[Federal Register Volume 62, Number 152 (Thursday, August 7, 1997)]
[Rules and Regulations]
[Pages 42401-42410]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 97-20747]
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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.
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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 October 6,
1997.
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 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 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.
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\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).
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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
[[Page 42402]]
recognized that section 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
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\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. 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.
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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 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 underwriter is participating is consistent with the
protection of fund investors.
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\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.
\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).
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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
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\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).
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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 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
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\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).
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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
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\11\ See Proposing Release, supra note 8, at n.14 and
accompanying text.
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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 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
[[Page 42403]]
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 presents particular problems
for fund complexes that have several funds that might have an interest
in purchasing the security.15
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\12\ Rule 10f-3(d).
\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.
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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
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\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%.
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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 as purchasers of
securities.18 These effects have been particularly acute for
municipal bond funds.19
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\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.
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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 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
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\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 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)].
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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.
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\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.
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2. Percentage of Fund Assets
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.
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\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).
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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
[[Page 42404]]
securities, with certain modifications from the proposal in response to
issues raised by commenters, as described below.
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
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\25\ 17 CFR 230.144A.
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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 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
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\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.
\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.
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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 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.
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\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) [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)].
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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
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\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).
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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 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
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\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).
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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 a greater variety of offering structures, in a
manner consistent with the protection of investors.33
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\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)].
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[[Page 42405]]
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 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
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\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)].
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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 percentage limit may properly be based on the total
amount of the entire global offering.35
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\35\ See Rowe Price-Fleming International Inc., SEC No-Action
Letter (Apr. 12, 1996).
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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
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\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.
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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 the purchase occur before the
underwriters know if the offering is fully subscribed.38
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\37\ Rule 10f-3(a)(2).
\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.
---------------------------------------------------------------------------
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 purchasers (other than
underwriters or members of the selling syndicate) in the same offering.
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\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.
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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
[[Page 42406]]
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
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\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) para. 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).
---------------------------------------------------------------------------
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 underwriters were not
committed to underwrite more than 50% of the principal amount of the
offered securities.
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\45\ See MSRB Rule G-11(e), MSRB Manual (CCH) para. 3551.
\46\ See Proposing Release, supra note 8, at n.57 and
accompanying text (citing Public Securities Association,
Fundamentals of Municipal Bonds 80 (1990)).
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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.
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.
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\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.
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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 commenters specifically supported this
proposed amendment. The Commission is adopting the amendment as
proposed.49
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\48\ Proposing Release, supra note , at n.52.
\49\ Amended rule 10f-3(b)(10) [17 CFR 270.10f-3(b)(10)].
---------------------------------------------------------------------------
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
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\50\ See amended rule 10f-3(b)(6) [17 CFR 270.10f-3(b)(6)].
---------------------------------------------------------------------------
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 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
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\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).
\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'').
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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 adopting today, the
Commission believes that the current reporting
[[Page 42407]]
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
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\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).
\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.
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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 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.
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\55\ See Proposing Release, supra note, at n.684 (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))).
---------------------------------------------------------------------------
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.
---------------------------------------------------------------------------
\56\ See Institutional Liquid Assets, SEC No-Action Letter (Dec.
16, 1981).
---------------------------------------------------------------------------
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 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
---------------------------------------------------------------------------
\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.
---------------------------------------------------------------------------
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.
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 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
[[Page 42408]]
number of 3235-0226, with an expiration date of May 31, 1999.
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\58\ 44 U.S.C. 3501-3520.
---------------------------------------------------------------------------
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 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.
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
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:
Sec. 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
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
[[Page 42409]]
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. 77d(2)], rule 144A thereunder [Sec. 230.144A of this chapter],
or rules 501-508 thereunder [Secs. 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 Sec. 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 Sec. 230.144A of this
chapter.
(5) NRSRO has the same meaning as that set forth in Sec. 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 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.
(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 Sec. 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.
(9) Periodic Reporting. The existence of any transactions effected
pursuant to this section shall be reported on the Form N-SAR
[Sec. 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 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.
[[Page 42410]]
Dated: July 31, 1997.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 97-20747 Filed 8-6-97; 8:45 am]
BILLING CODE 8010-01-P
