LeBoeuf, Lamb, Green & MacRae, L.L.P.
125 West 55th Street
New York, NY 10019

February 15, 2001

VIA EMAIL

Mr. Jonathan G. Katz
Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549

Re: File No. S7-20-00; Proposed Rule: Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate

Dear Mr. Katz:

The Securities and Exchange Commission (the "Commission") recently proposed amendments to Rule 10f-3 under the Investment Company Act of 1940 (the "Proposed Amendments"). Rule 10f-3 permits a registered investment company (a "fund") that has certain affiliations with an underwriting participant to purchase securities during an offering, if certain conditions are met. The Proposed Amendments would expand the exemption provided by Rule 10f-3 to permit a fund to purchase government securities in a syndicated offering. The Proposed Amendments also would modify Rule 10f-3's quantitative limits on purchases of securities to cover purchases by a fund, as well as any discretionary non-fund account advised by the fund's investment adviser. We appreciate this opportunity to comment on the Proposed Amendments. We do so on behalf of certain of our investment company and investment adviser clients and based in part on their input.

I. Purchases of Government Securities

We fully support the Commission's efforts to expand the scope of Rule 10f-3 to permit funds to purchase government securities during the existence of an underwriting or selling syndicate for those securities. We commend the Commission and the Staff for their recognition that the distribution practice concerning government securities has been changing during the last few years and that government-sponsored enterprises have now begun to offer their securities through syndicated underwritings. Therefore, we welcome the proposed addition of government securities to the types of securities that may be purchased by a fund pursuant to Rule 10f-3. We agree with the Commission that "[g]overnment securities are high-quality investments, and therefore are unlikely to be dumped into a fund."

The Commission requested comment on whether Rule 10f-3 should include limitations on the purchase of government securities that do not apply to the other types of securities permitted to be purchased under the rule, in particular whether Rule 10f-3 should require that government securities must have received a certain minimum rating from a National Recognized Statistical Rating Organization, as is required for municipal securities. We do not believe that Rule 10f-3 should include additional limitations solely applicable to government securities. As noted, government securities are high quality investments and unlikely to be dumped into a fund. In addition, unlike municipal securities, government securities are backed by the full faith and credit of the United States government, and therefore are inherently more secure than municipal securities. Moreover, we are unaware of any government securities that do not carry an actual or implied credit rating of investment grade or better. Consequently, the protection of investors does not require the inclusion of additional limitations on the purchase of government securities under the rule.

II. Purchases Covered by the Percentage Limit Set Forth in Rule 10f-3(b)(7)

We express strong reservations regarding the Commission's proposal to amend Rule 10f-3 to include in the percentage limit purchases by any non-fund account over which the adviser has discretionary authority or exercises control. We believe that the percentage limit in its current form has served fund investors and the investment management industry well and that there is no need to amend the rule in this area.

We do not necessarily agree with the Commission's statement that the percentage limit in its current form contains "a possible 'loophole' . . . that could permit an investment adviser to circumvent the percentage limit and compromise the effectiveness of the rule." All investment advisers owe a fiduciary duty to their clients,1 including both fund and non-fund clients. These duties include a duty to act in the best interest of clients and, more specifically, a duty not to "dump" unwanted securities during an underwriting in which an affiliate acts as a principal underwriter.2 The purchase of a significantly large block of securities in an affiliated underwriting could violate these fiduciary duties.3 We believe, however, that in many circumstances the aggregate purchase of an amount greater than 25 percent by both an adviser's funds and discretionary non-fund clients would not violate these duties and that such a determination should turn on the facts and circumstances of each instance.4 In addition, we are not aware of any wide-spread abuse in this area. Accordingly, we urge the Commission to leave a flexible standard, guided by an adviser's fiduciary duties, to cover purchase by an adviser's non-fund clients.

* * *

We would be pleased to respond to any inquiries regarding the views set forth in this letter or other aspects of the Proposed Amendments. Please feel free to contact the undersigned at (212) 424-8542 or K. Oliver Rust at (212) 424-8571.

Sincerely,

Terrance J. O'Malley


Endnotes

1. SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180 (1963).
2. Section 206 of the Investment Advisers Act of 1940.
3. The proposing release cites an example where, under the rule as currently written, an adviser could arrange for its fund clients to purchase 25 percent of an offering and for its non-fund clients to purchase the remaining 75 percent of the offering. While this example may not technically violate Rule 10f-3, we believe that it would violate an adviser's fiduciary duties under Section 206 of the Advisers Act. On the other hand, there may be circumstances under which an adviser arranges for its fund clients to purchase 25 percent of an offering and its non-fund clients to purchase, for example, an additional 15 to 20 percent. The purchase of these additional shares may not violate an adviser's fiduciary duties depending on such factors as the price of the offering, the demand for the securities, client investment objectives and general market conditions.

4. We further note that the proposed inclusion of an adviser's discretionary non-fund accounts could be detrimental to investors. As recognized by the Proposed Amendments, the securities markets and the investment management industry have undergone significant changes in past few years. Among these changes is the fact that many advisory firms are now affiliated with broker-dealers that underwrite securities and these same advisory firms service hundreds and even thousands of clients. In addition, recent consolidation in the investment management industry means that a single adviser is likely to have many more clients than in the past. Thus, requiring an adviser to include its discretionary non-fund clients in the 25 percent limit in all circumstances may result in a client (i) not being able to purchase an attractive offering, (ii) receiving an uneconomically small allocation or (iii) having to buy the security at a higher price in the secondary market.