investment restriction that generally prohibits the Fund from (i) purchasing securities on margin (although certain Funds specify that they may use short-term credits as needed for the clearance of portfolio transactions); and (ii) engaging in short sales of securities.
Current 1940 Act provisions on issuing senior securities, engaging in short sales and purchasing on margin, together with the proposed fundamental investment restriction on senior securities as described above, will continue to limit the ability of a Fund to purchase securities on margin and engage in short sales. Therefore, the Investment Manager does not anticipate that deleting the current restrictions will result in additional material risk to a Fund or change the manner in which any Fund is managed at this time.
Each of the Funds currently has a fundamental investment restriction that prohibits such Fund from investing in other investment companies or unnecessarily limit such Fund’s investments in other investment companies. Upon elimination of this restriction, a Fund would remain subject to the restrictions under Section 12(d) of the 1940 Act, and any rules thereunder, relating to the Fund’s ability to invest in other investment companies, including open-end and closed-end investment companies, except where the Franklin Templeton funds have received an exemption from such restrictions. (The 1940 Act restrictions generally specify that a Fund, other than certain fund of funds and master/feeder arrangements, may not purchase more than 3% of another fund’s total outstanding voting stock, invest more than 5% of its total assets in another fund’s securities or have more than 10% of its total assets invested in securities of all other funds, although the SEC’s rules do permit a Fund to invest in money market mutual funds without regards to such limitations.) In addition, eliminating certain of these current restrictions on investments in other investment companies would enable the Funds to take advantage of the investment opportunities presented by the Cash Sweep Order or the new rules adopted by the SEC (discussed in Sub-Proposal 5h above), which provide relief from the 1940 Act restrictions relating to investments in other registered and unregistered investment companies in certain limited circumstances.
All of the Funds currently have a fundamental investment restriction that prohibits such Funds from investing in companies in which certain affiliated persons of the Fund have an ownership interest. This restriction was based on state law provisions that have been preempted by NSMIA. In addition, the 1940 Act provisions addressing conflicts of interest would continue to apply to the Funds and would limit certain principal transactions between a Fund and a portfolio company in which the Fund or its affiliates hold a significant interest.
and the rules thereunder have extensive provisions governing transactions in portfolio securities between a Fund and its affiliates, including officers and Board members, which are more carefully tailored to ensure that any such transactions are in the best interests of the Fund.
Investing in Put and Call Options
As identified inExhibit J-1to this proxy statement, each of the Funds currently has fundamental investment restrictions that prohibit such Funds from investing in options, including puts, calls, straddles, spreads or any combination thereof, or that limit a Fund’s ability to invest in such instruments. These restrictions were based upon state blue sky regulations that have been preempted by NSMIA.
Oil and Gas Programs
The Funds currently have a fundamental investment restriction that prohibits the Funds from investing in interests in oil, gas or other mineral exploration or development programs. These fundamental investment restrictions regarding oil and gas programs were based on state securities laws that had been adopted by a few jurisdictions, but have since been preempted by NSMIA.
Investing for Purposes of Exercising Control
Each Fund currently has a fundamental investment restriction prohibiting it from investing in any company for the purpose of exercising control or management. The 1940 Act does not require, and applicable state law no longer requires, that a Fund adopt such an investment restriction. However, each Fund remains subject to the diversification requirements of Sub-Chapter M of the Code and to the diversification requirements of the 1940 Act, which limit the amount of an issuer’s voting securities that a Fund may acquire.
What are the risks, if any, in eliminating the Restrictions?
The Boards and the Investment Manager do not anticipate that eliminating the Restrictions will result in any additional material risk to the Funds at this time. None of the Funds currently intends to change its present investment practices as a result of eliminating the Restrictions, except to the extent that Franklin Federal Tax-Free Income Fund would take advantage of the Cash Sweep Order or invest in other money market funds for cash management purposes.
THE BOARD OF EACH FUND UNANIMOUSLY RECOMMENDS
A VOTE “FOR” PROPOSAL 6.
u ADDITIONAL INFORMATION ABOUT THE FUNDS
The Investment Manager.The Investment Manager of the Funds7is Franklin Advisers, Inc., One Franklin Parkway, San Mateo, California 94403-1906. Pursuant to an investment management agreement with each Fund, the Investment Manager for a Fund manages the investment and reinvestment of that Fund’s assets. The Investment Manager is a direct, wholly owned subsidiary of Resources.
The Administrator.The administrator of each Fund is Franklin Templeton Services, LLC (“FT Services”), with offices at One Franklin Parkway, San Mateo, California 94403-1906. FT Services is an indirect, wholly owned subsidiary of Resources and an affiliate of the Investment Manager. Pursuant to an administration agreement, FT Services performs certain administrative functions for each Fund.
The Underwriter.The underwriter for the Funds is Franklin/Templeton Distributors, Inc., One Franklin Parkway, San Mateo, California 94403-1906.
The Transfer Agent.The transfer agent and shareholder servicing agent for the Funds is Franklin Templeton Investor Services, LLC, One Franklin Parkway, San Mateo, California 94403-1906.
The Custodian.The custodian for each Fund is Bank of New York, Mutual Funds Division, 100 Church Street, New York, New York 10286.
____________________
| 7 | | Except for Franklin Money Fund which, as a feeder fund to the Master Portfolio, does not have its own investment manager. |
28
Pending Litigation.Resources, certain of its subsidiaries and certain funds, current and former officers, employees, and directors/ trustees 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, advisers, 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.
The majority of these lawsuits duplicate, in whole or in part, the allegations asserted in regulatory matters that were previously settled and disclosed in Resources’ public filings, including: the February 4, 2004 Massachusetts Administrative Complaint concerning one instance of market timing; and the SEC’s findings regarding market timing in its August 2, 2004 Order. The lawsuits are styled as class actions, or derivative actions on behalf of either the named funds, including the Funds, or Resources. 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, where they remain pending.
Additional information about these lawsuits is disclosed in Part I., Item 3 Legal Proceedings of Resources’ Form 10-K, as well as on Resources’ website at franklintempleton.com, under “Statement on Current Industry Issues.”
Other Matters.Each Fund’s audited financial statements and annual report for its last completed fiscal year, and any subsequent semi-annual report to shareholders are available free of charge. To obtain a copy, please call 1-800/DIAL BEN® (1-800-342-5236) or forward a written request to Franklin Templeton Investor Services, LLC, P.O. Box 33030, St. Petersburg, Florida 33733-8030.
[Shareholders Sharing the Same Address.If two or more shareholders share the same address, only one copy of this proxy statement is being delivered to that address, unless the Fund(s) have received contrary instructions from one or more of the shareholders at that shared address. Upon written or oral request, the Funds will deliver promptly a separate copy of this proxy statement to a shareholder at a shared address. Please call 1-800/ DIAL BEN® (1-800-342-5236) or forward a written request to Franklin Templeton Investor Services, LLC, P.O. Box 33030, St. Petersburg, Florida 33733-8030, if you would like to (1) receive a separate copy of this proxy statement; (2) receive your annual reports or proxy statements separately in the future; or (3) request delivery of a single copy of annual reports or proxy statements if you are currently receiving multiple copies at a shared address.]
Principal Shareholders.The outstanding shares and classes of the Funds as of November 30, 2006, are set forth inExhibit K.
From time to time, the number of shares held in “street name” accounts of various securities dealers for the benefit of their clients may exceed 5% of the total shares outstanding of any class or Fund. To the knowledge of the Funds’ management, except as set forth below, as of November 30, 2006, there were no other entities owning beneficially more than 5% of the outstanding shares of any class of any Fund.
| Fund | Name and Address | Share Amount | Percentage (%) of Fund |
| Franklin Tax-Exempt Money Fund | Gladyce L. Foster Rev Tr
Gladyce L. Foster Trste
DTD 02/09/99
Los Angeles, CA 90049-1111 | 15,750,590.67 | 9.05% |
In addition, to the knowledge of the Funds’ management, as of November 30, 2006 [and except as noted above under Proposal 2], no nominee or Board member of a Fund owned 1% or more of the outstanding shares of that Fund, and the Board members and officers of that Fund owned, as a group, less than 1% of the outstanding shares of that Fund.
29
Contacting the Boards.If a shareholder wishes to send a communication to the Board of a Fund, such correspondence should be in writing and addressed to the Board of that Fund at the Fund’s offices as follows: One Franklin Parkway, San Mateo, California 94403-1906, Attention: Secretary. The correspondence will be given to the appropriate Board for review and consideration.
u AUDIT COMMITTEES
Audit Committee and Independent Registered Public Accounting Firm.Each Fund’s Audit Committee is responsible for the appointment, compensation and retention of the Fund’s independent registered public accounting firm (“auditors”), including evaluating their independence, recommending the selection of the Fund’s auditors to the full Board and meeting with such auditors to consider and review matters relating to the Fund’s financial reports and internal auditing. The members of the Audit Committees for the Funds are set forth below. All of the members of the Audit Committees are Independent Board Members.
| Fund(s) | | Audit Committee Members |
| Franklin Federal Tax-Free Income Fund | Robert F. Carlson |
| | Edith E. Holiday |
| | Frank W. T. LaHaye (Chairperson) |
| | John B. Wilson |
| | |
| Franklin Money Fund and The Money Market Portfolios | Robert F. Carlson |
| | Edith E. Holiday |
| | Frank W. T. LaHaye (Chairperson) |
| | |
| Franklin Tax-Exempt Money Fund | Harris J. Ashton |
| | Edith E. Holiday |
| | Frank W. T. LaHaye (Chairperson) |
| | John B. Wilson |
Selection of Auditors.The Audit Committee and the Board of each Fund have selected the firm of PricewaterhouseCoopers LLP (“PwC”) as auditors of the Fund for its current fiscal year. Representatives of PwC are not expected to be present at the Meeting, but will have the opportunity to make a statement if they wish, and will be available should any matter arise requiring their presence.
Audit Fees.The aggregate fees paid to PwC for professional services rendered by PwC for the audit of the Funds’ annual financial statements or for services that are normally provided by PwC in connection with statutory and regulatory filings or engagements for the last two fiscal years (ended on or before September 30, 2006) for the Funds are set forth inExhibit Lto this proxy statement.
Audit-Related Fees.There were no fees paid to PwC for assurance and related services by PwC that are reasonably related to the performance of the audit or review of the Funds’ financial statements and not reported under “Audit Fees” above for the last two fiscal years (ended on or before September 30, 2006).
In addition, the Audit Committees of the Funds pre-approve PwC’s engagement for audit-related services with the Investment Manager and certain entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Funds, which engagements relate directly to the operations and financial reporting of that Fund. There were no fees paid to PwC for these services for the twelve month periods ended September 30, 2006 and 2005.
Tax Fees.The aggregate fees paid to PwC for tax compliance, tax advice or tax planning services (“tax services”) to the Funds for the last two fiscal years (ended on or before September 30, 2006) are set forth inExhibit Lto this proxy statement. The tax services for which these fees were paid included tax compliance.
30
In addition, the Audit Committees of the Funds pre-approve PwC’s engagement for tax services to be provided to the Investment Manager and certain entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Funds, which engagements relate directly to the operations and financial reporting of the Funds. There were no fees paid to PwC for these tax services for the twelve month periods ended September 30, 2006 and 2005.
All Other Fees.The aggregate fees paid for products and services provided by PwC to the Funds, other than the services reported above, for the last two fiscal years are set forth inExhibit Lto this proxy statement. The services for which these fees were paid included review of materials provided to the Boards in connection with the investment management contract renewal process.
In addition, the Audit Committees of the Funds pre-approve PwC’s engagement for other services with the Investment Manager and certain entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Funds, which engagements relate directly to the operations and financial reporting of the Funds. The aggregate fees paid to PwC for the twelve month periods ended September 30, 2006 and September 30, 2005 for such other services and not reported above were $175,861 and $4,500, respectively. The services for which these fees were paid included review of materials provided to the Boards in connection with the investment management contract renewal process and review of the ICI transfer agent survey.
Aggregate Non-Audit Fees.The aggregate fees paid to PwC for non-audit services to the Funds for their last two fiscal years and to the Investment Manager or to any entity controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Funds for the twelve month periods ended September 30, 2006 and 2005 were $195,861 and $4,500, respectively.
The Audit Committees of the Funds have determined that the provision of the non-audit services, including tax-related services, that were rendered to the Investment Manager and to any entities controlling, controlled by, or under common control with the Investment Manager that provide ongoing services to the Funds is compatible with maintaining PwC’s independence.
Audit Committee Pre-Approval Policies and Procedures.As of the date of this proxy statement, no Audit Committee has adopted written pre-approval policies and procedures. As a result, all such services described above and provided by PwC must be directly pre-approved by the applicable Audit Committee(s).
u FURTHER INFORMATION ABOUT VOTING AND THE MEETING
Solicitation of Proxies.Your vote is being solicited by the Boards. The cost of soliciting proxies, including the fees of a proxy soliciting agent, will be borne by the Funds, [pro rata based upon ______]. The Funds reimburse brokerage firms and others for their expenses in forwarding proxy material to the beneficial owners and soliciting them to execute proxies. The Funds expect that the solicitation will be primarily by mail. In addition to solicitation by mail, certain officers and representatives of a Fund or its affiliates and certain financial services firms and their representatives, who will receive no extra compensation for their services, may solicit proxies by telephone, telegram or personally.
MIS Corporation, a subsidiary of Automatic Data Processing, Inc. (the “Solicitor”), has been engaged to assist in the solicitation of proxies, at an estimated cost of$___________.As the date of the Meeting approaches, certain Fund shareholders may receive a telephone call from a representative of the Solicitor if their votes have not yet been received. Authorization to permit the Solicitor to execute proxies may be obtained by telephonic instructions from shareholders of the Funds. Proxies that are obtained telephonically will be recorded in accordance with the procedures set forth below. The Boards believe that these procedures are reasonably designed to ensure that both the identity of the shareholder casting the vote and the voting instructions of the shareholder are accurately determined.
In all cases where a telephonic proxy is solicited, the Solicitor representative is required to ask for each shareholder’s full name and address and to confirm that the shareholder has received the proxy materials in the mail. If the shareholder is a corporation or other entity, the Solicitor representative is required to ask for the person’s title and confirmation that the person is authorized to direct the voting of the shares. If the information solicited agrees with the information provided to the Solicitor, then the Solicitor may ask for the shareholder’s instructions
31
on the Proposals. Although the Solicitor representative is permitted to answer questions about the process, he or she is not permitted to recommend to the shareholder how to vote, other than to read any recommendation set forth in the proxy statement. The Solicitor will record the shareholder’s instructions on the card. Within 72 hours, the shareholder will be sent a letter or mailgram to confirm his or her vote and asking the shareholder to call the Solicitor immediately if his or her instructions are not correctly reflected in the confirmation.
If a shareholder wishes to participate in the Meeting, but does not wish to give a proxy by telephone, the shareholder may still submit the proxy card(s) originally sent with the proxy statement or attend in person.
The Funds intend to pay all costs associated with the solicitation and the Meeting.
Voting by Broker-Dealers.The Funds expect that, before the Meeting, broker-dealer firms holding shares of the Funds in “street name” for their customers will request voting instructions from their customers and beneficial owners. If these instructions are not received by the date specified in the broker-dealer firms’ proxy solicitation materials, the Funds understand that broker-dealers may vote on Proposal 1, Election of a Board of Directors, on behalf of their customers and beneficial owners. Certain broker-dealers may exercise discretion over shares held in their name for which no instructions are received by voting these shares in the same proportion as they vote shares for which they received instructions.
Quorum.For each Fund, holders of a majority of the outstanding shares of the Fund present in person or represented by proxy, constitutes a quorum at the Meeting for purposes of acting upon the Proposals applicable to such Fund. The shares over which broker-dealers have discretionary voting power, the shares that represent “broker non-votes” (i.e., shares held by brokers or nominees as to which (i) instructions have not been received from the beneficial owners or persons entitled to vote and (ii) the broker or nominee does not have discretionary voting power on a particular matter), and the shares whose proxies reflect an abstention on any item will all be counted as shares present and entitled to vote for purposes of determining whether the required quorum of shares exists.
Method of Tabulation.The vote required to approve each Proposal and the effects of abstentions and broker non-votes on each Proposal are as follows:
Proposal 1, to amend the By-Laws to provide that the authorized number of directors shall not be less than five (5) nor more than ten (10), requires the affirmative vote of a majority of the shares of a Fund entitled to vote.
Proposal 2, to elect a Board of Directors, requires the vote of a plurality of shares of a Fund voted in person or by proxy at the meeting. The nominees who receive the highest numbers of votes will be elected to the Board.
Proposal 3, to approve an Agreement of Merger that provides for the reorganization of the fund into a Delaware statutory trust requires the affirmative vote of a majority of the outstanding shares of the Fund entitled to vote.
Proposal 4, for Franklin Money Fund only, to approve an Amended and Restated Agreement and Declaration of Trust for the Master Portfolio, requires the affirmative vote of a majority of the shares of the Master Portfolio voted.
Proposals 5 and 6, to approve amendments to, or the elimination of, certain fundamental investment restrictions of the Funds, each require the affirmative vote of the lesser of (i) 67% or more of the shares of the Fund entitled to vote thereon present at the Meeting if the holders of more than 50% of such outstanding shares of the Fund are present in person or represented by proxy; or (ii) more than 50% of the outstanding shares of the Fund entitled to vote thereon.
With respect to Proposal 2, each share of a Fund is entitled to one vote, except that shareholders are entitled to cumulate votes for the election of Directors. Thus, each shareholder entitled to vote for Directors will be able to give one candidate that number of votes which is equal to the number of Directors to be elected multiplied by the number of shares that the shareholder holds, and will be able to distribute the number of votes among two or more candidates in such a manner as the shareholder sees fit. Cumulative voting will be provided to all shareholders only if prior to the election of Directors at least one shareholder gives notice at the Meeting of his or her intention to cumulate votes. Cumulative voting is not applicable with respect to Franklin Money Fund shareholders’ providing voting instructions to Franklin Money Fund with respect to how Franklin Money Fund should vote its Master Portfolio shares on Proposal 2.
32
For the Master Portfolio, whether or not Proposals 2, 4, 5 and 6 with respect to the Master Portfolio are approved by its shareholders will be determined by reference to the shares outstanding of all of its various feeder funds, including Franklin Money Fund. Franklin Money Fund shareholders who do not provide voting instructions to such Fund will not affect such Fund’s votes at the Meeting with respect to the Master Portfolio. The percentage of Franklin Money Fund’s votes representing Feeder Fund shareholders not providing voting instructions will be voted by Franklin Money Fund’s Board or officers in the same proportion as the Fund shareholders who provide voting instructions.
Generally, however, abstentions and broker non-votes will be treated as votes present at the Meeting, but will not be treated as votes cast.
Simultaneous Meetings.The Meeting is to be held at the same time as a meeting of shareholders of most of the other U.S. registered open end Franklin Templeton funds and Franklin Mutual Recovery Fund (a closed-end fund operating as an interval fund). If any shareholder at the Meeting objects to the holding of simultaneous meetings and moves for an adjournment of the Meeting to a time promptly after the simultaneous meetings, the persons designated as proxies will vote in favor of such adjournment.
Adjournment.The Meeting as to any Fund may be adjourned from time to time for any reason whatsoever by vote of the holders of a majority of the shares present (in person or by proxy and entitled to vote at the Meeting), whether or not quorum is present. Such authority to adjourn the Meeting may be used in the event that a quorum is not present at the Meeting or, in the event that a quorum is present but sufficient votes have not been received to approve a Proposal, or for any other reason consistent with applicable state law and the Fund’s By-Laws, including to allow for the further solicitation of proxies. Any adjournment may be made with respect to any business which might have been transacted at the Meeting, and any adjournment will not delay or otherwise affect the effectiveness and validity of any business transacted at the Meeting prior to adjournment. Unless otherwise instructed by a shareholder granting a proxy, the persons designated as proxies may use their discretionary authority to vote as instructed by management of the Funds on questions of adjournment and on any other proposals raised at the Meeting to the extent permitted by the SEC’s proxy rules, including proposals for which management of such Funds did not have timely notice, as set forth in the SEC’s proxy rules.
Shareholder Proposals.The Funds are not required and do not intend to hold regular annual meetings of shareholders. A shareholder who wishes to submit a proposal for consideration for inclusion in a Fund’s proxy statement for the next meeting of shareholders of that Fund should send his or her written proposal to such Fund’s offices: One Franklin Parkway, San Mateo, California 94403-1906, Attention: Secretary, so that it is received within a reasonable time in advance of such meeting in order to be included in the appropriate Fund’s proxy statement and proxy card relating to that meeting and presented at the meeting. A shareholder proposal may be presented at a meeting of shareholders only if such proposal concerns a matter that may be properly brought before the meeting under applicable federal proxy rules, state law, and other governing instruments.
Submission of a proposal by a shareholder does not guarantee that the proposal will be included in the Fund’s proxy statement or presented at the meeting.
No business other than the matters described above is expected to come before the Meeting, but should any other matter requiring a vote of shareholders arise, including any questions as to an adjournment or postponement of the Meeting, the persons designated as proxies named on the enclosed proxy card will vote on such matters in accordance with the views of management.
| By Order of the Boards of Directors, |
| | |
| | |
| Craig S. Tyle |
| Vice President |
January __, 2007
33
