).
J. FREQUENTLY ASKED QUESTIONS:
WHEN IS DISCLOSURE CONSIDERED INTENTIONAL WITHIN THE MEANING OF REGULATION FD AND WHEN IS DISCLOSURE CONSIDERED NON-INTENTIONAL? Under Regulation FD, selective disclosure is considered intentional when the issuer (or person acting on its behalf) knows, or is reckless in not knowing, that the information disclosed is BOTH material and non-public. a non-intentional disclosure would be the inadvertent disclosure of material non-public information (i.e., a senior official later determines that the same information was not previously public or was material). For example, non-intentional selective disclosures may occur when senior officials inadvertently disclose material information in response to questions from analysts or security holders or when a decision is made to selectively disclose information that the company does not view as material but the market moves in response to the disclosure.
WHAT IS NON-PUBLIC INFORMATION?
Information is non-public if it has not been disseminated in a manner making it available to investors generally.
WHAT IS MATERIAL INFORMATION?
The Supreme Court has held that a fact is material if there is a substantial likelihood that it would have been viewed by the reasonable investor as having significantly altered the 'total mix' of information made available. Another way of considering whether information is material is if there is a substantial likelihood that a reasonable person would consider it important in deciding whether to buy or sell shares.
ARE THERE SPECIFIC TYPES OF INFORMATION THAT ARE CONSIDERED MATERIAL? There is no bright line test to determine materiality. However, below is a list of items that should be reviewed carefully to determine whether they are material.
o An impending departure of a portfolio manager who is primarily responsible for day-to-day management of an FTI Closed-End Fund;
o A plan to convert an FTI Closed-End Fund from a closed-end investment company to an open-end investment company;
o A plan to merge an FTI Closed-End Fund into another investment company;
o Impending purchases or sales of particular portfolio securities;
o Information about FRI related to earnings or earnings forecasts;
o Mergers, acquisitions, tender offers, joint ventures, or material change in assets;
o Changes in control or in management;
o Change in auditors or auditor notification that the issuer may no longer rely on an auditor's audit report;
o Events regarding the securities of FRI or an FTI Closed-End Fund's -
e.g., repurchase plans, stock splits or changes in dividends, calls
of securities for redemption, changes to the rights of security
holders, and public or private sales of additional securities; and
o Bankruptcies or receiverships.
ARE ALL ISSUER COMMUNICATIONS COVERED BY THE RULE?
No. Regulation FD applies only to communications by an issuer's senior official and others who regularly communicate with securities market professionals or security holders of the issuer. Regulation FD isn't intended to apply to persons who are engaged in ordinary-course business communications in connection with the issuer or to interfere with disclosures to the media. However, the traditional disclosure concerns (such as "tipping" material non-public information and leaking disclosure into the market) still apply.
ARE COMMUNICATIONS TO THE PUBLIC MEDIA COVERED BY REGULATION FD? No. However, an interview with a reporter is not the best way to disseminate material information to the public and is not a method of public disclosure mentioned by the SEC as a means to satisfy Regulation FD.
ARE ONE-ON-ONE DISCUSSIONS WITH ANALYSTS PERMITTED?
Yes. Regulation FD is not intended to undermine the role of analysts in "sifting through and extracting information that may not be significant to the ordinary investor to reach material conclusions." However, without an agreement from an analyst to maintain material non-public information in confidence until the information is made public by the issuer, persons covered by Regulation FD must not disclose material non-public information in one-on-one discussions with an analyst.
MAY ISSUERS PROVIDE GUIDANCE ON EARNINGS?
Not selectively. Although many issuers have historically provided earnings guidance, the SEC observed in Regulation FD's adopting release that an issuer that has a private conversation with an analyst in which the issuer provides direct or indirect guidance as to whether earnings will be higher than, lower than or even the same as forecasted will likely violate Regulation FD. Moreover, Regulation FD may be violated simply by confirming in a non-public manner an earnings forecast that is already public, because such confirmation may be material.
K. SUPPLEMENTAL INFORMATION - SECs DIVISION OF CORPORATE FINANCE
The following supplemental information is from the fourth supplement to the telephone interpretation manual of the Division of Corporation Finance of the U.S. Securities and Exchange Commission. It contains interpretations issued by members of the staff of the Division of Corporation Finance in response to telephone inquiries relating to Regulation FD and was last modified by the staff in June of 2001.
INTERPRETATIONS ISSUED OCTOBER 2000
1. CAN AN ISSUER EVER CONFIRM SELECTIVELY A FORECAST IT HAS PREVIOUSLY MADE TO THE PUBLIC WITHOUT TRIGGERING THE RULE'S PUBLIC REPORTING REQUIREMENTS? Yes. In assessing the materiality of an issuer's confirmation of its own forecast, the issuer should consider whether the confirmation conveys any information above and beyond the original forecast and whether that additional information is itself material. That may depend on, among other things, the amount of time that has elapsed between the original forecast and the confirmation (or the amount of time elapsed since the last public confirmation, if applicable). For example, a confirmation of expected quarterly earnings made near the end of a quarter might convey information about how the issuer actually performed. In that respect, the inference a reasonable investor may draw from such a confirmation may differ significantly from the inference he or she may have drawn from the original forecast early in the quarter. The materiality of a confirmation also may depend on, among other things, intervening events. For example, if it is clear that the issuer's forecast is highly dependent on a particular customer and the customer subsequently announces that it is ceasing operations, a confirmation by the issuer of a prior forecast may be material.
We note that a statement by an issuer that it has "not changed," or that it is "still comfortable with," a prior forecast is no different than a confirmation of a prior forecast. Moreover, under certain circumstances, an issuer's reference to a prior forecast may imply that the issuer is confirming the forecast. If, when asked about a prior forecast, the issuer does not want to confirm it, the issuer may simply wish to say "no comment." If an issuer wishes to refer back to the prior estimate without implicitly confirming it, the issuer should make clear that the prior estimate was as of the date it was given and is not being updated as of the time of the subsequent statement.
2. DOES REGULATION FD CREATE A DUTY TO UPDATE? No. Regulation FD does not change existing law with respect to any duty to update.
3. IF AN ISSUER WANTS TO MAKE PUBLIC DISCLOSURE OF MATERIAL NONPUBLIC INFORMATION UNDER REGULATION FD BY MEANS OF A CONFERENCE CALL, WHAT INFORMATION MUST THE ISSUER PROVIDE IN THE NOTICE AND HOW FAR IN ADVANCE SHOULD NOTICE BE GIVEN? An adequate advance notice under Regulation FD must include the date, time, and call-in information for the conference call.
Issuers also should consider the following non-exclusive factors in determining what constitutes adequate advance notice of a conference call:
o TIMING: Public notice should be provided a reasonable period of time ahead of the conference call. For example, for a quarterly earnings announcement that the issuer makes on a regular basis, notice of several days would be reasonable. We recognize, however, that the period of notice may be shorter when unexpected events occur and the information is critical or time sensitive.
o AVAILABILITY: If a transcript or re-play of the conference call will be available after it has occurred, for instance via the issuer's website, we encourage issuers to indicate in the notice how, and for how long, such a record will be available to the public.
4. CAN AN ISSUER SATISFY REGULATION FD'S PUBLIC DISCLOSURE REQUIREMENT BY DISCLOSING MATERIAL NONPUBLIC INFORMATION AT A SHAREHOLDER MEETING THAT IS OPEN TO ALL SHAREHOLDERS, BUT NOT TO THE PUBLIC? No. If a shareholder meeting is not accessible by the public, an issuer's selective disclosure of material nonpublic information at the meeting would not satisfy Regulation FD's public disclosure requirement.
5. COULD AN EXCHANGE ACT FILING OTHER THAN A FORM 8-K, SUCH AS A FORM 10-Q OR PROXY STATEMENT, CONSTITUTE PUBLIC DISCLOSURE? Yes. In general, including information in a document publicly filed on EDGAR with the SEC within the time frames that Regulation FD requires would satisfy the rule. In considering whether that disclosure is sufficient, however, companies must take care to bring the disclosure to the attention of readers of the document, must not bury the information, and must not make the disclosure in a piecemeal fashion throughout the filing.
6. FOR PURPOSES OF REGULATION FD, MUST AN ISSUER WAIT SOME PERIOD OF TIME AFTER MAKING A FILING OR FURNISHING A REPORT ON EDGAR THAT COMPLIES WITH THE EXCHANGE ACT BEFORE MAKING DISCLOSURE OF THE SAME INFORMATION TO A SELECT AUDIENCE?
Prior to making disclosure to a select audience, the issuer need only
confirm that the filing or furnished report has received a filing date
(as determined in accordance with Rules 12 and 13 of Regulation S-T)
that is no later than the date of the selective disclosure.
7. CAN AN ISSUER EVER REVIEW AND COMMENT ON AN ANALYST'S MODEL PRIVATELY WITHOUT TRIGGERING REGULATION FD'S DISCLOSURE REQUIREMENTS? Yes. It depends on whether, in so doing, the issuer communicates material nonpublic information. For example, an issuer ordinarily would not be conveying material nonpublic information if it corrected historical facts that were a matter of public record. An issuer also would not be conveying such information if it shared seemingly inconsequential data which, pieced together with public information by a skilled analyst with knowledge of the issuer and the industry, helps form a mosaic that reveals material nonpublic information. It would not violate Regulation FD to reveal this type of data even if, when added to the analyst's own fund of knowledge, it is used to construct his or her ultimate judgments about the issuer. An issuer may not, however, use the discussion of an analyst's model as a vehicle for selectively communicating - either expressly or in code - material nonpublic information.
8. DURING A NONPUBLIC MEETING WITH ANALYSTS, AN ISSUER'S CEO PROVIDES MATERIAL NONPUBLIC INFORMATION ON A SUBJECT SHE HAD NOT PLANNED TO COVER. ALTHOUGH THE CEO HAD NOT PLANNED TO DISCLOSE THIS INFORMATION WHEN SHE ENTERED THE MEETING, AFTER HEARING THE DIRECTION OF THE DISCUSSION, SHE DECIDED TO PROVIDE IT, KNOWING THAT THE INFORMATION WAS MATERIAL AND NONPUBLIC. WOULD THIS BE CONSIDERED AN INTENTIONAL DISCLOSURE THAT VIOLATED REGULATION FD BECAUSE NO SIMULTANEOUS PUBLIC DISCLOSURE WAS MADE? Yes. A disclosure is "intentional" under Regulation FD when the person making it either knows, or is reckless in not knowing, that the information he or she is communicating is both material and nonpublic. In this example, the CEO knew that the information was material and nonpublic, so the disclosure was "intentional" under Regulation FD, even though she did not originally plan to make it.
9. MAY AN ISSUER PROVIDE MATERIAL NONPUBLIC INFORMATION TO ANALYSTS AS LONG AS THE ANALYSTS EXPRESSLY AGREE TO MAINTAIN CONFIDENTIALITY UNTIL THE INFORMATION IS PUBLIC?
Yes.
10. IF AN ISSUER GETS AN AGREEMENT TO MAINTAIN MATERIAL NONPUBLIC INFORMATION IN CONFIDENCE, MUST IT ALSO GET THE ADDITIONAL STATEMENT THAT THE RECIPIENT AGREES NOT TO TRADE ON THE INFORMATION IN ORDER TO RELY ON THE EXCLUSION IN RULE 100(B)(2)(II) OF REGULATION FD?
No. An express agreement to maintain the information in confidence is sufficient. If a recipient of material nonpublic information subject to such a confidentiality agreement trades or advises others to trade, he or she could face insider trading liability.
11. IF AN ISSUER WISHES TO RELY ON THE CONFIDENTIALITY AGREEMENT EXCLUSION OF REGULATION FD, IS IT SUFFICIENT TO GET AN ACKNOWLEDGMENT THAT THE RECIPIENT OF THE MATERIAL NONPUBLIC INFORMATION WILL NOT USE THE INFORMATION IN VIOLATION OF THE FEDERAL SECURITIES LAWS?
No. The recipient must expressly agree to keep the information confidential.
12. MUST ROAD SHOW MATERIALS IN CONNECTION WITH A REGISTERED PUBLIC OFFERING BE DISCLOSED UNDER REGULATION FD?
Any disclosure made "in connection with" a registered public offering of the type excluded from Regulation FD is not subject to Regulation FD. That includes road shows in those offerings. All other road shows are subject to Regulation FD in the absence of another applicable exclusion from Regulation FD. For example, a disclosure in a road show in an unregistered offering is subject to Regulation FD. Also, a disclosure in a road show made while the issuer is not in registration and is not otherwise engaged in a securities offering is subject to Regulation FD. If, however, those who receive road show information expressly agree to keep the material nonpublic information confidential, disclosure to them is not subject to Regulation FD.
13. CAN AN ISSUER DISCLOSE MATERIAL NONPUBLIC INFORMATION TO ITS EMPLOYEES (WHO MAY ALSO BE SHAREHOLDERS) WITHOUT MAKING PUBLIC DISCLOSURE OF THE INFORMATION?
Yes. Rule 100(b)(1) states that Regulation FD applies to disclosures made to "any person outside the issuer." Regulation FD does not apply to communications of confidential information to employees of the issuer. An issuer's officers, directors, and other employees are subject to duties of trust and confidence and face insider trading liability if they trade or tip.
14. IF AN ISSUER HAS A POLICY THAT LIMITS WHICH SENIOR OFFICIALS ARE AUTHORIZED TO SPEAK TO PERSONS ENUMERATED IN RULE 100(B)(1)(I) - (B)(1)(IV), WILL DISCLOSURES BY SENIOR OFFICIALS NOT AUTHORIZED TO SPEAK UNDER THE POLICY BE SUBJECT TO REGULATION FD?
No. Selective disclosures of material nonpublic information by senior officials not authorized to speak to enumerated persons are made in breach of a duty of trust or confidence to the issuer and are not covered by Regulation FD. Such disclosures may, however, trigger liability under existing insider trading law.
15. A PUBLICLY TRADED COMPANY HAS DECIDED TO CONDUCT A PRIVATE PLACEMENT OF SHARES AND THEN SUBSEQUENTLY REGISTER THE RESALE BY THOSE SHAREHOLDERS ON A FORM S-3 REGISTRATION STATEMENT. THE COMPANY AND ITS INVESTMENT BANKERS CONDUCT MINI-ROAD SHOWS OVER A THREE-DAY PERIOD DURING THE PRIVATE PLACEMENT. DOES THE RESALE REGISTRATION STATEMENT FILED AFTER COMPLETION OF THE PRIVATE PLACEMENT AFFECT WHETHER DISCLOSURE AT THE ROAD SHOWS IS COVERED BY REGULATION FD?
No. The road shows are made in connection with an offering by the issuer that is not registered (i.e., the private placement), regardless of whether a registration statement is later filed for an offering by those who purchased in the private placement.
ADDITIONAL INTERPRETATIONS ISSUED DECEMBER 2000
1. DOES THE MERE PRESENCE OF THE PRESS AT AN OTHERWISE NON-PUBLIC MEETING ATTENDED BY PERSONS OUTSIDE THE ISSUER DESCRIBED IN PARAGRAPH (B)(1) OF RULE 100 UNDER REGULATION FD RENDER THE MEETING PUBLIC FOR PURPOSES OF REGULATION FD?
Regulation FD states that a company can make public disclosure by filing or furnishing a Form 8-K or by disseminating information through another method (or combination of methods) that is reasonably designed to provide broad, non-exclusionary distribution of the information to the public. Some companies may attempt to satisfy the latter method for public dissemination by merely having the press in attendance at a meeting to which the public is not invited or otherwise present. If it is attended by persons outside the issuer described in paragraph (b)(1) of Rule 100 under Regulation FD and if it is not otherwise public, the meeting will not necessarily be deemed public for purposes of Regulation FD by the mere presence of the press at the meeting. Whether or not the meeting would be deemed public would depend, among other things, on when, what and how widely the press reports on the meeting.
2. IS REGULATION FD INTENDED TO REPLACE THE PRACTICE OF USING A PRESS RELEASE TO DISSEMINATE EARNINGS INFORMATION IN ADVANCE OF A CONFERENCE CALL OR WEBCAST AT WHICH EARNINGS INFORMATION WILL BE DISCUSSED?
No. In adopting Regulation FD, the Commission specifically indicated that it did not intend the regulation to alter or supplant the rules of self-regulatory organizations with respect to the use of press releases to announce material developments. In this regard, the Commission specifically endorsed a model for the planned disclosure of material information, such as earnings, in which the conference call or webcast is preceded by a press release containing the earnings information.
APPENDIX E: CHINESE WALL POLICY
AS REVISED AUGUST, 2004
The following revised memorandum updates the memo, dated November 19, 1999, and reflects changes to the Advisory Groups. The memorandum sets forth FTI's policies and procedures for restricting the flow of "Investment Information" and erecting barriers to prevent the flow of such "Investment Information" (the "Chinese Wall") between the following Advisory Groups:
1. Franklin Templeton Advisory Group ("Franklin Templeton");
2. Franklin Floating Rate Trust Advisory Group ("Floating Rate"); and
3. Franklin Mutual Advisory Group ("Franklin Mutual")
"Investment Information" of each respective Advisory Group is information relating to:
o actual and proposed trading on behalf of clients of the Advisory Group;
o current and prospective Advisory Group client portfolio positions; and
o investment research related to current and prospective positions.
Specifically, under the Chinese Wall, access persons/13 from these Advisory Groups (as defined in Appendix A) are prohibited from having access to Investment Information of an Advisory Group other than his or her own Advisory Group with the following exception: Access persons to Floating Rate may have access to Investment Information of Franklin Templeton, but access persons to Franklin Templeton may not have access to Floating Rate.
The Chinese Wall applies to ALL access persons, including part-time employees, and consultants, and are in addition to those obligations prescribed by the Franklin Templeton Investment's Code of Ethics (the "Code of Ethics").
Questions regarding these procedures should be directed to the attention of the Director, Global Compliance, San Mateo, California at (650) 312-2832 or e-mailed to jdavis@frk.com.
GENERAL PROCEDURES
CONFIDENTIALITY. Access persons within one Advisory Group (e.g., Franklin Templeton) may not disclose Investment Information to access persons of the other Advisory Group (e.g., Franklin Mutual). Any communication of Investment Information outside an Advisory Group should be limited to persons (such as Accounting, Investment Operations, Legal and Compliance personnel) who have a valid "need to know" such information and each of whom is specifically prohibited from disclosing Investment Information from one to another except when necessary for regulatory purposes. Nothing contained herein is designed to prohibit the proper exchange of accounting, operational, legal or compliance information among such persons in the normal course of performing his or her duties.
DISCUSSIONS. Access persons within one Advisory Group shall avoid discussing Investment Information in the presence of persons who do not have a need to know the information. Extreme caution should be taken with discussions in public places such as hallways, elevators, taxis, airplanes, airports, restaurants, and social gatherings. Avoid discussing confidential information on speakerphones. Mobile telephones should be used with great care because they are not secure.
ACCESS. Access persons should limit physical access to areas where confidential or proprietary information may be present or discussed. Only persons with a valid business reason for being in such an area should be permitted. In this regard, meetings with personnel who are not members of the same Advisory Group should be conducted in conference rooms rather than employee offices. Work on confidential projects should take place in areas that are physically separate and secure.
OUTSIDE INQUIRIES. Any person not specifically authorized to respond to press
or other outside inquiries concerning a particular matter shall refer all
calls relating to the matter to the attention of the Director, Corporate
Communications, Franklin Templeton Investments, in San Mateo, California, at
(650) 312-4701.
DOCUMENTS AND DATABASES. Confidential documents should not be stored in common office areas where they may be read by unauthorized persons. Such documents shall be stored in secure locations and not left exposed overnight on desks or in workrooms.
Confidential databases and other confidential information accessible by computer shall be protected by passwords or otherwise secured against access by unauthorized persons.
FAXING, MAILING AND EMAILING PROCEDURES. Confidential documents shall not be faxed, e-mailed or sent via interoffice or other mail to locations where they may be read by unauthorized persons, including to other FRI offices outside the Advisory Group, unless steps have been taken to remove or redact any confidential information included in such documents. Prior to faxing a document that includes confidential information, the sender shall confirm that the recipient is attending the machine that receives such documents.
THE CHINESE WALL
GENERAL. FRI has adopted the Chinese Wall to separate investment management activities conducted by certain investment advisory subsidiaries of FRI. The Chinese Wall may be amended or supplemented from time to time by memoranda circulated by the Global Compliance Department.
CHINESE WALL RESTRICTIONS. Except in accordance with the Wall-crossing procedures described below or in accordance with such other procedures as may be developed by the Global Compliance Department for a particular department or division:
o No access person in any Advisory Group (as defined in Appendix A) shall disclose Investment Information to any access person in the any other Advisory Group, or give such access persons access to any file or database containing such Investment Information; and
o No access person in any Advisory Group shall obtain or make any effort to obtain Investment Information within the any other Advisory Group from any person.
An access person who obtains Investment Information of an Advisory Group other than his or her own in a manner other than in accordance with the Chinese Wall procedures described herein, shall immediately notify an appropriate supervisory person in his or her department who, in turn, should consult with the Global Compliance Department concerning what, if any, action should be taken. Unless expressly advised to the contrary by the Global Compliance Department, such employee shall refrain from engaging in transactions in the related securities or other securities of the related issuer for any account and avoid further disclosure of the information.
CROSSING PROCEDURES. Disclosure of Investment Information of one Advisory Group to an access person in another Advisory Group on a "need to know" basis in the performance of his or her duties, should be made only if absolutely necessary. In such instance, the disclosure of such information may be made only in accordance with the specific procedures set forth below.
An access person within one Advisory Group must obtain prior approval from the Global Compliance Department before making any disclosure of Investment Information to an access person within the other Advisory Group.
Before approval is granted, the Global Compliance Department must be notified in writing by an Executive Officer within the Advisory Group (the "Originating Group") which proposes to cross the Chinese Wall of (1) the identity of the Advisory Group access person(s) who are proposed to cross the Chinese Wall, (2) the identity of the access person(s) in the other Advisory Group (the "Receiving Group") who are proposed to receive the Investment Information, (3) the applicable issuer(s), (4) the nature of the information to be discussed, and (5) the reason for crossing the Chinese Wall. The form of notice is attached to this Memorandum as Appendix B. The Global Compliance Department will notify an Executive Officer within the Receiving Group of the identity of the access person(s) who are proposed to cross the Chinese Wall. The Global Compliance Department may not disclose any additional information to such person.
If approval is obtained from an Executive Officer within the Receiving Group, the Global Compliance Department will notify the requesting Executive Officer in the Originating Group that the proposed Wall-crosser(s) may be contacted. Personnel from the Global Compliance Department or their designees must attend all meetings where Wall-crossing communications are made. Communications permitted by these crossing procedures shall be conducted in a manner not to be overheard or received by persons not authorized to receive confidential information.
A record of Wall-crossings will be maintained by the Global Compliance Department.
An access person who has crossed the Chinese Wall under these procedures must maintain the confidentiality of the Investment Information received and may use it only for the purposes for which it was disclosed.
Any questions or issues arising in connection with these crossing procedures will be resolved between the appropriate Executive Officers(s), the Global Compliance Department and the Legal Department.
APPENDIX A
AS OF JUNE 2004
FRANKLIN TEMPLETON INVESTMENT'S ADVISORY GROUPS
1. FRANKLIN/TEMPLETON ADVISORY GROUP
Franklin Advisers, Inc.
Franklin Advisory Services, LLC
Franklin Investment Advisory Services, Inc.
Franklin Private Client Group, Inc.
Franklin Templeton Alternative Strategies, Inc.
Franklin Templeton Asset Management S.A. (France)
Franklin Templeton Fiduciary Bank & Trust Ltd. (Bahamas)
Franklin Templeton Institutional Asia Limited (Hong Kong)
Franklin Templeton Institutional, LLC
Franklin Templeton Investments Corp (Canada)
Franklin Templeton Investment Management, Limited (UK)
Franklin Templeton Investment Trust Management Co., Ltd. (Korea)
Franklin Templeton Investments Japan, Ltd.
Franklin Templeton Investments (Asia) Limited (Hong Kong)
Franklin Templeton Investments Australia Limited
Franklin Templeton Italia Societa di Gestione del Risparimo per
Azioni (Italy)
Templeton/Franklin Investment Services, Inc.
Templeton Investment Counsel, LLC
Templeton Asset Management, Limited.
Templeton Global Advisors Limited (Bahamas)
Franklin Templeton Asset Management (India) Pvt. Ltd.
Fiduciary Trust Company International (NY)
Fiduciary International, Inc.
Fiduciary Investment Management International, Inc.
Fiduciary International Ireland Limited (Ireland)
Fiduciary Trust International Limited (UK)
Fiduciary Trust International of California
Fiduciary Trust International of Delaware
Fiduciary Trust International of the South (Florida)
FTI -Banque Fiduciary Trust (Switzerland)
2. FRANKLIN FLOATING RATE TRUST ADVISORY GROUP
3. FRANKLIN MUTUAL ADVISORY GROUP
Franklin Mutual Advisers, LLC
APPENDIX B
M E M O R A N D U M
TO: The Global Compliance Department - San Mateo FROM: RE: Chinese Wall Crossing |
DATE:
The following access person(s)
Name Title Department
within the _______________________ Advisory Group are proposing to cross the Chinese Wall and communicate certain Investment Information to the access persons within the ______________________ Advisory Group identified below.
Name Title Department
Such access person(s) will cross the Chinese Wall with respect to the following issuer:
APPROVED: -------------------------- -----------------------------------
Executive Officer Executive Officer (Receiving Group)
(Originating Group)
|
1 Proprietary Information: Information that is obtained or developed during the ordinary course of employment with Franklin Templeton Investments, whether by you or someone else, and is not available to persons outside of Franklin Templeton Investments. Examples of such Proprietary Information include, among other things, internal research reports, research materials supplied to Franklin Templeton Investments by vendors and broker-dealers not generally available to the public, minutes of departmental/research meetings and conference calls, and communications with company officers (including confidentiality agreements). Examples of non-Proprietary Information include information found in mass media publications (e.g., The Wall Street Journal, Forbes, and Fortune), certain specialized publications available to the public (e.g., Morningstar, Value Line, Standard and Poors), and research reports available to the general public.
2 Appropriate Analyst: Any securities analyst or portfolio manager, other than you, making recommendations or investing funds on behalf of any Associated Client, who may be reasonably expected to recommend or consider the purchase or sale of the security in question.
3 Associated Client: A Fund or client whose trading information would be available to the Access Person during the course of his or her regular functions or duties.
4 This restriction applies equally to transactions occurring in margin and option accounts, which may not be due to direct actions by the Portfolio Person. For example, a stock held less than sixty (60) days that is sold to meet a margin call or the underlying stock of a covered call option held less than sixty (60) days that is called away, would be a violation of this restriction if these transactions resulted in a profit for the Portfolio Person.
5 You are not required to separately report the vesting of shares or options of Franklin Resources, Inc., received pursuant to a deferred compensation plan as such information is already maintained.
6 Officers, directors and certain other designated employees of FRI and its affiliated closed-end funds may be subject to additional ownership reporting and pre-clearance requirements with respect to BEN shares and shares of affiliated closed-end shares as well as certain Rule 144 affiliated policies and procedures. Contact the Code of Ethics Administration Department for additional information. See also the attached Insider Trading Policy.
7 Please note that these conditions apply to any discretionary account in existence prior to the effective date of this Code or prior to your becoming an Access Person. Also, the conditions apply to transactions in any discretionary account, including pre-existing accounts, in which you have any direct or indirect beneficial ownership, even if it is not in your name.
8 Any pre-existing agreement must be promptly amended to comply with this condition. The required reports may be made in the form of an account statement if they are filed by the applicable deadline.
9 Security includes any option to purchase or sell, and any security that is exchangeable for or convertible into, any security that is held or to be acquired by a fund.
10 Special circumstances include but are not limited to, for example, holidays, differences in time zones, delays due to travel, and the unusual size of proposed trades or limit orders. Limit orders must expire within the applicable clearance period.
11 As of November 2004
12 If an investment opportunity is presented to you in your capacity as a portfolio manager AND the investment opportunity is suitable for the fund/client, it must first be offered to the fund/client before any personal securities transaction can be effected.
13 The definition of access person is the same as that contained in the Code of Ethics.
POWER OF ATTORNEY
The undersigned officers and directors of FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, INC. (the "Registrant") hereby appoint BRIAN E. LORENZ, KAREN L. SKIDMORE, CRAIG S. TYLE, DAVID P. GOSS and STEVEN J. GRAY (with full power to each of them to act alone) his/her attorney-in-fact and agent, in all capacities, to execute, deliver and file in the names of the undersigned, any and all instruments that said attorneys and agents may deem necessary or advisable to enable the Registrant to comply with or register any security issued by the Registrant under the Securities Act of 1933, as amended, and/or the Investment Company Act of 1940, as amended, and the rules, regulations and interpretations thereunder, including but not limited to, any registration statement, including any and all pre- and post-effective amendments thereto, any other document to be filed with the U.S. Securities and Exchange Commission and any and all documents required to be filed with respect thereto with any other regulatory authority. Each of the undersigned grants to each of said attorneys, full authority to do every act necessary to be done in order to effectuate the same as fully, to all intents and purposes, as he/she could do if personally present, thereby ratifying all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall be deemed to be a single document.
The undersigned officers and directors hereby execute this Power of Attorney as of the 22nd day of May, 2007.
/s/ CHARLES B. JOHNSON /s/ HARRIS J. ASHTON Charles B. Johnson, Harris J. Ashton, Director and Chief Executive Officer- Director Investment Management /s/ ROBERT F. CARLSON /s/ SAM GINN Robert F. Carlson, Sam L. Ginn, Director Director /s/ EDITH E. HOLIDAY /s/ RUPERT H. JOHNSON, JR. Edith E. Holiday, Rupert H. Johnson, Jr., Director Director /s/ FRANK W.T. LAHAYE /s/ FRANK A. OLSON Frank W.T. LaHaye, Frank A. Olson, Director Director /s/ LARRY D. THOMPSON /s/ JOHN B. WILSON Larry D. Thompson, John B. Wilson, Director Director /s/ JIMMY D. GAMBILL /s/ GALEN G. VETTER Jimmy D. Gambill, Galen G. Vetter, Chief Executive Officer-Finance Chief Financial Officer and and Administration Chief Accounting Officer |
POWER OF ATTORNEY
The undersigned officers and trustees of FRANKLIN CALIFORNIA TAX-FREE INCOME FUND, a Delaware statutory trust (the "Registrant"), hereby appoint BRIAN E. LORENZ, KAREN L. SKIDMORE, CRAIG S. TYLE, DAVID P. GOSS and STEVEN J. GRAY (with full power to each of them to act alone) his/her attorney-in-fact and agent, in all capacities, to execute, deliver and file in the names of the undersigned, any and all instruments that said attorneys and agents may deem necessary or advisable to enable the Registrant to comply with or register any security issued by the Registrant under the Securities Act of 1933, as amended, and/or the Investment Company Act of 1940, as amended, and the rules, regulations and interpretations thereunder, including but not limited to, any registration statement, including any and all pre- and post-effective amendments thereto, any other document to be filed with the U.S. Securities and Exchange Commission and any and all documents required to be filed with respect thereto with any other regulatory authority. Each of the undersigned grants to each of said attorneys, full authority to do every act necessary to be done in order to effectuate the same as fully, to all intents and purposes, as he/she could do if personally present, thereby ratifying all that said attorneys-in-fact and agents may lawfully do or cause to be done by virtue hereof.
This Power of Attorney may be executed in one or more counterparts, each of which shall be deemed to be an original and all of which shall be deemed to be a single document.
The undersigned officers and trustees hereby execute this Power of Attorney as of the 22nd day of May, 2007.
/s/ CHARLES B. JOHNSON /s/ HARRIS J. ASHTON Charles B. Johnson, Harris J. Ashton, Trustee and Chief Executive Officer- Trustee Investment Management /s/ ROBERT F. CARLSON /s/ SAM GINN Robert F. Carlson, Sam L. Ginn, Trustee Trustee /s/ EDITH E. HOLIDAY /s/ RUPERT H. JOHNSON, JR. Edith E. Holiday, Rupert H. Johnson, Jr., Trustee Trustee /s/ FRANK W.T. LAHAYE /s/ FRANK A. OLSON Frank W.T. LaHaye, Frank A. Olson, Trustee Trustee /s/ LARRY E. THOMPSON /s/ JOHN B. WILSON Larry D. Thompson, John B. Wilson, Trustee Trustee /s/ JIMMY D. GAMBILL /s/ GALEN G. VETTER Jimmy D. Gambill, Galen G. Vetter, Chief Executive Officer-Finance Chief Financial Officer and Chief and Administration Accounting Officer |