SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release Nos. IC-22775, IS-1095; File No. S7-7-96]
RIN 3235-AG61
Exemption for the Acquisition of Securities During the Existence of An
Underwriting or Selling Syndicate
AGENCY: Securities and Exchange Commission
ACTION: Final Rule
SUMMARY: The Commission is adopting amendments to the rule under the
Investment Company Act of 1940 that permits an investment company that is
related to certain participants in an underwriting to purchase securities
during an offering, if certain conditions are met. The amendments increase
the percentage of an underwriting that investment companies having the same
investment adviser may purchase in reliance on the rule, and expand the
scope of the rule to include securities of certain foreign and domestic
issuers that are not registered with the Commission under the Securities
Act of 1933. The amendments respond to changes in the investment company
and underwriting industries that have occurred since the rule last was
substantively amended in 1979.
EFFECTIVE DATE: The rule amendments will become effective [insert date 60
days after publication in the Federal Register].
FOR FURTHER INFORMATION CONTACT: C. Hunter Jones, Special Counsel, Office
of Regulatory Policy, or Nadya B. Roytblat, Assistant Director, Office of
Investment Company Regulation, Division of Investment Management, at (202)
942-0690, U.S. Securities and Exchange Commission, 450 5th Street, N.W.,
Mail Stop 10-2, Washington, D.C. 20549.
Requests for formal interpretive advice should be directed to the
Office of Chief Counsel at (202) 942-0659, Division of Investment
Management, U.S. Securities and Exchange Commission, 450 5th Street, N.W.,
Mail Stop 10-6, Washington, D.C. 20549.
SUPPLEMENTARY INFORMATION: The Commission today is adopting amendments to
rule 10f-3 [17 CFR 270.10f-3] under the Investment Company Act of 1940 [15
U.S.C. 80a] (the "Investment Company Act").
TABLE OF CONTENTS
EXECUTIVE SUMMARY
I. BACKGROUND
A. Introduction
B. Proposed Amendments to Rule 10f-3
II. DISCUSSION
A. Quantity Limitations
1. Percentage of Offering Purchased
2. Percentage of Fund Assets
B. Foreign Offerings and Rule 144A Securities
1. Eligible Foreign Offerings
2. Rule 144A Offerings
3. Calculation of Percentage Limit in Global Offerings
C. Price and Timing of the Purchase
D. Group Sales
E. Role of Fund Board of Directors
F. Reporting and Recordkeeping
G. U.S. Government Securities
III. COST-BENEFIT ANALYSIS
IV. PAPERWORK REDUCTION ACT
V. SUMMARY OF REGULATORY FLEXIBILITY ANALYSIS
VI. STATUTORY AUTHORITY
TEXT OF RULE
EXECUTIVE SUMMARY
The Commission is adopting amendments to rule 10f-3 under the
Investment Company Act. Rule 10f-3 provides an exemption from section
10(f), which prohibits any registered investment company ("fund") from
purchasing securities for which an underwriter having certain relationships
======END OF PAGE 2======
with the fund ("affiliated underwriter") is acting as a principal
underwriter during the existence of an underwriting or selling syndicate
for the securities. The amendments are intended to provide funds with
additional flexibility, consistent with the protection of investors, to
make investments that may be in the best interests of investors.
The amendments will permit a fund subject to the rule, together with
other funds that have the same investment adviser, to purchase, during the
existence of an underwriting or selling syndicate:
* up to 25% of the principal amount of an offering;
* securities of foreign issuers or of domestic reporting issuers in an
"Eligible Foreign Offering"; and
* certain securities that are exempt from registration and are eligible
for resale pursuant to rule 144A under the Securities Act of 1933
("Securities Act").
The Commission is not adopting the amendment that would have permitted
a fund subject to the rule to purchase municipal securities in a group sale
(i.e., a purchase for which all members of an underwriting syndicate,
including the affiliated underwriter, receive credit). Rather, in light of
the comments, the Commission has concluded that there is insufficient
justification at this time to alter the treatment of group sales of
municipal securities under rule 10f-3.
I. BACKGROUND
A. Introduction
Section 10(f) of the Investment Company Act was designed to address
one of the major abuses noted in the period before enactment of the
Investment Company Act -- the use of funds by underwriters that controlled
======END OF PAGE 3======
these funds as a "dumping ground" for unmarketable securities.<(1)>
An underwriter could, for example, "dump" unmarketable securities on its
controlled fund, either by causing the fund to purchase the securities from
the underwriter itself, or by encouraging the fund to purchase securities
from another member of the underwriting syndicate. Fund assets also could
be used to absorb the risks of an underwriting in more subtle ways, such as
by facilitating price stabilization in connection with an underwriting.
Section 10(f) prohibits any fund from purchasing any security for
which an affiliated underwriter is acting as a principal
underwriter,<(2)> during the existence of an underwriting or selling
syndicate for that security.<(3)> Congress recognized that section
<(1)> See 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).
<(2)> "Principal underwriter" is defined in section 2(a)(29) of
the Investment Company Act [15 U.S.C. 80a-2(a)(29)] to mean (in
relevant part) an underwriter who, in connection with a primary
distribution of securities, (A) is in privity of contract with
the issuer or an affiliated person of the issuer, (B) acting
alone or in concert with one or more other persons, initiates or
directs the formation of an underwriting syndicate, or (C) is
allowed a rate of gross commission, spread, or other profit
greater than the rate allowed another underwriter participating
in the distribution.
<(3)> Section 10(f) [15 U.S.C. 80a-10(f)] prohibits a fund from
purchasing a security during the existence of an underwriting or
selling syndicate if a principal underwriter of the security is
an officer, director, member of an advisory board, investment
adviser, or employee of the fund, or is a person of which any
such officer, director, member of an advisory board, investment
adviser, or employee is an affiliated person. As noted above,
for purposes of this release, a person that falls within one of
these categories is referred to as an "affiliated underwriter,"
even though the Investment Company Act defines the term
"affiliated person" to include a broader set of relationships.
See section 2(a)(3) of the Investment Company Act [15 U.S.C.
(continued...)
======END OF PAGE 4======
10(f), by prohibiting all purchases by a fund having the specified
relationships with an underwriter ("affiliated fund") during the existence
of the underwriting or selling syndicate, could be overly broad. Thus,
Congress gave the Commission specific authority to exempt persons from that
prohibition when an exemption would be consistent with the protection of
investors.<(4)>
In 1958, the Commission used its exemptive authority under section
10(f) to adopt rule 10f-3.<(5)> The rule currently permits a fund to
purchase securities in a transaction that otherwise would violate section
10(f) if, among other things, (i) the securities either are registered
under the Securities Act or are municipal securities, (ii) the offering
<(3)>(...continued)
80a-2(a)(3)]. Similarly, this release refers to a fund that is
subject to section 10(f) as a result of its relationship with an
"affiliated underwriter," as an "affiliated fund."
<(4)> Section 10(f) authorizes the Commission to exempt, by rule
or order, conditionally or unconditionally, "any transaction or
classes of transactions from any of the provisions [of section
10(f)], if and to the extent that such exemption is consistent
with the protection of investors." By contrast, section 6(c) of
the Investment Company Act [15 U.S.C. 80a-6(c)] authorizes the
Commission more generally to exempt persons, securities, or
transactions from provisions of the Investment Company Act if
"necessary or appropriate in the public interest and consistent
with the protection of investors and the purposes fairly intended
by the policy and provisions" of the Investment Company Act.
<(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) [23 FR 9548 (Dec. 10, 1958)].
The rule codified the conditions of orders that the Commission
had granted prior to 1958 exempting certain funds from section
10(f) to permit them to purchase specific securities.
======END OF PAGE 5======
involves a "firm commitment" underwriting,<(6)> (iii) the fund and all
other funds advised by the same investment adviser do not in the aggregate
purchase more than the greater of 4% of the principal amount of the
securities being offered or $500,000 (but in no event greater than 10% of
the offering) (the "percentage limit"), (iv) the fund does not use more
than 3% of its assets to purchase the securities, (v) the fund purchases
the securities from a member of the syndicate other than the affiliated
underwriter, (vi) the fund purchases the securities at a price not more
than the public offering price prior to the end of the first day on which
the securities are offered, and (vii) the fund's directors have adopted
procedures for purchases made in reliance on the rule and regularly review
fund purchases to determine whether they comply with these
procedures.<(7)> The conditions of rule 10f-3 are designed to ensure
that a purchase by a fund from a syndicate in which an affiliated
<(6)> A "firm commitment" underwriting, for purposes of rule
10f-3, is one in which the underwriters are committed to purchase
all of the securities being offered, if the underwriters purchase
any of the securities being offered. See amended rule
10f-3(b)(5) [17 CFR 270.10f-3(b)(5)].
<(7)> The provisions of rule 10f-3 are similar to provisions
permitting limited affiliated transactions by persons subject to
section 406 of the Employee Retirement Income Security Act of
1974 ("ERISA") [29 U.S.C. 1106] and by banks subject to section
23B of the Federal Reserve Act [12 U.S.C. 371c-1]. See
Prohibited Transaction Class Exemption 75-1 (Oct. 24, 1975)
(Department of Labor class exemption permitting purchases in
limited circumstances, subject to conditions similar to rule 10f-
3); section 23B(b) of the Federal Reserve Act [12 U.S.C.
371c-1(b)] (prohibiting a bank or its subsidiary from purchasing,
as principal or fiduciary, securities from underwriting
syndicates in which an affiliate of the bank participates, but
permitting acquisitions of such securities if a majority of the
bank's independent directors have approved the acquisition in
advance).
======END OF PAGE 6======
underwriter is participating is consistent with the protection of fund
investors.
B. Proposed Amendments to Rule 10f-3
On March 21, 1996, the Commission issued a release proposing
amendments to rule 10f-3 ("Proposing Release").<(8)> The proposed
amendments to rule 10f-3 were intended to respond to concerns that the
dramatic growth in the fund industry, combined with increasing
concentration in the underwriting industry, and increasing business
affiliations between funds and underwriters, had made the percentage limit
too restrictive. The Proposing Release also noted that these trends have
caused more funds to be subject to the prohibitions of section
10(f).<(9)>
The proposed amendments were designed to balance these concerns with
the need for funds to have more flexibility to purchase securities when
their affiliated underwriters are members of syndicates. The proposed
amendments would have eased some of the restrictions of the rule to take
into account fundamental changes in the industry, while preserving those
parts of the rule that continue to protect investors.
The Commission received 18 comment letters on the proposed amendments
to rule 10f-3. Commenters were supportive of the direction of the proposed
amendments; many urged the Commission to further loosen the restrictions
<(8)> Exemption for the Acquisition of Securities During the
Existence of an Underwriting Syndicate, Investment Company Act
Release No. 21838 (Mar. 21, 1996) [61 FR 13630 (Mar. 27, 1996)].
<(9)> See Proposing Release, supra note 8, at nn.9-20 and
accompanying text; see also Jack Willoughby, Fortify '40 -- or
Fight, INSTITUTIONAL INVESTOR, Jan. 1997, at 15-16 (noting
increasing affiliation between fund management and securities
underwriting firms).
======END OF PAGE 7======
imposed by the rule. The Commission is adopting amendments to rule 10f-3
with a number of changes from the amendments as proposed, in view of the
issues raised by commenters.<(10)>
II. DISCUSSION
A. Quantity Limitations
1. Percentage of Offering Purchased
Rule 10f-3 limits the amount of securities that affiliated funds may
purchase during the existence of an underwriting or selling syndicate. As
discussed in the Proposing Release, the purpose of the percentage limit is
to provide an indication that a significant portion of an offering is being
purchased by persons other than a single affiliated fund
complex.<(11)>
The percentage limit in rule 10f-3 currently prohibits funds advised
by the same investment adviser from purchasing, in the aggregate, more than
4% of the principal amount of the offering, or $500,000, whichever is
greater, but in no event more than 10% of the offering.<(12)> The
Proposing Release noted that the current percentage limit appears to be
more restrictive than necessary for the protection of fund investors. As a
result, the percentage limit may impose unnecessary costs. Affiliated
funds that are limited to purchasing 4% of an offering, if they wish to
<(10)> The amendments also add headings to the text of rule 10f-
3 in order to make the rule more understandable and usable. In
addition, the title of the rule has been changed to "Exemption
for the acquisition of securities during the existence of an
underwriting or selling syndicate" to conform to the language of
section 10(f).
<(11)> See Proposing Release, supra note 8, at n.14 and
accompanying text.
<(12)> Rule 10f-3(d).
======END OF PAGE 8======
purchase more than that amount, must wait until the underwriting or selling
syndicate terminates, and purchase the securities in the secondary market.
This delay can cause these funds to pay a significantly higher price for
the securities and incur significant additional transaction
costs.<(13)> Thus, funds that are restricted by the percentage limit
of rule 10f-3 might not be able to purchase desirable securities at prices
that would benefit their portfolios.<(14)> In addition, because
compliance with the percentage limit is based on purchases by all funds
with the same investment adviser, the percentage limit present particular
problems for fund complexes that have several funds that might have an
interest in purchasing the security.<(15)>
<(13)> In many instances, particularly in the equity market, the
price of a security increases, sometimes dramatically, after an
initial public offering. See, e.g., I LOUIS LOSS & JOEL
SELIGMAN, SECURITIES REGULATION 333 n.28 (1989); Jonathan A.
Shayne & Larry D. Soderquist, Inefficiency in the Market for
Initial Public Offerings, 48 VAND. L. REV. 965 (1995). There are
additional potential costs to purchasing securities in the
secondary market. In secondary market purchases, for example,
funds must pay brokerage commissions that they usually do not pay
when purchasing directly in an underwritten offering.
<(14)> Funds in a large fund complex also may find it
inefficient to purchase only 4% of an offering, particularly if
the total offering amount is small. For these funds, 4% of an
offering may be too small an amount to have any significant
effect on the funds' portfolios. The portfolio managers of the
funds may then decide not to purchase the security at all.
<(15)> For example, some fund complexes have over fifty funds.
Perhaps as many as twenty of the funds might be interested in
purchasing a security in a primary offering because investing in
the security is consistent with each fund's investment
objectives. In that case, those twenty funds must limit their
total purchases of the security to the greater of 4% of the
offering or $500,000, but in no event more than 10% of the
offering.
======END OF PAGE 9======
In response to these concerns and changes in the industry, the
Commission proposed to amend the percentage limit to permit funds relying
on the rule to purchase up to the greater of 10% of the principal amount of
an offering, or $1 million, but in no event more than 15% of the
offering.<(16)> Commenters generally agreed with the reasons for
raising the percentage limit. Most commenters stated that the percentage
limit should be significantly higher than that proposed, and many suggested
that the percentage limit be eliminated entirely. No commenter suggested
that the current percentage limit be retained or lowered. Commenters
differed, however, on the appropriate percentage limit.<(17)>
The Commission continues to believe that the percentage limit provides
assurance that a significant portion of an offering will be purchased by
persons other than a single fund complex affiliated with an underwriter,
and should continue to be a component of the protections afforded by rule
10f-3. At the same time, the constraints of the percentage limit appear to
be more restrictive on funds than they have been in the past, as a result
of the growth in the fund industry and the increasing importance of funds
<(16)> See Proposing Release, supra note 8, at nn.21-26 and
accompanying text.
<(17)> Comments ranged from supporting the percentage limit as
proposed, to a percentage limit as high as 80%.
======END OF PAGE 10======
as purchasers of securities.<(18)> These effects have been
particularly acute for municipal bond funds.<(19)>
Subsequent to the Commission's adoption of the current percentage
limit in 1979, fund ownership of securities increased substantially, both
in absolute levels and as a percentage of total securities owned by all
securityholders.<(20)> Given the consistent, dramatic growth in fund
<(18)> As the Proposing Release noted, in 1980 there were 564
funds with total assets of $134.8 billion, and in 1995 there were
5,789 funds with total assets of over $2.8 trillion. Proposing
Release, supra note 8, at n.10. By December 1996, there were
6,270 funds with total assets of over $3.5 trillion. Investment
Company Institute, Press Release (Jan. 28, 1997). Assets
invested in funds currently exceed account deposits at commercial
banks. See BOARD OF GOVERNORS OF THE FEDERAL RESERVE SYSTEM,
FLOW OF FUNDS ACCOUNTS OF THE UNITED STATES (Mar. 14, 1997)
(table L.109).
<(19)> Increases in the demand for municipal bonds by mutual
funds have outpaced increases in the supply of new municipal
bonds. In 1980, 42 municipal bond funds held under $3 billion in
municipal bonds. By 1996, 1,180 municipal bond funds held over
$287 billion in municipal bonds. By contrast, the growth in
municipal bond supply has grown only modestly: in 1980,
approximately $47 billion in municipal bonds were issued; by
1996, issuances had only grown about fourfold, to $184 billion.
INVESTMENT COMPANY INSTITUTE, 1997 MUTUAL FUND FACT BOOK 68;
INVESTMENT COMPANY INSTITUTE, 1986 MUTUAL FUND FACT BOOK 19;
INVESTMENT COMPANY INSTITUTE, 1981 MUTUAL FUND FACT BOOK 77;
Investment Company Institute, Press Release (Jan. 28, 1997); BOND
BUYER, 1997 YEARBOOK 11; BOND BUYER, 1990 YEARBOOK 38; Lipper
Closed-End Fund Performance Analysis Service (Jan. 1997), at 78.
Some commenters noted that the withdrawal of several investment
banks from the municipal bond business has intensified these
pressures.
<(20)> In 1979, funds (not including insurance company separate
accounts) owned approximately 2% ($61.6 billion) of outstanding
securities (including U.S. government securities); in 1996, funds
owned approximately 13% ($2.7 trillion) of outstanding
securities, an increase in the percentage of ownership of over
500% compared to 1979. See BOARD OF GOVERNORS OF THE FEDERAL
RESERVE SYSTEM, FLOW OF FUNDS ACCOUNTS OF THE UNITED STATES,
1979-1988 (Mar. 14, 1997) (tables L.209 through L.214); BOARD OF
GOVERNORS OF THE FEDERAL RESERVE SYSTEM, FLOW OF FUNDS ACCOUNTS
(continued...)
======END OF PAGE 11======
assets, and in light of the Commission's administrative experience with
rule 10f-3 as well as the protections provided by the rule's other
conditions, the Commission believes that adopting a percentage limit higher
than the proposed limit is appropriate.<(21)>
The Commission has amended rule 10f-3 to provide a 25% limit on the
principal amount of an offering that affiliated funds may purchase. A
percentage limit of 25% of the principal amount of an offering should
provide assurance that a significant portion of the offering is being
distributed to investors not affiliated with the funds, while affording
significant relief to purchasing funds compared to the percentage limit
currently imposed in rule 10f-3. The Commission believes that a 25% limit
would prevent a single fund complex affiliated with an underwriter from
purchasing the majority of an offering, and should provide some assurance
that purchasers other than one or two fund complexes affiliated with the
underwriters are purchasing securities in the offering.<(22)> The
Commission recognizes that this limit is significantly below that suggested
by many industry commenters. The Commission is unconvinced at this time,
however, that the case for raising the percentage limit higher has been
made persuasively by commenters.
2. Percentage of Fund Assets
<(20)>(...continued)
OF THE UNITED STATES (Mar. 14, 1997) (tables L.209 through
L.214).
<(21)> See amended rule 10f-3(b)(7) [17 CFR 270.10f-3(b)(7)].
<(22)> With respect to the calculation of the percentage limit
in Eligible Rule 144A Offerings, see infra note 34 and
accompanying text. With respect to the calculation of the
percentage limit in multi-class or multi-tranche offerings, see
infra Section II.B.3.
======END OF PAGE 12======
Rule 10f-3 currently prohibits a fund from using more than 3% of its
assets to acquire securities in a transaction in reliance on the rule (the
"3% limit").<(23)> The Commission proposed to eliminate this limit,
noting that the other provisions of rule 10f-3 provide sufficient
protections against dumping, and that the diversification provisions of the
Investment Company Act provide shareholders of most funds with protections
similar to those provided by the 3% limit.<(24)> Commenters
supported the proposed amendment eliminating the 3% limit, which the
Commission is adopting.
B. Foreign Offerings and Rule 144A Securities
A fund currently cannot rely on rule 10f-3 to purchase securities of
any issuer, including a foreign issuer, unless the securities are
registered under the Securities Act or are municipal securities. The
proposed amendments would have permitted a fund to purchase securities
issued by a foreign issuer that were not registered under the Securities
Act if the securities were issued in either an "Eligible Foreign Offering"
or a "Foreign Issuer Rule 144A Offering," as defined in the proposed
amendments. Commenters generally supported extending the rule to purchases
of foreign securities that are not registered under the Securities Act.
The Commission is adopting the amendments related to foreign securities,
with certain modifications from the proposal in response to issues raised
by commenters, as described below.
<(23)> Rule 10f-3(e).
<(24)> See section 5(b)(1) of the Investment Company Act [15
U.S.C. 80a-5(b)(1)] (limiting a diversified fund to investing,
with respect to 75% of its assets, no more than 5% of its assets
in the securities of a single issuer).
======END OF PAGE 13======
In considering the proposed amendments related to offerings of foreign
securities, the Commission also focused on similar issues related to
domestic issuers that might sell their securities outside the United States
or privately in unregistered offerings. The Commission has concluded that
rule 10f-3 should be extended to securities of certain domestic issuers
that are sold in foreign offerings or that are exempt from registration and
eligible for resale pursuant to rule 144A.<(25)>
1. Eligible Foreign Offerings
The amendments permit an affiliated fund to purchase securities in a
public offering that is conducted under the laws of a country other than
the United States ("Eligible Foreign Offering").<(26)> An Eligible
Foreign Offering must be subject to regulation by a foreign financial
regulatory authority, as defined in the Investment Company Act, in the
country in which the public offering occurs.<(27)> The rule also
requires that financial statements of the issuer of the securities that are
prepared and audited in a manner required or permitted by the appropriate
<(25)> 17 CFR 230.144A.
<(26)> Amended rule 10f-3(a)(2) [17 CFR 270.10f-3(a)(2)].
<(27)> Amended rule 10f-3(a)(2)(i) [17 CFR 270.10f-3(a)(2)(i)].
"Foreign financial regulatory authority" is defined in section
2(a)(50) of the Investment Company Act [15 U.S.C. 80a-2(a)(50)]
generally as any (A) foreign securities authority, (B) other
governmental body or foreign equivalent of a self-regulatory
organization empowered by a foreign government to administer or
enforce its laws relating to certain financial activities, or (C)
membership organization a function of which is to regulate the
participation of its members in such financial activities.
A "foreign securities authority" is defined in section 2(a)(49)
of the Investment Company Act [15 U.S.C. 80a-2(a)(49)] as any
foreign government or any governmental body or regulatory
organization empowered by a foreign government to administer or
enforce its laws as they relate to securities matters.
======END OF PAGE 14======
foreign financial regulatory authority in the country in which the Eligible
Foreign Offering occurs, for the two years prior to the offering, must be
made available in connection with the offering.<(28)>
The rule, as proposed, would have limited Eligible Foreign Offerings
to offerings by foreign issuers. The Commission has decided to permit an
affiliated fund to purchase a domestic issuer's securities offered in an
Eligible Foreign Offering, provided that the domestic issuer is a reporting
issuer.<(29)> This requirement is designed to provide assurance that
<(28)> Amended rule 10f-3(a)(2)(iii) [17 CFR
270.10f-3(a)(2)(iii)]. The amendments as adopted do not specify
the format of the financial statements that must be provided, in
recognition that financial reporting standards differ from
country to country. Nor do the amendments specify that
applicable foreign law must require the issuer to disclose
information about itself and the offering to prospective
purchasers. The other components of the definition of an
Eligible Foreign Offering should make this condition unnecessary.
Fund management should determine whether there is sufficient
information concerning the issuer and the offering to ensure that
the securities are marketable and that the other conditions of
the rule, particularly those related to the price and timing of
the purchase of the securities, are satisfied.
<(29)> Amended rule 10f-3(a)(2)(iv) [17 CFR 270.10f-3(a)(2)(iv)]
(requiring that the domestic issuer (1) have a class of
securities registered pursuant to section 12(b) or 12(g) of the
Securities Exchange Act of 1934 ("Exchange Act") or be required
to file reports pursuant to section 15(d) of the Exchange Act,
and (2) have filed all the material required to be filed pursuant
to section 13(a) or 15(d) of the Exchange Act for the 12 months
preceding the offering).
Separate from the conditions included in rule 10f-3, Regulation S
under the Securities Act [17 CFR 230.901 - .904] contains certain
limitations on the availability of its safe harbor from
registration for foreign offers and sales by domestic issuers.
Rule 10f-3 exempts certain transactions only from the
prohibitions contained in section 10(f) of the Investment Company
Act. Nothing in this release should be interpreted to suggest
that the requirements and limitations of Regulation S do not
apply to transactions permitted under rule 10f-3. See Offshore
Offers and Sales, Securities Act Release No. 6863 (Apr. 24, 1990)
(continued...)
======END OF PAGE 15======
the issuer is not making a foreign offering in order to avoid the
disclosure requirements of the U.S. securities laws to facilitate the
dumping of securities on affiliated funds.
2. Rule 144A Offerings
Many fund purchases of foreign issuer securities are made in offerings
that are exempt from the registration provisions of the Securities Act and
in which the securities are eligible for resale pursuant to rule 144A under
the Securities Act ("rule 144A offerings").<(30)> Rule 144A is a
non-exclusive safe harbor that exempts from the registration provisions of
the Securities Act resales of securities to certain institutions, known as
Qualified Institutional Buyers ("QIBs").<(31)>
A rule 144A offering of a foreign issuer's securities often is part of
a larger global offering. Sometimes a global offering is divided into
several tranches -- one for the issuer's home country, one for the United
<(29)>(...continued)
[55 FR 18306 (May 2, 1990)]. The Commission recently proposed
amendments to Regulation S that would, if adopted, treat equity
securities of domestic issuers and equity securities of foreign
issuers with primary trading markets in the United States as
restricted securities for purposes of rule 144 under the
Securities Act [17 CFR 230.144]. See Offshore Offers and Sales,
Securities Act Release No. 7392 (Feb. 20, 1997) [62 FR 9258 (Feb.
28, 1997)].
<(30)> 17 CFR 230.144A. In 1993, funds purchased more foreign
equity securities in rule 144A offerings than did any other type
of purchaser. See SECURITIES AND EXCHANGE COMMISSION, STAFF
REPORT ON RULE 144A 15 (1994) ("STAFF REPORT").
<(31)> Under rule 144A, the seller must reasonably believe that
the purchaser is a QIB. A QIB is an institution of a type listed
in rule 144A that owns or invests on a discretionary basis at
least $100 million of certain securities. See 17
CFR 230.144A(a)(1). Many funds qualify as QIBs in their own
right, and others qualify because they are part of a "family" of
funds that owns, in the aggregate, at least $100 million of
certain securities. 17 CFR 230.144A(a)(1)(iv).
======END OF PAGE 16======
States, and one or more for other countries. Other times, there is a
single home country tranche from which limited amounts of securities may be
sold in the United States and elsewhere. In both cases, the price for the
securities is uniform to all purchasers, and the issuer prepares an
offering document that provides detailed information about the issuer and
the offered securities.<(32)>
The proposed amendments would have permitted a fund to purchase
securities in a "Foreign Issuer Rule 144A Offering," subject to the other
conditions of rule 10f-3 (except for the Securities Act registration
requirement). Most commenters supported this proposal. The Commission is
adopting these amendments with a number of changes that should accommodate
<(32)> Although most foreign rule 144A placements appear to be
priced the same as concurrent foreign offerings, there is no
regulatory requirement that the securities be priced in this
manner. See STAFF REPORT, supra note 30, at 26. It has been
suggested, however, that most securities eligible for resale
pursuant to rule 144A are sold in underwriting arrangements with
terms and conditions substantially similar to those applicable to
registered public offerings. See 1 EDWARD GREENE ET AL., U.S.
REGULATION OF THE INTERNATIONAL SECURITIES MARKETS: A GUIDE FOR
DOMESTIC AND FOREIGN ISSUERS AND INTERMEDIARIES 141 (1993); see
also REPORT OF THE ADVISORY COMMITTEE ON THE CAPITAL FORMATION
AND REGULATORY PROCESSES, Appendix A at 39-42 (1996) (stating
that rule 144A offerings bear increasing resemblance to public
offerings, and that, due to the active participation of mutual
funds as buyers and sellers of rule 144A debt securities,
"liquidity is readily available, even without subsequent
registration." (footnote omitted)). Rule 144A requires an issuer
to provide certain information about itself that the purchaser of
the securities may request, including financial information for
its two most recent fiscal years of operation. See 17 CFR
230.144A(d)(4). The rule exempts from this information
requirement foreign governments and foreign private issuers that
furnish information to the Commission pursuant to rule 12g3-2(b)
under the Exchange Act [17 CFR 240.12g3-2(b)]. See 17 CFR
230.144A(d)(4)(i).
======END OF PAGE 17======
a greater variety of offering structures, in a manner consistent with the
protection of investors.<(33)>
The proposed amendments would have required that securities offered in
a Foreign Issuer Rule 144A Offering also be offered in a concurrent
Eligible Foreign Offering. The Proposing Release stated that the
concurrent public offering requirement was designed to provide assurance
that there would be a widespread distribution of securities that are
fungible with the securities purchased by the fund. One commenter
specifically supported this approach, but several commenters opposed it,
stating that rule 144A offerings often do not involve a concurrent foreign
public offering of securities of the same class. In response to a request
for comment, several commenters also suggested that the rule should permit
affiliated funds to purchase securities of domestic issuers in rule 144A
offerings. The Commission has decided to amend rule 10f-3 to permit the
<(33)> The adopted amendments define the phrase "Eligible Rule
144A Offering" in lieu of the phrase "Foreign Issuer Rule 144A
Offering" because, as discussed further below, the amendments
permit the purchase of securities of both foreign and domestic
issuers in Rule 144A offerings. Amended rule 10f-3(a)(4) [17 CFR
270.10f-3(a)(4)]. In order to clarify the nature of an Eligible
Rule 144A Offering, the definition specifies that the securities
must be sold in certain types of transactions exempt from the
registration requirements of the Securities Act. Amended rule
10f-3(a)(4)(i) [17 CFR 270.10f-3(a)(4)(i)]. The amended rule
provides that the fund may reasonably rely on the written
statements of the issuer or an underwriter in determining whether
this condition has been satisfied. See amended rule 10f-3(b)(3)
[17 CFR 270.10f-3(b)(3)].
The amendments in no way affect the determination that must be
made by a fund's board of directors whether a security purchased
by the fund in a rule 144A placement is deemed a liquid security
for purposes of the fund's liquidity policies. See Resale of
Restricted Securities, Securities Act Release No. 6862 (Apr. 23,
1990) [55 FR 17933 (Apr. 30, 1990)].
======END OF PAGE 18======
purchase of securities in rule 144A offerings of foreign and domestic
issuers, subject to the other conditions of the rule.
The Commission is making two additional changes that are reflected in
the definition of "Eligible Rule 144A Offering." The proposed amendments
would have required that securities purchased in an Eligible Rule 144A
Offering be purchased "in the United States." This requirement has been
eliminated. Second, the proposed amendments would have required that the
offer or sale be made "exclusively" to QIBs. Several commenters suggested
that the sale of a portion of the offering to non-QIBs should not prevent
an affiliated fund from purchasing securities in the offering. The amended
rule therefore does not include the exclusivity requirement because, as
suggested by commenters, it may be unnecessarily limiting. The percentage
limit as applied to an Eligible Rule 144A Offering, however, would be
measured with respect to the portion of the offering sold to
QIBs.<(34)>
3. Calculation of Percentage Limit in Global Offerings
Several commenters recommended that the Commission clarify that the
percentage limit in the context of a global offering applies to the entire
global offering rather than to the U.S. portion of the offering. The
Commission staff has stated that in a global, multi-tranche offering of
securities with identical terms at an identical offering price, with
various closings that are conditioned upon each other, calculation of the
<(34)> A purchasing fund under the rule need not be a QIB. If
there is a concurrent Eligible Foreign Offering with respect to
an Eligible Rule 144A Offering, the percentage limit may be
calculated by reference to the securities sold in both offerings.
See amended rule 10f-3(b)(7)(ii) [17 CFR 270.10f-3(b)(7)(ii)].
======END OF PAGE 19======
percentage limit may properly be based on the total amount of the entire
global offering.<(35)>
The Commission believes that this approach is consistent with the
purpose of section 10(f) and rule 10f-3, and with the protection of
investors. This method of calculating the percentage limit would not be
appropriate, however, in an offering of different classes or series of a
security when each class or series has different terms, whether conducted
in one country or in many countries.<(36)>
C. Price and Timing of the Purchase
Rule 10f-3 currently requires that a security purchased in reliance on
the rule be "purchased at not more than the public offering price prior to
the end of the first full business day after the first date on which the
issue is offered to the public."<(37)> This provision is intended to
provide assurance that the price paid by the affiliated fund is no higher
than that paid by similarly situated but unaffiliated purchasers, and that
<(35)> See Rowe Price-Fleming International Inc., SEC No-Action
Letter (Apr. 12, 1996).
<(36)> For example, if an issuer offers multiple classes, series
or tranches of a security, with each class, series or tranche
having different maturity dates, interest rates and yields, it
would be inappropriate to calculate the percentage limit with
respect to the total value of all of the securities offered.
Rather, the percentage limit would be calculated with respect to
each class, series or tranche of the issue. With respect to
municipal securities, the Commission has stated in the past that
a single offering of municipal securities would not be deemed to
be separate classes of securities for purposes of the percentage
limit solely by virtue of differing maturity dates. See
Exemption of Acquisition of Securities During the Existence of
Underwriting Syndicate, Investment Company Act Release No. 10592
(Feb. 13, 1979) [44 FR 10580 (Feb. 21, 1979)] at n.21.
<(37)> Rule 10f-3(a)(2).
======END OF PAGE 20======
the purchase occur before the underwriters know if the offering is fully
subscribed.<(38)>
The amended rule clarifies this language and provides that the
securities must be purchased "prior to the end of the first day on which
any sales are made, at a price that is not more than the price paid by each
other purchaser of securities in that offering or in any concurrent
offering of the securities."<(39)> The provision should be applied
to offerings registered under the Securities Act, municipal offerings, and
to Eligible Foreign Offerings in the same way as the pre-amendment
provision.<(40)> With regard to Eligible Rule 144A Offerings, this
provision requires funds purchasing securities to pay no more than the
public offering price in any concurrent public offering of the same
securities. In addition, the price that funds pay for securities in the
Eligible Rule 144A Offering must not be higher than that paid by other
<(38)> See Investment Company Acquisition of Securities
Underwritten by an Affiliate of That Company, Investment Company
Act Release No. 14924 (Jan. 29, 1986) [51 FR 4386 (Feb. 4, 1986)]
at n.17 and accompanying text.
<(39)> Amended rule 10f-3(b)(2)(i) [17 CFR 270.10f-3(b)(2)(i)].
As proposed, the amended rule provides an exception from the
pricing requirement in an Eligible Foreign Offering if rights to
purchase the securities are offered as "required by law to be
granted to existing security holders of the issuer." Id.
<(40)> The change in language from referring to the day on which
the securities are "offered to the public" to referring to the
day on which "any sales are made" is not intended to make a
substantive change to this condition; rather, it is intended to
reflect the development of shelf registration as well as current
business practice and usage of the terms. Sales would be made on
the first day on which the underwriter accepts orders to purchase
the securities -- not the day on which the underwriter purchases
the securities from the issuer. The amended requirement that the
purchase must occur "prior to the end of the first day" conforms
the rule text to the Commission's long-standing interpretation of
this condition. Id.
======END OF PAGE 21======
purchasers (other than underwriters or members of the selling syndicate) in
the same offering.
D. Group Sales
The proposed amendments to rule 10f-3 would have permitted the
purchase of municipal securities in "group sales."<(41)> A "group
sale" is a sale of municipal securities resulting from a "group order,"
which is an order for securities for the account of all members of a
syndicate in proportion to their respective participations in the
syndicate.<(42)> Rule 10f-3 currently prohibits a fund from
purchasing a security, directly or indirectly, from its affiliated
underwriter. This provision of the rule permits a purchase from a
syndicate manager, but not if the purchase is through a group
sale.<(43)> This provision is designed to ensure that a purchase
permitted by rule 10f-3 does not violate section 17(a) of the Investment
Company Act, which prohibits a fund from purchasing securities from an
affiliate or from an affiliate of an affiliate.<(44)>
<(41)> Rule 10f-3 currently defines "municipal securities" by
reference to section 3(a)(29) of the Exchange Act [15 U.S.C.
78c(a)(29)]. See rule 10f-3(a)(1)(ii).
<(42)> See Municipal Securities Rulemaking Board ("MSRB") Rule
G-11(a)(iii), MSRB Manual (CCH) 3551; see also The Galaxy Fund
et al., Investment Company Act Release No. 20660 (Oct. 26, 1994)
[59 FR 54665 (Nov. 1, 1994)] (Notice of Application).
<(43)> By contrast, an affiliated fund may, under rule 10f-3,
purchase a municipal security through an order in which the fund
designates one or more of the syndicate participants to receive
credit for the sale (also known as a "designated order"),
provided that the fund does not designate its affiliated
underwriter as one of the recipients of the credit.
<(44)> 15 U.S.C. 80a-17(a).
======END OF PAGE 22======
According to Municipal Securities Rulemaking Board rules, a syndicate
that is offering municipal securities must establish a priority by which
orders for the securities will be filled.<(45)> The proposed
amendments related to group sales were based on the assumption that group
orders frequently receive first priority,<(46)> and that the
prohibition in rule 10f-3 on group sales therefore could act to the
detriment of affiliated municipal bond funds by preventing them from
purchasing municipal bonds in oversubscribed offerings in which only group
orders are filled. The proposed amendments would have permitted group
sales if (1) the syndicate were to establish that orders designated as
group orders would have first priority, or that only group orders would be
filled and (2) at the time of sale, the affiliated underwriter were not
committed to underwrite more than 50% of the principal amount of the
offered securities.
Two commenters disagreed with the factual premise of the proposed
group sale provision. These commenters stated that group orders typically
do not receive first priority in offerings, but rather that "designated
orders" (orders in which the purchaser designates one or more members of
the syndicate to receive credit for the sale) often receive first priority.
One commenter suggested that the proposed amendment could have the
unintended effect of encouraging syndicate managers to give group orders
first priority in municipal offerings when they otherwise would not.
<(45)> See MSRB Rule G-11(e), MSRB Manual (CCH) 3551.
<(46)> See Proposing Release, supra note 8, at n.57 and
accompanying text (citing PUBLIC SECURITIES ASSOCIATION,
FUNDAMENTALS OF MUNICIPAL BONDS 80 (1990)).
======END OF PAGE 23======
Under the current rule, an affiliated fund may purchase municipal
securities through a designated order, as long as the fund does not
designate its affiliated underwriter as the recipient of the credit. In
view of the availability of this option, the Commission has determined not
to adopt the proposed group sale amendments.<(47)> The Commission
considered permitting group sales if the offering were oversubscribed and
only group orders would be filled in the offering, but concluded that it
would be impracticable to include such a condition in the rule at the
present time. To the extent that the prioritization of group orders poses
an impediment to the purchase of municipal securities under rule 10f-3,
funds may seek exemptive relief from sections 10(f) and 17(a) as they have
in the past, on a case-by-case basis.
E. Role of Fund Board of Directors
Rule 10f-3 currently requires fund boards of directors to adopt
procedures pursuant to which a fund may purchase securities in reliance on
the rule. The Commission proposed to amend the requirement related to
directors' duties to clarify that the directors must approve, rather than
adopt, procedures for the purchase of securities pursuant to rule 10f-3, in
order to reflect more accurately the role of the board in approving
policies and procedures developed by fund management.<(48)> Two
<(47)> In order to clarify that a purchase of municipal
securities in a group sale proposed to be permitted by rule 10f-3
also would be exempt from the prohibition against affiliate
transactions contained in section 17(a) of the Investment Company
Act, the Commission proposed new rule 17a-10, to exempt any
purchase of municipal securities in a group sale that complied
with rule 10f-3 from section 17(a)(1). This rule is not being
adopted.
<(48)> Proposing Release, supra note 8, at n.52.
======END OF PAGE 24======
commenters specifically supported this proposed amendment. The Commission
is adopting the amendment as proposed.<(49)>
The Commission also requested comment on the role of fund directors in
determining compliance with the proposed foreign securities provisions, and
whether the existing requirements for the establishment and review of
procedures are sufficient to cover the proposed amendments. Several
commenters responded that the existing requirement concerning board duties
is sufficient. The Commission has determined not to adopt any substantive
change in the requirement concerning board duties. Fund boards are
reminded, however, that changes in procedures will likely be required to
accommodate purchases made under the amendments to rule 10f-3, including
procedures concerning the reasonableness of commissions, spread or profit
received by principal underwriters.<(50)>
The Commission continues to recognize the important role played by the
fund directors in safeguarding the interests of fund investors.<(51)>
A fund's board should be vigilant in reviewing the procedures and
transactions as required by rule 10f-3 as well as in conducting any
additional reviews that it determines are needed to protect the interests
of investors, particularly if the fund purchases significant amounts of
<(49)> Amended rule 10f-3(b)(10) [17 CFR 270.10f-3(b)(10)].
<(50)> See amended rule 10f-3(b)(6) [17 CFR 270.10f-3(b)(6)].
<(51)> See., e.g., Burks v. Lasker, 441 U.S. 471, 484 (1979)
(noting the importance of fund directors in "furnishing an
independent check upon management"); DIVISION OF INVESTMENT
MANAGEMENT, U.S. SECURITIES AND EXCHANGE COMMISSION, PROTECTING
INVESTORS: A HALF CENTURY OF INVESTMENT COMPANY REGULATION 251-
260 (1992) (describing the important functions of fund directors
as required by the Investment Company Act and the rules
thereunder).
======END OF PAGE 25======
securities in reliance on rule 10f-3. For example, the board should
consider monitoring how the performance of securities purchased in reliance
on rule 10f-3 compares to securities not purchased in reliance on the rule,
or to a benchmark such as a comparable market index. Such monitoring would
enable the board to determine not only whether existing procedures are
being followed, but also whether the procedures are effective in fulfilling
the policies underlying section 10(f).<(52)>
F. Reporting and Recordkeeping
The proposed amendments would have eliminated the current requirement
in rule 10f-3 that a fund report any transactions under rule 10f-3 to the
Commission in its semi-annual report on Form N-SAR and attach to that form
certain written records of those transactions.<(53)> In view of the
increase in the percentage limit and the other amendments the Commission is
<(52)> See amended rule 10f-3(b)(10)(ii) [17 CFR 270.10f-
3(b)(10)(ii)] (requiring the board to make and approve "such
changes to the procedures as the board deems necessary"). See
also Exemption of Acquisition of Securities During the Existence
of Underwriting Syndicate, Investment Company Act Release No.
10736 (June 14, 1979) [44 FR 36152 (June 20, 1979)] (stating that
the "Commission expects that investment company directors, in
establishing procedures under [rule 10f-3] and determining
compliance with such procedures, will address the concerns
embodied in section 10(f) of the Act against overreaching and the
placing of otherwise unmarketable securities with an investment
company").
<(53)> Rule 10f-3(g) currently requires that a fund attach to
its report on Form N-SAR "a written record of each [rule 10f-3]
transaction, setting forth from whom the securities were
acquired, the identity of the underwriting syndicate's members,
the terms of the transaction, and the information or materials"
upon which the board determined that the purchases were made in
accordance with the fund's procedures concerning compliance with
rule 10f-3. Reports on Form N-SAR are available for public
inspection from the Commission in hard copy, and through the
Commission's Electronic Data Gathering, Analysis and Retrieval
("EDGAR") database, which is accessible through the Commission's
Internet Web site (http://www.sec.gov).
======END OF PAGE 26======
adopting today, the Commission believes that the current reporting
requirement will provide useful information to the Commission in monitoring
compliance with the amended rule. The Commission has decided to retain the
Form N-SAR reporting requirement of rule 10f-3.<(54)>
As noted above, rule 10f-3 requires that the information attached to
Form N-SAR include, among other things, the terms of the transaction and
the information or materials upon which the board of directors makes a
determination that all transactions during the preceding quarter were
effected in accordance with the fund's procedures for ensuring compliance
with the rule. The information reported pursuant to these provisions
generally should include the date of the purchase, the maturity date and
interest rate of any series purchased, the number and value of securities
purchased (specific as to each series if applicable), and the aggregate
number and value of securities offered through the underwriting or selling
syndicate.
G. U.S. Government Securities
The Proposing Release requested comment whether rule 10f-3 should be
amended to permit the purchase of other types of securities, such as U.S.
government securities, that rule 10f-3 currently does not address, and the
extent to which the conditions of the rule should apply to such purchases.
In requesting comment, the Commission noted that it might not be necessary
for rule 10f-3 to permit the purchase of U.S. government securities because
the arrangements among distributors of these securities may not always
<(54)> Amended rule 10f-3(b)(9) [17 CFR 270.10f-3(b)(9)]. The
Commission intends to monitor reports concerning rule 10f-3
transactions and take appropriate action in response to any
problems that arise.
======END OF PAGE 27======
constitute underwriting or selling syndicates for purposes of section
10(f).<(55)> Two commenters suggested that section 10(f) should not
be interpreted to prohibit fund purchases of securities issued by agencies
or instrumentalities of the U.S. government if a fund affiliate is a dealer
in the primary distribution of the securities and that, in the alternative,
the Commission should amend rule 10f-3 to permit such purchases.
The Commission has determined not to adopt amendments to rule 10f-3
related to additional types of securities. As noted above and in the
Proposing Release, section 10(f) does not apply to certain types of
offerings of U.S. government securities.<(56)> The Commission has
not received any applications for exemptive relief with respect to
offerings of U.S. government securities to which the section does apply,
which suggests that relief may not be necessary at this time. Moreover, in
light of the variety of these types of offerings and securities, and the
unique issues they may present under section 10(f), it may be more
appropriate to address these offerings of securities on a case-by-case
basis in connection with individual requests for exemption.
III. COST-BENEFIT ANALYSIS
The amendments to rule 10f-3 would increase the flexibility for funds
to purchase securities during the existence of a syndicate in which an
<(55)> See Proposing Release, supra note 8, at n.64 (citing
Institutional Liquid Assets, SEC No-Action Letter (Dec. 16, 1981)
(granting no-action relief under section 10(f) to Goldman, Sachs,
which had sought relief in order to act as one of a limited
number of broker-dealers participating in a distribution of
Federal Home Loan Bank notes, arguing that it should not be
considered a member of an "underwriting or selling syndicate" for
purposes of section 10(f))).
<(56)> See Institutional Liquid Assets, SEC No-Action Letter
(Dec. 16, 1981).
======END OF PAGE 28======
affiliated underwriter participates. These amendments should benefit
funds, which will be able to (i) purchase securities of foreign and
domestic issuers in Eligible Foreign Offerings and Eligible Rule 144A
Offerings in reliance upon rule 10f-3, without having to seek an exemptive
order from the Commission and (ii) in many cases, purchase more desirable
quantities of securities at advantageous prices. The potential benefits to
fund investors of these proposed amendments are better investment
performance and lower costs to the funds.
The costs of the amendments to funds and investors are likely to be
minimal. Fund investment advisers and boards of directors will be required
to determine whether purchases of securities in foreign offerings and rule
144A offerings comply with the standards in the amended rule. Rule 10f-3,
however, currently has standards that must be met for purchases permitted
under the rule. Thus, the additional cost of complying with the standards
related to purchases of securities in foreign offerings and rule 144A
offerings are likely to be minimal.<(57)>
Similarly, with respect to costs of reporting rule 10f-3 transactions
on Form N-SAR, the increased opportunities to purchase greater quantities
and types of securities may result in an increased aggregate cost of
reporting for funds that purchase in reliance on the rule. At the same
time, however, due to the increased number of securities that are likely to
be purchased, the average compliance costs (per security purchased) of
reporting rule 10f-3 transactions will probably diminish.
<(57)> Purchases of securities in foreign offerings and rule
144A offerings, of course, are voluntary. If a fund were to
determine that the costs of a purchase would outweigh the
benefits, it could decide not to purchase.
======END OF PAGE 29======
The increased risk of the dumping of unmarketable securities on
affiliated funds appears to be minimal. The amendments are designed to
loosen the restrictions of rule 10f-3 while maintaining those features of
the rule that protect investors. The Commission is not aware of any
evidence that dumping has been problematic under the current conditions of
the rule, and the Commission intends to monitor transactions undertaken in
reliance on rule 10f-3 after the amendments become effective.
Comment letters on the Proposing Release did not provide empirical
data quantifying the dollar benefits of amending the rule. Therefore, it
is difficult to estimate what effect, if any, the rule amendments will have
on the prices of securities, on issuers' capital costs, or on the
securities markets generally. However, the amendments are likely to
increase efficiency in the securities markets because the amendments remove
unnecessary restrictions on certain market participants. Funds with
affiliated underwriters likely will purchase a larger proportion of their
portfolios through primary offerings and a smaller proportion in the
secondary market. Conversely, other investors likely will purchase a
smaller proportion of their portfolios in primary offerings and larger
proportions in the secondary market.
IV. PAPERWORK REDUCTION ACT
As set forth in the Proposing Release, rule 10f-3 contains "collection
of information" requirements within the meaning of the Paperwork Reduction
Act of 1995 ("PRA").<(58)> Accordingly, the collection of
information requirements contained in the rule amendments were submitted to
the Office of Management and Budget ("OMB") for review pursuant to section
<(58)> 44 U.S.C. 3501 - 3520.
======END OF PAGE 30======
3507(d) of the PRA. No comments were received on the proposal with respect
to the PRA. The collection of information requirements are in accordance
with section 3507 of the PRA. An agency may not conduct or sponsor, and a
person is not required to respond to, a collection of information unless
the agency displays a valid OMB control number. OMB approved the PRA
request and assigned a control number of 3235-0226, with an expiration date
of May 31, 1999.
The collections of information under rule 10f-3, and as required to be
reported on Form N-SAR, are necessary for investment companies to obtain
the benefit of exemption from section 10(f) of the Investment Company Act
that rule 10f-3 provides. As described in more detail in the Proposing
Release and in this release above, the collections of information are
necessary to provide the Commission with information regarding compliance
with rule 10f-3. The Commission may review this information during
periodic examinations or with respect to investigations. Except for the
information required to be kept under paragraph (b)(11)(ii) of rule 10f-3
as amended, none of the information required to be collected or disclosed
for PRA purposes will be kept confidential. If the records required to be
kept pursuant to these rules are requested by and submitted to the
Commission, they will be kept confidential to the extent permitted by
relevant statutory and regulatory provisions.
The amendments to rule 10f-3 as adopted do not impose a greater
paperwork burden upon respondents than that estimated and described in the
Proposing Release. The retention of the reporting requirement on Form N-
SAR will not increase the estimated burden for respondents, because the
======END OF PAGE 31======
proposed elimination of this reporting requirement was not calculated as a
reduction in burden for purposes of the proposed amendments.
V. SUMMARY OF REGULATORY FLEXIBILITY ANALYSIS
A summary of the Initial Regulatory Flexibility Analysis ("IRFA") was
published in the Proposing Release. No comments were received on the IRFA.
The Commission has prepared a Final Regulatory Flexibility Analysis
("FRFA") in accordance with 5 U.S.C. 604 regarding amendments to rule 10f-3
under the Investment Company Act.
The FRFA discusses the need for, and objectives of, the rule
amendments. The FRFA states that rule 10f-3 permits funds to purchase
securities notwithstanding section 10(f) of the Investment Company Act if
certain conditions are met. The amendments to rule 10f-3 expand the
circumstances in which funds subject to section 10(f) may purchase
securities. The FRFA further states that the amendments are designed to
increase the flexibility of funds to purchase (i) quantities of securities
that are in the interest of fund investors and (ii) certain domestic and
foreign securities that are not registered under the Securities Act, while
minimizing the risk of abuses that section 10(f) was enacted to address.
The FRFA estimates that out of approximately 3,850 active investment
companies registered with the Commission as of December 31, 1996, a total
of approximately 800 would be considered small entities. The amendments to
rule 10f-3 would apply to approximately 40 of these 800 small entities.
The FRFA indicates that the proposed amendments would affect small entities
in the same manner as other entities subject to section 10(f), but that the
amendments increase flexibility for all funds.
======END OF PAGE 32======
Finally, the FRFA states that in adopting the amendments the
Commission considered (a) the establishment of differing compliance
requirements that take into account the resources available to small
entities; (b) simplification of the rule's requirements for small entities;
(c) the use of performance rather than design standards; and (d) an
exemption from the rule for small entities. The FRFA states that the
Commission concluded that different requirements for small entities are not
necessary and would be inconsistent with investor protection, and that the
amended rule incorporates performance standards to the extent practicable.
Cost-benefit information reflected in the "Cost-Benefit Analysis" section
of this Release also is reflected in the FRFA. The FRFA is available for
public inspection in File No. S7-7-96, and a copy may be obtained by
contacting C. Hunter Jones, Securities and Exchange Commission, 450 Fifth
Street, N.W., Mail Stop 10-2, Washington, D.C. 20549.
VI. STATUTORY AUTHORITY
The Commission is adopting amendments to rule 10f-3 pursuant to the
authority set forth in sections 10(f), 31(a), and 38(a) of the Investment
Company Act [15 U.S.C. 80a-10(f), 80a-30(a), 80a-37(a)].
TEXT OF RULE
List of subjects in 17 CFR Part 270
Investment companies, Reporting and recordkeeping requirements,
Securities
For the reasons set out in the preamble, Title 17, Chapter II of the
Code of Federal Regulations is amended as follows:
PART 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
======END OF PAGE 33======
1. The authority citation for Part 270 continues to read, in part,
as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless otherwise
noted;
* * * * *
2. Section 270.10f-3 is revised to read as follows:
270.10f-3. Exemption for the acquisition of securities during the
existence of an underwriting or selling syndicate.
(a) Definitions.
(1) Domestic Issuer means any issuer other than a foreign government,
a national of any foreign country, or a corporation or other organization
incorporated or organized under the laws of any foreign country.
(2) Eligible Foreign Offering means a public offering of securities,
conducted under the laws of a country other than the United States, that
meets the following conditions:
(i) The offering is subject to regulation by a "foreign financial
regulatory authority," as defined in section 2(a)(50) of the Act [15 U.S.C.
80a-2(a)(50)], in such country;
(ii) The securities are offered at a fixed price to all
purchasers in the offering (except for any rights to purchase securities
that are required by law to be granted to existing security holders of the
issuer);
(iii) Financial statements, prepared and audited in accordance
with standards required or permitted by the appropriate foreign financial
regulatory authority in such country, for the two years prior to the
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offering, are made available to the public and prospective purchasers in
connection with the offering; and
(iv) If the issuer is a Domestic Issuer, it meets the following
conditions:
(A) It has a class of securities registered pursuant to section 12(b)
or 12(g) of the Securities Exchange Act of 1934 [15 U.S.C. 78l(b) or
78l(g)] or is required to file reports pursuant to section 15(d) of the
Securities Exchange Act of 1934 [15 U.S.C. 78o(d)]; and
(B) It has filed all the material required to be filed pursuant to
section 13(a) or 15(d) of the Securities Exchange Act of 1934 [15 U.S.C.
78m(a) or 78o(d)] for a period of at least twelve months immediately
preceding the sale of securities made in reliance upon this (or for such
shorter period that the issuer was required to file such material).
(3) Eligible Municipal Securities means "municipal securities," as
defined in section 3(a)(29) of the Securities Exchange Act of 1934 [15
U.S.C. 78c(a)(29)], that have received an investment grade rating from at
least one NRSRO; provided, that if the issuer of the municipal securities,
or the entity supplying the revenues or other payments from which the issue
is to be paid, has been in continuous operation for less than three years,
including the operation of any predecessors, the securities shall have
received one of the three highest ratings from an NRSRO.
(4) Eligible Rule 144A Offering means an offering of securities that
meets the following conditions:
(i) The securities are offered or sold in transactions exempt from
registration under section 4(2) of the Securities Act of 1933 [15 U.S.C.
======END OF PAGE 35======
77d(2)], rule 144A thereunder [ 230.144A of this chapter], or rules 501 -
508 thereunder [ 230.501 - 230.508 of this chapter];
(ii) The securities are sold to persons that the seller and any
person acting on behalf of the seller reasonably believe to include
qualified institutional buyers, as defined in 230.144A(a)(1) of this
chapter; and
(iii) The seller and any person acting on behalf of the seller
reasonably believe that the securities are eligible for resale to other
qualified institutional buyers pursuant to 230.144A of this chapter.
(5) NRSRO has the same meaning as that set forth in 270.2a-
7(a)(14).
(b) Conditions. Any purchase of securities by a registered
investment company prohibited by section 10(f) of the Act [15 U.S.C. 80a-
10(f)] shall be exempt from the provisions of such section if the following
conditions are met:
(1) Type of Security. The securities to be purchased are:
(i) Part of an issue registered under the Securities Act of 1933 [15
U.S.C. 77a - aa] that is being offered to the public;
(ii) Eligible Municipal Securities;
(iii) Securities sold in an Eligible Foreign Offering; or
(iv) Securities sold in an Eligible Rule 144A Offering.
(2) Timing and Price.
(i) The securities are purchased prior to the end of the first day on
which any sales are made, at a price that is not more than the price paid
by each other purchaser of securities in that offering or in any concurrent
offering of the securities (except, in the case of an Eligible Foreign
======END OF PAGE 36======
Offering, for any rights to purchase that are required by law to be granted
to existing security holders of the issuer); and
(ii) If the securities are offered for subscription upon exercise
of rights, the securities shall be purchased on or before the fourth day
preceding the day on which the rights offering terminates.
(3) Reasonable Reliance. For purposes of determining compliance with
paragraphs (b)(1)(iv) and (b)(2)(i) of this section, an investment company
may reasonably rely upon written statements made by the issuer or a
syndicate manager, or by an underwriter or seller of the securities through
which such investment company purchases the securities.
(4) Continuous Operation. If the securities to be purchased are part
of an issue registered under the Securities Act of 1933 [15 U.S.C. 77a -
aa] that is being offered to the public or are purchased pursuant to an
Eligible Foreign Offering or an Eligible Rule 144A Offering, the issuer of
the securities shall have been in continuous operation for not less than
three years, including the operations of any predecessors.
(5) Firm Commitment Underwriting. The securities are offered
pursuant to an underwriting or similar agreement under which the
underwriters are committed to purchase all of the securities being offered,
except those purchased by others pursuant to a rights offering, if the
underwriters purchase any of the securities.
(6) Reasonable Commission. The commission, spread or profit received
or to be received by the principal underwriters is reasonable and fair
compared to the commission, spread or profit received by other such persons
in connection with the underwriting of similar securities being sold during
a comparable period of time.
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(7) Percentage Limit. The amount of securities of any class of such
issue to be purchased by the investment company, or by two or more
investment companies having the same investment adviser, shall not exceed:
(i) If purchased in an offering other than an Eligible Rule 144A
Offering, 25 percent of the principal amount of the offering of such class;
or
(ii) If purchased in an Eligible Rule 144A Offering, 25 percent of the
total of:
(A) The principal amount of the offering of such class sold by
underwriters or members of the selling syndicate to qualified institutional
buyers, as defined in 230.144A(a)(1) of this chapter, plus
(B) The principal amount of the offering of such class in any
concurrent public offering.
(8) Prohibition of Certain Affiliate Transactions. Such investment
company does not purchase the securities being offered directly or
indirectly from an officer, director, member of an advisory board,
investment adviser or employee of such investment company or from a person
of which any such officer, director, member of an advisory board,
investment adviser or employee is an affiliated person; provided, that a
purchase from a syndicate manager shall not be deemed to be a purchase from
a specific underwriter if:
(i) Such underwriter does not benefit directly or indirectly from the
transaction; or
(ii) In respect to the purchase of Eligible Municipal Securities,
such purchase is not designated as a group sale or otherwise allocated to
the account of any person from whom this paragraph prohibits the purchase.
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(9) Periodic Reporting. The existence of any transactions effected
pursuant to this section shall be reported on the Form N-SAR [ 274.101 of
this chapter] of the investment company and a written record of each such
transaction, setting forth from whom the securities were acquired, the
identity of the underwriting syndicate's members, the terms of the
transaction, and the information or materials upon which the determination
described in paragraph (b)(10)(iii) of this section was made shall be
attached thereto.
(10) Board Review. The board of directors of the investment
company, including a majority of the directors who are not interested
persons of the investment company:
(i) Has approved procedures, pursuant to which such purchases may be
effected for the company, that are reasonably designed to provide that the
purchases comply with all the conditions of this section;
(ii) Approves such changes to the procedures as the board deems
necessary; and
(iii) Determines no less frequently than quarterly that all
purchases made during the preceding quarter were effected in compliance
with such procedures.
(11) Maintenance of Records. The investment company:
(i) Shall maintain and preserve permanently in an easily accessible
place a written copy of the procedures, and any modification thereto,
described in paragraphs (b)(10)(i) and (b)(10)(ii) of this section; and
(ii) Shall maintain and preserve for a period not less than six
years from the end of the fiscal year in which any transactions occurred,
the first two years in an easily accessible place, a written record of each
======END OF PAGE 39======
such transaction, setting forth from whom the securities were acquired, the
identity of the underwriting syndicate's members, the terms of the
transaction, and the information or materials upon which the determination
described in paragraph (b)(10)(iii) of this section was made.
By the Commission.
Jonathan G. Katz
Secretary
July 31, 1997
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