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



                              ======END OF PAGE 34======







     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.


                              ======END OF PAGE 37======







          (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.


                              ======END OF PAGE 38======







          (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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