56248 Federal Register I Vol. 57, No. 229 I Friday, November 27 1992 I R•Jies and Regulations -... 


control zones that do not underlie the 

continental control area have no upper 

limit. A control zone may include one or 

more airports and is normally a circular 

area w ith extensions as necessary to 

include instrument approach paths. 

4. Section 71.607 is revised to read as 

follows: 

§ 71.607 Jet route descriptions. 

Each jet route description can be 

found in subpart M of FAA Order 

7400.7A (incorporated by reference, se.:: § 71.1 ). 

5. Section 71.609 is revised to read as 

follows: 

§ 71.609 Area high route descriptions. 

Each area high route description can 

be found in subpart M of FAA Order 

7400.7 A (incorporated by reference, see 

§ 71.1). 

Issued in Washington, DC. on November 

16. 1992. 

Harold W. Becker, 

Manager. Airspace-Rules andAeronautical 

Information Division. 

lFR Doc. 92-28572 Filed 11-25-92; 8:45am] 

BtLUMG COOE 4910.13-11 

SECURITIES AND EXCHANGE 

COMMISS.ION 

17 CFR Part 270 

[Release No.IC-19105; FUe No. 87-12-92) 

RIN 3235-AF47 

Exclusion From the Deflnttlon of 

Investment Company for Structured 

Flnanclngs 

AGENCY: Securities and Exchange 


Commission. 


ACTION: Final rule. 


SUMMARY: The Securities and Exchange 

Commission is adopting a new rule .• rule 

3a-7 under the Investment Company Act 

of 1940 (the "Act"), to exclude issuers 

that pool income-producing assets and 

issue securities backed by those assets 

("structured financing") from the 

definition of "investment company." The 

rule permits structured financings to · 

offer their securities publicly In the 

United States without registering under 

the Act and complying with the Act's 

substantive requ~rements. Rule 3a-7 

removes an unnecessary and · 

unintended barrier to the use of 

structured financings in all sectors of the 

economy, Including the small business 

sector. 


EFFECTIVE DATE: November 27,1992. 


FOR FURTHER INFORMATION CONTACT: 


Rochelle G. Kauffman, Senior Counsel, 

(202) 272-2038, or Elizabeth R. 

Krentzman, Attorney, (202) 272-5416. 

Office of Regulatory Policy, Division of 


Investment Management, 450 Fifth 


Street, NW. Washington, DC 20549. 


SUPPLEMENTARY INFORMATION: The 

Securities and Exchange Commission is 

adopting a new rule, rule 3a-7, under the 

Investment Company Act of 1940 (15 

U.S.C. 80a) (the "Act"). Rule 3a-7 


excludes from the definition of 


"investment company" under section 


3(a) of the Act (15 U.S.C. 80a-3(a)) 


structured financings that meet the 


rule's conditions. The adoption of rule 


3a·7 implements the recommendation 


'made in chapter 1 of the Division of 


Investment Management's report, 


Protecting Investors: A Half Century of 

'l~1vestment Company RegulatiOn. 1 1n 

addition, the Commission is announcing 

that it is not pursuing any legislative 

changes to section 3(c)(5) (15 U.S.C. 80a3(c)(5)) at this time. 

Table of Contents 

J. Background 

II. Discussion 

A. Rule 3a-7 

1. Scope of the Rule 

z. Conditions 

(I) Securities Baaed on Underlying Cash 

Flows 

(li) Nature of Securities Sold to the Public 

(Iii) Acquisition and Disposition of Eligible 

Assets 

(lv) The Independent Trustees 

B. Amending Section 3(c)(5) 


Ill. Cost/Benefit Analysis 


IV. Summary of the Final Regulatory 


Flexibility Analysis 


V. Statutory Authority 

VI. Effective Dale 

VII. Text of Adopted Rule 

I. Background 

Structured finance is a technique 


whereby Income-producing assets, in 


most cases, Illiquid, are pooled and 


· converted into capital market 

Instruments. In a typical financing, a 

sponsor transfers a pool of assets to a 

limited purpose entity, which in turn 

issues non-redeemable debt obligations 

or equity securities with debt-like · 

characteristics ("fixed-income 

securities"). Payment on the securities 

depends primarily on the cash floli!S . 

generated by the pooled assets. Issuers 

that have more assets ot that expect to 

receive more income than needed to 

make fuJI payment on the fixed-income 

securities also may sell interests in the 

residual cash flow. 

1 Division ollnvestmcnl Management. SEC. .The 

Treotment ofStructurod Finance Under the 

Investment Company Act. Protecting Investors: A 

llalf Century of Investment Company Regulation 

(1992). The report concluded a two-yeor 

exumln<illon or the reguloll<in or lnvestmenl 

companies and certain other pooled lnveslrncnt 

vehicles. 

A servicer, which often is the sponsor 

or an affiliate of the sponsor, is the 

primary administrator of the pool. 

collecting payments on the underlying 

assets when due and ensuring that funds 

are available so that investors are paid 

in a timely manner. In most cases, an 

independent trustee. usually a large 

commercial bank, monitors the issuer's 

fulfillment of its obligations. 

Since its inception in the 1970's, 

structured finance has grown 

tremendously, becoming one of the 

dominant means of capital formation in 

the United States. Nev€rtheless, the 

growth and development of this market 

has been constrained in some degree by 

the Act. 

Structured financings fall within the 

definition of investment company under 

section 3(a); but cannot operate under 

the Act's requirements. 2 Many private 

sector sponsored financlngs 3 have 

avoided regulation under the Act by 

relying on section 3{c}(5). which 

generally excepts from the definition of 

investment company any person who is 

not engaged in the business of issuing 

redeemable securities and who is 

primarily engaged in one of the finance 

businesses enumerated in the section. In 

addition, the Commission has Issued 

more than 125 orders exempting other 

structured financings. primarily those 

Involving mortgage-related assets. from 

the Act. • Financings that cannot rely on 

section 3(c)(5) or obtain an exemption 

must sell their securities in private 

placements in reliance on section 

3(c}(t), 6 the "private" Investment 

company exception, or outside the 

United States. 

As a practical matter, the Act treats 

similar types of structured financings 

very differently, depending solely on the 

assets securitized. 8 Some sectors of the 

1 For exa;..ple, the llmltotlons of section 18 on the 

Issuance or senior securities and the prohibitions or 

section 17 on lransaclions Involving affiliales 

conflict wllh the opera lion of structured flnandngs. 

15 u.s.c. 808-18. -17. 

• Mosl structured financlngs 'ponaored by I he 

· federal government and government sponsored 

enterprises are exempted from the Act under 

&ecllon 2(b). which exempts, among olher lhings. 

activities of United Stoles Govemmcnl 

lnstrumenlalllles. or wholly-owned corpora lions or 

IIUch imtnimenlolilies. 15 U.S.C. 80a-2(b). 

•Structured financings I hoi hove received orders 

may continue lo rely on lhem or may rely on rule 

3&-7. 

'15 U.S.C. 80o-3[c)(t ). 

• For exompkl. most struclured financing& boc~ed 

by consumer receivables are excepted from lhe Acl 

under section 3(c)(5). Slruclured flnanclngs bucked 

by general purpose loons. however. ore nol 

excepted and cannot be sold publicly In the Unlled 

Stales. even I hough the financing may be similar to 

ihose qualifying lor on exception or receiving 

exemptive relief. · 
Federal Register I .Vol. 57, No. 229 I Friday, November 27, 199Z l Rules and Regulations 56249 

economy, including small business. 

generally are unable to use structured 

financlngs as sourc~s of capital, and 

many United Stales investol'$ ar€ dented 

the opp.ortu~ity to purchase sound 

capital mruket instruments. 

On May 29, 1992, the Commission 

proposed rule 3a-7, which was inte11de~ 

to exclude virtually an structured 

finuncings from the definition of 

investment company, subject to certain 

conditions. 7 These conditions generally 

would have required issuers to (i) issue 

primarily fixed-inrome securities, with 

payment.thereon based on the cash flow 

derived from the pooled assets; (ii) offer 

to the public only highly rated fixedincome securities; {iii) hold to maturity 

substantially all of the financing's . 

assets, with limited exceptions: and (ivj 

deposit assets, cash flows, and other 

property not needed for the financing's 

operation in a segregated account 

maintained by an independent trustee. 8 

The proposed conditions were intended 

to reflect the structural and operational 

distinctions between registered 

investment companies and structured 

financings and incorporate invl)stor 

protections currently imposed by the 

market. itself. They also_sought to 

ucc;ommodate f1,1ture innovations in the 

structured finance market, consistent 

with Investor protection. 

II. Discussion 

A. Rule3a-7 

The Commission received forty-two . 


comment letters addressing.proposed 


rule 3a~7. 9 All but two agreed.that · 


7 Exclusion from·tbe Definition of f1westment 


Company for Certain Structured Financings, 


Investment Oomp!IRY Act Re)easeNo..18736 [May 


. 29, 1992)~ 57 FR 23980 Uune S, 1992) [hereinafter 

Proposing Release!: · ' 

· ·•sofiid.• section U.A.2. 

,The commenters were Advanta Corp.: the 

American Bankers ASGociation: the American llar 

Association's 1940 Act Structured Finance Task 

f'orce ("ABA Task Force"): Brown & Wood: · 

Cudwalader. Wickersham & Taft: Chemical Dank; 

Chose Manhattan Corp.: Citibank N.A. ("Citibank"): 

Cleary. Gottlieb, Steen & Hamilton: Cra vath, 

Swnine & Moore, on behalf of Salomon· Brothers Inc .. 

["Salomon Brothers"); Davis Polk & Wardwell: Dean 

Witter Financial Service.!' Group 'Inc. {"Dean 

'Witter"): Debcvolse & Plimpton, on behalf of The 

New York Life Insurance Company: Fareila, Braun & 

Martel: Fidelity Management & Research Company 

. ["FMR"): Financial Security Assurance ("I'SA"J: 

1-'irst Chicago Corp. {"First Chicago"); General 

Motors 1\(',ceptance Corp.: Investment Company 

Institute {"ICI"): Kirkland & Ellis: Kulak Rock: 

Luthom & Watkins. on behalf of Sears. Roebuck and 

Co. and Sears Reoeivnbles Finnncing Group. Inc. 

("Sears"): Lehman Brothers: Locke Purnell Rain 

Harrell; Mayer. Brown & Platt: M.BNJ\ America · 

B11nk N.A. ["Mf:INA"): Menill Lynch & Co. ("Merrill 

Lynch"): Mortgage Bankers AssoCiation of America 

In<;. (''MBA"): Natlonsllank Corp.: New Yo~k Sjale 

Dar Associlo.tioil: North .AmerkHn. Secut·ities 

Administrtitors Assoctalioll. Inc. ("NI\SAA''l: 

Orri<:k, Herrington & Sutcllffe: i'ubli~· $ecuritles 

structured financings should be 

excluded from regulation under the Act. 

Althl>uglt.the com.menters generally 

considered the proposal to be~ positive 

step toward the removal of barriers to 

the use of structured financlngs, most 

argued that it was unnecessarily 

restrictive and, in some respects, 

inconsistent with the current operations 

of many structured financings. The rule, 

as adopted, has been modified to 

address the commenters' concerns. 10 

1. Scope of the Rule 

Rule 3a-7 excludell from the definition 

of investment company any issuer who 

is engaged in the business of acquiring 

and holding eligible assets {and in 

activities related or incidental thereto) 

and·who does not issue redeemable · 

securities. The rule has been modified 

from the proposal in several respects to 

ensure that most structured financings. 

rElgardless of their underlying assets. 

can rely on the exclusion and engage in 

practices necessary to their 0peration.11 

First, paragraph (h)(l) defines the term 

"eligible assets" as "financial assets. 

either fixed or revolving, that by their 

terms conv.ert .into cash within a finite 

time period plus any rights or other 

assets designed to assure servicing or 

timely distribution of proceeds to the 

security holders." This definition is 

based on the definition of "asset-backed 

security" in the recently adopted 

revisions to Form S-3 under the 

Securities Act of 1933 {"Securities 

Act"). 12 · 

Association ("PSA"); Residentiul Fundill8 Corp 

("RFC"): Rogers & Wells: Securities Industry. 

Association {''SIA"): Stroock & Stroock Be Lavan; 

Sullivan, fl< ~t:amwell: Thal;her l'rc;>ffHt & Wopd: · 

White & CaB(J: and Willkie Farr & Gallagher.. 10 In adoptit1g rule 38-7, the Commission disagrees 

with tlill' argullients made by tli1dC! arid NASAl\ 

that structured·financ!ngs'lue investment companies 

and shoul~ be.regulated under lhf!AllL.See Letter 

from the ICI to Jonathan G. Kaq:. Seeretarjl. SEC 4-6 

[Aug. 4, 1!192). File No. S7- 12--92 {hereinafter ICI 

Comment Letter): Letter from NASAA lo Jonathrtn 

G. Katz. Secretary, SEC5 {Aug. 5.1992), File No. 87­

12-412 (hereinafter NASAA .Comment Letter). 

Structured finandngs are fundamentally different. 

from investment companies in operation and 

purpose. Notwilhs\untling its size and rapid growth. 

the &lructured finance market has been virtually 

free of abuse . . Requiring regulatlon based on 

theoretical concerns would only disrupt an 

increasingly Important fonn of finance. 1 ' One co.mmenter suggested the propoued rule be 

clarified .to permit issuers to hold only one eligible 


ass.et Letter from Salomon Brothers to jonathan G. 


· Katz, Secrelury, SEC 11 (Aug. 4, 1992), File No. S7­

12--9,& [hereinafter Salomon Brothers Comment 

.tetter). Such clarification Is unnecessary since the 

rule as propo~ed did not exclude this type of 

strudure. _. · 12 These.amendtnents expanded the.benefils of 

rule 415 under the Securities .Act. the so-ca.lled shelf 

registration rule .. to offerings .ofinvastment grade · 

asset-backed.securitles. As adopted. Form S-3 

defines "asset-bauk!ld security" as "a security thai 

is prlmurily serviced by the cashnows of a discrete 

Paragraph (bl{l) replaces proposed 

paragraph {b)(l), which would have 

defined eligible assets to mean 

obligations that have scheduled cash 

flows, and other assets that serve solely 

to suppott the credit ofthe securities. 13 

Many commenters were concerned that 

the proposed definition did not · 

encomp~tss all of the types of assets that 

can be securitized. 14 Commenters also 

noted that the proposed definition 

appeared not to include assets. 

commonly used to support the liquidity 

of the securities and the 

creditworthiness of the assets being 

secmilized. 15 Finally, many commentet·s 

pool of receivables or other financialussets. either 

fixed or fev,lving, that by their terms convert into 

cash within a finite time period plus any rights Of 

other assets designed to assure the servicing or 

timely uistrihuHon ofprocecds to the 

securityholder'l!." See Simplification of Registration 

Pmcc<iures f<lr Primary Securities OfferinRs, 

Securities Act Release No. 6964 (Oct. 22. 111921. 57 

PR 48910 {Oct. 29. 100.2). 

'" l,;:oposed paragraph (b){l) defined eligible 

assets as " obligations. !hut require scheduled cash 

payments·. such .as notes. bonds, debentures, 

evidences of Indebtedness. certificates of deposit, 

leases.. instaHment contracts, interest rate swaps. 

repurchase agreemenll!, guaranteed investment 

contracts. accounts rec!llvablc. chattel paper. 

cumulatlve preferred stock, guarantees, annuit.cs. 

ond participations or beneficiallnlerests in any of 

the foregoing: and other assets that serve solely to 

support the credit of th11 issuer's securities. such as 

letters of credit, guarantees, and cash collateral 

RCCOUIIls," 

'• Some commonter~~. for eKample, expressed 

c:oucem that the proposed requirement of sclleduiml 

cash payments W()Uid exclude revolving assets 

(such as (lredit card accounts receivables; revolving 

home equity loans. and dealer warehouse 

receivables) because the cash payments on such 

assets vary acpor!lif\S:to curre11t.loan palapces. S(/e. 

e.g.. Letter {rom Cadwalader. Wicke.rshnm &Taft to 

Jonathan G. Katz. Secretary SEC 4--5 [Aug. 3. l992j . . 

File No. 87-12-412 (hereinafter.Cadwalader. 

Wickersham &Taft Comment Letter): Letter from 

ADA Tas~ Force· to Jonathan C .. l<atz, Secretary. 

SI;:C 2 {Aug, 4, 1992), Ei!e No, S7-1iHJ2 .(hereinaflor 

ABA Task Force Comment Letter). Mortgage pansthrough certillcates also may not have met ihe 

definiiion since they are equity in(ercsts, not 

obligations, and their payments depend heavily on 

unscheduled. prepayments. Letter from Stroock & 

Stroock & Lavan to Jonathan G. Katz. Secretary, 

SEC 4 (Aug. 4, 1992), file No. S7-12- 92 jhm·ein"ftef 

Stroock & Stroock Be Lavan Comment l..ett<lf). 1 • See. e.g .. L"tter fmm Mayer, Brown & Piall to 

Jonathon G. Katz. Secretory, SEC App. 21 {Aug. 3. 

1992), File No. S7-12-92 (hereinafter Mayer.llrown 

& l'lutt Comment Letter): l.etler from Brown & Wood 

to Jonath<m G. Katz. Secretary. SEC 10 (July 20. 

1992), File No. S7-12-92 (hereinafter Brown & Wood 

Comment Letter). For example, liquidity and credit 

support may be provided th.-ougb the use of 

facilities such ~~~ asset purchase and secondary 

rruirketing arrangements. See LeUer from Cifibank 

In Jonathan G. Katz. Secretary, SEC 9 (Aug. 4. 1992). 

File No. S7- 12- 92 (hereinafter Citibank Comment 

Letter). Also. c0mmenlers noted that private 

mortgage h:surance. Iitle insurance, and casunlly 

insur~nce. all of whieh .a~ frequently used to 

support the crfllfilo~ the. u.nder\ylng 1u:sets .would 

not have met the proposed definition. See. e.g.. 

Cudwalader. Wickershani & Taft Comment l.ettcr. 

supra note 14. at 6. 
562&0 Federal Register I Vol. 57, No. 229 I Friday, November 27. 1992 / Rules and Regulations 

stated that assets that are "ancillary" or 

"incidental" to eligible assets, such as · 

collateral securing a. securitized asset, 

might not have been eligible assets 

under the proposed definition. 16 

Consequently, they feared that proposed 

paragraph (b)(l) would have precluded 

many financings from relying on the 

rule. 

As modified, paragraph (b)(1) 

encompasses any self-liquidating asset 

which by its terms converts into one or 

more cash payments within 'il finite 

·period of lime. Accordingly, virtually all 

assets that can be securitized (i.e., 

which produce cash flows of the type 

that may be statistically analyzed by 

rating agencies and investors) will meet 

. the definition of eligible asset. 17 In 

addition, the definition includes credit 

and liquidity arrangements that support 

the payment of the securities and the 

underlying assets. and ancillary or 

incidental assets which are necessary in 

the course of servicing the underlying 

assets or to assure the distribution of 

cash flow and/or proceeds to security 

holders. 18 

•• SP.e, e.g.. ABA Task Force Comment Letter. 


811pra note 14, at 3; Letter from Merrill Lync!J to 


Jonathon G. Katr., Secretary. SEC 9-10 (Aug. 4. 


1!!92), File No. S7-t2-92 (hereinafter Merrill Lynch 
 Comment Letter). Other exumples of uncillnry or 

incidental assets include proceeds from eligible 

assets. equity securities received in reorganizations 

or bu11kruptcics of obligors on eligible assets, short- term reinvestments. and property obtained upon the 

lease default of a third-party lessee. 11 In this regard. one commcnter suggested that 

the Commission udopt the standard used in the 

proposed amendments to Form 8-3 becnuse it more accurately rencctcd market practices. See Cltibank 

Comment L<!ttcr. supra note 15, at 2-3. for s.imilnr 

reusons . other commentcrs suggested thu't the . 

Commission d efine "eligible assets" to include, "assets that by their terms convert into cash over a 

finite period of time," borrowing the terminology 

used in Regulations under th e Securities Act (17 

CFR 230 § 903[c)(4)) to define "assets" for that rule's 

provisions relati ng to asset· backed securi ties . See. 

e.g.• AIJA Tusk foN:e Comment Letter. supra note 

14, at 2-4: Brown & Wood Comment Letter. supra 

note 15. at 9. One commcnter. however, stated that 

standard. which Is used in both RegulationS and 

Form S-3. still would not reach some assets that can 

bn sP.curilized. Sec Stroock & Stroock & Lovan 

Comment Letter. supra note 14. at 4-5. Another 

r:omm e nler suggested that the standard was 

umhiguous. Sea Mayer. Brown & Platt Comment 

Lcller. supro not~ 15, a t App. 16. 

Although the definition of ell~lblc assets is 

intended to be brood . It is impossible to devise a d1!finition of eligible assets that will Include all 

types of assets that cnn be securitized. Accordingly. 

issuers. or other parties on their behalf. may request 

I he Divi•ion of Investment Mnnogcment toke o no· 

action position with respect to th e holding of 

specifi ed assets that do not meet the definition of 

"eligible nssets," provided such assets meet the 

inhmt of !he definition . 

'"Thus. for e~ampl e, although common stock 

H•merally would not b e nn eligible assilt because it 

does not produce cash fiows that can be analyzed 

slu tistl cally. issuers could hold common stock, for 

exumplc. that was involuntarily obtained through u 

work·out because the r.ommon stock would . be an 

ancillary or lncidcntulusset. 

Paragraph (b)(t) does not include a 

list of assets that would meet the 

definition of eligible assets. the . 

proposed paragraph had included a nonexclusive list of eligible assets. to 

provide guidance to sponsors .of 

financings seeking to rely on the rule. 

Almost all commenters suggested 

additional assets for the list, 19 even 

though some cautioned that the list 

proposed was so inclusive that It might 

be interpreted as being exclusive. 20 

Such an interpretation could cause 

confusion and ultimately impede the 

evolution of the structured finance 

market, thereby outweighing the 

intended benefits of including a list in 

the definition. Paragraph (b)(l), as 

adopted, is intended to include all of the 

~ssets provided as examples in the 

proposed paragraph, i9 addition to those 

discussed in connection with the 

comments received on the proposed 

provision. 21 

In addition, the rule permits an issuer 

to engage in activities that are related or 

incidental to the business of acquiring 

and holding eligible assets. The release 

proposing rule 3a-7 ("proposing 

release") a had explained that only 

issuers whose sole business is to hold a pool of eligible assets. would be able to 

rely on the· rule. A few commenters 

suggested that this interpretation could 

preclude current practices, since an 

i.ssuer's activities during the operation of 

a financili.g is not limited to acquiring 

and holding eligible assets. 23 

A d' 1 h 1 d d · ccor mg y, t e ru e, as a opte • provides issuers with the flexibility to 

engage in related or incidental activities. 

Finally, the rule retains the proposed 

requirement that issuers issue only non- redeemable securities. The Commission 

has decided, however. to delete the 

reference to debt securities payable 


upon fourteen days' demand. While 


precluding issuers from acting in a 
 · · ·'1 1f d h' manner Simi ar to mutua un B, t IS 

•• These assets included numerous types o( 

financial derivative products, franchise fees, cash, 

credit·cord receivables representing cash advances, 

insurance policies, reserve funds, liquidity and 

maturity facilities, and lines of credit. 20 See, e.g .. Letter from Cleary, Gottlieb. Steen ll 

Hamilton to jonathan G. Katz. Secretary, SEC 15 

(Aug. 6, 1992), File No. S7-12-ll2 (hereinafter Cleary. 

Gottlieb, Steen & Hamilton Comment Letter). 

2 1 See supra notes 1~16 & 111-19 und 

accompanying text. 


21 Proposing Release. supra note . 


25 For example. an issuer may engage in such 


~ctivities as filing registration statements. returning 

dc(ective assets to the sponsor. and through the 

serviccr as its agent. servicing the assets. See, e.g .. 

Letter from Kirkland & Ellis to Jonuth~n G. Katz, 

Secretary. SEC 11 (Aug. 4, 1992). File S7-12-llZ 

(hereinnftcr Kirkland & Ellis Comment Letter). 

approach also codifies industry · 

practice. 

24 

2. Conditions 

(I) Securities based on underlying 

cash flows. '{'_aragraph (a)(t] requires the 

issuer to issue fixed-income securities or 

other securities that entitle their holders 

to receive payments that depend 

primarily on the cash flow from eligible 

assets. Paragraph (a)(l) differs from the 

proposal to reflect the inclusion of 

interest-only ("10") securities, principalonly ("PO") securities, and "any other 

securities with similar characteristics" 

in the definition of "fixed-income 

securities" in paragraph (b](2). Proposed 

rule 3a-7 would have excluded these 

securities from the definition of fixedincome securities, thereby effectively 

precluding issuers relying on the rule 

from selling such securities to the 

general public. The Commission noted in 

the proposing release that sales of 10 

and PO securities to unsophisticated 

investors may raise suitability concerns, 

but requested comment on whether this 

restriction would be appropriate.~ 

"Several r.ommenters questioned whether the 


proposed mle would preclude financlngs from 


issuing certain types of securities, or from 


conducting repurchases In certain specified 


situations. See, e.g.. ABA Task Forco Comment 


·tetter. supm note 14, ut 28-32 (e .g .• secondury 

market "tender option bonds," "Dutch Auction" 

flouter/inverse floater programs): Citibank 

Comment l.etter. supra note 15, at 3 (e.g.. securities 

that commence amurtizHtion over time ot the 

holder's option ). Anothnr commented thut the 

prohibition on issuing redeemable securities would 

odequa!ely ser\IC !o differenliate finoncings from 

open-end management investment companies 

("mutual funds"), making the restriction on the 

issuance of shorHcm1 demand notes unnecessary. 

Letter from SIA to Jonathan G. Ka.tz.. Secretary. SEC 

14 [Aug. 13. 1992). file No. S7-12-92 (herein after SlA 

Comment Letter). Still two other commel,lters . 

expressed concern that the proposed rule implicitly 

would permit the issuance of securities with a 

demand fenture of grenter than fourteen days, 

which in turn could promote investor confu•lon 

between structured linoncings and mutual funds 

and provide opportunities for abuse. Letter from 

FMR to Jonathon G. Katz. Secretory, SEC 2 (July 31. 

1992). File No. S7-12-92 (hereinafter I'MR Comment 

Letter}; IC I Comment Letter. supra note 10, at 17-111. 

Publicly offered financings rarely, if ever. issue 

redeemable securities. Numerous no-action 

positions have addressed the definition of 

rcdeemuhle security in the context of section 3[c)[5). 

See, e.g .. CulHornia Dentists' Guild Real Estate 

Mortgage Fund ll (pub. ov~til. Jan . 4, 1990)(u security 

that may be presen!cd to the issuer by !he holder is 

not a redccmltblc security if substuntlul re s triction• 

ore placed on the right of redemption). Counsel 

concerned about whether a security wou ld be a 

redeemnble ser.uri ty und e r rule 311·7 may exuminc 

these no· action positions for guidance. · · 

"The Commission also noted that financing• !hut 

offer 10 nnd PO securities urauubly niny represent u 

type of complex capit11l structure thnt ·the Act wns 

intended to address. See Proposing Releu'sc·. supro 

note 7. at n.74 and nccompanylng text. 
Federal Register I Vol. 57, No. 229 I Friday, November 27, 1992 I Rules and Regulations 56251 

Although a few commenters 

supported the restriction. most opposed 

it. 26 Opponents argued. among other 

things. that it would be inappropriate for 

the Commission to impose suitability 

requirements in a rule whose pur-pose is 

to exclude structured financings from 

the definition of investment company. 21 

In addition, they pointed out that the 

restriction was unnecessary. given the 

suitability requirements imposed on 

broker-dealers under the Securities. 

Exchange Act of 1934. 28 Commenters 

also argued that the restriction was 

illogical because 10 and PO securities 

often are less volatile than other types 

of securities that could be sold to the 

general public under the proposed rule. 29 

The Commission agrees with these 

commenters, and paragraphs (a)(1} and 

(b)(Z) have been modified accordingly. 30 

Nothing related to the Commission's 

adoption of this rule should be deemed 

to limit the duties of broker-dealers tq 

observe suitability requirements. 31 

••comparo F'MR Comment Letter. supra note 24. 

ut 7: NASAA Comment Letter. supra note 10. at 2-3 

(supporting r~striction) with. e.g.. ABA Tusk force 

Comment Leller. supra note 14. at 6: Brown & Wood 

Comment Letter. suoro note 15. at 1()-11 (opposmg 

restriction) 

"See Cadwnlader. Wickersham !I Taft Comment 

Letter supra note 14, atlO. 

"See e.g.. id.: I.e tier from Lehman Brothers to 

Jonathan C. l<atz. Secretary. SEC 2 (Aug. 18. 1!1921 

File No, S7-1Z-92. 

"'See. e.g.. ABA Task force Comment Letter. 

supra note 14. ai 5. Commenters also argued that 

investors should not be precluded from using 10 and 

PO securities for hedging purpose&. see, e.g.. Stroock 

8o Stroock 8o Lavan Comment Leller. supra note 14, 

atlJ: and that the definitions of 10 securities. 1'0 

~ecurities. and "other securities with similar 

characteri6Cics" arc vague See. e.g .. Cleury Gottlieb. 

Steen 8o llumillon Comment Letter. supro note 20. at s. 7-8. 

' 

0 The rlcfinition of fblt'd-mcome secunties is 

ontcnded to encompass the vanous types of debt 

and debt-like securities currently offered by 

structured financings. The definition is not intended . 

however. to mclude residual interests structured a• 

debt securities wher~ a large portion of the · 

investor's return is contingent. Based on language 

suggested by commenters. paragmph fb)(2) also has 

been modified to .remove ambiguities and to , 

delineate other methods currently used to cakulatP 

inlt:r~sl on asset-backed securities. See. e.g.. Brow~ 

8o Wood Comment Letter. supra note 15, at B: ABA 

Tusk i'orce Comment Letter. supra note 14. at 8. 

"As noted in the Proposing Release. the Fedcrnl 

Financial Institutions Examination Councilndopted 

a supervisory policy statemlmtthat includes 

restrictions governing the trading of 10 and PO 

securities by national banks due to the volatility of 

these instruments. Comptroller of the Currency. 

Administrator of National Bunks. Supervisory 

Policy Statement on Securities Activities. Banking 

Circular No. 226 (Rev.) (Jan. 10. 1992). Likewise. the 

National Associa\ion ollnsuranc'e Commissioners is 

drafting a proposal limiting insuronce compon)· · 

purchases of thcs.e securities 

Finally. paragraph (a)(1) requires 

issuers to issue fixed-income securities 

or other securities which entitle security 

holders to receive payments that depend 

primarily on th!l cash flow from eligible 

assets. The proposed paragraph would 

have required issuers to issue primarily 

fixed-income securities with payment 

thereon dependent on the cash flow 

from eligible assets. 

Several commenters expressed 

concern regarding the proposed 

requirement that an issuer primarily 

issue fixed-income securities. 

Commenters pointed out that the 

requirement could unnecessarHy restrict 

the ability of issuers to rely on the rule 

where. for example, the value of nonfixed income obligations {e.g., residual 

interests) exceeded the value of the 

issuer's fixed-income securities. 32 

Accordingly, final paragraph (a)(1) 

permits the issuance of both fixedincome securities and other securities, 

provided payment on these obligations 

is based primarily on cash flows from 

the underlying asset pool. 33 

Commenters also suggested lhat the 

proposed provision governing payments 

based on cash flows be modified to 

permit securities to be paid from 

collections from cash collateral accounts 

and other forms of credit enhancements. 

and to permit asset-backed commercial 

paper programs that use liquidity 

facilities to rely on the rule. 3 • ThP. 

provision tying payments to cash flows 

is intended to include payments 

obtained in any manner other than from 

the market value or fair value of the 

eligible assets. 3 ~ As such, aQd in light of 

the broad definition of eligible assets in 

paragraph (b){1), modification of this 

requirement is unnecessary. 

In addition, in some financings, 

residual interests are paid, in part, oul of 

lhe proceeds from the disposition of 

"See. e.g.. Kirkland II Ellis Comment Letter 

supra note 23. at 12. 33 The requirement that the issuer prurwnly 1ssue 

these sacurities has been rendered unnecessary 

since final paragraph (alf1) now covers all securities 

(i.e., secutJties the payment on which primarily 

·d.,pencls on cHsh flows) issued by structured 

Cinnncings. 

•• See. e.g .. l<irkland 8o Ellis Comment Letter 

supra note 23. at12: Mayer. Brown & Pia II Commenl 

Leiter. supra note 15. at App. 2. Asset-backed 

commercial paper programs issue commercial paper 

on un ongoing basis and are backed by a diversified 

pool of assets. with assets added to the pool 

throughout the life of the program. Asset-backed 

commercial paper prosrams generally contain a 

variety of relatively short-term assets, such us credit 

cnrd receivables. automobile lease receiv~bles. and 

short-term money market instruments 

a• As meniloned in the Proposing Release. supro note 7, at n.65. this paragraph is intended to 

preclude structured financings using a "marke• 

VHlue" structure from relying on rule 3u·7, since 

market value transactions presont issues that diffe~ · 

from finnncings usin!! the cash now structure 

eligible asscts. 36 To address this 

practice, final.paragraph (a)[1) requires 

the issuance of securities primari/,1• 

backed by the cash flows from eligiblf' 

assets. 31 

{ii} Nature of the Securities Sold to 

the Public. Under paragraph (al(Z) of the 

final rule, fixed-income securtties thai 

are rated, at the time of initial sale, in 

one of lhe four highest long-term debt 

categories or an equivalent short-term 

category by at least one nationally 

recognized statistical rating 

organization. or "rating agency," may be 

sold by the issuer and any underwrilcr 

without restriction. 38 Other fixed· 

income securities may be sold only to 

accredited investors as defined in rule 

501(a)(1). (2). {3), and (7J under the · 

Securities Act 39 and to entities in 

which all of the equity owners qualify as 

such investors ("institutional accredited 

investors"). Finally, all other securities, 

such as residual interests, could be sold 

only to "qualified institutional buyers" 

as defined in rule 144A under the 

Securities Act 40 and to persons 

involved in the organization or 

operation of the issuer and their 

affiliates . 

The final rule. as a condition to thP 

availability of the exemption, retains a 

rating requirement for securities sold to 

the general public. Virtually all 

·commenters supported this approach. 41 

•• These financings are not structured as market 

value transactions. even though payment of thw 

residual interests may depend. in pari. on thP 

market value of the disposed llssets. 

''Similarly. finnncings whose fixed-mcome 

securities are paid, In part. from funds ol>tuined 

through the disposition of assets that. for cxumple . 

do not conform to a representation or warranty 

would be able to satisfy the provision. 

,. As in the case of the proposed rule. the r11ling 

agency may not be an affiliated person of the is~~er 

or of any person involved in the organization or 

operation or the issuer. such us the financing's 

sponsor. servicer. trustee. and provider of credit 

support. 

•• 17 CFR 230.501(a)(l), (2), (3). (7). These 

investors generally include bnnks. savings nnd loan 

associations. registered brokcr-deulers. insurance 

companies. registered investment companies. 

business development compnmes. amnii busines> 

development companies. state Hnd local government 

employee benefit plans with totol asscfs in excess 

of $5 million. certain employee benefit plans 

regulated under the Employee Relirementln>omr 

Security Act of 1974, corporations, business trusts 

partnership§. and churltable orguniznlions with 

total assets in excess of $5 million. nnd privatP 

business development companies. /d. 

•o 17 CFR 230.144A 41 See. e.g.. Cleary. Collheb. Steen 8o Hamilton 

Comment Letter. supra note ZO. nt 17-18. Only two 

commenters. neither of which purticipotca in the 

structured fimmce industry. opposed the use of a 

rating standard. ICI Comment Leller. supra note 10 

al14-17 (suggesting HS im alternnlive limotinR the 

sale of securities issued in structured financings to 

accredited investors); NASAA Comment l..elter. 

.<upro notP tO. al3-4. Conlmucll 
56252 Federal Register I Vol. 57, No. 229 I Friday, November 27, 1992 I Rules and Regulations 

The rating requirement Is 

incorporated in the rule as a means of 

distinguishing structured financing& 

from registered lm estment companies. 

The Commission wishes to emphasize 

that, although ratings generally reflect 

evaluations of credit risk, the rating 

requirement is not intended to address 

investment risks associated with the 

credit quality of a financing. 

The involvement of rating agencies 

represents one of the most significant 

attributes of the structured finance 

market. This is because structured 

financing& enable issuers to generate 

capital by converting often Illiquid, 

unrated assets into marketable rated 

securities. As discussed in the proposing 

release, rating agency evaluations tend 

to address most of the Act's concerns 

regarding abusive practices, such as 

self-dealing and overreaching by 

Insiders, mlsvaluation of assets, and 

inadequate asset coverage. 42 Rating 

agencies have been successful in 

analyzing the structural integrity of 

financings, without Impeding the 

development of the structured finance 

market. Indeed, ratings appear to have . , 

been a major factor in investor 

acceptance of structured financing&. 

The proposed rule would have limited 

securities sold to the public to those 

rated in one of the two hlghes_t 

categories. Most commenters favored·& 

rating In orie'of the four highest · · 

categories (i.e., an investment grade 

rating), which has been incorporated In 

the final rule. 43 

Investment grade flnancings have 

virtually the same structural safeguards. 

As several commenters noted, the 

difference between obligations rated In 

one of the two highest categories and 

those receiving an investment grade 

One commenter recommended that the rating 

requirement apply to only one class. or "tranche." of 

on Issuer's securities. Brown Ill Wood Comment 

Letter. supro note 15, at f. The Commission did not 

rollow this approach. out of a toncem that the 

structural safeguards achieved through the rntlng 

process accompany all securities sold to 

unsophisli~Atted investors. Since the YOSt majority of 

flnancings offer to the public only oblisollons rated 

investment grade. the ruling re<Julrement should not 

materially affect the structured finance marl.et. 

..Proposing Release, supra note 7, sections 1.8. 

and II.A.2.(1i). See a/so text accompanying note 7S 

infro. 

"Only one com mentor suggested thai a rating In 

any category would be sufficient ror securities sold 

lo Ihe general public. Leiter from Oebevoise II! 

Plimpton. on behalf of The New York Life Insurance 

Compuny. to Jonathon G. Kat~ Secretoiy. SEC 6-17 

(Aug. 4. 1992). File No. S7-12-9Z. Because finonclngs 

rorely, 1r over. sell&ecuri ties rated below investment 

grKde lo persons other than sophisticated Investors, 

euch an approach would be contrary lo current 

indu81ry proctlce. In addition. lower-rated sec;urilles 

may present the types of Investor protection · 

concerns. most nolubly with reopect lo leverage, 

addressed by the Investment Company Act. 

rating generally does not reflect a 

diminution In the structured protections 

attending the financing. Rather, 

variances within the investment grade 

category lend lo renee! differences in 

the credit quality of the obligation. In 

addition, consistent with the intent of 

the rule, the investment grade standard 

is more likely to accommodate a greater 

number and newer types of 

securitizations, such as financings 

involving small businesses. 44 

The final rule clarifies 'that the rating 

may include those assigned long-term 

debt obligations or an equivalent shortterm rating, as appropriate to the 

obligation's maturity. •~ While most 

financings issue long-term debt, newer 

structures, such as asset-backed 

commercial paper programs, issue shortterm obligations. By permitting reliance 

on either a long-term or a short-term 

rating, the final rule reflects the' varying 

types of structures. The final rule also 

recognizes that a particular rating 

category may include a subclassification or gradation (such as _a 

plus or minus) to indicate relative 

stan.ding within that category; 

As In the case of the proposed rule, 

the final rule requires securities to be 

rated by only one rating agency. Almost 

all commenters favored this approach. 

Unlike evaluations of credit quality, 

rating agencies are highly unlikely to 

- disagree as to the fundamental 

structural and operational integrity of a 

financing. Mandating ratings from more 

than one rating agency could increase 

substantially the costs of structured 

financing&, without any commensurate 

benefit to public Investors. 46 

In addition, like the proposed rule, the 

rating requirement applies only at the 

time a security Is sold by the Issuer or 

any underwriter acting on its behalf. 41 ln 

"The inveslmentsrnde standard also ia 

consistent wllh the Commission's recent 

amendments to Form 8-3. See Sec./\cl Rei. 6964, 

.supra note 12. 


"Short·lerm ratini!S generally cover securities 


with a maturity of one year or less. Decause a rating 

agency's lons-tenn ratings generally do not 

correspond to those assigned short-term debt. a 

short-term ruling In one of the four highest 

calegoriea may not equate to the investment grudc 

standard contemplated by the rule. Accordingly. 

short-lenn obligoUons must receive a rating 

equivulent to inveotmenl 111ade. Depending on the 

ralins agency. an equivalent shorl·lerm rating may 

represent the third or fourth highest ahort-tenn 

category. 

"Counter to the Intent of the rule. the costs 

associated with requiring two ratings also could be a barrier to the use of small and more Innovative 

flnuncings. 

.., To provide grea ter flexibility. the final rule 

applies solely to ealus-ond not to offers-by the 

Issuer ond Its unde..Wrlters. lssue1'11; ror example. 

would ·be penni !led to offer rcsiduulinteresls and 

investment grade fixed-income securities purouant 

to the same registration slotement. so long as the 

the event of a rating downgrade, 

secondary market transactions in 

securities sold to the public would not 

jeopardize thP. issuer's continued 

reliance on the rule.'8 The final 

provision clarifies that the rating 

requirement applies solely to initial 

sales by the issuer or any underwriter. •

9 

The rating requirement thus would not 

apply at the time of remarketing 

procedures used by some financings to 

periodically set the interesl rate on the 

financing's fixed-income securities. 

Under the final rule, fixed-Income 

securities that do not meet the rating 

requirement (including unrated 

obligations) may be sold to institutional 

accredited investors. Any securities, 

without regard to type or rating (e.g.: 

res idual interests), may be sold to 

qualified institutional buyers as defined 

in rule 144A under the Securities Act 

and to persons involved in the 

organization or operation of the issuer 

and their affiliates. As proposed, · 

securities not meeting the rule's rating 

requirement or qualifying as fixedIncome securities ("non-conforming 

securities") could have been sold only to 

qualified institutional buyers and to 

affiliated persons of the issuer. 

Most commenters indicated that 

limiting sales of non·conforming 

securities to qualified institutional 

buyers would be too restrictive, 

particularly with respect to sales of 

lower and unrated fixed-income 

securities. Several commenters 

recommended the two-tier approach 

incorporated in the final rule. 110 

respective eecuritiesare sold to the appropriate 

clnss of Investors. 41 Several commenters suggl!sted that the ruling 

requirement apply at the time securities are issued, 

as opposed to the lime of ocluul sale. These 

commenlers expressed concern that an underwriter 

could <:~~use on issuer to lose the exemption where a 

rating downgrade occurred prior to the 

underwriter's sale of its allotment. See. e.g .. 

Codwaladcr. Wickersham 8o Taft Comment l.eller. 

supra note 14. e11l-14 . The Commission believes II 

. Is oppropriale to require that Ihe structural 

safeguards allending an inveatmenl grade rating be 

essuMld ot the lime securities ure first sold to the 

public. As discussed infra. issuers may maintain the 

continued avoilubillly or the exemption by. for 

example. requiring underwriters to sell downgraded 

securities to sophisticated investors or to persons 

Involved in the financing as specified in 

subparographsla)I2)(1Jend (it). 

•In some structures. securities are sold by the 

Issuer and Its undcrwrile1'9 of different lime• (e.g.. 

muster trusts} or on on ongoing basis (e.g .. DS<Iel· 

bucked commercial paper programs). The ruling 

requlremcnl applies lo ull such sales (regardless of 

the similarity or dissimilarity of the securities 

involved). nolfustlo the first sale in any s eries of 

sules . 

• 0 See. e.g.. ABA Task Forr.e Comment Letter. 


supra nola 14. at 13. Some commentcrs also 


recommended o subjective standard that would 


reach peT!Ions with slgntflco.nt experience In tho 
 · ConllnuO<I 
Federal Register I Vol. 57, No. 229 I Friday, November 27, 1992 I Rules and Regulations 56253 

Commenters pointed out that a large 

number of institutional accredited 

investors that do not" meet the definition 

of qualified in.stitutional buyers 

routinely purchase non-investment 

grade fixed -income securities. By · 

contrast. residual interests typically are 

sold only to very highly sophisticated 

investors, i.e.. those meeting the 

qualified institutional buyer test. · 

Non-conforming securit ies typically 

are not marketed to natural persons, 

who generally are not in a position to · 

conduct their own due diligence 

analyses prior to investing. Accordingly. 

the rule retains the proposed exclusion 

of natural persons from the category of 

sophisticated investors eligible to 

purchase non-conforming securities. 

Commenters also favored expansion 

of the proposed provision governing 

sales of non-conforming securities to 

affiliated persons of the issuer, pointing 

out that, in many financings, the issuer 

does not have any affiliates. 51 The 

intent of the proposed provision was to 

codify the current practice of 

distributing non-conforming securities to 

persons involved in the financing, such 

as the spon·sor or other provider of · 

sec uritized assets. Accordingly, the final 

rule clarifies 'that non-conforming 

securities may be sold to persons 

involved in the operation or 

organization of the financing (excluding 

agencies rating the s tructure) and their 

affiliates.G2 

As in the case of securities offered to · 

the public, the final rule applies to the 

sale of non-conforming securities by the 

issuer or its underwriters. 5 3 To prevent 

the sale and resale of non-conforming 

securities to public investors, the issuer 

and its underwriters must exerc~se 

reasonable care to ·ensure that nonconforming securities are not sold or 

resold to persons other than those 

specified in subparagraphs (a)(2) (i) and 

(ii). Such reasonable care may include; 

structured finance market. Such an approac h muy 

introduce unnecessary complexities in evaluating an investor's status under the rule. 

•• See. e.g .. Cleary. Gottlieb, Steen & Hamilton 

Comment Letter, supra note 20, at 18. Issuers, for 

exumple. typically are esta blished as Independen t entities to avoid the risk tho I immlvency on the part 

of the financing' s sponsor will affect payments to investors . 02 This approach ols.o addresses the intermediote 

step used in some financings where, prior to rating. 

securities ore issued by a third party {e.g .. a special 

purpose corporation) to the entity that ultimately 

will issue securities in reliance on the rule. 

To preserve their independence from the transaction, any agency rating the issuer's 

obligations could not purchase non-conforming 

securities . 1\s indicated in the Proposing Release. 

s upra note 7 at n.94. " trustee could purcha•e non· conforming securities (us well us rated obligoticins) so long as the trustee remains unaffilluted with' thP. 

financing. 

but is not limited to, contractual 

restrictions on sale and resale, the 

placement of cautionary legends on 

cerlifica ted securities. inquiry to 

determine .if the investment is made by 

. 	the entity or on behalf of others, and 


appropriate disclosure. 5 4 


(iii) Acquisition and dispD!>ition of 

eligible assets. Paragraph (a)(3) permits 

an issuer to acquire additional eligible 

assets or to dispose of eligi bl e assets 

during the operation of the financing, 

provided three conditions are 

satisfied. 5 5 Paragraph (a)(3) differs 

significan tly from the proposed 

provision, in response to suggestions 

made by commenters. · 

Proposed paragraph (a)(3) would have 

req uired an issuer to hold substantially · 

all eligible assets to maturity, subject to 

four limited exceptions. 66 The provision 

sought to ensure that any changes in a 

financing's assets would not adversely 

affect the issuer's outstanding fixedincome security holders, and that the 

underlying asset pool would not be 

"managed" to the same extent and in 

the same manner as a management 

investment company. 5 7 At the same 

time, the provision was intended to 

permitfinancings to operate without 

undue impediments and to codify 

current practices. The Commission 

requested comment on whether 

proposed paragraph (a)(3) would · achieve its intended purposes, and 

whether an alternative approach would 

be more appropriate. 

One commenter stated that proposed 

paragraph (a)(3) satisfac;:torily balanced 

the need for flexibility while ensuring 

that financings would not act like 

management investment companies. 56 

'"While limiting the type of investor ·eligible to purchase non-conforming securities, the rule ,would not restrict the offering mechanism employed. As in 

the case of securities offered to the public, issuers 

and underwriters would be free to sell non· 

conforming securities through private placements or public offerings. 

•• These steps parallel those set (orth in 

Regulation 0 with respect to the resale of privately 

placed securities. See 17 CfR 230.50Z(d). 

"Assr.ts that do not meet the definition of 

eligible a88ets are not subject to th ese conditions . 

•• The four exceptions would have permilled the 

issuer to (II substitute eligible assets for other 

eligible assets of the same type and of the same or 

higher credit quality: (ii) substitute pursuant to a defeasance mechanism government securities for 

eligible assets, provided such government securities 

proauce cash Oows similar to those expected from 

Jhe replaced asset; (iiil ucquirc additional eligib le assets thnt do not result in a downgrnding in the 

rating of the issuer's outstanding fixed-income 

securities; and (iv) dispose of eligib le assets in 

connection with the Issuer's termin.nllon. 61 The "management" of slru~tured financing~ is 

significantly different from that of manugcment . investment companies. •·or example. in a structured 

financing, the scrvicer (unlike most investment 

advisers of munogemcnt Investment companies) 

generally hus very limite~ discretion und must 

Two other commenters argued that the 

proposed provision was not restrictive 

enough and would permit structured 

financings that acquire and re.move 

assets on an ongoing basis (e.g., asset ­

backed commercial paper programs) to 

be managed in a manner similar to 

management investment companies. 

59 

Most commenters, however, argued 

that proposed paragraph (a)(3) was too 

restrictive, since it was inconsistent 

with the operation of many financings. 

For example , commenters noted that the 

proposal could cause particular 

difficulties for financings backed by 

credit card receivables 60 and assetbacked commercial paper programs. 61 It 

a lso would preclude financings from 

engaging in common activities that do 

not in any sense parallel typical 

"management" of registered investment 

compa ny portfolios, including selling 

assets where documentation is defective 

or for nonconformity with 

representations and warranties, 

disposing of assets in default or in 

imminent default. and removing excess 

. credit support. 62 

follow specific guidelines established prior to the 

issuance of the financing's securities . Also. unlike 

mutual funds. the acquisition or disposition of 

assets In o structured financing rarely affects the 

payment of the outstanding securities held by the 

general public. Finally. the acquisition or disposition 

of assets in a structured financing generally does 

not occur for the sole purpose of ac hieving gains or 

decreasing losses resulting in market value changes. 61 J.etter from Chemical Bank to Jonathon G. Katz. 

Secretary, SEC 3-4 (Aug. 3. 1992). file No. S7-12-92 

(hcreil)after Chemical Bank Comment Letter). 

••See NASAA Comment Letter. supra note 10. at 

4-5; ICI Comment Letter. supra note 10. at 6-13. Thu 

IClspecificully argued that these types of structu red 

financing& should not be able to rely on the rule. /d., 

ot12-13. In addition. another commenter stated tho! 

the asset management limitations should be made 

more restrictive to Increase Investor protection. 

FMR Comment Letter. supra note 24. at 4-5. 

00 Credit card flnancings are backed by current . 

and future receivables gencruted by specified credit 

card accounts; the balance of the pool fluctuates as 

new.receivables are generated and existing 

amounts are paid. To accommodate the fluctuating 

balance, a seller (sponsor) certificate Is issued to 

absorb the variations in the balance of the pool. 

thereby enabling the principal balance of the 

investor certificates to he maintained at a fixed 

level foro sta led tert'n. Proposed paragraph (u){3) 

would hove prohibited the disposal of assets not 

Olleded to pny the il)vestor cerlificoles if the sellers 

interes t becomes disproportionately large, causing 

unnecessary economic burdens on the seller. 

1\rguobly. such burdens could limit the number of 

these flnancings eligible to rely on the rule. Soo. e.g .. ABA Task l'orce Comment Letter. supra note 14, ut 

16-17. 

• • Assct·bHcked commercial paper programs 

maintain the credit quality of their assets and the 

liq.uidily of their securities primarily through the 

disposition of a98els . Such dispositions would have 

been prohibited under the prppopol. Sec Cilil>nPk 

Comment i,eller, supro noie 15. HI 9. 
Federal Register I Vol. 57, No. 2Z9 / Friday, November 27. 1992 I Rules and Regulations 

Paragraph (a)(3), as adopted, 

effectuates the intent of the proposed 

provision, but uses a different approach 

derived from the suggestions of 

commenters. The paragraph provides 

virtually all structured financing&, 

including those that require a significant 

degree of asset acquisitions and 

dispositions, the flexibility to engage in 

current practices without raising 

concerns that they could engage in 

portfoho management practices · 

resembling those employed by mutual 

funds Paragraph (a}(3)(i} permits an 

issuer to acqmre additional assets or 

dispose of eligible assets (regardless of 

whether other assets are substituted for 

the removed assets) only if that action 

complies with the terms and conditions 

set forth in the agreements. indentures, 

or other instruments pursuant to which 

the issuer's securities are issued. 63 

Typica1ly, the types. (and. in some 

instances, the credit quality) of assets 

that a financing may acquire, and the 

conditions under which an issuer may 

add or remove assets, are identified 

specifically in the financing's operative 

documents at the initiation of thf' 

financing. Accordingly, paragraph 

(a)(3}(i) merely codifies industry 

practice.14 

· Paragraph (a)(3)lii) permits assets to 

be acquired or disposed of during the 

operation of the financing, if such action 

does not result in a downgrading of the 

rating of the financing's outstanding 

fixed-income securities. This provision 

Is similar to proposed paragraph 

(a)(3}(iii) except that it applies to both 

the acquisition and disposition of 

..See, e.g., Cltlbank Commoot Letier. supra note 

at 6-9; Letter from Firat Chicago to Jonathan G; · 

Katz. Secretary. SEC 5-6 [July 28. 1992), Pile No. S7­

t2--9Z (hereinafter PlnJt Chicago Comment Letter): 

Cleary, ·Gottlieb. Steen 8r Hamilton Comment Letlcr, 

Gupra note 20. attt. 

"Several commentenJ Included a similar 

1requirement In their suggeeted changes to proposed 

paragraph (a)l3). See. e.g .. Kirkland 8r Ellis Comment 

Letter. supra note 23, at16: Salomon Brothers 

Comment Letter. lfUpro note 11, at6. 

• 	 ..This requirement Is not Intended Ia prevenl an 

Issuer (or any party acting an irs behalll from 

having ony diecretlon with respect II' Us assets. 

bsuera often have discretion with respect to routine, 

perfunctory matters that do not affect the payment 

of the fixed-income securities. In addition, issuers 

oflen havuome discretion in connection with the 

· disposition or acquisition of their usseta. provided 

~uch actions meet predetermined 8Uidellnee eel 

forth In the opcmtlve documents . 

The Commission also I• aw11re tha t In several 

circumstances flnancinl!s have had to sell or ~tcquire 

assets In ways that were not anticipated at the lim~> 

the financing was established. In these cases. the 

operative documems were amended. wtth both 

•nvestor and rating agency concurrence. Paragraph 

full3llll would !N'rmilthe t:ontlnuallon or lhl& 

pra ctice 

eligible assets.~ By precludmg actions 

that result in a rating downgrade. 

paragraph (a){3)(ii} is intended to ensure 

that any changes in the financing's 

assets will not adversely affect the 

financing's outstanding fixed-income 

security· holders. 66 

Finally, paragraph (a)(3)(iii} does not 

allow the acquisition or disposition of 

eligible assets primarily for the purpose 

of recognizing gains or preventing losses 

resulting from market value changes 

This condition prohibits an issuer from 

purchasing eligible assets with the hope 

of realizing capital gains through resale 

after such assets have appreciated in 

value. It also will prevent an issuer from 

disposing of assets, regardless of the 

reason for their acquisition, primarily to 

obtain a profit.61 lssuers, however, 

would be permitted to retain any profits 

obtained through the disposition of 

assets, provided the assets were not 

removed for the primary purpose or 

obtaining that profit. 68 

..Propoeed paragraph taJI3)1iil) would havt 

applied only to the acquisilion of eligible asaeta. 

Two commen !era 8U88ested changes to the proposed 

paragraph that effectively would have prevented 

BBset-backed commercial paper programe and other 

types of flnanctnge from relying on the rule. See ICI 

Comment Letter. supra note 10. at13; PMR 

Comment Letter. supra note 24, at4. Many other 

commenlers. however, suggested maintaining the 

provision, either as propo&ed or in the fonn 

adopted. See. 8-IJ., Letter from Dean Witter to 

Jonathan G. katz.. Secretary, SEC 16-11 (Aus- 14 

1992), Fila No. S7-12-92 (hereinafter Dean Witter 

Comment Letter) 

..The provision olso addre1!8es. In part. one 

c:oncem raised by the 10--the danger of self· 

dealins by affiliates. See ICI Comment Letter, lfupra 

note 10. at !HI. The rating agency evaluation• 

address moat of the Act's coneerns about abusive 

practices, Including sell-dealing and overreaching 

by lneidel'8. Aroy addition or removal of aneta by 

lnsldcrnthat could re sult in investor harm would 

result ln a downgrading of the outstanding fixedIncome securities. In addition. the involvement of an independent trustee, as required by·the rule, also 

will alleviate this concern. 

· "In the Proposing Release, supra note 7,the 

Commission spocilically requested comment on 

whether It would be appropriate to Include a 

genernl prohibition on the trading of assets for 

profit. Several commenters supported this approach. 

See. e.g .• l..etter from the American Bankers 

Association to Jonathan G. Katz, Secretary, SEC 4 

(Aug. 4, 1992), File No. S7-12-9Z: Mayer. Drown 8r 

Platt Comment Letter, supra note 15. at App. 5-6; 

Slroook 8r Stroocl< 8r Lavon Comment Letter. supra 

note 14, at 7-12. A few commentera suggested that 

such a prohlbhlon was vague and'unworkable. See. 

e.g.. Cleary. Gottlieb, Sleen, 8r Hamilton Comment 


Letter, supra nole 20. at n.n: Salomon Brothel'8 


Comment Letter. supra note ll, at 7. Paragraph 


(a)(Jl(lii) haa been drafted In o way ~esigned to 


addreaathese commentcn~' concema. 


..Por ell ample. an lsauer may sell eligible assets 

that do not conform to a representation or wananty 

Similarly, an iaauer may eall eligible aaacts In 

excess of required levels where the assets wenacquired for credit enhancement and are sold 

becaoae they are no longer needed to ensure 

payment of the fixed-income securities. An tasuet 

however. may not obtain an eligible asset for thf 

primary purpose of enabling residual hQldenl to 

benefl1 from market appreciahon upon an) · 

subsequent sale 

Some commenters, while favoring the 

requirement that issuers hold 

substantially all assets to maturity, 

suggested amendments to the proposed 

exceptions, or the addition of new 

exceptions, intended to reflect industry 

practice. This approach would require a 

lengthy, detailed list of exceptions, 

which could, in effect, frustrate the 

development of other types of 

· financings. 69 . 

The Commission also declined to 

impose an objective limitation on the 

number of portfolio transactions. In the 

proP'osing release, the Commission 

requested comment on whether 

proposed paragraph (a)(3} should be 

replaced with d condition requiring that 

a specified percentage (e.g .• sixty 

percent) of the aggregate amount of 

pooled assets be held to maturity. 

Commenters responded that such a 

restriction is arbitrary and would unduly 

limit flexibility . ' 0 

(lv) The Independent Trustee. 

Paragraph (a){4) retams the requirement 

that the trustee not be affiliated with the 

issuer or. with any person involved in 

the organization or operation of the 

lssuer.11 The Commission declined to 

adopt the suggestion made by two 

commenters that the rule permit the 

trustee to be affiliated with some of the 

parties involved in the financing's 

operation. 13 Adoption of this suggestion 

could result in the trustee monitoring the 

· activities of an affiliate. The rule, 

however. does not prevent a trustee 

from assuming the duties of servicer if 

the primary servicer is unable to 

perform its duties, or to perform other 

duties with respect to the operation of 

the financing.nThe rule, however, 

would not allow a trustee to provide 

credit enhancement in support of the 

issuer's securities. 

·Paragraph (a}(4) also retains the 

requirement that the trustee execute an 

agreement stating that it will not resign 

00 Based on suggestions from commenten1. at least 

14 additional exceptions would need to be t!lcluded 

in the rule for structured linancings to operate in 

accordance with current Industry practice. Of 

cou1'116, II is impostible to determine the other 

exceptions that would be .required to addreu future 

Innovations in the etructured finarw:e market. 

"'See. e.g., Cleary. Gottlieb, Steen 8r Hamilton 

Comment Letter, supra note ZO. at n.ll. 

'' Paragmph (o)l4) also retains the proposed 

requirement that the trustee be a bank that meets 

the requlraments of section 2f11a)(1) governing 

trustees of unit investment trusts. See 1~ U.S.C. 80a26(a)(1). 

"See Letter from RFC to Jonathan G. katz. 


Secretary. SEC S (Aug. 3. 1992), File 87-12-92 


(trustee should be allowed to be affiliated with 


ubs~m~lcP.rs of the Assets) (hereinafter RFC 

Comment lAliier): Chemical Bank Comment Letter. 

•upro note 58. at 5 (trustee should be allowed to be 

uffilisted with the underwriter and placement 

Hgcn11 
Federal Register J Vol. 57, No. 229 I Friday, November 27, 1992. I Rvles and Regulations 56255 

until the structured financing has been 

completely liquidated or until a 

successor trustee has been designated. 

Unlike the proposed paragraph, 

however. paragraph (a)(4) does not 

require the agreement to provide that 

the sponsor or its agent keep a record of 

the financing's security holders. The 

Commission eliminated this requirement 

in response to commenlers' concerns that it would, in effect, prohibit the 

issuance of bearer securities, which are .used frequently in international 

' offerings.74 

Paragraph (a)(4) also requires the 

issuer to take reasonable steps to cause 

the trustee to have a perfected security 

interest or ownership interest valiq 

against third parties in eligible assets 

that principally generate the cash flow 

needed for payment on the fixed-income 

securities. It also would require that 

cash flows from eligible assets be 

deposited periodically in a segregated 

account maintained or controlled by the 

trustee. 

Proposed paragraph (a)(4) would have 

required all property of the issuer at the 

time the financing is established, and all 

subsequently acquired property 

(including cash flows) to be transferred 

to the trustee within a reasonable time 

of receipt. This would have prohibited 

servicers from commingling the 

financing's cash flows With its own. The 

Commission proposed this requirement 

as a means to ensure the safekeeping of 

the Issuer's assets. 

Virtually all commenters arxued that 

the proposed requirement, if interpreted 

literally, was inconsistent with industry ' 

practice, and would be so impractical 

and expensive to implement that it could 

eliminate the economic benefit of struc~ured financing& as a finan~;e 

alternative. 75 Camrnenters generally 

explained that, under in~ustry pra.ctice, 

whether a trustee takes physical 

possession of any of the issuer's assets 

depends on a number of factors. Often a trustee may not take possession of the 

assets because their transfer to the 

trustee is too burdensome, the servicer 

needs the assets for servicing purposes, or the asset itself is Incapable of 

physical possession. 76 ln addition, 

whether a servicer commingles the 

financing's cash flow with its own assets and, If so, bow long, may depend on the type ofthe asset securitized, and 

the capability of the servicer's computer 

10 Several commenters requested clariOcotlon on 

thls.luue.See. e.g.. RPC Comment "otter. supra note 

7Z. at 5. 

· ,. See.Cleary. Gottlieb. Steen A Hamilton 

CoRJmentl.elter, supro .note 20. at19-20. 

,.Soo. e.s :. Cillbank Comment Letter, supra note 

t5.-at9-1(}; Dean Willer Comment Letter, supra note 

65. at 2-6. 

systems to track the cash flow. n 

Commenters argued that the fact that 

the trustee may not physically hold the 

assets does not place the assets at risk, 

because the rating agencies closely 

evaluate the servicer's creditworthiness 

and capability to perform its 

responsibilities, and require the . 

financing be operated in a manner that 

would minimize any risk to the 

safekeeping of the assets. 71 

Accordingly, some commenters 

argued that since requirements assuring 

the safekeeping of the assets vary from 

transaction to transaction, It is difficult 

to devise a standard for all structured 

financing& without impeding industry 

practice. 79 These commenters suggested 

that the Commission delete any 

requirement with respect to the 

saf~keeping of the assets. 110 Other 

commenters, however, suggested as an 

alternative that the rule require only 

that an issuer take actions necessary· for 

the trustee to have a perfected security 

interest or an ownership interest in the 

assets. 81 

In recognition of the importance of 

safekeeping of assets under the 

Investment Company Act, the 

Commission has determined to require 

safekeeping of assets, but in a way that 

it believes Is consistent with Industry 

practice. Paragraph (a)(4) requires that an Issuer take reasonable steps to 

provide the trustee with perfected 

,.See. fi.JJ •• Dean Witter Comment Letter. wpro note 65. at 6 (the loan documentation for boot. 

automobile. and recreallonol vehicle Joana senerally 

Ia not transferred to the trustee. abaenl o compelling 

business reaaon for dolll8 ao, becauae of the enormous adminialrallve and financial burden II 

would ploa~ on the originator of the oBSets); SIA 

Comment Letter, supro note 24. at 19 (uaeta needed 

for servicing purposes); Merrill Lynch Comment 

Letter. supra note 16. at 7 (some assets. such as 

credit card receivables and bool!~ntry aecwilles. 

exist only os computer entries). 77 See Fil'llt CMcago Comment Leller. 6upro note 

62, ot 7-8 (In e financing backed by credit card 

oocount receivables. commingling Ia uno"oldoble 

when the servlcer has rights to the monthly excess 

funds attributable to finance charge receivables th1t 

exceed the amount needed to pay ln"eatol'tlt. ABA 

Tusk Force Comment Leiter. supra note 14. at 23 

(discussing computer capabllitlea). 

"See. e.g .. Mayer. Drown 8o Platt Comment Letter. 

supra note 15. ot App. 14-15; Leiter from Sears to 

Jonathan G. Katz. Secretary. SEC !HI (Aug. 14, 

1992). Pile No. S7-1~2. for example. the rating 

agencies senerally permit a aervicer with an equal 

or higher rating as the Ononcing's fixed-income 

· securities to -commingle the financlng'a .cosh flows 

with Ita own aaseta. In Instances where the servJcer 

does not poaaeaathe appropriate rating. the rotlng 

agencies may devlae on alternative orransement to 

permit the servlcer to commingle aaseta·wllhout 

· jeopordlzlng -lnvestor protection. See Dean Witter 

Comment Leiter. 8Upra note 65. ot 5. 

"See. e.g.. Brown 8o Wood Comment Letter, supra 

·. note 15, at·18; Stroock. & Stroock a Lavan Comment 

Letter, supra note 14. at 19. . 10 See. e.g.. Stroock 8o Stroock 8o Lavon Comment 

Leiter. 8Up1W note 14. at 19. 

seeunty interests or ownership interesis-. 

The rule does not require. that a 

perfected security Interest be a first 

security interest. This requirement 

applies only to asse'ts .that principally· provide the cash flow needed for 

payments on the fixed-income 

securities: thus. perfected or ownership 

Interests in ancillary assets are not 

required. 82 

With respect to cash flows, paragraph 

(a)(4) requires that they periodically be 

deposited in a segregated account, 

consistent with rating agency 

requirements. Thus, possession of cash 

flows by the servicer for periods of time 

would be permitted. where a rating 

agency has determined that the risk of 

loss therebom is· minimal. 

Finally, paragraph (a)(4) e~cludes 

asset-backed comme~cial paper 

programs. from its requirements. Se\lersl 

commemera·noted thatthese programs 

ordinamy· operate wio\hout a t.rustee. 83 

Commenters argued that requiring a 

trustee would not be practical and 

.would do little to add to investor 

protection, due to the short-term of the 

seonrltles, the ahort-tenn nature of the 

assets underlying the11e programs, the 

multi-seller structures used In such 

programs, and the roles of providers of 

credit and liquidity facilities. 14 Upon 

reflection. the Commission agrees 

requiring a trustee for commercial paper 

programs would be costly and would 

not add to Investor protection. ~ 

B. Amending Section 3{c)(5) 

In the proposing release, the 

Commission requested comment on 

whether section 3(c)(5) should be 

amended, either to include other 

financing activities. or to prevent 

structured financings from continued 

reliance. Two commenters suggested 

that the section be expanded to exclude 

other financing techniques from the 

"See. e.g.. ABA Task Porce Comment Letter. 

~upra note 14. at 20-Zl. Z4. 

"'For example. In a structured financing backed 

by automobile Joonu. security Interests would be 

required to be perfected in th~rloons. but not In the 

automobile• lhemaelns. 

Th" Cbmmlssion recosnlua that under the 

Unif.nm Commerdnl Code, .poeseaaion m~ be 

required to creatv a valid· 1ecurity Interest for 

certain lnatrumenta. e.g .• mortgage noletl. 

Accordlf131y, perfection may be lost when the 

tru1t1te•s roqulred-to d&liver to the ·aemcer assets 

needed for the·opernllon of the flnancins. o.A.. servicing. The provision has been drafted to permit 

truateee to continue this practice. See ABA Task 

Force Comment Letter. supra note 14. at 2A. 

"Cioory•.Gottlleb. Steeno& Hamilton .Oomment 

Letter. supro note 20. at 21 ; Kirkland & Eilts 

Comment Letter. ~upra note 23. at 7. 

"See;e.g.• Letter from Karen ,., Kirchen, Geneml 

Group Counacl. Citlbank; to Marianne 1(, Smythe. 

Director. Division of Investment Manugement. SEC 

4 (Sept . 25. 1992). File No.. 57-12-112. 
56256 Federal Register I Vol. 57. No. 229 I Friday, i~ovember 27, 1992 I Rules and Regulations 

Act. ss One commenter suggest ed that 

the section be narrowed to apply only to 

active businesses. s7 Most commenters. 

however. argued that it would be 

inappropriate to narrow the scope of 

section 3(c)(5), at least until both the 

market and the Commission gains 

experience with rule 3a-7. 88 Commenters 

also pointed to the difficulty of drafting 

an amendment that would excludE' · 

structured financings without 

inadvertently preventing traditional 

factoring vehicles from relying on the 

section. 811 In light of these comments, the 

Commission has decided not to pursue 

any legislative changes to section 3(c)(5) 

Rt this time. 

In addition, the Commission's 

Division of Investment Management has . 

decided not to withdraw at this time its 

no-action position with respect to the 

treatment of whole pool agency 

certificates under section 3(c)(5)(C),9° 

The Commission announced in the 

proposing release that this position 

would be withdrawn upon adoption of 

rule 3a-7. Commenters strongly urged 

reconsideration of this decision. In 

particular. commenters argued that 

whole pool certificates should be 

considered to be interests in real estate 

because holders of such certificates 

receive payment streams that reflect 

payments on the underlying mortgages. 9 t 

Moreover, they argued that withdrawal 

"The Proposing Release. supra not e 7, requested 

comm ent on whether rule 3o-7 should s pecify other 

duti e s for trustees In addition to those propose d. For 

.example, the release questioned whether any 

portion of the Trust Indenture Act's requ irements 

should be made applicable to financings that are 

not subject to that Act. Me>st commenters argued 

that specifying addition a l duties for the trustee 

would be unnecessary, given th e lack of abuse in 

the structured Finance market. See. e.g .. 

Cadwalader. Wickersham & Taft Comment LeHer 

supra note 14. at 21. The Commission has 

de te rmin ed not to 9pecify any additional duti e s for 

the trustee . 

.. l.ettcr from MBNA to Jonathan G. Katz . 

Se cre tary. SEC 71Aug. 4. 1992). File No. S7-12-92; 

Letter from NP.w York Stale Bar Assoc1ation to 

Jonathan G Kutz, Secretary. SEC 5 (Aug . 3. 1992). 

File No. 57 -12--92. Neither commenter submitled 

spe cific language . 

"ICI Comment Letter. supro not e 10. at·2()...22. 

" See. e.g .. ABA Task Force Comm e nt Letter. 

supra note 14. at 33; Cadwalader. Wickersham & 

T1tft Comme nt Letter, supra note 14. at 21-22 . 

•• See. e.g .. Letter from Sidley & Austin, on behalf 

of the Commercial Finance Association . to Jonathan 

G. Katz. Secretory. SEC (Aug. 5, 1992). File No . S7­

12- 9Z: Citibank Comment Letter. supra note 15. at 
 11. 


"" The Division has taken th e position tharissuers 


holding whole pool certificates issu ed by thr 


Go ve rnment Notion a l Mortgage Association , the · 


Fod e rui National Mortgage Association, and the 


Fed e ral Home Loan Mortgage Corporation can rei~ 

on section 3(cl(5! since such certificut es are 


int e re sts in real estnte. See. e.g .. American llomP 


Finance Corp.tpub. avail. Apr. 9. 1981). See als o 


Proposing Release. supra note 7. at nn 44-45 and 


urcompanymg te 1 

of this position could cause real ~state 

investment trusts a nd mortgage banker!l 

that hold whole pool agency certificates 

to become subject to the Act. 97 

Ill. Cost/Benefit Analysis 

The rule will reduce a number or 

unnecessary coats by permitting certain 

types of structured financings to be sold 

in public offerings. rather than in private 

placements. This should reduce costs for 

issuers and allow investors access to a 

greater variety of financings. The rule 

also would mean that issuers of certain 

types of mortgage-related securities no 

longer would have to apply to the 

Commission for individual exemptive 

orders. This should reduce· costs both for 

the issuers and for the Commission. 

IV. Summary of the final Regulatory 

Flexibility Analysis 

The Commission has prepared a Final 

Regulatory Flexibility Analysis in 

accordance with 5 U.S.C. 604 regarding 

adoption of rule 3a-7. The Analysis 

explains that the rule is intended to 

reduce an unnecessary and unintended 

barrier to the use of structured 

financings in all sectors of the economy , 

including the small business sector. The 

Analysis explains that current law has 

constricted the development of the · 

structured finance industry. It states that 

the costs of compliance with rule 3a-7 

will be minimal because the proposal 

essentially codifies industry practice. A 

copy of the Final Regulatory Flexibility 

Analysis may be obtained by contacting 

Rochelle G. Kauffman, Esq.. or Elizabeth 

R. Krentzman. Esq., both at Mail Stop 

10-6, Securities and Exchange 

Commission, 450 Fifth Street. NW.. Washington, DC 20549. 

V. Effective Date 

Rule 3a-7 is effective upon publication 

in the Federal Register. Pursuant to 5 

U.S.C. 553(d)(1), immediate effectiveness 

is appropriate because rule 3a-7 is 

purely exemptive in nature. It excludes 

structured financings from the definition 

of investment company, thereby 

permi'tting structured financings to offer 

their securities publicly .in the United 

States without registering under the Act. 

The rule is intended to remove an 

unnecessary and unintended barrier to 

the use of structured financings in all 

sectors of the economy. The benefits of 

the rule to both sponsors of financings 

and to potential investors should be 

availab)P at the earliest possible time . 

••see e./1 ·· Brown & Wood Co mmcn1 Lett e r supr~ 

note 15. a t 20 

"See. e.11 .. ABA Tas~ Force Comment Letter 


supra not e 14. at 27 


VI. Statutory Authority 

The Commtssion is adopting rule Ja -7 

under the e~emptive and rulemaking 

authority set forth in sections 6(c) and 

38(a) (15 U.S.C. 80a-6(c). -37(a)) of the 

Investment tompany Act of 1940. The 

authority citations for these actions 

precede the text of the actions. 

VII. Text of Adopted 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. BOa-1 et seq., sections aoa- 37. BOa-39 unless otherwise noted; ' 

z. By adding § 270.3a-7 to read as 

follows : 

§ 270.3a-7 Issuers of Asset-Backed 

Securities. 

(a) Notwithstanding section 3(a) of the 

Act, any issuer who is engaged in the 

business of purchasing. or otherwise 

acquiring, and holding eligible assets 

(and in activities related or incidental 

thereto), and who does not issue 

redeemable securities will not be 

deemed to be an investment company: 

Provided That: 

(1) The issuer issues fixed -income 

securities or other securities which 

entitle their holders to receive payments 

that depend primarily on the cash flow 

from eligible assets; 

(2) Securities sold .by the issuer or any 

underwriter thereof are fixed -income 

securities rated, at the time of initial 

sale, in one of the four highest categories 

assigned long-term debt or in an equivalent short -term category (within 

either of which there may be sub· 

categories or gradations indicating 

relative standing) by at least one 

nationally recognized statistical rating 

organization that is not an affiliated 

person of the issuer or of any person 

involved in the organization or operation of the issuer, except that: 

(i) Any fixed-income securities may 

be sold to accredited investors as defined in paragraphs (1), (2), (3), and (7) 

of rule 501(a) under the Securities Act of 

1933 (17 CFR Z30.501(a)) and any entity 

in which all of the equity owners camP 

within such paragraphs; and 
Federal Register I VoJ. 57, No. 229 I Friday, November 27, 1992 I Rules and Regula'tions 56257 

(ii) Any securities may be sold to 

qualified institutional buyers as defined 

in rule 144A under the Securities Act (17 

CfR 230.144A) and to persons (other 

than ariy rating organization rahng the 

issuer's securities) involved in the 

organization or operation of the issuer 

or an affiliate, as defined in rule 405 

under the Securities Act (17 CFR 

230.405), of such a person; 

Provided, That the issuer or any 

underwriter thereof effecting such sale 

exercises reasonable care to ensure that 

such securities are sold and will be 

resold to persons specified in . 

paragraphs (a)(2) (i) and (ii) of this 

section; 

(3} The issuer acquires additional 

eligible assets, or disposes of eligible 

assets, only if: 

(i) The assets are acquired or · 

disposed of in accordance with the 

tenns and conditions set forth in the 

agreements. indentures, or other 

instruments pursuant to which the 

issuer's securities are issued, 

(ii) The acquisition or disposition of 

the assets does not result in a 

downgrading in the rating of the issuer's 

outstanding fixed-income securities; and 

(iii) The assets are not acquired or 

disposed of for the primary purpose of 

recognizing gains or decreasing losses 

resulting from market value changes; 

and 

(4} If the issuer issues any securities 

other than securities exempted from the 

Securities Act by section 3(a)(3} thereof 

{15 U.S.C. 77c{a)(3)), the issuer: 

(i) Appoints a trustee that meets the 

requirements of section 26(a}(1) of the 

Act and that is not affiliated, as that 

term is defined in rule 405 under the 

Securities Act (17 CFR 230.405), with the 

issuer or with any person involved in 

the organization or operation of the 

issuer, which does not offer or provide 

credit or credit enhancement to the 

issuer, and that executes an agreement 

or instrument concerning the issuer's 

securities containing provisions lo ·the 

effect set forth in section 26(a)(3} of the 

Act; . 

(ii) Takes reasonable steps to cause 

the trustee to have a perfected security 

interest or ownership interest valid 

against third parties in those eligible 

assets that principally generate the cash 

flow needed to pay the fixed -income · 

security holders, provided that such 

assets otherwise required to be held by 

the trustee may be released to the extent 

needed at the time for the operation of 

·the issuer: and · · 

(iii) Takes actions necessary for the 

cash flows derived from eligible assets 

for the benefit of ~he holders of fi.xed­

. ..· ·income securities to be deposited 

periodically in a segregated account that 

is maintained or controlled,by.the 

trustee consistent with the nHlng of the 

outstanding fixed-Income securities. 

(b) For purposes of this section: 

{1) Elig1b/e assets means financial 

assets, either fixed or revolving, that by 

their terms convert into cash within a 

finite time period plus any rights or. 

·other assets designed to assure the · 

servicing or timely distribution of 

proceeds to security holders. 

(2) Fixed-mcome securities means any 

securities that entitle the holder to 

receive: 

(i) A stated principal amount; or 

(ii) Interest on a principal amount 

(which may be a notional principal 

amount) calculated by reference to a · 

fixed rate or to a standard or formula 

which does not reference any change in 

the market value or fair value of eligible 

assets; or 

(iii) Interest on a principal amount 

(which may be a notional principal 

amount) calculated by reference to 

auctions among holders and prospective 

holders, or through remarketing of the 

security; or 

(iv) An amount equal to specified 

fixed or variable portions of the interef\t 

received on the assets held by the 

issuer; or 

(v} Any combination of amounts 

des.cribed in paragraphs (b)(2) (i), {ii), 

(iii}, and (iv) of this section; 

Prov1ded, That substantially all of the 

payments to which the holders of such 

securities are entitled consist of the 

foregoing amounts. 

By the Commission. 


Dated: November 19, 1992. 


Margaret H. McFarland, 


Deputy Secretary. 

IFR Doc. 92-28728 Filed.11- 25-92; 8:45am) 


IIILUNG COD£ 801G-01-M 


INTERNATIONAL TRADE 

COMMISSION 

19 CFR Part 207 


Implementing Regulations for the U.S.· 


Can~da Free-Trade Agreement 


AGENCY: International Trade 


Commission. 


ACTION: Final rules. 


SUMMARY: The Commission is amending 

subpart G of part 207 of its Rules to 

conform the Comm{ssion's regulations 

with amendments to the U.S.-Canada 

Free-Trade Agreement Implementation 

Act of 1988(FTA Implementation Act) 

contained in section 134 of the Customs 

and Trade Act of 1990 (hereinafter 

"technical amendments"). The 

Commission's amendments modify and · 

finalize the Commission's interim 

regulations that were previously issued 

in an effort to conform the Commission's 

rules with the ITA Implementation Act, 

as amended. 

The substantive amendments to 

subpart G clarify the requirements 

imposed on a person retaining access to 

proprietary information under a: 

protective order issued during the 

administrative proceeding and clarify 

the categories of people whom the panel 

may determine are entitled to have 

access,to privileged information. 

DATES: Effective date: December 15, 

1992. ' 

FOR FURTHER tNFOAMAnGN CONTACT. 

·Abigail A. Shaine, Esq .• Office of the 

General Counsel, U.S. International 

Trade Commission, telephone (202) 205­

3094. Hearing impaired persons are 

advised that infonnation on the matter 

can be obtained by contacting the 

Commission's TOO Tenninal,on 202­

205-1810. 

SUPPLEMENTARY tNFORMATION: 

Background. 

On Friday. December 30, 1988, the 

Commission published in the Federal 

Register, the interim rules with a request 

for comments 53 FR 53248 (December 30, 

1988}, which rules were amended at 54 

FR 36289 (September 1, 1981'.) These 

rules govern procedure.s for filing a 

Notice of Intent To Commence Judicial 

Review(§ 207 92), for granting access to 

proprietary information (§ 207.93}, for 

governing access to privileged 

information when a panel orders the 

Commission to grant such access 

(§ 207.94). and for imposing. sanctions 

for violations of the admimstrative 

protective orders (APO) (§§ 207.100 

through 207.120.} No comments were 

received from the public on these rules. 

On August 20, 1990, technical 

amendments were made by section 134 

of the Customs and Trade Act of 1990. 

(Pub. L. 101-382) (August 20, 1990}, to the 

ITA Implementation Act, (Pub. L. 11)()­

449) (September 28. 1988}. The U.S. and 

Canadian Governments also have 

amended the Rules of Procedure for 

Article 1904 Rules. 

On August 6, 1992, the Commission 

published in the Federal Register 

amended interim rules with a· request for 

comments. The Commission .amended 

these rules to conform the Commission' s 

regulations with amendments to the 

ITA Impl ementation Act and to the 

amended Article 1904 Rules. 

The Commission received ·only three 

commenls during the period allowed for 

public comment. One person commented 

that the Interim rules did not .aJiow for a