Investment Company Act of 1940 — Section 10(f)
December 12, 2011
RESPONSE OF THE OFFICE OF CHIEF COUNSEL
DIVISION OF INVESTMENT MANAGEMENT
Our Ref. No. 20111212101
File No. 811-09645
Your letter dated December 9, 2011 requests our assurance that we would not recommend enforcement action to the Commission under section 10(f) of the Investment Company Act of 1940, as amended (“1940 Act”) against the Funds (as defined below), if the Funds purchase or otherwise acquire certain loan assignments and participations from Citigroup, Inc. or Citibank, N.A. (“Citibank”) as part of the closing of a primary offering, where a Fund’s director is an affiliated person of Citibank.
You state that Columbia Management Investment Advisers, LLC (the “Adviser”) provides investment advisory services to certain investment companies registered under the 1940 Act (the “Funds”). You state that several of the Funds have significant portfolios of participation interests in loans originated by various banks. These Funds purchase loan assignments and participations (including bridge commitments) in primary transactions (i.e., direct placements) (collectively, “Covered Participations”). You state that Citibank has a significant market presence, in various capacities, in Covered Participation placement and trading activities, including serving regularly as a “lead arranger” for Covered Participations.1
You state that Mr. Anthony M. Santomero serves as a trustee or director, as applicable, to certain of the Funds (“Trustee”).2 You represent that Mr. Santomero is “independent” of the Adviser and its affiliates, and of the various subadvisers that subadvise certain Funds, in that he is not a director, officer or employee of the Adviser or its affiliates, or of the various subadvisers that subadvise particular Funds.
You state, however, that Mr. Santomero is an “interested person” of the Funds and the Adviser and the subadvisers as defined in section 2(a)(19) of the 1940 Act by virtue of his position as an independent director of Citibank, which may engage from time to time in brokerage execution, principal transactions and/or lending relationships with the Funds or other funds or accounts advised/managed by the Adviser and/or a Fund’s subadviser.3 You represent that Citibank is not an affiliated person, or an affiliated person of an affiliated person, of the Adviser or any subadvisers of the Funds. You further represent that Citibank is not an affiliated person, or an affiliated person of an affiliated person, of the Funds’ principal underwriter.
You state that section 10(f) of the 1940 Act, in relevant part, provides:
No registered investment company shall knowingly purchase or otherwise acquire, during the existence of any underwriting or selling syndicate, any security… a principal underwriter of which is an officer, director, member of an advisory board, investment adviser, or employee of such registered company, or is a person… of which any such officer, director, member of an advisory board, investment adviser, or employee is an affiliated person…
Section 10(f) of the 1940 Act was designed primarily to prevent an underwriter from “dumping” otherwise unmarketable securities on a fund in order to stimulate the market in these securities or to relieve the underwriter or selling syndicate of securities that are otherwise unmarketable.4
You state that rule 10f-3 under the 1940 Act exempts from the section 10(f) prohibition purchases of certain types of securities, including (i) securities that are part of an issue registered under the Securities Act of 1933 (“1933 Act”), and (ii) securities sold in an eligible rule 144A offering (“Rule 144A Securities”), subject to compliance with specific procedural and substantive conditions that are designed to guard against “dumping” unmarketable securities on a fund.5
You believe that section 10(f) of the 1940 Act should not prohibit the Funds from purchasing Covered Participations during the existence of any underwriting or selling syndicate involving Citibank. You assert that there is some uncertainty as to whether section 10(f) of the 1940 Act is applicable to Covered Participations. Among other things, you contend that although offerings of Covered Participations resemble underwritings or selling syndicates in certain respects, the offering process for Covered Participations does not constitute an “underwriting” within the meaning of the 1933 Act because a Covered Participation is not a security under the 1933 Act.6
You further believe that the concerns that section 10(f) of and rule 10f-3 under the 1940 Act are intended to address, namely to prevent an underwriter from “dumping” otherwise unmarketable securities on a fund in order to benefit the fund’s affiliated underwriter or selling syndicate, will not be implicated by the proposed purchases of Covered Participations. In particular, you contend that the associations between Citibank, on one hand, and the Funds and the Adviser and subadvisers, on the other hand, are attenuated, such that the Advisers and subadvisers have no incentive that might conflict with their obligation to make independent investment decisions about the Funds’ purchases of Covered Participations. To this end, you represent that Citibank is not an affiliated person, or an affiliated person of an affiliated person, of the Adviser or any subadvisers of the Funds, or of the Funds’ principal underwriter.7 Similarly, you contend that absent any affiliation with the Adviser and subadvisers, Citibank has no meaningful ability to cause a Fund to purchase any Covered Participations, thus obviating any concerns about Citibank engaging in activities that might be construed as “dumping” with respect to a Covered Participation.
You further contend that Covered Participations share certain attributes with Rule 144A Securities, including being offered primarily to a limited number of institutional investors that may include qualified institutional buyers (such as investment companies, commercial banks, investment banks and insurance companies) and subsequently being transferable among these investors.8 In addition, you make certain representations that are modeled on the conditions of rule 10f-3 under the 1940 Act, including limiting the amount of any Covered Participation to be purchased by the Funds from Citibank as part of a closing of a primary offering, aggregated with certain other funds and accounts, to not exceed 25% of the principal amount of the same class of financing of which the Covered Participation is a part. You further represent that Mr. Santomero will recuse himself from voting on any matters relating to the Funds’ purchases of such Covered Participations, including any determination that purchases of such Covered Participations were effected in compliance with your representations.
Based on the facts and representations set forth in your letter, we would not recommend enforcement action to the Commission under section 10(f) of the 1940 Act against the Funds, if the Funds make the proposed purchases in the manner described above.9 This response expresses our views on enforcement action only and does not express any legal conclusions on the questions presented. Because our position is based on the facts and representations in your letter, you should note that any different facts or representations may require a different conclusion.
1 You state that market practice for Covered Participations is for the lead arranger to receive fees from the borrower rather than the purchaser (Fund).
2 Hereinafter, “Funds” refers only to those Funds that are now or in the future overseen by Mr. Santomero as a trustee or director, as applicable.
3 See section 2(a)(19) of the 1940 Act defining “interested person.”
4 See Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Investment Company Act Release No. 22775 (July 31, 1997), citing Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. on Banking and Currency, 76th Cong., 3d Sess. 35 (1940) (statement of Commissioner Healy).
5 See Adoption of Rule N-10F-3 Permitting Acquisition of Securities of Underwriting Syndicate Pursuant to Section 10(f) of the Investment Company Act of 1940, Investment Company Act Release No. 2797 (Dec. 2, 1958) (Initial Adopting Release for rule 10f-3) (“The experience heretofore gained by the Commission in its consideration of requests of orders of exemption under [its section 10(f) exemptive authority] indicates that protection of investors may be adequately insured by the conditions and safeguards specified by the rule being adopted”).
6 You state that, as a result, the lead arranger does not have liability under section 11 of the 1933 Act as a statutory underwriter, even if such lead arranger is acting on a “firm commitment” basis.
7 Compare Merrill Lynch Asset Management, SEC Staff No-Action Letter (Apr. 28, 1997) (staff provided no-action assurances under section 10(f) of the 1940 Act, among other assurances, to permit funds to engage in direct placement agency transactions in which an affiliate of the funds’ investment adviser acted as placement agent, subject to representations and procedures designed to protect against the types of concerns that prompted Congress to enact section 10(f)).
8 You state that because the 1933 Act does not apply to Covered Participations, borrowers and lenders do not observe the technicalities of compliance with rule 144A, including certification of the lenders as qualified institutional buyers.
9 This letter confirms the position taken regarding the Funds under section 10(f) of the 1940 Act that David W. Grim and Sara P. Crovitz of the Division of Investment Management provided orally on June 1, 2011 to Robert M. Kurucza and Marco E. Adelfio of Goodwin Procter.
The Incoming Letter is in Acrobat format.