The largest institutional buyer of New York State debt balked at a $ 640 million refunding issue sold by the state's Local Government Assistance Corp., citing the transaction's designation rules, fund officials said yesterday.

Officials at the San Mateo, Calif.-based Franklin Resources Inc., which owns funds that manage about $ 40 billion of municipal assets and about $ 4 billion of tax-exempt New York bonds, said they have a company policy that does not authorize their funds to purchase bonds from offerings in which the issuer stipulates that the buyer designate commissions to specific bond dealers.

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