References to Ratings of Nationally Recognized Statistical Rating Organizations
A Small Entity Compliance Guide1
On October 5, 2009, the Securities and Exchange Commission ("Commission") adopted amendments to certain of its rules under the Investment Company Act of 1940 to remove references to securities credit ratings issued by nationally recognized statistical rating organizations ("NRSROs"). The amendments are designed to address concerns that references to NRSRO ratings in Commission rules may have contributed to an undue reliance on those ratings by market participants. The Commission believes that the references to credit ratings in the amended rules are no longer warranted as serving their intended purposes. The amendments to rules 5b-3 and 10f-3 under the Investment Company Act, which may affect small entities, are discussed in greater detail below.2 The effective date of the amendments is November 12, 2009.
Amendment to Rule 5b-3 under the Investment Company Act
Rule 5b-3 is a look-through provision that allows an investment company ("fund") to treat a refunded bond it acquires as the U.S. Government securities that are placed in an escrow account and pledged only to satisfy the payments due to investors under the bond. One of the former rule's conditions is that an independent certified public accountant ("CPA") must have certified to the escrow agent that the escrowed Government securities will meet the payments due to investors under the refunded bond, unless the bond has the highest debt rating from an NRSRO. The amendment to Rule 5b-3 eliminated this exception. Therefore, under the amended rule, the CPA certification condition applies to all refunded bonds, regardless of their NRSRO ratings. Amended Rule 5b-3, however, does not require that funds obtain the CPA certification. Rather, the amended rule requires that the CPA certify to the escrow agent that the escrowed securities will satisfy all scheduled payments. This requirement may be met, for example, by the fund manager confirming that a certification meeting the requirements of the amended rule was provided to the escrow agent.
Amendments to Rule 10f-3 under the Investment Company Act
Rule 10f-3 permits registered funds, if certain conditions are met, to purchase securities in an underwritten offering in which an affiliate of the fund is a member of the underwriting syndicate. Under the former rule, municipal securities that a registered fund purchases must have received certain of the highest NRSRO ratings. Under the amended rule, the municipal securities instead must (i) have sufficient liquidity such that they can be sold at or near their carrying value within a reasonably short period of time, and (ii) be subject to no greater than moderate credit risk, or, if the issuer has been in continuous operation for less than three years (i.e., is a less seasoned issuer), subject to a minimal or low amount of credit risk.
The adopting release for the amendments to rules 5b-3 and 10f-3 can be found on the Commission's website at http://www.sec.gov/rules/final/
The text of rules 5b-3 and 10f-3 can be accessed through the "Investment Management" section of the Commission's website at http://www.sec.gov/
Contacting the Securities and Exchange Commission
The Commission's Division of Investment Management is happy to assist small funds with questions regarding the amendments to rules 5b-3 and 10f-3. The Division's Office of Chief Counsel answers questions submitted by email and telephone. You can submit a question by e-mail to email@example.com and a staff member of the office will call you to discuss your question. You can also contact the Office of Chief Counsel at (202) 551-6825.
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