SECURITIES AND EXCHANGE COMMISSION 

17 CFR Parts 240, 242, 249 and 270 

Release Nos. 34-60789, IC-28939; File Nos. S7-17-08, S7-19-08 

RIN 3235-AK17, 3235-AK19 

References to Ratings of Nationally Recognized Statistical Rating Organizations 

AGENCY: Securities and Exchange Commission. 

ACTION: Final rule. 

SUMMARY: The Securities and Exchange Commission (“Commission”) is adopting 

amendments to certain of its rules and forms to remove references to securities credit ratings. 

The Commission is eliminating certain references to credit ratings issued by nationally 

recognized statistical rating organizations (“NRSROs”) in rules and forms under the Securities 

Exchange Act of 1934 related to the regulation of self-regulatory organizations and alternative 

trading systems, and in rules under the Investment Company Act of 1940 that affect an 

investment company’s ability to purchase refunded securities and securities in underwritings in 

which an affiliate is participating. The Commission believes that the references to credit ratings 

in these rules and forms are no longer warranted as serving their intended purposes. The 

amendments are designed to address concerns that references to NRSRO ratings in Commission 

rules may have contributed to an undue reliance on those ratings by market participants. In a 

companion release, the Commission is re-opening the comment period for certain other proposed 

rule and form amendments that would eliminate additional references to NRSRO ratings. 

EFFECTIVE DATE: November 12, 2009.

FOR FURTHER INFORMATION CONTACT: For the rule and form amendments under the 

Securities Exchange Act of 1934, Michael Gaw, Assistant Director, at (202) 551-5602, Brian 
2

Trackman, Special Counsel, at (202) 551-5616, and Sarah Albertson, Special Counsel, at (202) 

551-5647, in the Division of Trading and Markets; for rules under the Investment Company Act 

of 1940, Penelope W. Saltzman, Assistant Director, and Daniel K. Chang, Attorney, at (202) 

551-6792, in the Division of Investment Management, at the Securities and Exchange 

Commission, 100 F Street, NE, Washington, DC 20549. 

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to Rule 

3a1-11 under the Securities Exchange Act of 1934 (the “Exchange Act”),2 Rules 300, 301(b)(5) 

and 301(b)(6) of Regulation ATS,3 Form ATS-R4 and Form PILOT.5 The Commission also is 

adopting amendments to Rules 5b-36 and 10f-37 under the Investment Company Act of 1940 

(“Investment Company Act”).8

 

1

 17 CFR 240.3a1-1. 

2

 15 U.S.C. 78a. Unless otherwise noted, all references to rules under the Exchange Act will be to 

Title 17, Part 240 or Part 242 of the Code of Federal Regulations [17 CFR 240 or 17 CFR 242].

3

 17 CFR 242.300, 242.301(b)(5), and 242.301(b)(6).

4

 17 CFR 249.638.

5

 17 CFR 249.821.

6

 17 CFR 270.5b-3. 

7

 17 CFR 270.10f-3. 

8

 15 U.S.C. 80a. Unless otherwise noted, all references to rules under the Investment Company 

Act will be to Title 17, Part 270 of the Code of Federal Regulations [17 CFR 270]. 
3

TABLE OF CONTENTS 

I. INTRODUCTION ........................................................................................................................ 3 

II. DISCUSSION ............................................................................................................................. 5 

A. Amendments to Rules under the Exchange Act ........................................................... 5 

1. Rule 3a1-1............................................................................................................... 5 

2. Rules 300, 301(b)(5) and 301(b)(6) of Regulation ATS......................................... 7 

3. Form ATS-R and Form PILOT .............................................................................. 9 

4. Discussion............................................................................................................. 11

B. Amendments to Rules under the Investment Company Act....................................... 16 

1. Refunded Securities (Rule 5b-3)........................................................................... 18 

2. Affiliated Underwritings (Rule 10f-3).................................................................. 21

III. PAPERWORK REDUCTION ACT................................................................................................ 28 

IV. COST-BENEFIT ANALYSIS....................................................................................................... 32 

V. CONSIDERATION OF BURDEN ON COMPETITION AND PROMOTION OF EFFICIENCY,

COMPETITION AND CAPITAL FORMATION ............................................................................... 42 

VI. FINAL REGULATORY FLEXIBILITY CERTIFICATION AND ANALYSIS.......................................... 46 

VII. STATUTORY AUTHORITY......................................................................................................... 52 

TEXT OF RULE AMENDMENTS ........................................................................................................ 53 

I. INTRODUCTION

Last year the Commission issued rulemaking initiatives in furtherance of the Credit 

Rating Agency Reform Act of 2006.9

 The Commission also proposed to eliminate from certain 

Commission rules and forms references to credit ratings.10 The Commission proposed to amend 

 

(footnote continued) 

9

 Pub. L. No. 109-291, 120 Stat. 1327 (2006). See, e.g., Proposed Rules for Nationally Recognized 

Statistical Rating Organizations, Exchange Act Release No. 57967 (June 16, 2008) [73 FR 36212 

(June 25, 2008)]. 

10 See References to Ratings of Nationally Recognized Statistical Rating Organizations, Exchange 

Act Release No. 58070 (July 1, 2008) [73 FR 40088 (July 11, 2008 (“Exchange Act Proposing 

Release”)] (proposing amendments to rules and forms under the Exchange Act); References to 

Ratings of Nationally Recognized Statistical Rating Organizations, Investment Company Act 

Release No. 28327 (July 1, 2008) [73 FR 40124 (July 11, 2008)] (“Investment Company Act 
4

these rules and forms to address concerns that the inclusion of requirements relating to credit 

ratings could create the appearance that the Commission had, in effect, given its “official seal of 

approval” on ratings, which could adversely affect the quality of due diligence and investment 

analysis and lead to undue reliance on NRSRO ratings.11

Today the Commission is adopting several of the amendments that we proposed last year 

to rules and forms under the Exchange Act and rules under the Investment Company Act.12 The 

Commission believes that the references to credit ratings in these rules are no longer warranted 

as serving their intended purposes. These amendments would reduce reliance on credit ratings in 

our rules under the Exchange Act and the Investment Company Act, consistent with the 

protection of investors. 

 

Proposing Release”) (proposing amendments to rules under the Investment Company Act and 

Investment Advisers Act of 1940 (“Investment Advisers Act”)). See also Security Ratings, 

Securities Act Release No. 8940 (July 1, 2008) [73 FR 40106 (July 11, 2008)] (proposing 

amendments to rules and forms under the Securities Act of 1933 (“Securities Act”) and the 

Exchange Act). 

11 See Exchange Act Proposing Release, supra note 10, at Section I; Investment Company Act 

Proposing Release, supra note 10, at Section I. We note that the Department of Treasury 

similarly has expressed concern that investors were overly reliant on credit rating agencies, and 

that credit ratings often failed to accurately describe the risk of rated products. The Department 

of Treasury recommended that regulators reduce the use of credit ratings in regulations and 

supervisory practices wherever possible. See U.S. Department of the Treasury, Financial 

Regulatory Reform – A New Foundation: Rebuilding Financial Supervision and Regulation 6, 46 

(July 2009). 

12 The Commission is deferring consideration of action and reopening the comment period on other 

proposed amendments to remove NRSRO ratings references to rules under the Securities Act, 

Exchange Act, Investment Company Act, and Investment Advisers Act. See References to 

Ratings of Nationally Recognized Statistical Rating Organizations, Securities Act Release No. 

9069, Exchange Act Release No. 60790, Investment Advisers Act Release No. 2932, Investment 

Company Act Release No. 28940 (Oct 5, 2009) (“NRSRO Comment Re-Opening Release”). 
5

II. DISCUSSION

A. Amendments to Rules under the Exchange Act 

The Commission today is revising Rule 3a1-1 under the Exchange Act;13 Rules 300, 

301(b)(5) and 301(b)(6) of Regulation ATS;14 Form ATS-R;15 and Form PILOT16 to remove 

references to NRSRO ratings. Each of these rules and forms was adopted in 1998 as part of the 

Commission’s new framework for the regulation of exchanges and alternative trading systems 

(“ATSs”).17 That framework provides the operator of a securities market the choice whether to 

register as a national securities exchange or to register as a broker-dealer and comply with the 

requirements of Regulation ATS. 

1. Rule 3a1-1

The amendments to Rule 3a1-1 are being adopted as proposed. Rule 3a1-1(a) provides 

an exemption from the Exchange Act definition of “exchange” – and thus the requirement to 

register as an exchange – for a trading system that, among other things, is in compliance with 

Regulation ATS.18 Rule 3a1-1(b) contains an exception to the exemption from the exchange 

definition. Under this exception, the Commission may require a trading system that is a 

“substantial market” to register as a national securities exchange if it finds that such action is 

necessary or appropriate in the public interest or consistent with the protection of investors.19 

 

13 17 CFR 240.3a1-1. 

14 17 CFR 242.300, 242.301(b)(5), and 242.301(b)(6). 

15 17 CFR 249.638. 

16 17 CFR 249.821. 

17 See Exchange Act Release No. 40760 (Dec. 8, 1998) [63 FR 70844 (Dec. 22, 1998)] ("Regulation 

ATS Adopting Release"). 

18 See 17 CFR 240.3a1-1(a)(2). 

19 See 17 CFR 240.3a1-1(b); Regulation ATS Adopting Release, 63 FR at 70857. 
6

Thus, pursuant to Rule 3a1-1, the Commission may require a “dominant” ATS to register as an 

exchange.20

Prior to the amendments being adopted today, Rule 3a1-1 set forth eight classes of 

securities in any one of which an ATS might achieve “dominant” status: (1) equity securities; 

(2) listed options; (3) unlisted options; (4) municipal securities; (5) investment grade corporate 

debt securities; (6) non-investment grade corporate debt securities; (7) foreign corporate debt 

securities; and (8) foreign sovereign debt securities.21 Under the definitions that were provided 

in Rule 3a1-1, investment grade and non-investment grade corporate debt securities have three 

elements in common. They are securities that: (1) evidence a liability of the issuer of such 

security; (2) have a fixed maturity date that is at least one year following the date of issuance; 

and (3) are not exempted securities, as defined in Section 3(a)(12) of the Exchange Act.22 The 

distinguishing characteristic of an investment grade corporate debt security was that it has been 

rated in one of the four highest categories by at least one NRSRO.23 A non-investment grade 

corporate debt security under our rules was a corporate debt security that has not received such a 

rating.24

The Commission is revising Rule 3a1-1 by replacing paragraphs (b)(3)(v) and (b)(3)(vi), 

which define investment grade corporate debt securities and non-investment grade corporate debt 

 

20 Specifically, the Commission may – after notice to an ATS and an opportunity for it to respond – 

require the ATS to register as an exchange if, during three of the preceding four calendar quarters, 

the ATS had: (1) 50% or more of the average daily dollar trading volume in any security and 5% 

or more of the average daily dollar trading volume in any class of securities; or (2) 40% or more 

of the average daily dollar volume in any class of securities. See 17 CFR 240.3a1-1(b)(1). 

21 See 17 CFR 240.3a1-1(b)(3). 

22 Compare 17 CFR 240.3a1-1(b)(3)(v) with 17 CFR 240.3a1-1(b)(3)(vi). 

23 See 17 CFR 240.3a1-1(b)(3)(v). 

24 See 17 CFR 240.3a1-1(b)(3)(vi). 
7

securities, respectively, with a single category “corporate debt securities” in paragraph 

(b)(3)(v).25 This new definition retains verbatim the three elements common to the existing 

definitions of investment grade and non-investment grade debt securities. The 5% and 40% 

thresholds beyond which the Commission could require an ATS to register as an exchange also 

remain unchanged.26 Under amended Rule 3a1-1, the Commission can, for example, determine 

that an ATS must register as an exchange if the system had – during three of the preceding four 

calendar quarters – 50% or more of the average daily dollar trading volume in any security and 

5% or more of the average daily dollar trading volume in corporate debt securities, or 40% of the 

average daily dollar trading volume in corporate debt securities.27

2. Rules 300, 301(b)(5) and 301(b)(6) of Regulation ATS

As proposed, the Commission is making similar changes to Rules 300, 301(b)(5) and 

301(b)(6) of Regulation ATS. Rule 300 sets forth definitions used in Regulation ATS, including 

of “investment grade corporate debt security” and “non-investment grade corporate debt 

security.”28

 

25 Existing paragraphs (b)(3)(vii) and (b)(3)(viii) are unchanged but redesignated as paragraphs 

(b)(3)(vi) and (b)(3)(vii), respectively. 

26 See supra note 19. While the percentage thresholds remain unchanged, the dollar volume needed 

to reach these thresholds has increased. For example, under Rule 3a1-1 as it existed prior to 

today's action, an ATS that had 40% of the average daily dollar trading volume in non-investment 

grade corporate debt securities and 0% of the average daily dollar trading volume in investment 

grade corporate debt securities for three consecutive months could have been required by the 

Commission to register as an exchange. Under the amended Rule 3a1-1, the Commission will not 

be able to require the ATS to register as an exchange because the ATS’s combined average daily 

dollar trading volume in corporate debt securities would be less than 40%. 

27 The other six classes of securities – equity securities, listed options, unlisted options, municipal 

securities, foreign corporate debt securities, and foreign sovereign debt securities – remain 

unchanged. Therefore, as under Rule 3a1-1 prior to today's amendments, the Commission may 

also determine that an ATS must register as an exchange if the system exceeds the volume 

thresholds in any of these other classes of securities. 

28 See 17 CFR 242.300(i) and (j). 
8

Rule 301(b)(5) of Regulation ATS imposes a “fair access” requirement, whereby an ATS 

that exceeds certain volume thresholds in any class of securities must establish written standards 

for granting access to trading on its system and not unreasonably prohibit or limit any person in 

respect to access to the services it offers.29 Prior to today's amendments, the fair access standard 

applied if an ATS had 5% or more of the average daily volume during at least four of the 

preceding six calendar months in any of the following: (1) any individual National Market 

System stock (“NMS stock”);30 (2) any individual equity security that is not an NMS stock and 

for which transactions are reported to a self-regulatory organization (“SRO”); (3) municipal 

securities; (4) investment grade corporate debt securities; or (5) non-investment grade corporate 

debt securities. 

Rule 301(b)(6) of Regulation ATS31 requires an ATS that exceeds certain volume 

thresholds in any class of securities to comply with standards regarding the capacity, integrity 

and security of its automated systems. Five classes of securities were identified in Rule 

301(b)(6): (1) NMS stocks; (2) equity securities that are not NMS stocks and for which 

transactions are reported to a SRO; (3) municipal securities; (4) investment grade corporate debt 

securities; and (5) non-investment grade corporate debt securities.32

The Commission is amending Rules 300, 301(b)(5) and 301(b)(6) as proposed to 

establish a single class of "corporate debt securities" and to eliminate the existing separate 

classes of investment grade and non-investment grade corporate debt securities. Accordingly, 

paragraphs (i) and (j) of Rule 300 are replaced with a new paragraph (i) defining “corporate debt 

 

29 See 17 CFR 242.301(b)(5). 

30 See 17 CFR 240.600(a)(47) (defining "NMS stock"). 

31 17 CFR 242.301(b)(6). 

32 17 CFR 242.301(b)(6)(i). 
9

security” to mean any security that: (1) evidences a liability of the issuer of such security; 

(2) has a fixed maturity date that is at least one year following the date of issuance; and (3) is not 

an exempted security, as defined in Section 3(a)(12) of the Exchange Act.33 Former paragraphs 

(i)(D) and (i)(E) of Rule 301(b)(5) are replaced with a new paragraph (i)(D) providing that an 

ATS must comply with the access requirements set out in Rule 301(b)(5) if, with respect to 

corporate debt securities, such system accounts for 5% or more of the average daily volume 

traded in the United States for the requisite number of months. The 5% threshold at which an 

ATS would have to grant fair access to its system also remains unchanged.34 Former paragraphs 

(i)(D) and (i)(E) of Rule 301(b)(6) are replaced with a new paragraph (i)(D) providing that an 

ATS must comply with the capacity, integrity and security requirements of Rule 301(b)(6) if, 

with respect to corporate debt securities, such system accounts for 20% or more of the average 

daily volume traded in the United States for the requisite number of months. The 20% threshold 

and the other three classes of securities remain unchanged. As with the changes to Rule 3a1-1, 

the other classes of securities referenced in these rules remain unchanged. 

3. Form ATS-R and Form PILOT

The Commission is making corresponding amendments as proposed to Form ATS-R and 

Form PILOT. Form ATS-R is used by ATSs to report certain information about their activities 

to the Commission on a quarterly basis.35 Form ATS-R requires each ATS to report the total unit 

volume and total dollar volume in the previous quarter for various categories of securities, 

 

33 15 U.S.C. 78c(a)(12). 

34 When the Commission originally adopted Regulation ATS, it set the fair access threshold at 20%. 

It later lowered the threshold to 5% in connection with the adoption of Regulation NMS. See

Exchange Act Release No. 51808 (June 9, 2005) [70 FR 37496, 37550 (June 29, 2005)]. 

35 Each ATS must file a Form ATS-R within 30 days of the end of each calendar quarter, and within 

ten days of a cessation of operations. See 17 CFR 242.301(b)(9). 
10

including – prior to today's amendments – investment grade and non-investment grade corporate 

debt securities. Consistent with the amendments to Regulation ATS described above, we are 

revising Form ATS-R to eliminate the separate categories for investment grade and noninvestment grade corporate debt securities, and instead creating a single category for “corporate 

debt securities.” 

As with the changes to Regulation ATS, “corporate debt securities” is defined in the 

instructions to Form ATS-R to mean any security that: (1) evidences a liability of the issuer of 

such security; (2) has a fixed maturity date that is at least one year following the date of issuance; 

and (3) is not an exempted security, as defined in Section 3(a)(12) of the Exchange Act. Because 

separate classes for investment grade and non-investment grade corporate debt securities are 

eliminated for purposes of the thresholds in Rule 3a1-1 and Rules 301(b)(5) and 301(b)(6) of 

Regulation ATS, no purpose is served by requiring ATSs to separately report their trading 

volumes for investment grade and non-investment grade debt securities on Form ATS-R. The 

figures for the separate classes will be added together and reported as a single item on the 

amended form. The Commission is not making any other changes to Form ATS-R. 

Ordinarily, Section 19 of the Exchange Act36 and Rule 19-4 thereunder37 require a SRO 

to file with the Commission proposed rule changes on Form 19b-4 regarding any changes to an

material aspect of its operations, including any trading system. Rule 19b-5 under the Exchange 

Act

y 

 

38 sets forth a limited exception to that requirement by permitting an SRO to operate a pilot 

trading system without filing proposed rule changes with respect to that system if certain criteria 

36 15 U.S.C. 78s. 

37 17 CFR 240.19b-4. 

38 17 CFR 240.19b-5. 
11

are met. One of those criteria is that the SRO files a Form PILOT in accordance with the 

instructions on that form. Like Form ATS-R, Form PILOT – prior to today's amendments – 

required quarterly reporting of trading activity by classes of securities, including investment 

grade and non-investment grade corporate debt securities. For the same reasons we are 

amending Rule 3a1-1 and Regulation ATS, we are also revising Form PILOT to eliminate these 

two categories, replacing them with a single category of “corporate debt securities.” Corporate 

debt securities are defined identically in Form PILOT and Form ATS-R. The Commission 

believes that it is appropriate to obtain trading volumes from pilot trading systems for the 

combined class of corporate debt securities, and that separate reporting of the two classes is not 

necessary to adequately monitor the development of pilot trading systems. The Commission 

notes that, in over nine years since Rule 19b-5 and Form PILOT were adopted, no SRO has ever 

established a pilot trading system pursuant to Rule 19b-5 to trade corporate debt securities. 

4. Discussion

In the Exchange Act Proposing Release, the Commission sought comment on proposed 

changes to certain Exchange Act rules and forms, including the changes to Rule 3a1-1, 

Regulation ATS, Form ATS-R and Form PILOT that the Commission is adopting today. With 

respect to Rule 3a1-1 under the Exchange Act and Rules 300, 301(b)(5) and 301(b)(6) of 

Regulation ATS, the Commission sought comment on whether, in light of the proposed 

combination of investment grade and non-investment grade corporate debt securities into a single 

class, it should adopt lower thresholds at which an ATS that trades corporate debt securities 

should be required to register as an exchange. The Commission also solicited comment on 

whether the proposed amendments to Rule 3a1-1, Regulation ATS, Form ATS-R and Form 

PILOT would significantly affect investors, market participants, the national market system or 

the public interest. 
12

The Commission received many comments broadly arguing that the elimination of 

references to NRSRO ratings would not reduce undue reliance on the NRSROs and could have a 

potentially destabilizing effect, but these comments focused on NRSRO references in rules 

where the NRSRO credit rating was relied upon to determine the credit risk or liquidity of a 

particular security in order to achieve the rules’ regulatory purpose. 39 For example, one 

commenter suggested that credit ratings are a necessary part of an effective risk measurement, 

along with each participant’s independent analysis of credit risk, and questioned the availability 

and quality of substitutes for such ratings.40

In contrast, the amendments to Regulation ATS and the related Exchange Act rules 

discussed herein simply use NRSRO ratings to categorize trading activity into market segments 

 

39 The comment letters are available for public inspection and copying in the Commission’s Public 

Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between the 

hours of 10:00 am and 3:00 pm (File No. S7-17-08), and also are available on the Commission’s 

Internet Web site (http://www.sec.gov/comments/s7-17-08/s71708.shtml ). The Commission 

received 20 comments in response to the Exchange Act Proposing Release. Many of the 

comments commended the Commission’s efforts to reform the credit rating process, but opposed 

the proposals outlined in the proposed rulemakings. See, e.g., Comment Letter of Charles 

Schwab (Sept. 5, 2008) (labeling the Commission’s proposed amendments to remove NRSRO 

rating from its rules as premature and ultimately destabilizing) (“Schwab Comment Letter”); 

Comment Letter of the Securities Industry and Financial Markets Ass’n. (Sept. 4, 2008) (“SIFMA 

Comment Letter”) (noting that SIFMA has not found that the possibility of undue reliance on 

credit ratings supports the deletion of references to, and the use of, credit ratings in regulations 

while stating that the appropriate degree of use of credit ratings by market participants is less of a 

regulatory issue and more one of best practices within the marketplace). One commenter also 

encouraged the Commission to analyze the potential consequences of removing particular 

references to ratings, as opposed to a wholesale abandonment of NRSRO-ratings based criteria. 

See Comment Letter of Moody’s Investor Services (Sept. 5, 2008). Another commenter 

encouraged the Commission to withdraw the proposals from active consideration until the 

Commission has coordinated with other regulatory agencies to prevent the proposals from 

conflicting with existing or proposed regulation of other financial services industries. See

Comment Letter of Mortgage Bankers Ass’n. (Sept. 5, 2008). In addition, the majority of 

commenters specifically opposed the other proposed amendments in the Exchange Act Proposing 

Release. The Commission is deferring action and seeking additional comments on those other 

proposed amendments. See NRSRO Comment Re-Opening Release, supra note 12. 

40 See Schwab Comment Letter (specifically commenting on Rule 15c3-1 under the Exchange Act 

(the “Net Capital Rule”), Rule 2a-7 under the Investment Company Act and Rule 206(3)-3T 

under the Investment Advisers Act). 
13

for purposes of these rules’ reporting and other requirements. The two commenters who 

expressly addressed the specific changes that the Commission is adopting in this release raised 

no objection to the elimination of references to NRSRO ratings in Rule 3a1-1, Regulation ATS, 

Form ATS-R and Form PILOT.41 One commenter, an NRSRO, was generally supportive of 

these proposed changes, stating that the current distinction between investment grade and noninvestment grade corporate debt securities in these rules and forms was “superfluous and can be 

eliminated without any untoward consequences for investors.”42 The other commenter was also 

generally supportive of the proposals, and advocated various additional rule changes that, in its 

view, would enhance transparency for investors in fixed income securities.43 

Consistent with the reasons set forth in the Exchange Act Proposing Release and based 

on the Commission’s experience since the adoption of Regulation ATS in 1998, the Commission 

believes that distinguishing investment grade corporate debt securities and non-investment grade 

corporate debt securities as separate classes of securities under Rule 3a1-1, Regulation ATS, 

Form ATS-R and Form PILOT is no longer necessary. In each case, as discussed, we believe 

that combining all corporate debt securities into a single class is appropriate. Consolidated 

reporting is adequate for Commission purposes and removal of NRSRO references in these rules 

 

41 See Comment Letter of DBRS (Sept. 8, 2008) (“DBRS Comment Letter”); Comment Letter of 

Multiple-Markets (Sept. 5, 2008) (“Multiple-Markets Comment Letter”). 

42 See DBRS Comment Letter. 

43 See Multiple-Markets Comment Letter. The commenter also suggested reducing the volume 

threshold in Rule 3a1-1 for the determination of a “substantial market” and distinguishing market 

centers based on client and product types, and a corresponding reduction of the threshold in Rule 

301(b)(6) for determining the applicability of capacity, integrity, and security requirements. The 

commenter also advocated that the Commission undertake a review of electronic trading 

platforms to evaluate fair access under Rule 301(b)(5). In addition, the commenter encouraged 

the Commission to make public the data filed on both Forms ATS and ATS-R. Although these 

comments go beyond the scope of the initial proposal, the Commission will consider them in 

connection with any future proposals in this area. 
14

may help marginally reduce any undue reliance on credit ratings. 

With regard to Rule 3a1-1, the Commission believes that exceeding a volume threshold 

for a combined class of all corporate debt securities is a sufficient indication of significant 

trading activity that could warrant requiring an ATS to register as an exchange, and that it is not 

necessary to assess trading volumes in the narrower segments of investment grade and noninvestment grade corporate debt securities. While the amendment to Rule 3a1-1 adopted today 

increases the dollar volume of trading in corporate debt securities that an ATS must execute 

before it is required to register as an exchange, which could potentially reduce the likelihood that 

an ATS would be required to register as an exchange,44 we believe that this change is 

nevertheless appropriate. As noted above, the Commission believes that these NRSRO 

references are no longer necessary and thus there is no need to analyze “dominance” in separate 

classes of investment grade and non-investment grade corporate debt securities. We specifically 

asked in the Exchange Act Proposing Release whether the Commission should lower the 

threshold in Rule 3a1-1 for the combined class of corporate debt securities. The Commission 

received no comments in response to this question and no suggestion for an alternate threshold. 

Following the amendment adopted today, we will continue to analyze for dominance in six other 

classes of securities (in addition to the new single class for corporate debt securities).45 

For the same reasons we are amending Rule 3a1-1, we believe that amending Rules 300, 

301(b)(5) and 301(b)(6) of Regulation ATS is appropriate because these NRSRO references are 

no longer necessary to serve their regulatory purpose and such removal may help reduce any 

undue reliance on credit ratings. The Commission believes that a volume threshold for a 

 

44 See supra note 25. 

45 In over ten years since adopting Rule 3a1-1, the Commission has never determined to require an 

ATS to register as an exchange because it has become “dominant.” 
15

combined class of all corporate debt securities is sufficient for the fair access requirement and 

the capacity, integrity and security requirements. The Commission believes that the purposes of 

Regulation ATS will be fulfilled if investment grade and non-investment grade corporate debt 

securities are combined into a single class. ATSs will continue to be subject to the existing fair 

access requirement and capacity, integrity and security requirements with respect to the other 

existing classes of securities set forth in Rules 301(b)(5) and 301(b)(6) of Regulation ATS. 

For the reasons described above, the Commission believes that the changes to Rule 

3a1-1, Regulation ATS, Form ATS-R and Form PILOT that we are adopting today to remove 

references to NRSRO ratings are necessary and appropriate in the public interest and consistent 

with the protection of investors. While the removal of the distinction between investment grade 

and non-investment grade corporate debt in the context of ATS reporting may marginally reduce 

the information immediately available to the Commission regarding corporate debt traded, the 

Commission believes that these specific references are not necessary.46 Eliminating these 

references may help marginally reduce undue reliance on credit ratings and the removal of these 

requirements relating to credit ratings could marginally reduce compliance costs for ATSs. 

Moreover, as discussed above, the Commission does not believe that the broad concerns raised 

by many commenters regarding the risks inherent in removing NRSRO ratings and replacing 

them with a substitute in response to the Exchange Act Proposing Release are applicable to the 

specific changes being adopted in today's amendments. Finally, the Commission notes that the 

two commenters who specifically commented on these changes supported them. 

 

46 The Commission retains the authority to request more specific information regarding the 

securities traded by ATSs. See 17 CFR 242.302-303. 
16

B. Amendments to Rules under the Investment Company Act 

Four of the Commission’s rules under the Investment Company Act (Rules 2a-7, 3a-7, 

5b-3 and 10f-3) and one rule under the Investment Advisers Act of 194047 (“Investment Advisers 

Act”) (Rule 206(3)-3T) reference credit ratings by NRSROs. These rules use the credit ratings 

issued by NRSROs in different contexts, and for different purposes, to distinguish among various 

grades of debt and other rated securities. 

In July 2008, we proposed to amend each rule to omit references to NRSRO ratings and, 

except with respect to one of the rules, substitute alternative provisions that were designed to 

achieve the same purpose as the ratings.48 We received 66 comments on the proposal.49 Six 

commenters generally advocated eliminating references to NRSRO ratings in Commission 

rules.50 However, most commenters opposed the amendments. Many of those commenters 

 

(footnote continued) 

47 15 U.S.C. 80b. 

48 See Investment Company Act Proposing Release, supra note 10, at Section III. 

49 The comment letters are available for public inspection and copying in the Commission’s Public 

Reference Room, 100 F Street, NE, Washington, DC 20549 on official business days between the 

hours of 10:00 am and 3:00 pm (File No. S7-19-08), and also are available on the Commission’s 

Internet Web site (http://www.sec.gov/comments/s7-19-08/s71908.shtml). 

50 Comment Letter of Professor Frank Partnoy (received Sept. 5, 2008) (“I am submitting comments 

to applaud the Commission’s proposed rules, to indicate that there is strong academic support for 

its proposal ....”) (“Partnoy Comment Letter”); Comment Letter of Lawrence J. White, Professor 

of Economics, Stern School of Business (Sept. 5, 2008) (“White Comment Letter”) (“I endorse 

[the] general spirit of the SEC’s proposed rules and urge the SEC to go even further and to 

eliminate the NRSRO category entirely.”); Comment Letter of the Government Finance Officers 

Ass’n. (Sept. 5, 2008) (“GFOA Comment Letter”) (“We also generally support the Commission’s 

proposals to deemphasize the reliance on ratings throughout its Rules.”); Comment Letter of The 

Reserve (Sept. 5, 2008) (advocating removal of the designation of any entities as NRSROs); 

Comment Letter of Financial Economists Roundtable (Dec. 1, 2008) (“FER Comment Letter”) 

(“strongly endors[ing] eliminating from SEC regulations every prescriptive mandate that is or 

would be based solely on credit ratings set by NRSROs” but acknowledging a division of opinion 

with regard to assessing the net benefits of “quasi-safe-harbors (offered mainly to officers and 

directors of money market mutual funds) based on credit ratings”); Comment Letter of CFA 

Institute (Mar. 26, 2009) (“CFA Institute Comment Letter”) (“agree[ing] with the objectives ... to 

eliminate, modify or substitute references to ratings assigned by an NRSRO in an effort to reduce 

reliance on ratings that may have inadvertently conveyed an ‘official seal of approval’” but 
17

supported the Commission’s reevaluation of the use of NRSRO ratings in its rules, but suggested 

that the Commission continue its evaluation pending implementation of the additional 

requirements for NRSROs that we recently adopted under the Credit Rating Agency Reform 

Act.51 Most commenters also addressed specific proposed rule amendments, which we discuss in 

more detail below. 

Today we are amending Rules 5b-3 and 10f-3 under the Investment Company Act.52 As 

 

(footnote continued) 

questioning the breadth of certain proposed changes and urging retention of current regulation for 

certain rules). 

51 See, e.g., Comment Letter of the Investment Company Institute (“ICI Comment Letter”) (Sept. 5, 

2008); Comment Letter of the American Securitization Forum (Sept. 5, 2008) (“ASF Comment 

Letter”); Comment Letter of the Vanguard Group (Aug. 1, 2008) (“Vanguard Comment Letter”). 

We proposed and adopted rules under the Credit Rating Agency Reform Act in 2007. See

Oversight of Credit Rating Agencies Registered as Nationally Recognized Statistical Rating 

Organizations, Exchange Act Release No. 55231 (Feb. 2, 2007) [72 FR 6378 (Feb. 9, 2007)] 

(proposing release); Oversight of Credit Rating Agencies Registered as Nationally Recognized 

Statistical Rating Organizations, Exchange Act Release No. 55857 (June 5, 2007) [72 FR 33564 

(June 18, 2007)] (adopting release). We also have, among other things, adopted amendments to 

those rules this year to impose additional requirements on NRSROs to address concerns about the 

integrity of their rating procedures and methodologies. See, e.g., Amendments to Rules for 

Nationally Recognized Statistical Rating Organizations, Exchange Act Release No. 59342 (Feb. 

2, 2009) [74 FR 6456 (Feb. 9, 2009)]. We believe, however, that the amendments eliminating the 

references to NRSRO ratings in certain rules would address our separate concerns discussed 

above. See supra text accompanying note 11. 

52 As discussed below and in a companion release, we are adopting amendments to Rule 5b-3 with 

respect to investments in refunded securities, and are deferring consideration of action on and 

requesting further comment on, amendments to Rule 5b-3 with respect to investments in 

repurchase agreements. See NRSRO Comment Re-Opening Release, supra note 12. We are also 

requesting further comment on the proposed amendments to Rule 3a-7 under the Investment 

Company Act and Rule 206(3)-3T under the Investment Advisers Act. See id. In June 2009, as 

part of our proposal on money market fund reform, we requested further comment on whether we 

should eliminate the use of NRSRO ratings in Rule 2a-7. See Money Market Fund Reform, 

Investment Company Act Release No. 28807 at Section II.A.a (June 30, 2009) [74 FR 32688 

(July 8, 2009)] (“Money Market Fund Proposing Release”). We also sought comment on what 

other alternatives we could adopt to encourage more independent credit risk analysis and meet the 

regulatory objectives of the requirement in Rule 2a-7 regarding NRSRO ratings. We asked 

whether we should consider a roadmap for phasing in the eventual removal of NRSRO references 

from the rule. We specifically noted that we were considering an approach under which a money 

market fund’s board would designate three (or more) NRSROs that the fund would look to for all 

purposes under Rule 2a-7 in monitoring whether a security held by a fund continues to be an 

“eligible security” for purposes of the rule. We are not pursuing this approach with regard to the 

rules we are amending today because Rules 5b-3 and 10f-3 require that certain standards be met 
18

discussed further below, we believe that these amendments eliminate unnecessary references to 

credit ratings. The amendments may marginally reduce any undue reliance on credit ratings and 

may advance the goal of promoting better analysis of underlying investment decisions. In 

addition, because the references are no longer necessary and an adequate substitute exists for the 

reference in Rule 10f-3, reliance on credit ratings in these contexts is no longer justified. We 

believe the amendments to Rule 5b-3 are necessary and appropriate in the public interest and 

consistent with the protection of investors and the purposes fairly intended by the policy and 

provisions of the Investment Company Act.53 We also believe that the amendments to Rule 

10f-3 are consistent with the protection of investors.54

1. Refunded Securities (Rule 5b-3)

Under Rule 5b-3, a “refunded security” is a debt security whose principal and interest 

payments are to be paid by U.S. government securities that have been irrevocably placed in an 

escrow account and are pledged only to the payment of the debt security.55 Section 5(b)(1) of the 

Investment Company Act limits the amount that a fund that holds itself out as being “diversified” 

may invest in the securities of any one issuer (other than the U.S. Government). Rule 5b-3 

permits a fund that acquires a refunded security to treat it as an acquisition of the escrowed 

government securities for purposes of the diversification requirements of Section 5(b)(1) of the 

Act, if certain conditions are met.56

 

(footnote continued) 

when the fund acquires those securities, and do not require subsequent monitoring of credit 

ratings by various NRSROs. See Rule 5b-3(c)(iv); Rule 10f-3(a)(3). 

53 See Section 6(c) of the Investment Company Act. 

54 See Section 10(f) of the Investment Company Act. 

55 Rule 5b-3(c)(4). 

56 Rule 5b-3(b). Similarly under Rule 2a-7, a money market fund may treat the acquisition of a 

refunded security, as defined in Rule 5b-3(c)(4), as the acquisition of the escrowed government 

securities for purposes of Rule 2a-7’s diversification requirements. Rule 2a-7(c)(4)(ii)(A), (B), 
19

One of the conditions of Rule 5b-3 is that an independent certified public accountant 

(“independent accountant”) must have certified to the escrow agent that the escrowed securities 

will satisfy all scheduled payments of principal, interest, and applicable premiums on the 

refunded securities.57 The rule requires the certification by an independent accountant (together 

with the other conditions) to ensure that the bankruptcy of the issuer of the pre-refunded 

securities would not affect payments on the securities from the escrow account.58 This condition 

is not required, however, if the refunded security has received a debt rating in the highest rating 

category from an NRSRO.59 The Commission included this exception because in rating 

refunded securities, NRSROs typically require the same determination.60

 

Last year the Commission proposed to eliminate the exception to the certification 

requirement for securities that have received the highest credit rating from an NRSRO. Under 

the proposed amendment, the accountant certification condition would apply uniformly to all 

refunded securities, regardless of the securities’ credit rating. 

We are amending Rule 5b-3, as proposed, to eliminate the exception for refunded 

securities with certain credit ratings.61 Under the amended rule, an independent accountant must 

2a-7(a)(20) (definition of “refunded security”). 

57 Rule 5b-3(c)(4)(iii). 

58 See Treatment of Repurchase Agreements and Refunded Securities as an Acquisition of the 

Underlying Securities, Investment Company Act Release No. 25058 (July 5, 2001) [66 FR 36156 

(July 11, 2001)] (“Rule 5b-3 Adopting Release”), at text accompanying n.25 (explaining that the 

conditions required in the definition of refunded security correspond to those in the definition of 

the term in Rule 2a-7); Revisions to Rules Regulating Money Market Funds, Investment 

Company Act Release No. 21837 (Mar. 21, 1996) [61 FR 13956 (Mar. 28, 1996)] (“Rule 2a-7 

1996 Amending Release”), at Section II.D.2. 

59 Rule 5b-3(c)(4)(iii). 

60 See Technical Revisions to the Rules and Forms Regulating Money Market Funds, Investment 

Company Act Release No. 22921 (Dec. 2, 1997) [62 FR 64968 (Dec. 9, 1997)], at Section I.B.2.c. 

61 Amended Rule 5b-3(c)(4)(iii). 
20

have certified to the escrow agent that the deposited securities will satisfy all scheduled 

payments of principal, interest and applicable premiums on the refunded securities.62 Thus, the 

same standard will apply for securities with the highest NRSRO debt rating as currently apply to 

those that have received lower or no ratings. 

Three commenters objected to the proposed amendment, asserting that requiring funds to 

obtain independent accountants’ certifications for refunded securities is inefficient, could 

increase fund expenses and could decrease liquidity if funds choose not to bid on refunded 

securities for which certificates are not readily available.63 The amended rule, however, does not 

require that funds obtain such a certification. Rather, it requires that an independent accountant 

certify to the escrow agent that the escrowed securities will satisfy all scheduled payments. This 

requirement may be met, for example, by the fund manager confirming that a certification 

meeting the requirements of the rule was provided to the escrow agent. 

Bond indentures or resolutions authorizing the issuance of the refunded bonds typically 

require that the escrow agent receive a certificate from an independent accountant that the 

escrowed securities will satisfy all scheduled payments on the refunded securities. Fund 

managers could confirm that the escrow agent has received such a certification, and this 

confirmation could come from any of multiple sources at little expense, such as the issuer’s Web 

site, a municipal dealer’s Web site or the escrow agent’s Web site.64 Moreover, and as explained 

in the Proposing Release, a fund could satisfy the certification requirement of Rule 5b-3 by 

 

62 Id. 

63 See Calvert Comment Letter (Sept. 5, 2008); Letter of Connecticut Treasurer (Sept. 4, 2008) 

(“Connecticut Treasurer’s Comment Letter”); Oppenheimer Comment Letter (Sept. 4, 2008). 

64 Although such information may not be readily available from all of these sources today, issuers, 

dealers, escrow agents or NRSROs are likely to provide such information to meet the needs of 

fund managers. 
21

determining that a third party such as an NRSRO, in the course of evaluating an offering of 

refunded securities, already has determined that an independent accountant provided the required 

certification to the escrow agent.65

Because we understand that accountant certifications are typically provided during the 

course of a refunding transaction, we believe that it will not be difficult or expensive for fund 

managers to confirm that the certification has been provided to the escrow agent. Thus, we do 

not believe that eliminating the ratings requirement exception in Rule 5b-3 is likely to result in 

significant additional costs to purchasers. Fund managers’ ability to confirm without significant 

difficulty or expense that the requisite certification has been provided to the escrow agent should 

address concerns that the amendment could decrease the liquidity of refunded securities as a 

result of funds choosing not to bid on refunded securities for which certificates are unavailable. 

2. Affiliated Underwritings (Rule 10f-3) 

Section 10(f) of the Investment Company Act prohibits a registered fund from knowingly 

purchasing any security for which an underwriter having certain relationships with the fund or its 

 

65 See Investment Company Act Proposing Release, supra note 10, at text accompanying n.59. 

Some rating agencies require certifications that we understand meet the requirements of Rule 

5b-3. See, e.g., Moody’s Investors Services, RATINGS METHODOLOGY: REFUNDED BONDS (June 

2007) (available at 

http://www.moodys.com/moodys/cust/research/MDCdocs/29/2006700000441141.pdf?doc_id=20

06700000441141&frameOfRef=municipal) (“The initial verification reports should be prepared 

by an individual Certified Public Accountant (CPA), a CPA firm, a Public Accounting Firm, or 

by another entity with nationally recognized proficiency in providing verification reports. 

Importantly, the verification should be provided by an entity independent of the issuer and 

refunding transaction.”); Fitch Ratings, Guidelines for Rating Prerefunded Municipal Bonds 

(Apr. 2, 2009) available at 

http://www.fitchratings.com/creditdeskreports/report_frame.cfm?rpt_id=431370; Standard & 

Poor’s, Criteria/Governments/U.S. Public Finance: Defeasance (June 26, 2007) available at 

http://www2.standardandpoors.com/portal/site/sp/en/us/page.article/2,1,1,0,1204836565946.html

#ID199. 
22

investment adviser (“affiliated underwriter”) is acting as a principal underwriter66 during the 

existence of an underwriting or selling syndicate for that security.67 The prohibition was 

designed to prevent the “dumping” of unmarketable securities on affiliated funds, either by 

forcing the fund to purchase unmarketable securities from the underwriting affiliate itself or by 

forcing or encouraging the fund to purchase the securities from another member of the 

syndicate.68 

The Commission adopted Rule 10f-3 in 1958 to permit a fund that is affiliated with a 

member of an underwriting syndicate to purchase securities from the syndicate if certain 

conditions are met.69 The conditions are designed to address the risks raised by purchases that 

 

(footnote continued) 

66 The term “principal underwriter” means (in relevant part) an underwriter who, in connection with 

a primary distribution for securities: (1) is in privity of contract with the issuer or an affiliated 

person of the issuer; (2) acting alone or in concert with one or more other persons, initiates or 

directs the formation of an underwriting syndicate; or (3) is allowed a rate of gross commission, 

spread, or other profit greater than the rate allowed another underwriter participating in the 

distribution. 15 U.S.C. 80a-2(a)(29). 

67 Section 10(f) prohibits a registered fund from knowingly purchasing a security during the 

existence of an underwriting or selling syndicate if a principal underwriter of the security is an 

officer, director, member of an advisory board, investment adviser, or employee of the fund or is 

a person of which any such officer, director, member of an advisory board, investment adviser, or 

employee is an affiliated person. An affiliated person of a fund includes, among others: (1) any 

person directly or indirectly owning, controlling, or holding with power to vote, five percent or 

more of the outstanding voting securities of the fund; (2) any person five percent or more of 

whose outstanding voting securities are directly or indirectly owned, controlled, or held with 

power to vote by the fund; and (3) any person directly or indirectly controlling, controlled by, or 

under common control with the fund. 15 U.S.C. 80a-2(a)(3)(A), (B) and (C). 

68 See REPORT OF THE SEC, INVESTMENT TRUSTS AND INVESTMENT COMPANIES, H.R. DOC. NO. 

279, 76th Cong., 2d Sess., pt. 3, at 2581, 2589 (1939). The sales were also used to alleviate 

certain of an affiliated underwriter’s financial difficulties. For example, an underwriter could 

benefit by rapidly turning over its securities inventory to produce working capital and to reduce 

the related expenses of carrying the inventory. Congress also expressed concern regarding the 

amount of underwriting fees earned by the sponsors and affiliated persons who placed the 

securities with the fund. See HEARINGS ON S.3580 BEFORE A SUBCOMMITTEE OF THE 

COMMISSION ON BANKING AND CURRENCY, 76th Cong., 3d Sess. 209, 212-23 (1940). 

69 Exemption of Acquisition of Securities During Existence of Underwriting Syndicate, Investment 

Company Act Release No. 2797 (Dec. 1, 1958) [23 FR 9548 (Dec. 10, 1958)]. The rule codified 

the conditions of orders that the Commission had granted prior to 1958 exempting certain funds 
23

could benefit fund affiliates. For example, one condition of the rule requires that securities be 

purchased before the end of the first day on which any sales are made, at a price that is not more 

than the price paid by each other purchaser of securities in that offering or in any concurrent 

offering of the securities.70 In addition, the commission, spread or profit received or to be 

received by the principal underwriters must be reasonable and fair compared to the commission, 

spread or profit received by other such persons in connection with the underwriting of similar 

securities being sold during a comparable time period.71 The rule also requires public reporting 

of securities purchases made in reliance on the rule. A fund must report the existence of any 

such purchases on Form N-SAR, and provide a written record of each transaction, setting forth 

from whom the securities were acquired, the identity of the underwriting syndicate’s members, 

the terms of the transaction, and the information or materials on which the board has made a 

determination that the transaction complied with the procedures approved by the board.72

We amended Rule 10f-3 in 1979 to add municipal securities to the class of securities that 

funds could purchase under the rule.73 The rule defines municipal securities that may be 

purchased during an underwriting in reliance on the rule (“eligible municipal securities”) to 

include securities that have an investment grade rating from at least one NRSRO or, if the issuer 

or the entity supplying the revenues or other payments from which the issue is to be paid has 

been in continuous operation for less than three years (i.e., the security is a less seasoned 

 

from Section 10(f) to permit them to purchase specific securities. 

70 See Rule 10f-3(c)(2) (also providing an exception from the pricing provision for rights offerings 

required by law in certain foreign offerings). 

71 See Rule 10f-3(c)(6). 

72 See Rule 10f-3(c)(9). 

73 Rule 10f-3(c)(1)(iii). See Exemption of Acquisition of Securities During the Existence of 

Underwriting Syndicate, Investment Company Act Release No. 10736 (June 14, 1979) [44 FR 

36152 (June 20, 1979)] (“Rule 10f-3 1979 Adopting Release”). 
24

security), one of the three highest ratings from an NRSRO.74 The rating requirement was 

designed to prevent the purchase of less seasoned and lower quality securities, and thereby 

reduce the risk of unloading unmarketable securities on the fund.75

In July 2008, we proposed to eliminate the references to NRSRO ratings in Rule 10f-3 

and substitute alternate provisions that require the assessment of liquidity and credit risk.76 

Those alternate provisions were designed to achieve the same purpose as that served by the 

references to credit ratings, in addressing concerns that funds might purchase less seasoned, 

unmarketable securities in affiliated underwritings.77

Most commenters on the proposed amendments did not specifically address the 

amendments to Rule 10f-3. As noted above, some of those commenters agreed generally with 

eliminating references to NRSRO ratings from Commission rules, while other commenters did 

not.78 One commenter specifically supported the proposed amendments to Rule 10f-3.79 It noted 

that, although the duty to make credit determinations “may appear to require expertise beyond 

typical board experience, boards would be allowed to rely on information and assessments 

provided by other sources.”80 Seven commenters specifically opposed the amendments to Rule 

 

74 Rule 10f-3(a)(3). As noted above, an investment grade debt security is a security that has been 

rated in one of the four highest categories by at least one NRSRO. See supra text following note 

22. 

75 See Rule 10f-3 1979 Adopting Release, supra note 73; Exemption of Acquisition of Securities 

During the Existence of Underwriting Syndicate, Investment Company Act Release No. 10592 

(Feb. 13, 1979) [44 FR 10580 (Feb. 21, 1979)], at Section B.2. 

76 See Investment Company Act Proposing Release, supra note 10, at Section III.D. 

77 See id. at Section III. 

78 See supra note 50 and accompanying text; Schwab Comment Letter; Calvert Comment Letter; 

SIFMA Comment Letter. 

79 See CFA Institute Comment Letter. 

80 Id. 
25

10f-3.81 Some expressed concerns that the proposed standards would likely increase the time and 

costs of the board of directors’ oversight and could result in a lack of consistency among funds 

as to what is an eligible municipal security, and a lack of transparency in the board’s subjective 

determinations.82

Today we are adopting the amendments as proposed, and we address the concerns of 

commenters below. The amended rule eliminates the references to ratings and revises the rule’s 

definition of “eligible municipal security” to mean securities that are sufficiently liquid that they 

can be sold at or near their carrying value within a reasonably short period of time.83 In addition, 

the securities would have to be either: (1) subject to no greater than moderate credit risk; or 

(2) if they are less seasoned securities, subject to a minimal or low amount of credit risk.84

The standards we are adopting require a level of liquidity and credit quality that is very 

similar to that of the current rule, but without the reference to NRSRO ratings.85 These standards 

 

(footnote continued) 

81 See, e.g., Independent Trustees of Fidelity Fixed-Income Funds Comment Letter (Oct. 3, 2008) 

(“Fidelity Independent Trustees Comment Letter”); SIFMA Comment Letter; Realpoint 

Comment Letter (Aug. 14, 2008). 

82 See Fidelity Independent Trustees Comment Letter; SIFMA Comment Letter. SIFMA also 

asserted that the proposed amendment would provide “little added benefit while creating 

substantial market uncertainty.” 

83 For a discussion of the proposed amendments to Rule 10f-3, see Investment Company Act 

Proposing Release, supra note 10, at Section III.D. 

84 The amended rule defines “eligible municipal securities” to mean “‘municipal securities’ as 

defined in Section 3(a)(29) of the [Exchange Act], that are sufficiently liquid such that they can 

be sold at or near their carrying value within a reasonably short period of time and either (i) [a]re 

subject to no greater than moderate credit risk; or (ii) [i]f the issuer of the municipal securities, or 

the entity supplying the revenues or other payments from which the issue is to be paid, has been 

in continuous operation for less than three years, including the operation of any predecessors, the 

securities are subject to a minimal or low amount of credit risk.” Amended Rule 10f-3(a)(3). 

85 As discussed above, some commenters expressed concerns about a possible lack of consistency 

among funds as to what constitutes an “eligible municipal security” under the amended rule. See 

supra note 82 and accompanying text. Those commenters did not specify whether such lack of 

consistency might directly affect funds or investors, or might affect the municipal securities 

markets in an indirect way. We believe that funds’ determinations as to whether particular 
26

are designed to address the investor protection concerns that a fund and its investors might be 

harmed by the fund’s purchase of unmarketable securities in an affiliated underwriting. A fund 

that purchases municipal securities that are sufficiently liquid should, by the terms of the 

amended rule, be able to sell the securities at or near their carrying value within a reasonably 

short period of time. Thus, the fund should be able to sell the securities, and thereby unwind its 

position and reduce its exposure, relatively quickly. Furthermore, securities that are subject to 

no greater than moderate credit risk or, if less seasoned, are subject to minimal or low credit risk, 

are similarly less likely to be unmarketable securities that have been “dumped” on the fund.86 

Securities that meet these quality standards are likely to be more liquid, and thus able to be sold 

relatively quickly by the fund.87

Protection of the fund is further provided by other existing provisions in the rule that 

require the fund’s board of directors, including a majority of disinterested directors, to 

(1) approve procedures under which the fund purchases securities under the rule, (2) approve any 

needed changes to those procedures and (3) review purchases quarterly to assure that they 

conformed to the fund’s procedures.88 Those provisions will continue to apply to affiliated 

 

(footnote continued) 

securities meet the amended rule’s standards of credit quality and liquidity will be sufficiently 

consistent for the purposes that Rule 10f-3 was adopted to promote, i.e., the protection of funds 

and their investors from the purchase of unmarketable securities. 

86 A municipal security (or its issuer) subject to a moderate level of credit risk would present 

average creditworthiness relative to other municipal or tax exempt issues or issuers. Moderate 

credit risk also would denote current low expectations of default risk, with an adequate capacity 

for payment of principal and interest. Municipal securities subject to minimal or low credit risk 

would be less susceptible to default risk (i.e., have a low risk of default) than those with moderate 

credit risk. These securities (or their issuers) also would demonstrate a strong capacity for 

principal and interest payments and present above-average creditworthiness relative to other 

municipal or tax exempt issues (or issuers). 

87 See M. DAVID GELFAND, STATE AND LOCAL GOVERNMENT DEBT FINANCING § 8:72 (2nd. ed. 

2007) (noting that municipal securities trade largely on the basis of creditworthiness). 

88 See Rule 10f-3(c)(10)(i)-(iii). See also Rule 10f-3 1979 Adopting Release, supra note 73 (“[T]he 
27

underwritings under the amended rule,89 and the board’s responsibilities with regard to fund 

procedures will apply to the new standards in the rule regarding liquidity and credit quality.90

We believe that the standards provided in the amended rule – that an “eligible security” 

must be sufficiently liquid that it can be sold at or near its carrying value within a reasonably 

short period of time, and either subject to no greater than moderate credit risk, or, if less 

seasoned, subject to a minimal or low amount of credit risk – are sufficiently clear to permit a 

fund board or fund investment adviser to understand the risks acceptable under the amended rule 

without significantly increasing the time and costs of board oversight. In addition, as we pointed 

out when we proposed the amendments to Rule 10f-3, the amendments may emphasize for funds 

the need to independently evaluate the credit risks associated with the underwritten security, and 

may possibly benefit funds by enabling them to acquire a wider range of securities, including 

unrated securities, that present attractive investment opportunities and the requisite level of credit 

quality, even though they do not meet the current rule’s ratings requirement.91 In exercising 

caution to ensure compliance with the revised standards, funds also might limit their acquisitions 

of municipal securities in reliance on the amended rule to securities of higher credit quality than 

 

Commission expects that investment company directors, in establishing procedures under the rule 

and determining compliance with such procedures, will address the concerns embodied in section 

10(f) of the Act against overreaching and the placing of otherwise unmarketable securities with 

an investment company.”); Exemption for the Acquisition of Securities During the Existence of 

an Underwriting or Selling Syndicate, Investment Company Act Release No. 22775 (July 31, 

1997) [62 FR 42401 (Aug. 7, 1997)] (“1997 Rule 10f-3 Adopting Release”), at text following 

n.51 (“A fund’s board should be vigilant in reviewing the procedures and transactions as required 

by rule 10f-3 as well as in conducting any additional reviews that it determines are needed to 

protect the interests of investors, particularly if the fund purchases significant amounts of 

securities in reliance on rule 10f-3.”). 

89 Rule 10f-3(c)(10); Investment Company Act Proposing Release, supra note 10, at n.69 and 

accompanying text. 

90 See amended Rule 10f-3(a)(3), (c)(10)(i). 

91 See Investment Company Act Proposing Release, supra note 10, at Section VI.A. 
28

required under the current rule. 

In developing procedures under the rule, the board of directors may incorporate ratings, 

reports, analyses, opinions and other assessments issued by third-parties, including NRSROs, 

although an NRSRO rating, by itself could not substitute for the evaluation performed by the 

board. We would expect the board to evaluate assessments it intends to incorporate and the 

third-party sources that provide those assessments.92 The board could then incorporate in its 

procedures those third party assessments that it determines are reliable. The ability to 

incorporate outside assessments may mitigate the potential increased burdens about which some 

commenters expressed concern.93 

III. PAPERWORK REDUCTION ACT

A. Rule and Form Amendments under the Exchange Act 

Certain provisions of the amendments to the forms contain “collection of information” 

 

92 When a fund’s determination with regard to a security departs from ratings provided by NRSROs 

(including ratings by “unsolicited” NRSROs), the board may choose to require in its policies and 

procedures that the fund document the rationale underlying the determination. See Realpoint 

Comment Letter (recommending that the Commission require that a fund document when its 

determinations differ from those of “unsolicited” NRSROs). We are not adopting such a 

requirement because we believe the board should make the determination regarding the extent to 

which it will rely on the rating of any NRSRO as an appropriate indication of credit quality or 

liquidity. 

93 See supra note 82 and accompanying text. The ability to rely on outside assessments also 

addresses to some extent the concerns expressed by one commenter about market uncertainties. 

See SIFMA Comment Letter. Any remaining increase in uncertainty (for funds and their 

shareholders) that results from the exercise of discretion by funds and their advisers in 

determining which municipal securities to purchase under the amended rule, is an inherent 

corollary of the flexibility added by the rule amendments. We also note, with regard to concerns 

about transparency, that investors and fund analysts will continue to have access to information 

about the securities that funds hold and have purchased in reliance on rule 10f-3. See Form 

N-SAR [17 CFR 274.101], Item 770 (reporting of transactions effected in reliance on rule 10f-3); 

Form N-CSR [17 CFR 274.128], Item 6(a) (disclosure in shareholder reports of portfolio 

holdings); Form N-Q [17 CFR 274.130], Item 1 (quarterly schedule of portfolio holdings). 
29

requirements within the meaning of the Paperwork Reduction Act of 1995 (“PRA”).94 The hours 

and costs associated with preparing and filing the disclosure, filing the forms and schedules and 

retaining records required by these regulations constitute reporting and cost burdens imposed by 

each collection of information. An agency may not conduct or sponsor, and a person is not 

required to respond to, a collection of information unless it displays a currently valid control 

number. The titles of the affected information forms are “Form ATS-R” (OMB Control Number 

3235-0509) and “Form PILOT” (OMB Control Number 3235-0507). Responses to this 

collection are mandatory for broker-dealers that comply Regulation ATS (in the case of Form 

ATS-R) and for SROs that operate pilot trading systems (in the case of Form PILOT). For the 

reasons discussed below, we do not believe the amendments will result in a material or 

substantive revision to these collections of information.95

The amendments to Form ATS-R and Form PILOT revise the forms to require that 

information which had been reported as separate items (i.e., investment grade debt corporate debt 

securities and non-investment grade corporate debt securities) now will be combined and 

reported as a single item (i.e., corporate debt securities). In all other respects, as discussed in the 

Exchange Act Proposing Release, the information collected on these forms remains unchanged.96 

Accordingly, the Commission does not believe the amendments will result in a substantive or 

material revision to those collections of information97 within the meaning of the PRA.98 The 

Commission received no comments on the PRA analysis in the Exchange Act Proposing Release 

 

94 44 U.S.C. 3501 et seq. 

95 5 CFR 1320.5(g). 

96 See Exchange Act Proposing Release, 73 FR at 40097. 

97 5 CFR 1320.5(g). 

98 44 U.S.C. 3501 et seq.
30

applicable to Forms ATS-R and PILOT.

B. Rule Amendments under the Investment Company Act

Certain provisions of the amendments to Rule 10f-3 contain “collection of information” 

requirements within the meaning of the PRA.99 The title for the collection of information is 

“Rule 10f-3 under the Investment Company Act of 1940, Exemption for the Acquisition of 

Securities During the Existence of an Underwriting and Selling Syndicate” (OMB Control No. 

3235-0226). Responses to this collection are mandatory for funds that intend to rely on Rule 

10f-3. Records of information made in connection with this requirement are required to be 

maintained for inspection by Commission staff, but the collection will not otherwise be 

submitted to the Commission. There are currently no approved collections of information for 

Rule 5b-3, and the amendments we are adopting today would not create any new collections. 

We requested comment on the collection of information requirements in the Investment 

Company Act Proposing Release and submitted the revisions to the collections of information to 

OMB for review and approval in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. We 

received no comments that specifically addressed the collection of information requirements. An 

agency may not conduct or sponsor, and a person is not required to respond to, a collection of 

information unless it displays a currently valid control number. 

Rule 10f-3 permits a fund that is affiliated with a member of an underwriting syndicate to 

purchase securities from the syndicate if certain conditions are met. In the case of a municipal 

security, the security generally must have received an investment grade rating by at least one 

NRSRO, or if it is a less seasoned security, one of the three highest ratings by an NRSRO. The 

 

99 44 U.S.C. 3501-3520. 
31

amended rule eliminates this condition and includes a substitute therefor.100 Under the 

amendment an “eligible municipal security” means a security that is sufficiently liquid that it can 

be sold at or near its carrying value within a reasonably short period of time, and is either: 

(1) subject to no greater than moderate credit risk; or (2) if it is a less seasoned security, subject 

to a minimal or low amount of credit risk. 

Rule 10f-3 also requires fund boards to (1) approve procedures under which the fund 

purchases securities in reliance on the rule, (2) approve needed changes to the procedures and 

(3) review purchases quarterly to ensure they were effected in compliance with the procedures.101 

Accordingly, fund boards currently review purchases of municipal securities made in reliance on 

Rule 10f-3, and should continue to do so under the amended rule. 

In our most recent PRA submission, Commission staff estimated that each year, 

approximately 350 funds engage in transactions in reliance on Rule 10f-3.102 Staff further 

estimated that each fund would, on average, take two hours to review and revise, as needed, 

written procedures for these transactions. In the Investment Company Act Proposing Release, 

we stated that we believed that any revisions funds would have to make to comply with the 

proposed amendment would be incorporated in the two hours of review.103 Some commenters 

asserted that the proposed amendment would likely increase the time and costs of the board of 

directors’ oversight.104 

We continue to believe that the specific changes a board might make to the procedures 

 

100 See supra notes 83-84 and accompanying text. 

101 Rule 10f-3(c)(10). 

102 See Submission for OMB Review, Comment Request, Rule 10f-3 [73 FR 13263 (Mar. 12, 2008)]. 

103 See Investment Company Act Proposing Release, supra note 10, at Section V.B. 

104 See supra note 82 and accompanying text. 
32

that are designed to comply with the amendments would not be significant. As noted above, we 

are adopting a standard regarding liquidity and credit quality that is very similar to that of the 

current rule.105 In addition, directors may incorporate securities quality assessments by third 

party sources that the directors determine are reliable in the procedures they approve and their 

review of municipal securities purchases made in reliance on Rule 10f-3, which may mitigate the 

potential increased burdens on fund boards.106 Nevertheless, in consideration of the comments, 

we recognize that there may be an additional one-time burden for fund boards to review and 

approve revised procedures designed to ensure compliance with the amendment to Rule 10f-3.107 

Commission staff estimates that each fund board would incur a one-time burden of two hours for 

a total burden for all fund boards of 700 hours at a cost of $2.8 million.108 Amortized over three 

years, this would be an annual burden of 0.67 hours per fund and 235 hours for all funds.109 

IV. COST-BENEFIT ANALYSIS

A. Rule and Form Amendments under the Exchange Act

The Commission is sensitive to the costs and benefits imposed by its rules. The 

Commission notes that no comments addressed the Commission's analysis of the costs and 

benefits associated with the proposed amendments to Rule 3a1-1, Regulation ATS, Form ATS-R 

 

105 See supra text accompanying note 85. 

106 See supra note 93 and accompanying text. These concerns were expressed with respect to the 

proposed amendments generally, and commenters did not provide any estimates of the increased 

burden that boards might incur under the proposed amendments. 

107 We do not anticipate the revised procedures would require an increase in the current estimated 

time the board spends each quarter to review acquisitions of securities for compliance with Rule 

10f-3. 

108 These estimates are based on the following calculations: 350 fund boards x 2 hours = 700 hours; 

700 hours x $4000 = $2,800,000. The estimate for the hourly cost for a fund board is based on an 

average board size of 8 directors and a cost of $500 per hour for each director. 

109 This estimate is based on the following calculation: 350 fund boards x 0.67 hours = 234.5 hours. 
33

and Form PILOT contained in the Exchange Act Proposing Release. 

1. Benefits

The amendments to Rule 3a1-1, Regulation ATS, Form ATS-R and Form PILOT 

eliminate the separate definitions of and references to investment grade corporate debt securities 

and non-investment grade corporate debt securities and replace them with a single category, 

“corporate debt securities.” The Commission believes that the inclusion of requirements relating 

to securities credit ratings are no longer necessary to achieve the regulatory purpose of these 

rules, and may help marginally reduce any undue reliance on credit ratings. 

For reasons discussed above, the Commission believes that it is no longer necessary to 

assess trading volumes in the narrower segments of investment grade and non-investment grade 

corporate debt securities to fulfill the purposes of those rules and forms. Broker-dealers that are 

subject to Regulation ATS will no longer have to purchase and keep track of credit ratings solely 

for the purpose of Regulation ATS. The other classes of securities and the threshold levels 

themselves remain unchanged. With respect to the changes to Form ATS-R and Form PILOT, 

we believe that combining investment grade and non-investment grade corporate debt securities 

into a single class for purposes of those two forms will benefit market participants by making 

reporting slightly more streamlined and may reduce undue reliance on references to ratings 

issued by credit rating agencies. At the same time, the Commission does not believe that the 

amendments to these rules and forms will significantly affect market participants because the 

total units and total dollar volume of corporate debt securities transacted will still be reported. In 

addition, the removal of these requirements relating to credit ratings reduces compliance costs 

for ATSs. 
34

 2. Costs

The amendments to Rule 3a1-1, Regulation ATS, Form ATS-R and Form PILOT 

eliminate the separate definitions of and references to investment grade corporate debt securities 

and non-investment grade debt securities and replace them with a single category, “corporate 

debt securities.” We believe that these changes will not impose any significant costs on market 

participants. 

The amendments to Rule 3a1-1 and Regulation ATS will marginally reduce the 

likelihood of an ATS meeting the thresholds in those rules. For example, under Rule 3a1-1 as it 

existed prior to today's action, an ATS that had 40% of the average daily dollar trading volume 

in non-investment grade corporate debt securities and 0% of the average daily dollar trading 

volume in investment grade corporate debt securities for at least four of the preceding six 

calendar months could have been required to register as an exchange. Under amended Rule 

3a1-1, the Commission can no longer require the ATS to register as an exchange, because its 

average daily dollar trading volume in corporate debt securities combined is less than 40%. A 

potential cost of the amendments to Rule 3a1-1 and Regulation ATS is that an ATS that 

exceeded one of the thresholds that existed prior to today and thus would have become subject to 

additional regulatory requirements (in the case of Regulation ATS) or must register as an 

exchange (in the case of Rule 3a1-1) will no longer exceed the threshold and will not have to 

meet the attendant requirements. However, the Commission believes that this possibility is 

remote, and that the amendments are unlikely to impose any costs on investors, market 

participants or the national market system generally. 

We believe that any costs associated with the changes to Form ATS-R and Form PILOT 

will be minimal. Respondents already determine and report the total units and total trading 
35

volume for investment grade and non-investment grade corporate debt securities separately. On 

the revised forms, respondents will report them together as a single item for “corporate debt 

securities.” Combining the categories of investment grade and non-investment grade debt on 

these forms will not significantly affect the level of information available to the Commission in 

monitoring ATSs. We expect that any programming costs to market participants to implement 

the reporting changes to these forms will be minimal and involve adding two previously reported 

items together and reporting the combined amount. 

In addition, broker-dealers that are subject to Regulation ATS will no longer be required 

to purchase and keep track of credit ratings solely for the purpose of Regulation ATS. If brokerdealers subject to Regulation ATS no longer purchase credit rating data from NRSROs, the 

amendments may marginally reduce the revenues of NRSROs that charge subscriber fees. 

However, we believe that the number of broker-dealers subject to Regulation ATS is small and 

these broker-dealers represent a very small portion of NRSRO customers. Further, these brokerdealers may subscribe to NRSRO ratings for other purposes. Therefore, we believe that any 

impact on the revenues of the NRSROs will likely be small. 

Also, combining the categories of investment grade and non-investment grade debt on 

these forms also will marginally reduce the level of information available to the Commission in 

monitoring ATSs. This may marginally reduce the ability of the Commission to stay abreast of 

changes to the trading of corporate debt securities. However, the Commission believes that the 

elimination of this detailed information will not significantly affect monitoring of ATSs because 

the Commission will still be able to monitor the volume of corporate debt traded by an ATS. 

B. Rule Amendments under the Investment Company Act 

As discussed above, the rule amendments we are adopting today eliminate certain 
36

references to NRSRO ratings in Rules 5b-3 and 10f-3. The amendments to Rule 5b-3 remove an 

exception based on credit ratings. The amendments to Rule 10f-3 substitute references to 

alternative credit quality and liquidity criteria that are similar to that of the current rule. We 

prepared a cost-benefit analysis in the Investment Company Act Proposing Release, and received 

comments relating to that analysis. 

1. Benefits 

The amendments to Rules 5b-3 and 10f-3 are part of our larger initiative to eliminate 

references to NRSRO ratings from Commission rules where possible. This initiative is designed 

to address the concern that the inclusion in the Commission’s rules and forms of requirements 

relating to security ratings could create the appearance that the Commission had, in effect, given 

its “official seal of approval” on ratings, which could adversely affect the quality of due 

diligence and investment analysis performed and lead to undue reliance on ratings. We noted 

that the proposed amendments to eliminate ratings as a whole might result in increased market 

efficiency by affording funds access to securities that do not meet the rating requirements in the 

current rules, but that would satisfy the credit risk and liquidity standards in the proposed 

amendments.110 It is difficult to estimate specifically the benefits of the amendments to Rules 

5b-3 and 10f-3 in isolation. We believe that the amendments to these rules remove unnecessary 

references to credit ratings, which may reduce undue reliance on credit ratings. Because these 

references are no longer necessary, and an appropriate substitute exists for the reference in Rule 

10f-3, reliance in these contexts is no longer justified. In addition, the amendment to Rule 10f-3 

could emphasize the importance to funds that acquire municipal securities in an affiliated 

underwriting of making an independent evaluation of the credit risks associated with the 

 

110 See Investment Company Act Proposing Release, supra note 10, at Section VII. 
37

underwritten security. Finally, by moving away from a required reliance on credit ratings in our 

rules, funds may possibly benefit by acquiring a wider range of securities that present attractive 

investment opportunities and the requisite level of credit quality, even though they do not meet 

the current rule’s ratings requirement. 

2. Costs 

We anticipate that funds and investment advisers may incur certain costs as a result of the 

amendments we are adopting today. These costs will principally relate to the replacement of the 

NRSRO ratings standard with the new credit quality and liquidity criteria. Commenters asserted 

that elimination of a bright-line standard could create additional costs and uncertainty in the 

application of, compliance with, and enforcement of the rule.111 They also asserted that the 

subjective judgment-based standard in the proposed amendments might cause funds to acquire 

securities that do not meet the particular ratings requirement and that could result in the concerns 

that the rating requirements were designed to address (e.g., poor liquidity or credit quality). We 

understand these concerns. However, we believe that the alternative credit quality and liquidity 

criteria we are substituting for NRSRO ratings will achieve the same purpose the ratings were 

designed to meet, and that they are sufficiently clear to permit a fund board and adviser to 

understand the risks acceptable under the rules. In determining a security’s credit quality and 

liquidity, fund boards and advisers will, of course, be free to incorporate ratings, reports and 

analyses issued by, third parties, including NRSROs. We believe that most fund advisers, in the 

ordinary course of managing portfolios, already evaluate third party opinions, including those of 

ratings agencies, that provide assessments of the credit quality and liquidity of debt instruments. 

 

111 See, e.g., Oppenheimer Comment Letter (“a subjective standard is difficult to apply, difficult to 

test for compliance, and causes uncertainty regarding enforcement”). 
38

We also believe that the boards and advisers of funds that rely on Rule 10f-3 are likely to look to 

those third parties in which they have confidence when incorporating third party assessments in 

making their determinations. For these reasons, we do not anticipate that the amendments will 

result in significant costs or compromise investor protection. 

We are making changes today to two rules under the Investment Company Act, which are 

limited in scope. As noted above, we believe that the standards in the Rule 10f-3 amendments 

are similar to the NRSRO ratings they replace. Thus, we believe it is unlikely that the 

amendments will result in unintended adverse consequences or involve conflicts with other 

regulations, as some commenters have suggested.112 Those comments appeared to address the 

consequences of eliminating references to other rules, such as Rule 2a-7 or the entire group of 

rules we proposed to amend, the consequences of which could be more substantial. 

Rule 5b-3. The amendments we are adopting today eliminate references to NRSRO 

ratings in the definition of “refunded security” in Rule 5b-3. We anticipate that our elimination 

of references to NRSRO ratings in the definition of “refunded security” in Rule 5b-3 is unlikely 

to result in significant additional costs for funds that rely on the rule.113 Under the amendment, 

in order to meet the definition of a “refunded security” for purposes of the rule, an independent 

accountant must have certified to the escrow agent that the deposited securities will satisfy all 

scheduled payments of principal, interest and applicable premiums on the refunded securities.114 

This standard will apply to all securities regardless of their rating. 

Without providing specific estimates, some commenters stated this amendment could 

 

112 See, e.g., SIFMA Comment Letter; Comment Letter of Institutional Money Market Funds Ass’n 

(Sept. 5, 2008). 

113 See supra Section II.A.2. 

114 Amended Rule 5b-3(c)(4). 
39

create higher costs for funds and adversely affect the liquidity of refunded securities by requiring 

them to obtain an independent accountant’s certification.115 The amended rule, however, does 

not require funds to obtain accountants’ certificates, but requires the escrow agent to have 

received an accountant’s certification. Commenters also indicated that it may not always be 

clear whether the escrow agent for a refunded security has received the necessary certification, 

thus requiring funds to incur costs related to determining the certification status of each refunded 

security.116 As noted above, we understand that an independent accountant typically provides the 

escrow agent a certification during the course of a refunding transaction.117 We believe that fund 

managers could consult any of multiple sources at little expense to confirm the escrow agent’s 

receipt of this certification, including, for example, the issuer’s Web site, a municipal dealer’s 

Web site or the escrow agent’s Web site.118 In addition, funds may be able to satisfy the 

certification requirement of Rule 5b-3 by confirming that an NRSRO determined that an 

independent accountant has provided the required certification to the escrow agent.119 For these 

reasons, we believe that eliminating the ratings requirement exception in Rule 5b-3 is unlikely to 

result in additional costs to purchasers. Based on our belief that the amendment to Rule 5b-3 

would not result in additional costs or pose compliance difficulties for fund managers, we do not 

share commenters’ concerns that the rule amendment could decrease the liquidity of refunded 

securities. 

Rule 10f-3. In the Investment Company Act Proposing Release, we stated that our belief 

 

115 See, e.g., Calvert Comment Letter. 

116 See, e.g., Connecticut Treasurer’s Comment Letter. 

117 See supra text preceding note 64. 

118 See supra note 64 and accompanying text. 

119 See supra note 65 and accompanying text. 
40

that the proposed amendment to Rule 10f-3 would not impose costs on funds that rely on Rule 

10f-3 to purchase municipal securities.120 Some commenters asserted that the proposed 

amendments might increase the costs and time devoted to board oversight of these transactions 

and could result in a lack of consistency among funds as to what is an eligible municipal 

security, and a lack of transparency in the board’s subjective determinations.121 Rule 10f-3 

requires the fund’s board to determine that the fund has procedures reasonably designed to 

ensure that purchases are made in compliance with the rule and to determine each quarter that 

purchases made have been effected in compliance with the procedures.122 As noted above in our 

PRA analysis, we currently estimate that boards spend, on average, two hours each year revising 

procedures designed to ensure compliance with the rule and reviewing transactions to determine 

whether they have been effected in compliance with the procedures.123 We anticipate that the 

specific changes a board might make to the procedures that are designed to comply with the 

amendments would not be significant because, as noted above, we are adopting a level of credit 

quality and liquidity that is very similar to that of the current rule. In addition, directors may use 

securities quality assessments by outside sources that they determine are reliable in the 

procedures they approve and their review of municipal securities purchases made in reliance on 

Rule 10f-3. We anticipate this ability to use assessments of third parties may mitigate the 

potential increased oversight burdens on fund boards.124 After consideration of the comments, 

 

120 See Investment Company Act Proposing Release, supra note 10, at text preceding n.107. 

121 See, e.g., Fidelity Independent Trustees Comment Letter (“The proposed standards, given their 

emphasis on judgment, would likely increase the time and costs devoted to that oversight.”). 

122 Rule 10f-3(c)(10)(i), (iii). 

123 See supra text following note 102. 

124 See supra text accompanying note 106. These commenters did not provide any estimates of the 

increased burden that boards might incur under the proposed amendments. 
41

however, we recognize that fund boards may incur one-time costs to approve revised policies 

and procedures as a result of the amendment to Rule 10f-3. Staff estimates that a board may take 

two hours to review and approve revised procedures designed to ensure that transactions entered 

into in reliance on the rule comply with the amendment to Rule 10f-3. Staff further estimates 

that approximately 350 funds engage in transactions in reliance on Rule 10f-3. Staff estimates 

that boards of these funds would incur one-time costs of $8000 to review and approve revised 

procedures for a total cost to all funds of $2.8 million.125 

We do not believe that the amendments would significantly change the amount of time 

the board would spend to review transactions each quarter. We believe that a fund adviser, 

rather than the board, determines whether a security meets the definition of an eligible municipal 

security for purposes of Rule 10f-3. We also believe that the standards in the amended definition 

are sufficiently clear to allow a fund adviser to understand the risks and level of liquidity 

acceptable under the rule.126 Fund advisers may use securities quality assessments by third 

parties, including NRSROs, that the board or adviser determines are reliable in its review of 

municipal securities purchases made in reliance on Rule 10f-3, which may offset concerns about 

additional costs that may result from the amendment. We do not believe that the proposed 

amendments would result in increased costs for advisers in determining whether securities are 

“eligible municipal securities” under the amended rule. When the board performs its quarterly 

 

125 This is based on the following calculation: 350 funds x 2 hours x $4000 per hour of board time = 

$2,800,000. 

126 As discussed above, we believe that funds’ determinations as to whether particular securities meet 

the amended rule’s standards of credit quality and liquidity will be sufficiently consistent for the 

purposes that Rule 10f-3 was adopted to promote, i.e., the protection of funds and their investors 

from the purchase of unmarketable securities. See supra note 85. With regard to concerns about 

transparency, we note that investors and fund analysts will continue to have access to information 

about the securities that funds hold and have purchased in reliance on Rule 10f-3. See supra note 

93. 
42

review of transactions, we believe that the board would focus on reviewing whether the purchase 

was effected in compliance with the procedures the board has established.127 For these reasons, 

we continue to believe that the standards we are substituting with respect to eligible municipal 

securities will not require significantly greater consideration of these transactions on the part of 

the board than we have previously estimated. 

V. CONSIDERATION OF BURDEN ON COMPETITION AND PROMOTION OF EFFICIENCY,

COMPETITION AND CAPITAL FORMATION

A. Rule and Form Amendments under the Exchange Act

Section 3(f) of the Exchange Act128 requires the Commission, whenever it engages in 

rulemaking and is required to consider or to determine whether an action is necessary or 

appropriate in the public interest, to consider whether the action will promote efficiency, 

competition and capital formation. In addition, Section 23(a)(2) of the Exchange Act129 requires 

the Commission, when promulgating rules under the Exchange Act, to consider the impact any 

such rules would have on competition. Section 23(a)(2) further provides that the Commission 

may not adopt a rule that would impose a burden on competition not necessary or appropriate in 

furtherance of the purposes of the Exchange Act. The Commission notes that no commenters 

addressed the effect that the proposed changes to Rule 3a1-1, Regulation ATS, Form ATS-R and 

Form PILOT would have on efficiency, competition and capital formation. 

We believe that the amendments to Rule 3a1-1 under the Exchange Act and Rules 300 

and 301 of Regulation ATS will not create any adverse impact on efficiency, competition or 

capital formation. The Commission believes that the inclusion of requirements relating to credit 

 

127 See 1997 Rule 10f-3 Adopting Release, supra note 88, at text following n.51. 

128 15 U.S.C. 78c(f). 

129 15 U.S.C. 78w(a)(2). 
43

ratings are no longer necessary to achieve the regulatory purpose of these rules, and may help 

marginally reduce any undue reliance on credit ratings. Broker-dealers that are subject to 

Regulation ATS will no longer be required to purchase and keep track of credit ratings solely for 

the purpose of Regulation ATS. This reduces the cost to comply with Regulation ATS. 

However, we believe that any impact on the revenues of the NRSROs will be inconsequential. 

Therefore, these changes should not impose any additional burdens on competition. 

The Commission believes that combining investment grade and non-investment grade 

corporate debt securities into a single class of securities for purposes of the thresholds in those 

rules is unlikely to affect whether an ATS crosses one of those thresholds. Moreover, the other 

classes of securities for which the thresholds are applied – and the levels of the thresholds 

themselves – remain unchanged. Therefore, these changes should not affect the development of 

ATSs or capital formation. 

The amendments being adopted today also will increase the effective thresholds for Rule 

3a1-1(a) under the Exchange Act and Rules 301(b)(5) and 301(b)(6) of Regulation ATS for 

systems that trade corporate debt securities. The Commission believes that these changes will 

not impact whether any ATS crosses one of these thresholds. However, as outlined above,130 the 

changes could have the effect of reducing the regulatory requirements for some ATSs at some 

time in the future by potentially reducing the likelihood that an ATS would be required to 

register as an exchange. The Commission believes that the efficiency gains from combining the 

two categories of investment-grade and non-investment grade corporate debt into the single 

category of corporate debt justifies these risks. 

The changes to Form ATS-R and Form PILOT will simplify reporting for ATSs and 

 

130 See supra Section II.A.4. 
44

SROs that operate pilot trading systems. Form ATS-R and Form PILOT respondents are already 

required to determine and report the volumes of corporate debt securities. A single reporting 

item for “corporate debt securities” will replace the existing separate entries for “investment 

grade corporate debt securities” and “non-investment grade corporate debt securities.” Since 

respondents will no longer have to keep track of ratings, the calculation of these items does not 

force the respondent to purchase credit ratings solely for the purpose of Form ATS-R or Form 

PILOT. 

For the reasons discussed above, we believe that the changes to Form ATS-R and Form 

PILOT are unlikely to have any significant impact on efficiency, competition or capital 

formation. 

B. Rule Amendments under the Investment Company Act 

Investment Company Act Section 2(c) requires us, when engaging in rulemaking where 

we are required to consider or determine whether an action is necessary or appropriate in the 

public interest, to consider, in addition to the protection of investors, whether the action will 

promote efficiency, competition capital formation.131 

In the Investment Company Act Proposing Release, we indicated our belief that that the 

amendments to Rules 5b-3 and 10f-3 would not significantly affect competition or have an 

adverse affect on capital formation. We noted that the proposed amendments to eliminate ratings 

as a whole might have some negative effect on efficiency by eliminating an objective standard in 

credit quality determinations, or might result in increased market efficiency by affording funds 

access to securities that do not meet the rating requirements in the current rules, but that they 

 

131 15 U.S.C. 80a-2(c). 
45

would satisfy the credit risk and liquidity standards in the proposed amendments.132 We also 

stated that we did not believe that the amendments to Rules 5b-3 and 10f-3 would result in 

significant costs to investment companies, advisers or investors. We did not receive any 

comments that specifically addressed the effect of the proposed amendments to Rules 5b-3 and 

10f-3 on efficiency, competition and capital formation. 

As discussed above, the amendments we are adopting today to Rules 5b-3 and 10f-3 are 

part of a larger initiative to eliminate certain references to NRSRO ratings from Commission 

rules. The amendments to Rule 5b-3 remove an exception based on credit ratings, and do not 

require an analysis of liquidity or credit quality. In the amendment to Rule 10f-3, we have 

substituted standards that require a level of credit quality and liquidity that is similar to the 

standards in the current rule, but without references to NRSRO ratings. These standards are 

designed to achieve the same purpose as ratings references were designed to meet, with minimal 

costs and consistent with the protection of investors. We believe that the amendments eliminate 

unwarranted references to credit ratings, which may reduce undue reliance on credit ratings and 

advance the goal of promoting better analysis of underlying investment decisions. Because these 

references are no longer necessary and an adequate substitute exists for the reference in Rule 

10f-3, reliance on credit ratings in these contexts is no longer justified. With respect to the 

standards in amended Rule 10f-3, in developing procedures under the rule, boards may 

incorporate ratings reports, analyses and other assessments issued by third parties, including 

NRSROs, although an NRSRO rating, by itself, could not substitute for the evaluation required 

to be performed under the amendments to the rules. For these reasons, we continue to believe 

that the amendments to Rules 5b-3 and 10f-3 are unlikely to result in any significant impact on 

 

132 See Investment Company Act Proposing Release, supra note 10, at Section VII. 
46

competition or capital formation. We also believe that the amendment to Rule 10f-3 which is 

limited in scope, is unlikely to have a significant effect on efficiency by eliminating an objective 

standard in credit quality determinations, or to result in significant market efficiency by affording 

funds access to securities that do not meet the rating requirement in the current rule but that 

would satisfy the revised standards. Similarly, because we believe that fund managers will not 

have significant difficulty or incur significant expense to confirm that an escrow agent has 

received the requisite certification from an independent accountant, we do not believe that the 

amendment to Rule 5b-3 eliminating the exception to this requirement for highly rated securities 

is likely to have a significant effect on efficiency. 

VI. FINAL REGULATORY FLEXIBILITY CERTIFICATION AND ANALYSIS

A. Rule and Form Amendments under the Exchange Act

Section 3(a) of the Regulatory Flexibility Act of 1980133 (“RFA”) requires the 

Commission to undertake an initial regulatory flexibility analysis of proposed rule amendments 

on small entities unless the Commission certifies that the rule, if adopted, would not have a 

significant economic impact on a substantial number of small entities.134 The Commission notes 

that no comments addressed the effect that the proposed changes to Rule 3a1-1, Regulation ATS, 

Form ATS-R and Form PILOT would have on small entities.

For purposes of Commission rulemaking in connection with the RFA, small entities 

include broker-dealers with total capital (net worth plus subordinated liabilities) of less than 

$500,000 on the date in the prior fiscal year as of which its audited financial statements were 

 

133 5 U.S.C. 603(a). 

134 5 U.S.C. 605(b). 
47

prepared pursuant to Rule 17a-5(d) under the Exchange Act,135 or, if not required to file such 

statements, a broker or dealer that had total capital (net worth plus subordinated liabilities) of 

less than $500,000 on the last day of the preceding fiscal year (or in the time that it has been in 

business, if shorter); and is not affiliated with any person (other than a natural person) that is not 

a small business or small organization.136 

An ATS that complies with Regulation ATS must, among other things, register as a 

broker-dealer.137 Thus, the Commission's definition of small entity as it relates to broker-dealers 

also will apply to ATSs. An ATS that approaches the volume thresholds for investment grade or 

non-investment grade corporate debt securities in Rule 3a1-1 or Regulation ATS would be very 

large and thus unlikely to be a small entity or small organization. With respect to the proposed 

changes to Form ATS-R, even if an ATS is a “small entity” or “small organization” for purposes 

of the RFA, the only change being proposed to the form is to eliminate the distinction between 

investment grade and non-investment grade corporate debt securities and to require reporting for 

the combined class of corporate debt securities. We believe this will impose only negligible 

costs on ATSs, even if they were small entities or small organizations. 

Similarly, SROs are the only respondents to Form PILOT and are not “small entities” for 

purposes of the RFA. Accordingly, no small entities would be affected by the proposed 

amendments to Form PILOT. 

Under Section 605(b) of the RFA,138 we certified that, when adopted, the rule 

amendments would not have a significant economic impact on a substantial number of small 

 

135 17 CFR 240.17a-5(d). 

136 See 17 CFR 240.0-10(c). 

137 See 17 CFR 242.301(b)(1). 

138 5 U.S.C. 605(b). 
48

entities. We included this certification in Part VIII of the Exchange Act Proposing Release. 

While we encouraged written comments regarding this certification, no commenters responded 

to this request as it pertains to the action taken in this release. 

B. Rule Amendments under the Investment Company Act 

This Final Regulatory Flexibility Analysis (“FRFA”) has been prepared in accordance 

with 5 U.S.C. 604. We published in the Investment Company Act Proposing Release an Initial 

Regulatory Flexibility Analysis (“IRFA”), which we prepared in accordance with the RFA. It 

relates to amendments to Rules 5b-3 and 10f-3 under the Investment Company Act. The 

amendments remove references to, and the required use of, NRSRO ratings from these rules. 

1. Need for and Objectives of the Rule Amendments 

The rule amendments are designed to address the concern that the inclusion in the 

Commission’s rules and forms of requirements relating to security ratings could create the 

appearance that the Commission had, in effect, given its “official seal of approval” on ratings, 

which could adversely affect the quality of due diligence and investment analysis and lead to 

undue reliance on ratings. 

2. Significant Issues Raised By Public Comment 

When the Commission proposed amendments to Rules 5b-3 and 10f-3, we requested 

comment on the proposal and the accompanying IRFA. In particular, we sought comments 

regarding: 

• The number of small entities that might be affected by the amendments; 

• The existence or nature of the potential impact of the amendments on small 

entities; and 

• How to quantify the impact of the amendments, including any empirical data 
49

supporting the extent of the impact. 

We received no comments that addressed the proposed amendments’ impact on small 

entities. 

3. Small Entities Subject to the Rule Amendments 

The amendments to Rules 5b-3 and 10f-3 will affect funds, including entities that are 

considered to be small businesses or small organizations (collectively, “small entities”) for 

purposes of the RFA. Under the Investment Company Act, for purposes of the RFA, a fund is 

considered a small entity if it, together with other funds in the same group of related funds, has 

net assets of $50 million or less as of the end of its most recent fiscal year.139 Based on 

Commission filings, we estimate that 122 investment companies may be considered small 

entities. The Commission staff estimates that all of these investment companies may potentially 

rely on Rules 5b-3 and 10f-3. 

4. Reporting, Recordkeeping and Other Compliance Requirements 

The amendments to Rule 5b-3 eliminate the exception for certification requirements in 

conditions relating to the treatment of refunded securities, by removing the exception for rated 

debt in the definition of “refunded security.”140 Under the amended rule, in order to meet the 

definition of “refunded security,” an independent accountant must have certified to the escrow 

agent that the deposited securities will satisfy all scheduled payments of principal, interest and 

applicable premiums on any refunded securities.141 The amendment eliminates the current 

exception that does not require the certification if the refunded security is rated in the highest 

 

139 17 CFR 270.0-10. 

140 See supra Section II.A.1. 

141 Amended Rule 5b-3(c)(4)(iii). 
50

category by an NRSRO. 

The amendments to Rule 10f-3 eliminate references to NRSRO ratings in the rule’s 

definition of “eligible municipal security” and substitute alternative provisions that require 

securities to be sufficiently liquid that they can be sold at or near their carrying value within a 

reasonably short period of time. In addition, the securities must be either: 

• Subject to no greater than moderate credit risk; or 

• If they are less seasoned securities, subject to a minimal or low amount of credit 

risk.142 

Small entities registered with the Commission as investment companies seeking to rely 

on each of the rules will be subject to the same requirements as larger entities. As discussed in 

the IRFA and in this FRFA, in developing the amendments to Rules 5b-3 and 10f-3, we 

considered the extent to which the amendments will have a significant impact on a substantial 

number of small entities. 

5. Commission Action to Minimize Effect on Small Entities 

The RFA directs us to consider significant alternatives that may accomplish our stated 

objective, while minimizing any significant adverse impact on small entities. In connection with 

the amendments, we considered several alternatives, including the following: 

(a) Different reporting or compliance standards or timetables. We believe that the 

credit quality and liquidity considerations required by the amendments to Rule 10f-3 should 

apply to all funds relying on the rules, including small entities. We believe that special 

compliance requirements or timetables for small entities are unnecessary because the substituted 

standards require a level of credit quality and liquidity that is similar to the standards in the 

 

142 Amended Rule 10f-3(a)(3). 
51

current rule, but without reference to NRSRO ratings. Thus, these standards are designed to 

achieve the same purpose that the ratings were designed to achieve without resulting in 

significant costs for funds, including small entities. In addition, funds that rely on Rule 10f-3 

may continue to use or rely on NRSRO ratings in making determinations under the amended 

rule. Moreover, different or special compliance requirements for small entities consistent with 

the Commission’s goal of removing references to NRSRO ratings in the rule may create a risk 

that those entities could purchase securities with insufficient liquidity and credit quality, to the 

detriment of the fund and its investors. As discussed above, we do not believe that the 

requirement that the escrow agent for all refunded securities (not just those that are not top-rated) 

have received an independent accountant’s certification would result in significant cost burdens 

for funds. We believe that fund managers may be able to obtain this information from multiple 

sources at little expense, including, for example, the issuer’s Web site, a municipal dealer’s Web 

site or the escrow agent’s Web site.143 In addition, funds can satisfy the certification requirement 

of Rule 5b-3 by determining that an NRSRO required an independent accountant to make the 

same determination.144 Because we understand that these certifications are typically provided 

during the course of refunding transactions, we believe that it will not be difficult or expensive 

for fund managers to confirm that the certification has been provided to the escrow agent. 

(b) Clarification, consolidation or simplification of reporting and compliance 

requirements. Where we have substituted alternative credit quality and liquidity criteria for 

ratings references in the amended rules, we have endeavored to make the criteria as clear and 

straightforward as possible. We believe that the standards provided by the amended rule are 

 

143 See supra note 64 and accompanying text. 

144 See supra note 65 and accompanying text. 
52

sufficiently clear to permit a fund (or a fund adviser conducting the analysis on behalf of the 

fund board) to understand the risks acceptable under the rule. The amended rules are designed to 

minimize the regulatory burden, consistent with the Commission’s objectives, on all entities 

eligible to rely on the respective rules, including small entities. 

(c) Performance rather than design standards. Rules 5b-3 and 10f-3, as amended, do 

not dictate any particular design standards that must be employed to meet the objectives of the 

rules. In fact, the amendments to the rules substitute a performance standard for references to 

NRSRO ratings. 

(d) Exempting small entities. Continuing to require small entities to rely exclusively 

on NRSRO ratings for the credit quality and liquidity determinations required by the 

amendments to Rule 10f-3 would not be consistent with the goals underlying our amendments. 

Moreover, fund boards may incorporate ratings reports, analyses and other assessments issued by 

third parties, including NRSROs, in making their determinations, although an NRSRO rating, by 

itself, could not substitute for the evaluation required to be performed under the amendments. 

VII. STATUTORY AUTHORITY

The Commission is adopting amendments to Rule 3a1-1, Rules 300 and 301 of 

Regulation ATS and Forms ATS-R and Pilot under the Exchange Act under the authority set 

forth in Sections 3, 11A(c), 15, 17, 23(a) and 36(a)(1) of the Exchange Act [15 U.S.C. 78c, 

78k-1(c), 78o, 78q, 78w(a) and 78mm(a)(1)]. The Commission is adopting amendments to Rule 

5b-3 under the Investment Company Act under the authority set forth in Sections 6(c) and 38(a) 

of the Investment Company Act [15 U.S.C. 80a-6(c) and 80a-37(a)]. The Commission is 

adopting amendments to Rule 10f-3 under the Investment Company Act under the authority set 

forth in Sections 10(f), 31(a) and 38(a) of the Investment Company Act [15 U.S.C. 80a-10(f), 

80a-30(a) and 80a-37(a)]. 
53

List of Subjects 

17 CFR Parts 240, 242 and 249. 

 Broker, Reporting and recordkeeping requirements, Securities. 

17 CFR Part 270 

 Investment companies, Reporting and recordkeeping requirements, Securities. 

TEXT OF RULE AMENDMENTS

 For reasons set out in the preamble, Title 17, Chapter II of the Code of Federal 

Regulations is amended as follows: 

PART 240 — GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE 

ACT OF 1934 

1. The authority citation for Part 240 continues to read in part as follows: 

 Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77z-3, 77eee, 77ggg, 77nnn, 77sss, 

77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j, 78j-1, 78k, 78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u5, 78w, 78x, 78ll, 78mm, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4, 80b-11 and 7201 et seq.; 

and 18 U.S.C. 1350, unless otherwise noted. 

* * * * * 

2. Amend § 240.3a1-1 by revising paragraphs (b)(3)(v), (b)(3)(vi) and (b)(3)(vii) 

and by removing (b)(3)(viii) to read as follows: 

§ 240.3a1-1 Exemption from the definition of “Exchange” under Section 3(a)(1) of the Act. 

* * * * * 

 (b) * * * 

(3) * * * 
54

(v) Corporate debt securities, which shall mean any securities that: 

(A) Evidence a liability of the issuer of such securities; 

(B) Have a fixed maturity date that is at least one year following the date of issuance; 

and 

(C) Are not exempted securities, as defined in section 3(a)(12) of the Act, (15 U.S.C. 

78c(a)(12)); 

(vi) Foreign corporate debt securities, which shall mean any securities that: 

(A) Evidence a liability of the issuer of such debt securities; 

(B) Are issued by a corporation or other organization incorporated or organized under 

the laws of any foreign country; and 

(C) Have a fixed maturity date that is at least one year following the date of issuance; 

and 

(vii) Foreign sovereign debt securities, which shall mean any securities that: 

(A) Evidence a liability of the issuer of such debt securities; 

(B) Are issued or guaranteed by the government of a foreign country, any political 

subdivision of a foreign country or any supranational entity; and 

(C) Do not have a maturity date of a year or less following the date of issuance. 

PART 242 — REGULATIONS M, SHO, ATS, AC AND NMS AND CUSTOMER 

MARGIN REQUIREMENTS FOR SECURITY FUTURES 

3. The authority citation for Part 242 continues to read as follows: 

 Authority: 15 U.S.C. 77g, 77q(a), 77s(a), 78b, 78c, 78g(c)(2), 78i(a), 78j, 78k-l(c), 78l, 

78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a), 78q(b), 78q(h), 78w(a), 78dd-1, 78mm, 80a-23, 80a-29 

and 80a-37. 

 4. Section 242.300 is amended by revising paragraph (i), removing paragraph (j) and 
55

redesignating paragraph (k) as paragraph (j). 

 The revision reads as follows: 

§ 242.300 Definitions. 

* * * * * 

(i) Corporate debt security shall mean any security that: 

 (1) Evidences a liability of the issuer of such security; 

 (2) Has a fixed maturity date that is at least one year following the date of issuance; 

and 

(3) Is not an exempted security, as defined in section 3(a)(12) of the Act (15 U.S.C. 

78c(a)(12)). 

* * * * * 

5. Section 242.301 is amended by: 

a. Adding the word “or” to the end of paragraph (b)(5)(i)(C); 

b. Revising paragraph (b)(5)(i)(D); 

c. Removing paragraph (b)(5)(i)(E); 

d. Adding the word “or” to the end of paragraph (b)(6)(i)(C); 

e. Revising paragraph (b)(6)(i)(D); and 

f. Removing paragraph (b)(6)(i)(E). 

The revisions read as follows: 

§ 242.301 Requirements for alternative trading systems 

* * * * * 
56

(b) * * * 

(5) * * * 

(i) * * * 

(D) With respect to corporate debt securities, 5 percent or more of the average daily 

volume traded in the United States. 

* * * * * 

 (6) * * * 

 (i) * * * 

 (D) With respect to corporate debt securities, 20 percent or more of the average daily 

volume traded in the United States. 

* * * * * 

PART 249 – FORMS, SECURITIES EXCHANGE ACT OF 1934 

6. The authority citation for Part 249 continues to read, in part, as follows: 

 Authority: 15 U.S.C. 78a et seq. and 7201 et seq.; and 18 U.S.C. 1350, unless otherwise 

noted. 

* * * * * 

 7. Form ATS-R (referenced in § 249.638) is amended by: 

 a. In the instructions to the form, Section B, revising the second term, “Investment 

Grade Corporate Debt Securities,” and removing the third term, “Non-Investment Grade 

Corporate Debt Securities”; and 

 b. In Section 4 of the form, revising Line L, to read “Corporate debt securities,” 
57

removing Line M and redesignating Lines N and O as Lines M and N. 

The revision reads as follows: 

Note: The text of Form ATS-R does not and this amendment will not appear in the 

Code of Federal Regulations. 

FORM ATS-R, QUARTERLY REPORT OF ALTERNATIVE TRADING SYSTEM 

ACTIVITIES 

FORM ATS-R INSTRUCTIONS 

B. * * * 

* * * * * 

CORPORATE DEBT SECURITIES - Shall mean any securities that (1) evidence a 

liability of the issuer of such securities; (2) have a fixed maturity date that is at least one year 

following the date of issuance; and (3) are not exempted securities, as defined in Section 3(a)(12) 

of the Exchange Act, (15 U.S.C. 78c(a)(12)). 

* * * * * 

8. Form PILOT (referenced in § 249.821) is amended by: 

a. In the instructions to the form, Section B, revising the second term, “Investment 

Grade Corporate Debt Securities,” and removing the third term, “Non-Investment Grade 

Corporate Debt Securities”; and 

b. In Section 9 of the form, revising Line J, to read “Corporate debt securities,” 

removing Line K and redesignating Lines L, M, N and O as Lines K, L, M and N. 

The revision reads as follows: 
58

Note: The text of Form PILOT does not and this amendment will not appear in the 

Code of Federal Regulations. 

FORM PILOT, INITIAL OPERATION REPORT, AMENDMENT TO INITIAL 

OPERATION REPORT AND QUARTERLY REPORT FOR PILOT TRADING 

SYSTEMS OPERATED BY SELF-REGULATORY ORGANIZATIONS 

FORM PILOT INSTRUCTIONS 

B. * * * 

* * * * * 

CORPORATE DEBT SECURITIES - Shall mean any securities that (1) evidence a liability of 

the issuer of such securities; (2) have a fixed maturity date that is at least one year following the 

date of issuance; and (3) are not exempted securities, as defined in Section 3(a)(12) of the 

Exchange Act, (15 U.S.C. 78c(a)(12)). 

* * * * * 

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940 

 9. The authority citation for Part 270 continues to read in part as follows: 

Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37 and 80a-39, unless otherwise 

noted. 

* * * * * 

 10. Section 270.5b-3 is amended by revising paragraph (c)(4)(iii) to read as follows: 

§ 270.5b-3 Acquisition of repurchase agreement or refunded security treated as 

acquisition of underlying securities. 

* * * * * 
59

 (c) * * * 

 (4) * * * 

 (iii) At the time the deposited securities are placed in the escrow account, or at the 

time a substitution of the deposited securities is made, an independent certified public accountant 

has certified to the escrow agent that the deposited securities will satisfy all scheduled payments 

of principal, interest and applicable premiums on the Refunded Securities. 

* * * * * 

11. Section 270.10f-3 is amended by: 

a. Revising paragraph (a)(3); 

b. Removing paragraph (a)(5); and 

c. Redesignating paragraphs (a)(6), (a)(7) and (a)(8) as paragraphs (a)(5), (a)(6) and 

(a)(7). 

The revision reads as follows: 

§ 270.10f-3 Exemption for the acquisition of securities during the existence of an 

underwriting or selling syndicate. 

(a) * * * 

(3) Eligible Municipal Securities means “municipal securities,” as defined in section 

3(a)(29) of the Securities Exchange Act of 1934 (15 U.S.C. 78c(a)(29)), that are sufficiently 

liquid that they can be sold at or near their carrying value within a reasonably short period of 

time and either: 

(i) Are subject to no greater than moderate credit risk; or 
60

(ii) If the issuer of the municipal securities, or the entity supplying the revenues or 

other payments from which the issue is to be paid, has been in continuous operation for less than 

three years, including the operation of any predecessors, the securities are subject to a minimal or 

low amount of credit risk. 

* * * * * 

 By the Commission. 

 Elizabeth M. Murphy 

 Secretary 

Dated October 5, 2009