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September 9, 1998

Our Ref No. 97- 448-CC

Credit Suisse First Boston Corporation

File No. 132-3

RESPONSE OF THE OFFICE OF CHIF COUNSEL

DIVISION OF INVESTMENT MANAGEMENT

Your letter of May 28, 1997 requests assurance that the staf would not

recommend enforcement action to the Commssion if Credit Suisse First Boston

Corporation ("CSFB") establishes a trust (the "Trust") in the manner described below

without registering the Trust as an investment company under the Investment Company

Act of 1940 (the" 1940 Act") either on the basis that: (i) the Trust is not an investment

company, as defined in Section 3(a)(1) of the 1940 Act, or (ii) the Trust may rely on Rule 3a-7 under the 1940 Act. ..

Facts

CSFB intends to establish a Trust that wil hold U.S. Treasury infation-indexed

notes or bonds (the "Underlying Treasuries"). You represent that CSFB, or one or more

of its affliates, will acquire the Underlying Treasuries for deposit into the Trust either in

the secondary market or directly from the Treasury Deparment. The Underlying

Treasuries entitle the holder to a principal amount that is adjusted on a daily basis to

reflect changes in the U.S. City Average All Items Consumer Price Index for All Urban

Consumers (the "CPI"). Interest on the Underlying Treasuries is calculated as a fixed

percentage of the CPI-adjusted value of the principal amount and is paid semiannually. The Trust will have an institutional trustee (the "Trustee") that will hold the Underlying

Treasuries, collect payments made on the UnderlYing Treasuries, and distribute the

payments to holders of the pass-through certificates (the "Certificates") representing

interests in the Trust. ,

).

The Trust will issue two classes of Certificates, each of which will be entitled to a

specified portion of the cash flow from the UnderlYing Treasuries. The Certificates either

will be registered under the Securities Act of 1933, or will be issued in a private

placement. i Class A Certificates will entitle holders to receive: (i) semiannual interest

payments in an amount equal to the fixed interest rate accrued on the lesser of (a) the

initial aggregate principal amount of the Underlying Treasuries and (b) the CPI-adjusted aggregate principal amount of the UnderlYing Treasuries, and (ii) a principal payment on the maturity date of the Certificates (which will be the maturity date of the Underlying Treasuries) equal to the initial aggregate principal amount of the Underlying Treasuries. Class B Certificates will entitle holders to receive: (i) the excess, if any, of the CPIadjusted aggregate principal amount of the Underlying Treasuries over the initial

aggregate principal amount of the Underlying Treasuries, and (ii) all interest on that excess

amount. Each class of the Certificates will be issued in minimum denominations of at

least $500,000 principal amount, in the case of the Class A Certificates, or notional

~.

We take no position regarding the status of the Certificates under the Securities

Act of 1933.
2

principal amount, in the case of the Class B Certificates.2 Y QU represent that CSFB or

other securities dealers may make a secondary market in the Certificates, but are not

obligated to do so.

You represent that holders may redeem the Certificates only if certain conditions

are satisfied. Specifically, a holder must present both a Class A and a Class B Certificate

to the Trustee. In addition, the holder must obtain from a nationally recognized

investment ban a certificate dated not more than two business days prior to the proposed

date of withdrawal. The certificate must state that, in the opinion of the investment bank, the aggregate market value of the Underlying Treasuries (or of that portion of the Underlying Treasuries represented by the Certificates presented for redemption) exceeds

the aggregate market value of all of the outstanding Certificates (or of the Certificates

presented for redemption) (the "Market Condition"). Upon redemption, the holder will

receive its pro rata share of the Underlying Treasuries. Following redemption, a holder that has not redeemed all of its Certificates must retain at least $500,000 principal amount

(in the case of Class A Certificates) or notional principal amount (in the case of Class B

Certificates) of each class of Certificates held.

Analysis

Section 3(a)(1) of the 1940 Act defines an investment company, in relevant part, as

any issuer that" (A) is or holds itself out as being engaged primarily, or proposes to

engage primarily, in the business of investing, reLnvesting, or trading in s~curities" or "(C)

is engaged or proposes to engage in the business of investing, reinvesting, ownng,

holding, or trading in securities, and owns or proposes to acquire investment securities

having a value exceeding 40 per centum of the value of such issuer's total assets

(exclusive of Government securities and cash items) on an unconsolidated basis." 3

Subsection (A) of Section 3 (a)(1 ) is intended to apply to issuers that are engaged primarily in investing, reinvesting, or trading in securities, while subsection (B) is intended

to apply to issuers that are not engaged primarily in investing, reinvesting, or trading in

2 You represent that the Certificates will be rated in the highest category assigned

long-term debt by at least one nationally recognized statistical rating organization that is

not an afliated person of the Trust or of any person involved in the organization or

operation of the Trust, as required by Rule 3a-7.

3

"Investment securities" are defined in Section 3(a)(1) of the 1940 Act to include all

securities except government securities, securities issued by employees' securities

companies, and securities issued by majority-owned subsidiaries of the owner that are not

investment companies and are not relying on the exceptions from the definition of

investment company in paragraph (1) or (7) of Section 3( c) of the 1940 Act. A

"government security" is defined in Section 2(a)(16) of the 1940 Act to include, in relevant part, any security issued or guaranteed as to principal or interest by the United

States.
3

secunties.

securities, but nonetheless devote a substantial portion of their assets to investment .. 4 .

You assert that the Trust should not be considered an investment company within

the meaning of subsection (A) of Section 3(a)(1) because it does not invest, reinvest, or

trade in securities, but only passively holds a fixed portfolio of securities. In addition, you

assert that the Trust should not be considered an investment company within the meanng

of subsection (C) of Section 3 (a)(1) because it owns or holds only governent securities,

which are. not considered "investment securities." We disagree. We believe that even a

completely passive trust may be considered to be engaged primarily in the business of

investing in securities withiQ, the meaning of subsection (A) ifit had an investment purpose

in acquiring the securities that it holds, and engages in no business other than investing in

securities that may be considered "primary."s If a trust is engaged primarily in the

business of investing in securities, it is an investment company even if it holds only

government securities.6 If a trust may be considered an investment company under

4 See H.R. 2639, 76th Cong., 3d Sess. 11 (1940); SEC v. Fifth Avenue Coach

Lines, Inc., 289 F. Supp. 3, 27-28 (S.D.N.¥. 1968); In the Matter of J.D. Gillespie, 13

S.E.C. 470 (June 23, 1943). See also 1 Tamar Frankel, The Regulation of Money Managers 214 (1978).

See Fifh Avenue Coach Lines, 289 F.Supp. at 29-30 ("(T)he only business that

(Fifth Avenue Coach Lines) can fairly be found to be primarily engaged in was the

business of investing in securities. That was what it spent its money for. That is where its

income came from. It had no other business which could reasonably be called 'primary.' .

. . Th(e) word (invest) must be given its normal meaning, i.e., to put out money at risk in

the hope of gain."); Merrill Lynch, Pierce, Fenner & Smith, Inc. (pub. avaiL. Oct. 28,

1982) (staff determined that a passive trust that held certificates of deposit was an

investment company under subsection (A) of Section 3(a)(1)). See also Frankel, supra

note 4, at 216, 219 (a company that purchases securities in suffcient quantities even for

the first time, with the expectation of profits (as opposed to the keeping of cash ready for

other purposes), is in the business of investing).

You assert that the Trust may be distinguished from a unit investment trust,

because unit investment trusts are permitted to increase the size of their portfolios and sell

portfolio securities to permit cash redemptions, activities in which the Trust will not

engage. We do not believe that Congress intended to draw this distinction, however,

because a passive trust that holds only government securities nonetheless may be subject

to many of the abuses that the 1940 Act was intended to prevent. See, e.g., Sections 1 (b ),

9, 13, 19, 22( c), 26, and 37 of the 1940 Act, and Rule 22c- 1 thereunder. See also

Frankel, supra note 4, at 216.

6 Baker, Watts & Co. (pub. avaiL. Apr. 6, 1982).
4

company under subsection (C).

subsection (A), it is irrelevant whether the trust would be considered an investment 7 .

Alternatively, you assert that, even if the Trust may be considered an investment

company within the meaning of Section 3(a), it may rely on Rule 3a-7. Rule 3a-7 excepts

from the definition of investment company an issuer that "is engaged in the business of

purchasing, or otherwse acquiring, and holding eligible assets and who does not issue

redeemable securities (and in activities related or incidental thereto)," provided that certain

conditions are met.8 Section 2(a)(32) of the 1940 Act defines "redeemable security" as any security, other than short-term paper, under the terms of which the holder, upon its

presentation to the issuer, is.,ntitled to receive approximately his proportionate share of

the issuer's current net assets, or the cash equivalent thereof Whether a structured

finance company may be considered to issue redeemable securities depends on whether

there are substantial restrictions on withdrawaL. 9 You believe that the Trust will not be

issuing redeemable securities because Certificates will be offered only in denominations of

$500,000, and a holder may redeem Certificates only ifit presents both a Class A and a

Class B Certificate to the Trustee and obtains, no more than two days before withdrawal,

a certificate from an investment bank stating that the Market Condition has been satisfied.

In addition, following a redemption, a holder must retain at least $500,000 principal or

notional principal amount of each class of Certificate retained.

In the Matter of J.D. Gillespie, supra note 4, at 11 ("(S)ection (3(a)(1)(C)) is not

applicable (to a situation in which a trust has been determined to be engaged primarily in

the business of investing in government securities), being in the alternative to Section

(3(a)(1)(A)) and being designed to describe other types of issues. Thus the exclusion of Governent securities from the definition of investment securities in Section (3(a)(1)(C))

is irrelevant. The broader term "securities," used in Section (3( a)( 1 )(A)), obviously

includes Government obligations.").

8 You also request relief with respect to two specific issues under Rule 3a-7. First,

you assert that a Certificateholder's withdrawal of Underlying Treasuries, in the manner

described above, would not violate the rule's condition, under subparagraph (a)(3), that

the issuer dispose of eligible assets only if, among other things, the assets are not disposed

of for the primary purpose of recognizing gains or decreasing losses resulting from market

value changes. We agree that this clause is intended to address the intent of the issuer,

rather than a securityholder, in disposing of assets and therefore would not be violated by

a Certificateholder's withdrawal of Underlying Treasuries in the manner described above.

See Investment Company Act Release No. 19105 (Nov. 19, 1992) (release adopting Rule

3 a-7).

Second, you assert that both the Class A Certificates and the Class B Certificates

may be considered "fixed income securities" within the meaning of the rule. We agree.

9 Brown & Wood (pub avaiL. Feb. 24, 1994).
5

You represent that CSFB will sell the Certificates for a premium over the amount

that CSFB or its affliates paid for the Underlying Treasuries'. You anticipate, therefore,

that at the time that the Trust initially offers the Certificates for sale, the aggregate value

of the Underlying Treasuries will be less than the aggregate value of the outstanding Certificates. Under those circumstances, the Market Condition would not be satisfied. In

addition, you anticipate that, as a result of CSFB establishing and marketing the Trust,

competition may result in a decrease in the premium at which the Certificates are expected

to trade. For the Market Condition to be satisfied, however, the Certificates would have

to trade at a discount, a situation that may be unlikely to occur.

Because we are unable to determne the likelihood that the Market Condition

would be satisfied, we are ~nable to assure you that we would not recommend

enforcement action to the Commssion under Section 7 of the 1940 Act if the Trust does

not register as an investment company under the 1940 Act in reliance on Rule 3a-7. Our

position is based on the facts and representations in your letter, and different facts or

circumstances may require a different conclusion. 10 ~ l-lJrlÛJ~

Sarah A. Wagman

Special Counsel

10 In taking this position, we are not concluding that the Certificates necessarily are

redeemable securities for purposes of Rule 3a-7. Rather, your letter does not contain

suffciently specific facts about the operation of the Market Condition to permit us to

determine whether the Certificates are redeemable securities.

In addition, we note that you no longer are requesting confidential treatment for

your letter or this response. Telephone conversation of September 9, 1998 between Sarah

A. Wagman and Scott M. Freeman, counsel to CSFB.
SIDLEY & AUSTIN A PARTNERSHIP INCLUDING PROFESSIONAL CORPORATIONS

DALLAS

875 THIRD AVE~CE

NEW YORK, NEW YORK 10022

TELEPHONE 212 906 2000

FACSDlILE 212 906 2021

WASHINGTOS, D.C. CHICA('õC)

LON DOS

LOS ANGELES SINGAPORE

FOUNDED 1866 TOKYO

WRITER'S DIRECT NUMBER

(212) 906-2358

Re: Sections 2(a)(32) and 3(a) of, and

Rule 3a-7 under, the Investment

Company Act of 1940

May 28, 1997

Securities and Exchange Commission

450 Fifth Street, N.W.

Washington, D.C. 20549

Attention: Office of Chief Counsel

Division of Investment Management

Ladies and Gentlemen:

We represent Credit Suisse First Boston Corporation

(" CSFB") in connection wi th a proposed transaction involving the

formation of a Delaware or other business trust (the "Trust"),

into which would be deposited United States Treasury InflationIndexed Notes or Bonds (the "Underlying Treasuries"). The Trust

would issue two classes of "pass-through" certificates, which

would collectively represent a 100% beneficial ownership interest

in the Trust (collectively, the "Offered Securities"), as

described below.

On behalf of CSFB, we hereby respectfully request

confirmation that the staff of the Division of Investment

Management (the "Staff") of the Securities and Exchange

Commission (the "Commission") would not recommend enforcement

action to the Commission upon the facts set forth in this letter

if the Trust did not register as an investment company under the

Investment Company Act of 1940, as amended (the "1940 Act"),

based on our opinion that the Trust either (i) would not be an

"investment company" as such term is defined in Section 3 of the
SIDLEY & AUSTIN NEW YORK

Page 2

May 28, 1997

1940 Act or (ii) would qualify for the exclusion from the

definition of "investment company" provided by Rule 3a-7 under

the 1940 Act. As discussed below, we believe that the only

significant issue under Rule 3a-7 is whether .the Offered

Securities would constitute "redeemable securities", in which

case Rule 3a-7 would not be available for the Trust. We believe

the Offered Securities would not constitute "redeemable

securities" and, thus, even if the Trust were to be considered an

"investment company" under Section 3 of the 1940 Act, the Trust

should not be required to register as an investment company under

the 1940 Act.

Description of the Proposed Transaction

General

CSFB, or one or more of its affiliates, would acquire

Underlying Treasuries either in the secondary market or directly

from the Treasury Department and deposit them into the Trust.

The Trust will have an institutional trustee (the "Trustee")

that, you may assume for purposes of this letter, will cause the

Trust to comply with all the requirements of paragraph (a) (4) of

Rule 3a-7. Under the Trust i s organizational documents, the

Trustee would not be permi t ted to invest, reinvest or trade the

Underlying Treasuries, but instead would be required merely to

hold them, collect payments made thereon and distribute such

amounts to holders of the Offered Securities as described below.

The Trust would issue two separate classes (Class A and

Class B) of Offered Securities. Each class of the Offered

Securities would be issued in minimum denominations of at least

$500,000 principal amount (in the case of Class A) or notional

principal amount (in the case of Class B). The Offered

Securities would be either registered under the Securities Act of

1933, as amended (the "Securities Act"), or issued in private

placements and eligible for resale under Rule 144A thereunder.

In either case, the large minimum denomination would help ensure

that only large institutions and other "accredited investors"

purchase the Offered Securities. CSFB or other securities

dealers may (but would not be obligated to) make a market in the

Offered Securities.
SIDLEY & AUSTIN NEW YORK

Page 3

May 28, 1997

The Offered Securities would be rated in the highest

category "assigned long-term debt. . by at least one

nationally recognized statistical rating organization that is not

an affiliated person of the (Trust) or of any person involved in

the organization or operation of the (Trust) ", as required by, or

would otherwise comply with, paragraph (a) (2) of Rule 3a-7. The

Trust would not acquire "additional eligible assets", within the

meaning of paragraph (a) (3) of Rule 3a-7¡ and would dispose of

"eligible assets" only in connection with the withdrawal of the

Underlying Treasuries, as described below, and only in accordance

with the requirements of such paragraph (a) (3) .1

Description of the Underlying Treasuries

The Underlying Treasuries would be obligations of the

United States of America backed by its full faitn and credit and

issued pursuant to authority vested in the Secretary of the

Treasury under Chapter 31 of Title 31 of the United States Code.

Each Underlying Treasury would entitle the Trust, as the holder

thereof, to receive payments of interest on certain specified

semiannual interest payment dates and of principal on a specified

maturity date. The Underlying Treasuries would not be callable

or redeemable.

The Underlying Treasuries entitle the holder thereof to

receive a fixed percentage return (the "real" coupon) on a

principal amount that is linked to the U. S. Ci ty Average All

Items Consumer Price Index for All Urban Consumers (the "CPI")

More specifically, the principal amount of the Underlying

Treasuries is adjusted daily for changes in the CPI by

mul t iplying the initial principal amount thereof by the CPI

ratio. The CPI ratio for any date is the CPI for that date

di vided by the CPI for the issue date. Interest on the

Underlying Treasuries is a fixed percentage (determined at

In that regard, in our view, such withdrawals would not

violate clause (iii) of such paragraph (a) (3), which requires

that "the assets are not. . disposed of for the primary

purpose of recognizing gains or decreasing losses from market

value changes", because such clause appears addressed to gains or

losses realized by the issuer, rather than securityholders. We

would appreciate confirmation of this view by the Staff.
SIDLEY & AUSTIN NEW YORK

Page 4

May 28, 1997

issuance thereof through a Dutch auction conducted by the

Treasury Department) of the cpr -adj usted value of the principal

and is paid semiannually.

For example, assuming an Underlying Treasury issued in

June 1997 with a maturity date in June 2007, an initial principal

amount of $1,000 and a fixed interest rate of 3% per annum, if

the cpr rises in the first year after issuance by 4 % (i. e., the

cpr ratio is 1.04), the principal amount of such Underlying

Treasury will by the end of such year have increased by 4% to

$1,040. During such year, the holder of such Underlying Treasury

will have received approximately $31.20 of interest (consisting

of the 3% fixed interest rate on the $1,000 initial principal

amount ($30) plus 3% fixed interest on the $40 increase in

principal amount (approximately $1.202)). At maturity, the

greater of the $1, 000 initial principal amount and the then CPIadjusted principal amount of the Underlying Treasury will be

paid; accordingly, holders of the Underlying Treasury are

guaranteed to receive at least $1, 000 of principal regardless of

any decrease in the cpr. 3

On the first day of each month, the reference CPI will

be the CPI for the third preceding calendar month. For every

other day of the month, the reference cpr is determined by a

linear interpolation between the reference CPI for the first of

that particular month and the reference CPI for the first of the

following month.

2 This is an approximate amount because interest is in fact

paid semiannually, rather than only at the end of the year.

Thus, the first semiannual interest payment would be based upon

the principal amount as adjusted at mid-year, and the second such

payment would be based upon the principal amount as adjusted at

the end of the year.

3 However, holders are not guaranteed interest payments on

$1, 000 of principal (i. e. i if on any interest payment date the

Cpr-adjusted principal amount is less than $1, 000, interest will

be paid only on such lesser amount of principal) .
SIDLEY & AUSTIN NEW YORK

Page 5

Ma y 2 8, 1 9 9 7

Each payment received by the Trust on the Underlying

Treasuries would be distributed by the Trust on the date received

to the holders of the Offered Securities as described below. 4

Description of the Offered Securities i

The Offered Securities would have the same maturity and

virtually the same creditworthiness as the Underlying Treasuries.

The Class A Offered Securities would entitle the

holders thereof to (i) semiannual interest payments in an amount

equal to the fixed interest rate accrued on the lesser of (a) the

initial aggregate principal amount of the Underlying Treasuries

and (b) the CPI-adjusted aggregate principal amount of the

Underlying Treasuries and (ii) a principal payment on the

maturity date thereof (which would be the maturity date of the

Underlying Treasuries) equal to the initial aggregate principal

amount of the Underlying Treasuries. The Class B Offered

Securities would be entitled to all other payments received by

the Trust on the Underlying Treasuries, if any (i. e., the excess,

if any, of the CPI -adjusted aggregate principal dmount thereof

over the initial aggregate principal amount thereof, plus all

interest on any such excess). Using the example set forth above,

by the first anniversary of issuance, the Class A Offered

Securities would have received $30 in semi-annual interest

payments and would continue to be entitled to receive a principal

payment of $1,000 on the maturity date. The Class B Offered

Securities would have received approximately $1.20 of interest in

two semiannual payments and would have an accrued value of

4 CSFB intends that ei ther (i) all expenses of the Trust,

including the fees of the Trustee, would be paid by CSFB or its

affiliates, such that no moneys or assets of the Trust would be

used to pay such expenses, or (ii) addit ional Treasury securit ies

(the "Trust Expense Funding Securities") would be initially

deposited into the Trust, such that the cash received thereon

would be used to pay such expenses. In the latter case, payments

on the Trust Expense Funding Securities would not be distributed

to holders of the Offered Securities but would instead be used to

pay the expenses of the Trust. Either arrangement would, of

course, be fully described in the offering documents for the

Offered Securities.
SIDLEY & AUSTIN NEW YORK

Page 6

May 28, 1997

principal payable on the maturity date, subj ect to adj ustment to

reflect future fluctuations of the CPI, of $40.

The Class A Offered Securities would, as an economic

matter, be the equivalent of a "plain vanilla" Treasury security

(in our example, a $1,000 ten-year note with a fixed 3% interest

rate), except that if, on any interest payment date, the CPIadjusted aggregate principal amount of the Underlying Treasuries

is less than the initial aggregate principal amount thereof, the

holders of the Class A Offered Securities would receive interest

on such interest payment date based on the lower principal amount

(constituting all the interest paid on such date on the

Underlying Treasuries). The Class B Offered Securities would

constitute an instrument whose value is dependent upon the value

of the CPI; if the CPI did not increase after the issue date of

the êlass B Offered Securities, the Class B Offered Securities

would have no value.

The proposed transaction, if implemented and depending

upon its size, should make the market for United States Treasury

Inflation-Indexed Notes and Bonds more liquid, in that the

proposed program will require CSFB and/or its affiliates to

purchase Underlying Treasuries in order to deposit them with the

Trustee. In addition, the withdrawability feature discussed

below should make the market more efficient for both the Offered

Securities and the United States Treasury Inflation-Indexed Notes

and Bonds.

The Underlying Treasuries are modeled by the Treasury

Department on certain similar securities issued by the government

of Canada and, to a lesser extent, the Uni ted Kingdom. CSFB

understands that in both of those countries, such securi ties are

relatively illiquid, resulting in such governments paying higher

interest rates on such securities than they otherwise would.

Therefore, the program should be in the interest of the Treasury

Department to the extent it adds to the liquidity of the market

for the Underlying Treasuries.

It should also be noted that shortly after certain

investment banks began to "strip" regular, fixed rate, U.S.

Treasury securities (in the mid-1980 i s) into interest-only and

principal -only pieces (using custodial accounts but otherwise a
SIDLEY & AUSTIN NEW YORK

Page 7

May 28, 1997

process similar to the proposed program), the Treasury

Department, recognizing that a market existed for such pieces,

began to issue them itself under its STRIPS (Separate Trading of

Registered Interest and Principal of Securities) program. That

resul t could occur again in connect ion with CSFB i S proposed new

product because, although the Treasury' s STRIPS program does not

currently contemplate the issuance of a security like the Class B

Offered Securities, the Treasury could amend its STRIPS program

if CSFB' s proposed program proves successful.

Withdrawal of Underlying Assets from the Trust

The holder of only a Class A Offered Security or

Class B Offered Security would not be entitled to exchange such

security for Underlying Treasuries. Only the holder of both a

Class A and a Class B Offered Security would be entitled to do

so, by surrendering both such securities to the Trustee and

receiving from the Trustee (i. e ., wi thdrawing from the Trust)

such holder i s pro rata share of the Underlying Treasuries. 5 CSFB

believes that prospective investors in the Offered Securities

would insist on this feature in order to be comfortable that the

aggregate market value of the Of fered Securities would not

deviate significantly from that of the Underlying Treasuries due

to market inefficiencies.

CSFB proposes to condition the withdrawal rights of the

holders (the "Market Condition") by requiring each withdrawing

holder of both a Class A and a Class B Of fered Security to obtain

from a nationally recognized investment bank that regularly deals

in Treasury securities a certificate (a "Market Certificate"),

dated not more than two business days prior to the proposed date

of withdrawal, to the effect that, in the opinion of such

investment bank, the aggregate market value of the Underlying

Treasuries (or of that portion of the Underlying Treasuries

represented by the Offered Securities to be surrendered) exceeds

the aggregate market value of all the outstanding Offered

Securities (or of the Offered Securities to be surrendered), and

otherwise in form and substance satisfactory to the Trustee. In

- Such holder would also be required to pay a small fee to the

Trustee to reimburse it for its expenses in connection with the

exchange.
SIDLEY & AUSTIN NEW YORK

Page 8

May 28, 1997

addition, any such holder not exchanging all its Offered

Securities for Underlying Treasuries would be required to retain

at least $500 i 000 principal amount (in the case of Class A) or

notional principal amount (in the case of Class B) of each class

of Offered Securities retained by it.

Legal Analysis

Section 3 of the 1940 Act

Section 3 (a) 6 of the 1940 Act provides in pertinent part:

"(a) (1) When used in this title, "investment company"

means any issuer which--

(A) is or holds itself out as being engaged primarily,

or proposes to engage primarily, in the business of

investing, reinvesting, or trading in securities;

(or)

(C) is engaged or proposes to engage in the bus iness

of investing i reinvesting, owning, holding, or trading

in securities, and owns or proposes to acquire

investment securities having a value exceeding 40 per

centum of the value of such issuer 1 s total assets

(exclusive of Government securities and cash items) on

an unconsolidated basis.

(2) As used in this section, "investment securities"

includes all securities except (A) Government securities. "

Because the Trust would hold only the Underlying

Treasuries, which are "government securities" (as def ined in

6 In 1996 Congress amended the 1940 Act such that former

Sections 3 (a) (1) and 3 (a) (3) are now Sections 3 (a) (1) (A) and

3 (a) (1) (C) i respectively; the text of such sections, however, was

not changed. References to the former sections in cited

materials in the text have been conformed to the new

nomenclature.
SIDLEY & AUSTIN NEW YORK

Page 9

May 28, 1997

Section 2 (a) (16) of tbe 1940 Act) and therefore not "investment

securities", the Trust would not fall within the definition of

investment company in Section 3 (a) (1) (C). The only issue, then,

is whether the Trust could be viewed as falling within the

definition of investment company under Section 3 (a) (1) (A) of the

1940 Act. The Staff has stated that:

" (a) lthough Government securities are excluded in the

determination of whether the investment securities that an

issuer owns or proposes to acquire exceed 40% of its total

assets for purposes of Section 3 (a) ((1) (C) J of the Act, they

are securities for purposes of determining, under Section

3 (a) (1) ((A) J, whether an issuer is engaged primarily in the

business of investing in securities. Thus, an issuer could

invest exclusively in Government securities, thereby owning

no investment securities, and yet be an investment company

under Section 3 (a) (1) ((A) J of the Act."

Baker. Wat ts & Co. (May 6, 1982).

A critical factor in analyzing whether the Trust should.

be deemed an investment company under the 1940 Act is the

distinction in language between Section 3 (a) (1) (A) and Section 3

(a) (1) (C). To fall within the definition of investment company

under Section 3 (a) (1) (A), an issuer must be "engaged

primarily. . in the business of investing, reinvesting, or

trading in securities". Such activity is distinguishable from

the Section 3 (a) (1) (C) requirement of merely being "in the

business of. . owning (or) holding securities". In a

situation where a holding company held securities issued by its

non-investment company subsidiaries rather than investing or

trading in the securities, the Staff stated that "it appears that

(the holding companyJ would not be an investment company as

defined in Section 3 (a) (1) (A) because its primary business will

be owning or holding securities rather than 'invest ing,

reinvesting, or trading' in them, compare (sicJ i investing,

reinvesting, owning, holding or trading i in Section

'3 (a) ((1) (C) J "United Asset Management Corp.' (Nov. 2,

1981) .

Sect ion 3 (a) (1) (A) contemplates an issuer engaging in

investment and trading activities beyond merely owning or holding
SIDLEY & AUSTIN NEW YORK

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securities- -a distinction the Staff explicitly recognized in

United Asset Management Corp. The investment and trading in

securities referred to in Section 3 (a) (1) (A) would not occur in

the proposed transaction described above because the Trust would

be structured as a "pass-through entity" so that funds received

by the Trustee in respect of the Underlying Treasuries would be

used by the Trustee to pay all amounts due and payable on the

Offered Securities, without the need for the Trustee ever to

invest, reinvest or trade the securities in the Trust. Indeed,

as described above, the Trustee would be prohibi ted from doing so

and would be required merely to hold the government securities

included in the Trust for the benefit of the holders of the

Offered Securities.

"Owning" and "holding", when distinguished from

"investing", "reinvesting" and "trading", imply pass-ivity--a

company owns or holds a portfolio whose composition remains

unchanged. If the passive concepts of "owning" and "holding"

fall within the notion of "investing, reinvesting, or trading" in

securities, Sections 3 (a) (1) (A) and 3 (a) (1) (C) would cover nearly

identical areas and Section 3 (a) (1) (C) would be superfluous.

The legislative history of the 1940 Act indicates that

Congress intended Section 3 (a) (1) (A) to reach "typical"

investment companies - - those actively engaged in securi ties

investment and trading activities of a sort the public would

recognize as characteristic of investment companies. See

Hearings Before the Subcommittee on Securities and Exchanges of

the Subcommittee on Banking and Currency, 76th Cong., 3d Sess.

176 (1940) (testimony of David Schenker, SEC counsel primarily

responsible for drafting the 1940 Act). In contrast, Congress

intended the Section 3 (a) (1) (C) definition to reach investment

companies that, while not conforming to the popular conception of

an investment company, nonetheless placed such a substantial

portion of their assets into securities that investors in them

might need the same protections of the 194 a Act. Id. However,

Congress excluded parent holding companies with subsidiaries that

are not themselves investment companies from the Sect ion

3 (a) (1) (C) definition by excluding, along with government

securities, the securities issued by such subsidiaries from the

definition of "investment securities" in Section 3 (a) (2). This

exclusion of parent holding companies would not be effective if
SIDLEY & AUSTIN NEW YORK

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May 28 i 1997

such companies, despite their passive holding of the securities

of their subsidiaries, were viewed as falling within the Section

3 (a) (1) (A) definition.

Commission decisions have endorsed this view of

Section 3 (a) (1) (A). In Atlantic Coast Line Co., 11 S.E.C. 661

(1942), the Commission held that an issuer that had held

securities with a value exceeding forty percent of its assets for

many years and without material change was not an investment

company under Section 3 (a) (1) (A), but fell within the definition

of Section 3 (a) (1) (C). Id. at 664. The Commission stated that

an issuer is not a Section 3 (a) (1) (A) investment company where

its portfolio "has in fact been inactive". Id. at 663. See also

Gray Line Corp., 44 S.E.C. 314 (1970) (owning or holding

securities is a "relatively inactive business")

To fall within the Section 3 (a) (1) (A) investment

company definition, an issuer must also be or propose to be

"engaged primarily" in the business of invest ing, reinvest ing or

trading in securities. The determination of an issuer i s primary

engagement is a factual matter focusing on the nature of its

business. See Certain Prima Facie Investment Companies, SEC

Investment Company Act Release No. 10,937 (Nov. 13, 1979). The

Commission has stated that in deciding this question it considers

an issuer i s historical development, its public representations of

policy, the activity of its officers and directors, the nature of

its present assets, and the sources of its present income. Id.

While the assets in the Trust would be securities, we

believe that it would be incorrect to describe the Trust as being

"engaged primarily" (or, for that matter, at all) in the business

of investing, reinvesting or trading in securities. The U. S.

government securities that would be deposited in the Trust would

not be managed. The Trust would act merely as a conduit, making

required payments to holders of the Offered Securities from

amounts received on the Underlying Treasuries. Even if an

argument could be conceived that somehow the Trust initially

"invested" in the Underlying Treasuries (which seems contrary to

the fact that the Trust would as a practical matter not exist

until the deposit of the Underlying Treasuries were effected), it

is difficult to see how the Trust thereafter could be said to be

"engaged primarily" in the "business of investing i reinvest ing or
SIDLEY & AUSTIN NEW YORK

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trading in securities", as distinct from the business of owning

or holding securities.

Numerous persons requesting a no-action position from

the Staff have made arguments virtually identical to the

foregoing concerning the dist inction between Section 3 (a) (1) (A)

and Section 3 (a) (1) (C). See, e.g., Stephen B. Flood

(Chair/Committee on Securities Regulation, the Association of the

Bar of the City of New York) (Feb. 2, 1987); First Capital Surety

Corporation (Sept. 5, 1996); New York Life Settlement Corporation

(Dec. 22, 1995); General Electric Capital Corporation Structured

Settlement Program (July 6, 1993); Allstate Life Insurance

Company Structured Settlement Trust (Jan. 4, 1993); Merrill

Lynch. Pierce. Fenner & Smith Incorporated (Oct. 28, 1992); Dean

Witter Principal Guaranteed Fund III L.P. (July 23, 1992);

Merrill Lynch Capital Mãrkets Structured Investments Group (Oct.

16, 1989); Leaseway Transportation Corp. (Feb. 22, 1988); and

Centex Corporation (Nov. 20, 1986).

In most öf those requests, after distinguishing the

provisions of Section 3 (a) (1) (A) and Section 3 (a) (1) (C) and

arguing that the issuer in question was not covered by the former

because of the passive nature of its activities and was not

covered by the lat ter because its assets consisted entirely or

largely of government securities and cash, the writer went on to

distinguish such issuer from a unit investment trust, which is,

pursuant to Section 4 of the 1940 Act, one of the three principal

categories of investment companies.

We understand that the Staff previously has taken the

position that the lack of management of a portfolio of securities

does not necessarily preclude regulation under the 1940 Act and,

to support its position, has pointed to the inclusion of unit

investment trusts (which generally have fixed portfolios of

securities that are not managed) as among the types of investment

companies regulated under the 1940 Act. See generally, Gem

Savings Association (Aug. 12, 1983) and Merrill Lynch. Pierce.

Fenner & Smith Incorporated (Oct 28. 1982).

Although a "unit investment trust", as defined in

Section 4 of the 1940 Act, is subject to registration and

regulation under that Act, an issuer will not fall within that
SIDLEY & AUSTIN

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definition unless it first falls within the definition of

investment company under Section 3.7 In other words, an issuer

that would be categorized as a "unit investment trust ii under

Section 4, were it an investment company under Section 3, does

not somehow become subject to registration and regulation under

the 1940 Act unless it first meets the definition of investment

company under Section 3, even if such issuer otherwise resembles

a unit investment trust. Further, in light of the discussion

above, an issuer that owns and holds a fixed portfolio of

securities cannot be said to be in the business of "investing,

'reinvesting and trading" in securities and, therefore, cannot be

characterized as an investment company under Section 3 (a) (1) (A) .

Accordingly, an issuer that owns and holds a fixed portfolio of

securities may be characterized as an investment company only if

it falls within the definition contained in Section 3 (a) (1) (C)

(or, of côurse, Sect ion 3 (a) (1) (B), which is irrelevant for

purposes of this let ter). I f such an issuer owns and holds a

fixed portfolio of government securities (as defined in Section

2 (a) (16) of the 1940 Act), it will not fall within that

definition, even if that entity otherwise resembles a unit

investment trust.

Thus, a government bond mutual fund, which continually

trades government bonds, is clearly an investment company because

it falls within the definition under Section 3 (a) (1) (A); a unit

investment trust that owns and holds, but does not trade,

corporate debt secur it ies is an investment company because it

falls within the definition under Section 3 (a) (1) (C); but an

issuer that passively owns and holds only government securities

is not an investment company under Section 3 and therefore is not

Section 4 of the 1940 Act states that "investment companies

are divided into three principal classes, defined as follows" and

then goes on to define, in addition to unit investment trusts,

face-amount certificate companies and management companies. The

definition of each such class of investment company begins "(such

class) means an investment company" which . Accordingly, if

an issuer is not an investment company as defined in Section 3 of

the 1940 Act, Section 4 i s classification of investment companies

is irrelevant.
SIDLEY & AUSTIN NEW YORK

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May 28, 1997

a unit investment trust under Section 4, regardless of whether it

otherwise resembles a unit investment trust. 8

Accordingly, we believe that the Trust, which would

merely own and hold government securities, would not be an

investment company within the meaning of the 1940 Act. 9

Rule 3a-7

Even if the Trust were to be considered an "investment

company" under Section 3 of the 1940 Act, in our view the Trust

A number of the unit investment trusts that are registered

under the 1940 Act and that hold only government securities may

be deemed to be investment companies under Section 3 (a) (1) (A)

because, among other things, they are permi t ted to increase the

size of their portfolios (the business of investing) and to sell

their portfolio securities to permit cash redemptions (the

business of trading). See, e. g., The Merrill Lynch Fund of

Stripped ("Zero") U.S. Treasury Securities, Series A, B, C, D, E,

F, G, H, I, J and K (a Unit Investment Trust) (Post-Effective

Amendment No. 13 to Registration Statement on Form S-6 (filed

April 24, 1997)) and The Stripped (" Zero") U. S. Treasury

Securities Fund Provident Mutual Series A (Post-Effective

Amendment No. 14 to Registration Statement on Form S-6 (filed

Ap r i 1 25, 1997)).

Our analysis is not inconsistent with the Staff i s

position in Gem Savings Association and Merriii Lynch, Pierce,

Fenner & Smith Incorporated, supra. In those letters, both

issuers, despite their passive activities and lack of management,

were in the business of holding or owning securities within the

meaning of Section 3 (a) (1) (C). Those issuers, however, held

industrial development bonds and bank certificates of deposit,

respectively, neither of which const i tutes "government

securities" i thus, each issuer was an investment company within

the meaning of Section 3 (a) (1) (C). In contrast, the Trust, which

would also be in the business of owning and holding securities,

would own and hold only government securities. Accordingly, the

Trust would not be an investment company wi thin the meaning of

the 1940 Act.
SIDLEY & AUSTIN NEW YORK

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May 28, 1997

would qualify for the exclusion from the definition of

"investment company" provided by Rule 3a -7 under the 1940 Act.

We believe that the only significant issue with respect

to whether the Trust may rely on the exclusion from the

definition of "investment company" provided by Rule 3a-7 is

whether the Offered Securities would constitute "redeemable

securities" .10 The availability of such exclusion provided by

Rule 3a-7 is limited to issuers who do not issue redeemable

securities. A redeemable security is defined in Section 2 (a) (32)

of the 1940 Act as:

"any security, other than short - term paper, under the terms

of which the holder, upon its presentation to the issuer or

to a person designated by the issuer, is entitled (whether

absolutely or only out of surplus) to receive approximately

his proportionate share of the issuer i s current net assets i

or the cash equivalent thereof".

Based on the restrict ions on wi thdrawals from the Trust described

above, it is our opinion that the Trust would not be issuing

redeemable securities within the meaning of Section 2 (a) (32) .

There are two substantial conditions that a holder of

Class A or Class B Offered Securities would have to satisfy prior

to being entitled to exchange such Offered Securities for a pro

10 We note that (i) the Underlying Treasuries would constitute

"eligible assets" within the meaning of paragraph (b) (1) of

Rule 3a-7, (ii) the Trust would be engaged in the business of

purchasing, or otherwise acquiring, and holding such eligible

assets, (iii) the Class A Offered Securities, and, in our view i

the Class B Offered Securities, would be "fixed income

securities" within the meaning of paragraph (b) (2) of Rule 3a-7

(we would appreciate confirmation of this view by the Staff),

-(iv) as noted above, the Trust would comply with paragraph (a) (2)

of Rule 3a-7, relating to the ratings of the Offered Securities,

(v) as noted above, the Trust would comply with paragraph (a) (3)

of Rule 3a-7 and (vi) as noted above, the Trust and the Trustee

will comply with paragraph (a) (4) of Rule 3a-7. Accordingly, the

only significant issue under Rule 3a-7 is whether the Offered

Securities are "redeemable securities".
SIDLEY & AUSTIN NEW YORK

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Ma y 2 8, 1 9 9 7

rata share of the Underlying Treasuries. First, such holder must

hold both Class A and Class B Offered Securities. Holding either

the Class A or Class B Offered Securities alone would not entitle

the holder to wi thdraw any of the Underlying Treasuries. In

Brown & Wood (Feb. 24, 1994), the Staff noted that such a dualclass structure, where securities of each class much be presented

in order to withdraw the underlying assets of the issuer, did not

by itself mean that such securities were not "redeemable

securities". Notwithstanding the definition thereof in

Section 2 (a) (32) that refers to "any security. . which

upon .i presentation to the issuer" entitles the holder to

wi thdraw, which would seem to require that the holder be able to

present only one security, rather than two, in order to withdraw,

the Staff stated that:

"Whether a structured financing program issues

redeemable securities in the circumstances you describe

(i. e., presentation of both classes of securities required

for withdrawal of the underlying assets) will depend on

whether there are substantial enough restrictions on an

investor 's ability to withdraw portfolio securities. The

Division considers the following factors to be important to

this determination: (1) whether an investor i s withdrawal

right is conditional or absolute, (note omitted) (2) whether

the issuer offers the matching securities for sale to

investors at the same time or only at different times, (3)

whether and how often the issuer sponsors act i vi tiea (such

as auctions and mandatory tender features) designed to

facilitate an investor i s ability to acquire the matching

security or securities and present them for withdrawal, (4)

whether the amount of portfolio securities that an investor ¡

can withdraw from the program at anyone time is limited or

unlimited, (note omitted) (5) how often an investor can

withdraw portfolio securities from the program, (note

omitted) (6) whether or not there is a holding period

requirement, (note ami t ted) (7) the denominat ion of the

securities and the minimum amount needed to withdraw

portfolio securities, (note omitted) and (8) how the

withdrawal right feature is presented to investors."

With regard to these eight factors, we note that:

(1) most importantly, each investor's withdrawal right is
SIDLEY & AUSTIN NEW YORK

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May 28, 1997

conditional in that it would be subject to the Market Condition

as described above, (2) the Trust may offer the Class A and

Class B Offered Securities for sale to investors at the same

time, (3) the Trust would not sponsor activities (such as

auctions and mandatory tender features) designed to facilitate an

investor i s ability to acquire the matching Offered Securities;

instead, an investor would be required to purchase or otherwise

acquire the matching Offered Securities in the secondary market,

(4) the amount of Underlying Treasuries that an investor can

withdraw at anyone time would be unlimited (subject to (7)

below), (5) how often an investor can withdraw Underlying

Treasuries would be 1 imi ted by the Market Condition, (6) there

would be no holding period requirement, (7) the minimum

denomination of the Offered Securities would be $500,000 and any

investor not exchanging all its Offered Securities for Underlying

Treasuries would be required to retain at least $500,000 -

principal amount or notional principal amount, as the case may

be, of each class of Offered Securities retained by it, and (8)

the withdrawal right feature would be described in reasonable

detail in the prospectus or private placement memorandum pursuant

to which the Of~ered Securities are offered to investors.

The Market Condition, including the requirement that an

investor obtain a Market Certificate from a nationally recognized

investment bank, is a substantial restriction on a holder's

ability to withdraw its pro rata share of the Underlying

Treasuries. While it ia true that an investor may want to

withdraw the Underlying Treasuries if the aggregate value thereof

exceeds the aggregate value of the Offered Securities, it is by

no means true that that is the only situation in which an

investor would want to wi thdraw. Investors also might want to

withdraw the Underlying Treasuries in circumstances where their

aggregate value is either equal to or less than the aggregate

value of the Offered Securities. For example, CSFB expects the

market for the Underlying Treasuries to always be more liquid

than the market for the Offered Securities. Accordingly, a

holder of Of fered Securi ties might desire to exchange them for

more liquid Underlying Treasuries even if such Underlying

Treasuries had the same, or perhaps a lower, value. However,

such holder would be prohibited from effecting such exchange due

to such holder's inability to satisfy the Market Condition.
SIDLEY & AUSTIN NEW YORK

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Ma y 2 8, 1 9 9 7

Moreover, at the time of the proposed transaction, the

aggregate value of the Underlying Treasuries should be ~ than

that of the Offered Securities (otherwise, CSFB would have no

incentive to structure the transactionll). In that case, the

Market Condition would not be satisfied and withdrawals would not

be permitted. In fact, in CSFB i s view, as the market becomes

familiar with the Offered Securities and, if the proposed

transaction is successful, as addit ional, similar transact ions

are effected by CSFB or possibly others (including, perhaps, the

Treasury Department, as discussed above), the excess value of the

Offered Securities over the Underlying Treasuries should decrease

and, in an efficient market, virtually disappear (this is what

happened in the market for "stripped" Treasury securities in the

mid-1980 i s). Throughout this period, CSFB would not expect

withdrawal to be permitted because the Market Condition would not

be satisfied. Accordingly, the Market Conáition should be viewed

as substantial indeed.

In addition, we believe that it is helpful to analyze

the prohibition on issuing redeemable securities contained in

Rule 3a-7 in light of the Staff i s interpretation of the scope of

the phrase "redeemable securi ties" under other sections of the

1940 Act. Prior to 1970, the availability of the Section

3 (c) (5) (C) exemption under the 1940 Act was not conditioned on

not being engaged in the business of issuing redeemable

securities. The legislative history of the 1970 amendment that

added that condition states that "(tJ he amendment applies only tô~

those companies which purport to model themselves after open-end

companies by issuing a security redeemable at the option of the

holder" . 1970 U. S. C. C. A. N. 4933 The Trust does not purport to

model itself after an open-end company; nor do the proposed

operations of the Trust resemble those of a typical open-end

company, which is engaged in the cont inuous offering and

repurchase of securities.

11 CSFB would sell the Offered Securities for a premium over the

amount it or its affiliates paid to acquire the Underlying

Treasuries.
SIDLEY & AUSTIN NEW YORK

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May 28, 1997

Based on the preceding analysis, we respectfully

request that the Staff confirm that it would not recommend

enforcement action to the Commission if the Trust did not

register as an investment company in reliance upon our opinion

that the Trust either (i) would not be an "investment company" as

such term is defined in Section 3 of the 1940 Act or (ii) would

qualify for the exclusion from the definition of "investment

company" under Section 3 (a) of the 1940 Act provided by Rule 3a7.

We hereby request that this letter and the Staff i s

response thereto be afforded confidential treatment for a period

of 120 days from the date a response to this letter is sent to us

and that publication of this letter be delayed until the

expiration of such period, as contemplated by 17 CFR 200.81 (b) .

The reason for our request is- that premature disclosure of the

letter could compromise CSFB i s business objectives by alerting

its competitors to the details of its confidential new product

plans before it has had the opportunity to put those plans into

effect.

If you have any questions or comments about this

request or if you desire further information concerning this

matter, please call the undersigned collect at (212) 906-2358.

Also, we would appreciate a phone call from you if you are

considering issuing an unfavorable response to this request.

In accordance with Release No. 33-6269 of the

Commission, we have enclosed an original and seven copies of this

letter, and the specific subsections of the particular statute to

which this letter pertains are indicated in the upper right-hand

corner of the first page of this letter and each copy.
SIDLEY & AUSTIN NEW YORK

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May 28, 1997

Please acknowledge receipt of the foregoing by stamping

the enclosed receipt copy of this letter and returning it in the

self -addressed, stamped envelope enclosed for that purpose.

cc: Gina Hubbell

Credit Suisse First Boston Corporation

SM?97AB2 SEN 15/28/97 5: 14pm)