Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations 42401

1See Investment Trusts and Investment

Companies: Hearings on S. 3580 Before a

Subcomm. of the Senate Comm. on Banking and

Currency, 76th Cong., 3d Sess. 35 (1940) (statement

of Commissioner Healy).

2 ‘‘Principal underwriter’’ is defined in section

2(a)(29) of the Investment Company Act [15 U.S.C.

80a–2(a)(29)] to mean (in relevant part) an

underwriter who, in connection with a primary

distribution of securities, (A) is in privity of

contract with the issuer or an affiliated person of

the issuer, (B) acting alone or in concert with one

or more other persons, initiates or directs the

formation of an underwriting syndicate, or (C) is

allowed a rate of gross commission, spread, or other

profit greater than the rate allowed another

underwriter participating in the distribution.

3Section 10(f) [15 U.S.C. 80a–10(f)] prohibits a

fund from purchasing a security during the

Continued

customer funds until such investments

are withdrawn from segregation.

4. Section 1.27 is amended by revising

paragraphs (a)(4) and (b)(2) to read as

follows:

§ 1.27 Record of investments.

(a) * * *

(4) A description of the obligations in

which such investments were made,

including the CUSIP numbers;

* * * * *

(b) * * *

(2) A description of such documents,

including the CUSIP numbers; and

* * * * *

Issued in Washington D.C. on July 28,

1997, by the Commission.

Jean A. Webb,

Secretary of the Commission.

[FR Doc. 97–20766 Filed 8–6–97; 8:45 am]

BILLING CODE 6351–01–P

SECURITIES AND EXCHANGE

COMMISSION

17 CFR Part 270

[Release Nos. IC–22775, IS–1095; File No.

S7–7–96]

RIN 3235–AG61

Exemption for the Acquisition of

Securities During the Existence of An

Underwriting or Selling Syndicate

AGENCY: Securities and Exchange

Commission.

ACTION: Final rule.

SUMMARY: The Commission is adopting

amendments to the rule under the

Investment Company Act of 1940 that

permits an investment company that is

related to certain participants in an

underwriting to purchase securities

during an offering, if certain conditions

are met. The amendments increase the

percentage of an underwriting that

investment companies having the same

investment adviser may purchase in

reliance on the rule, and expand the

scope of the rule to include securities of

certain foreign and domestic issuers that

are not registered with the Commission

under the Securities Act of 1933. The

amendments respond to changes in the

investment company and underwriting

industries that have occurred since the

rule last was substantively amended in

1979.

EFFECTIVE DATE: The rule amendments

will become effective October 6, 1997.

FOR FURTHER INFORMATION CONTACT: C.

Hunter Jones, Special Counsel, Office of

Regulatory Policy, or Nadya B. Roytblat,

Assistant Director, Office of Investment

Company Regulation, Division of

Investment Management, at (202) 942–

0690, U.S. Securities and Exchange

Commission, 450 5th Street, N.W., Mail

Stop 10–2, Washington, D.C. 20549.

Requests for formal interpretive

advice should be directed to the Office

of Chief Counsel at (202) 942–0659,

Division of Investment Management,

U.S. Securities and Exchange

Commission, 450 5th Street, N.W., Mail

Stop 10–6, Washington, D.C. 20549.

SUPPLEMENTARY INFORMATION: The

Commission today is adopting

amendments to rule 10f–3 (17 CFR

270.10f–3) under the Investment

Company Act of 1940 (15 U.S.C. 80a)

(the ‘‘Investment Company Act’’).

Table of Contents

Executive Summary

I. Background

A. Introduction

B. Proposed Amendments to Rule 10f–3

II. Discussion

A. Quantity Limitations

1. Percentage of Offering Purchased

2. Percentage of Fund Assets

B. Foreign Offerings and Rule 144A

Securities

1. Eligible Foreign Offerings

2. Rule 144A Offerings

3. Calculation of Percentage Limit in

Global Offerings

C. Price and Timing of the Purchase

D. Group Sales

E. Role of Fund Board of Directors

F. Reporting and Recordkeeping

G. U.S. Government Securities

III. Cost–Benefit Analysis

IV. Paperwork Reduction Act

V. Summary of Regulatory Flexibility

Analysis

VI. Statutory Authority

Text of Rule

Executive Summary

The Commission is adopting

amendments to rule 10f–3 under the

Investment Company Act. Rule 10f–3

provides an exemption from section

10(f), which prohibits any registered

investment company (‘‘fund’’) from

purchasing securities for which an

underwriter having certain relationships

with the fund (‘‘affiliated underwriter’’)

is acting as a principal underwriter

during the existence of an underwriting

or selling syndicate for the securities.

The amendments are intended to

provide funds with additional

flexibility, consistent with the

protection of investors, to make

investments that may be in the best

interests of investors.

The amendments will permit a fund

subject to the rule, together with other

funds that have the same investment

adviser, to purchase, during the

existence of an underwriting or selling

syndicate:

• Up to 25% of the principal amount

of an offering;

• Securities of foreign issuers or of

domestic reporting issuers in an

‘‘Eligible Foreign Offering’’; and

• Certain securities that are exempt

from registration and are eligible for

resale pursuant to rule 144A under the

Securities Act of 1933 (‘‘Securities

Act’’).

The Commission is not adopting the

amendment that would have permitted

a fund subject to the rule to purchase

municipal securities in a group sale (i.e.,

a purchase for which all members of an

underwriting syndicate, including the

affiliated underwriter, receive credit).

Rather, in light of the comments, the

Commission has concluded that there is

insufficient justification at this time to

alter the treatment of group sales of

municipal securities under rule 10f–3.

I. Background

A. Introduction

Section 10(f) of the Investment

Company Act was designed to address

one of the major abuses noted in the

period before enactment of the

Investment Company Act—the use of

funds by underwriters that controlled

these funds as a ‘‘dumping ground’’ for

unmarketable securities.1 An

underwriter could, for example,

‘‘dump’’ unmarketable securities on its

controlled fund, either by causing the

fund to purchase the securities from the

underwriter itself, or by encouraging the

fund to purchase securities from another

member of the underwriting syndicate.

Fund assets also could be used to absorb

the risks of an underwriting in more

subtle ways, such as by facilitating price

stabilization in connection with an

underwriting.

Section 10(f) prohibits any fund from

purchasing any security for which an

affiliated underwriter is acting as a

principal underwriter,2 during the

existence of an underwriting or selling

syndicate for that security.3 Congress
42402 Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations

existence of an underwriting or selling syndicate if

a principal underwriter of the security is an officer,

director, member of an advisory board, investment

adviser, or employee of the fund, or is a person of

which any such officer, director, member of an

advisory board, investment adviser, or employee is

an affiliated person. As noted above, for purposes

of this release, a person that falls within one of

these categories is referred to as an ‘‘affiliated

underwriter,’’ even though the Investment

Company Act defines the term ‘‘affiliated person’’

to include a broader set of relationships. See section

2(a)(3) of the Investment Company Act [15 U.S.C.

80a–2(a)(3)]. Similarly, this release refers to a fund

that is subject to section 10(f) as a result of its

relationship with an ‘‘affiliated underwriter,’’ as an

‘‘affiliated fund.’’

4Section 10(f) authorizes the Commission to

exempt, by rule or order, conditionally or

unconditionally, ‘‘any transaction or classes of

transactions from any of the provisions [of section

10(f)], if and to the extent that such exemption is

consistent with the protection of investors.’’ By

contrast, section 6(c) of the Investment Company

Act [15 U.S.C. 80a–6(c)] authorizes the Commission

more generally to exempt persons, securities, or

transactions from provisions of the Investment

Company Act if ‘‘necessary or appropriate in the

public interest and consistent with the protection

of investors and the purposes fairly intended by the

policy and provisions’’ of the Investment Company

Act.

5See Adoption of Rule N–10F–3 Permitting

Acquisition of Securities of Underwriting Syndicate

Pursuant to Section 10(f) of the Investment

Company Act of 1940, Investment Company Act

Release No. 2797 (Dec. 2, 1958) [23 FR 9548 (Dec.

10, 1958)]. The rule codified the conditions of

orders that the Commission had granted prior to

1958 exempting certain funds from section 10(f) to

permit them to purchase specific securities.

6A ‘‘firm commitment’’ underwriting, for

purposes of rule 10f–3, is one in which the

underwriters are committed to purchase all of the

securities being offered, if the underwriters

purchase any of the securities being offered. See

amended rule 10f–3(b)(5) [17 CFR 270.10f–3(b)(5)].

7The provisions of rule 10f–3 are similar to

provisions permitting limited affiliated transactions

by persons subject to section 406 of the Employee

Retirement Income Security Act of 1974 (‘‘ERISA’’)

[29 U.S.C. 1106] and by banks subject to section

23B of the Federal Reserve Act [12 U.S.C. 371c–1].

See Prohibited Transaction Class Exemption 75–1

(Oct. 24, 1975) (Department of Labor class

exemption permitting purchases in limited

circumstances, subject to conditions similar to rule

10f–3); section 23B(b) of the Federal Reserve Act

[12 U.S.C. 371c–1(b)] (prohibiting a bank or its

subsidiary from purchasing, as principal or

fiduciary, securities from underwriting syndicates

in which an affiliate of the bank participates, but

permitting acquisitions of such securities if a

majority of the bank’s independent directors have

approved the acquisition in advance).

8Exemption for the Acquisition of Securities

During the Existence of an Underwriting Syndicate,

Investment Company Act Release No. 21838 (Mar.

21, 1996) [61 FR 13630 (Mar. 27, 1996)].

9See Proposing Release, supra note 8, at nn.9–20

and accompanying text; see also Jack Willoughby,

Fortify’40—or Fight, Institutional Investor, Jan.

1997, at 15–16 (noting increasing affiliation

between fund management and securities

underwriting firms).

10The amendments also add headings to the text

of rule 10f–3 in order to make the rule more

understandable and usable. In addition, the title of

the rule has been changed to ‘‘Exemption for the

acquisition of securities during the existence of an

underwriting or selling syndicate’’ to conform to the

language of section 10(f).

11See Proposing Release, supra note 8, at n.14

and accompanying text.

12Rule 10f–3(d).

13 In many instances, particularly in the equity

market, the price of a security increases, sometimes

dramatically, after an initial public offering. See,

e.g., I Louis Loss & Joel Seligman, Securities

Regulation 333 n.28 (1989); Jonathan A. Shayne &

recognized that section 10(f), by

prohibiting all purchases by a fund

having the specified relationships with

an underwriter (‘‘affiliated fund’’)

during the existence of the underwriting

or selling syndicate, could be overly

broad. Thus, Congress gave the

Commission specific authority to

exempt persons from that prohibition

when an exemption would be consistent

with the protection of investors.4

In 1958, the Commission used its

exemptive authority under section 10(f)

to adopt rule 10f–3. 5 The rule currently

permits a fund to purchase securities in

a transaction that otherwise would

violate section 10(f) if, among other

things, (i) the securities either are

registered under the Securities Act or

are municipal securities, (ii) the offering

involves a ‘‘firm commitment’’

underwriting, 6 (iii) the fund and all

other funds advised by the same

investment adviser do not in the

aggregate purchase more than the

greater of 4% of the principal amount of

the securities being offered or $500,000

(but in no event greater than 10% of the

offering) (the ‘‘percentage limit’’), (iv)

the fund does not use more than 3% of

its assets to purchase the securities, (v)

the fund purchases the securities from

a member of the syndicate other than

the affiliated underwriter, (vi) the fund

purchases the securities at a price not

more than the public offering price prior

to the end of the first day on which the

securities are offered, and (vii) the

fund’s directors have adopted

procedures for purchases made in

reliance on the rule and regularly

review fund purchases to determine

whether they comply with these

procedures.7 The conditions of rule 10f–

3 are designed to ensure that a purchase

by a fund from a syndicate in which an

affiliated underwriter is participating is

consistent with the protection of fund

investors.

B. Proposed Amendments to Rule 10f–

3

On March 21, 1996, the Commission

issued a release proposing amendments

to rule 10f–3 (‘‘Proposing Release’’).8

The proposed amendments to rule 10f–

3 were intended to respond to concerns

that the dramatic growth in the fund

industry, combined with increasing

concentration in the underwriting

industry, and increasing business

affiliations between funds and

underwriters, had made the percentage

limit too restrictive. The Proposing

Release also noted that these trends

have caused more funds to be subject to

the prohibitions of section 10(f).9

The proposed amendments were

designed to balance these concerns with

the need for funds to have more

flexibility to purchase securities when

their affiliated underwriters are

members of syndicates. The proposed

amendments would have eased some of

the restrictions of the rule to take into

account fundamental changes in the

industry, while preserving those parts of

the rule that continue to protect

investors.

The Commission received 18

comment letters on the proposed

amendments to rule 10f–3. Commenters

were supportive of the direction of the

proposed amendments; many urged the

Commission to further loosen the

restrictions imposed by the rule. The

Commission is adopting amendments to

rule 10f–3 with a number of changes

from the amendments as proposed, in

view of the issues raised by

commenters.10

II. Discussion

A. Quantity Limitations

1. Percentage of Offering Purchased

Rule 10f–3 limits the amount of

securities that affiliated funds may

purchase during the existence of an

underwriting or selling syndicate. As

discussed in the Proposing Release, the

purpose of the percentage limit is to

provide an indication that a significant

portion of an offering is being purchased

by persons other than a single affiliated

fund complex.11

The percentage limit in rule 10f–3

currently prohibits funds advised by the

same investment adviser from

purchasing, in the aggregate, more than

4% of the principal amount of the

offering, or $500,000, whichever is

greater, but in no event more than 10%

of the offering.12 The Proposing Release

noted that the current percentage limit

appears to be more restrictive than

necessary for the protection of fund

investors. As a result, the percentage

limit may impose unnecessary costs.

Affiliated funds that are limited to

purchasing 4% of an offering, if they

wish to purchase more than that

amount, must wait until the

underwriting or selling syndicate

terminates, and purchase the securities

in the secondary market. This delay can

cause these funds to pay a significantly

higher price for the securities and incur

significant additional transaction

costs.13 Thus, funds that are restricted
Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations 42403

Larry D. Soderquist, Inefficiency in the Market for

Initial Public Offerings, 48 Vand. L. Rev. 965 (1995).

There are additional potential costs to purchasing

securities in the secondary market. In secondary

market purchases, for example, funds must pay

brokerage commissions that they usually do not pay

when purchasing directly in an underwritten

offering.

14Funds in a large fund complex also may find

it inefficient to purchase only 4% of an offering,

particularly if the total offering amount is small. For

these funds, 4% of an offering may be too small an

amount to have any significant effect on the funds’

portfolios. The portfolio managers of the funds may

then decide not to purchase the security at all.

15For example, some fund complexes have over

fifty funds. Perhaps as many as twenty of the funds

might be interested in purchasing a security in a

primary offering because investing in the security

is consistent with each fund’s investment

objectives. In that case, those twenty funds must

limit their total purchases of the security to the

greater of 4% of the offering or $500,000, but in no

event more than 10% of the offering.

16See Proposing Release, supra note 8, at nn.21–

26 and accompanying text.

17Comments ranged from supporting the

percentage limit as proposed, to a percentage limit

as high as 80%.

18As the Proposing Release noted, in 1980 there

were 564 funds with total assets of $134.8 billion,

and in 1995 there were 5,789 funds with total assets

of over $2.8 trillion. Proposing Release, supra note

8, at n.10. By December 1996, there were 6,270

funds with total assets of over $3.5 trillion.

Investment Company Institute, Press Release (Jan.

28, 1997). Assets invested in funds currently exceed

account deposits at commercial banks. See Board of

Governors of the Federal Reserve System, Flow of

Funds Accounts of the United States (Mar. 14,

1997) (table L.109).

19 Increases in the demand for municipal bonds

by mutual funds have outpaced increases in the

supply of new municipal bonds. In 1980, 42

municipal bond funds held under $3 billion in

municipal bonds. By 1996, 1,180 municipal bond

funds held over $287 billion in municipal bonds.

By contrast, the growth in municipal bond supply

has grown only modestly: in 1980, approximately

$47 billion in municipal bonds were issued; by

1996, issuances had only grown about fourfold, to

$184 billion. Investment Company Institute, 1997

Mutual Fund Fact Book 68; Investment Company

Institute, 1986 Mutual Fund Fact Book 19;

Investment Company Institute, 1981 Mutual Fund

Fact Book 77; Investment Company Institute, Press

Release (Jan. 28, 1997); Bond Buyer, 1997 Yearbook

11; Bond Buyer, 1990 Yearbook 38; Lipper ClosedEnd Fund Performance Analysis Service (Jan. 1997),

at 78. Some commenters noted that the withdrawal

of several investment banks from the municipal

bond business has intensified these pressures.

20 In 1979, funds (not including insurance

company separate accounts) owned approximately

2% ($61.6 billion) of outstanding securities

(including U.S. government securities); in 1996,

funds owned approximately 13% ($2.7 trillion) of

outstanding securities, an increase in the percentage

of ownership of over 500% compared to 1979. See

Board of Governors of the Federal Reserve System,

Flow of Funds Accounts of the United States, 1979–

1988 (Mar. 14, 1997) (tables L.209 through L.214);

Board of Governors of the Federal Reserve System,

Flow of Funds Accounts of the United States (Mar.

14, 1997) (tables L.209 through L.214).

21See amended rule 10f–3(b)(7) [17 CFR 270.10f–

3(b)(7)].

22With respect to the calculation of the

percentage limit in Eligible Rule 144A Offerings,

see infra note 34 and accompanying text. With

respect to the calculation of the percentage limit in

multi-class or multi-tranche offerings, see infra

Section II.B.3.

23Rule 10f–3(e).

24See section 5(b)(1) of the Investment Company

Act [15 U.S.C. 80a–5(b)(1)] (limiting a diversified

fund to investing, with respect to 75% of its assets,

no more than 5% of its assets in the securities of

a single issuer).

by the percentage limit of rule 10f–3

might not be able to purchase desirable

securities at prices that would benefit

their portfolios.14 In addition, because

compliance with the percentage limit is

based on purchases by all funds with

the same investment adviser, the

percentage limit presents particular

problems for fund complexes that have

several funds that might have an interest

in purchasing the security.15

In response to these concerns and

changes in the industry, the

Commission proposed to amend the

percentage limit to permit funds relying

on the rule to purchase up to the greater

of 10% of the principal amount of an

offering, or $1 million, but in no event

more than 15% of the offering.16

Commenters generally agreed with the

reasons for raising the percentage limit.

Most commenters stated that the

percentage limit should be significantly

higher than that proposed, and many

suggested that the percentage limit be

eliminated entirely. No commenter

suggested that the current percentage

limit be retained or lowered.

Commenters differed, however, on the

appropriate percentage limit.17

The Commission continues to believe

that the percentage limit provides

assurance that a significant portion of an

offering will be purchased by persons

other than a single fund complex

affiliated with an underwriter, and

should continue to be a component of

the protections afforded by rule 10f–3.

At the same time, the constraints of the

percentage limit appear to be more

restrictive on funds than they have been

in the past, as a result of the growth in

the fund industry and the increasing

importance of funds as purchasers of

securities.18 These effects have been

particularly acute for municipal bond

funds.19

Subsequent to the Commission’s

adoption of the current percentage limit

in 1979, fund ownership of securities

increased substantially, both in absolute

levels and as a percentage of total

securities owned by all

securityholders.20 Given the consistent,

dramatic growth in fund assets, and in

light of the Commission’s administrative

experience with rule 10f–3 as well as

the protections provided by the rule’s

other conditions, the Commission

believes that adopting a percentage limit

higher than the proposed limit is

appropriate.21

The Commission has amended rule

10f–3 to provide a 25% limit on the

principal amount of an offering that

affiliated funds may purchase. A

percentage limit of 25% of the principal

amount of an offering should provide

assurance that a significant portion of

the offering is being distributed to

investors not affiliated with the funds,

while affording significant relief to

purchasing funds compared to the

percentage limit currently imposed in

rule 10f–3. The Commission believes

that a 25% limit would prevent a single

fund complex affiliated with an

underwriter from purchasing the

majority of an offering, and should

provide some assurance that purchasers

other than one or two fund complexes

affiliated with the underwriters are

purchasing securities in the offering.22

The Commission recognizes that this

limit is significantly below that

suggested by many industry

commenters. The Commission is

unconvinced at this time, however, that

the case for raising the percentage limit

higher has been made persuasively by

commenters.

2. Percentage of Fund Assets

Rule 10f–3 currently prohibits a fund

from using more than 3% of its assets

to acquire securities in a transaction in

reliance on the rule (the ‘‘3% limit’’).23

The Commission proposed to eliminate

this limit, noting that the other

provisions of rule 10f–3 provide

sufficient protections against dumping,

and that the diversification provisions

of the Investment Company Act provide

shareholders of most funds with

protections similar to those provided by

the 3% limit.24 Commenters supported

the proposed amendment eliminating

the 3% limit, which the Commission is

adopting.

B. Foreign Offerings and Rule 144A

Securities

A fund currently cannot rely on rule

10f–3 to purchase securities of any

issuer, including a foreign issuer, unless

the securities are registered under the

Securities Act or are municipal

securities. The proposed amendments

would have permitted a fund to

purchase securities issued by a foreign

issuer that were not registered under the

Securities Act if the securities were

issued in either an ‘‘Eligible Foreign

Offering’’ or a ‘‘Foreign Issuer Rule

144A Offering,’’ as defined in the

proposed amendments. Commenters

generally supported extending the rule

to purchases of foreign securities that

are not registered under the Securities

Act. The Commission is adopting the

amendments related to foreign
42404 Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations

25 17 CFR 230.144A.

26Amended rule 10f–3(a)(2) [17 CFR 270.10f–

3(a)(2)].

27Amended rule 10f–3(a)(2)(i) [17 CFR 270.10f–

3(a)(2)(i)]. ‘‘Foreign financial regulatory authority’’

is defined in section 2(a)(50) of the Investment

Company Act [15 U.S.C. 80a–2(a)(50)] generally as

any (A) foreign securities authority, (B) other

governmental body or foreign equivalent of a selfregulatory organization empowered by a foreign

government to administer or enforce its laws

relating to certain financial activities, or (C)

membership organization a function of which is to

regulate the participation of its members in such

financial activities.

A ‘‘foreign securities authority’’ is defined in

section 2(a)(49) of the Investment Company Act [15

U.S.C. 80a–2(a)(49)] as any foreign government or

any governmental body or regulatory organization

empowered by a foreign government to administer

or enforce its laws as they relate to securities

matters.

28Amended rule 10f–3(a)(2)(iii) [17 CFR 270.10f–

3(a)(2)(iii)]. The amendments as adopted do not

specify the format of the financial statements that

must be provided, in recognition that financial

reporting standards differ from country to country.

Nor do the amendments specify that applicable

foreign law must require the issuer to disclose

information about itself and the offering to

prospective purchasers. The other components of

the definition of an Eligible Foreign Offering should

make this condition unnecessary. Fund

management should determine whether there is

sufficient information concerning the issuer and the

offering to ensure that the securities are marketable

and that the other conditions of the rule,

particularly those related to the price and timing of

the purchase of the securities, are satisfied.

29Amended rule 10f–3(a)(2)(iv) [17 CFR 270.10f–

3(a)(2)(iv)] (requiring that the domestic issuer (1)

have a class of securities registered pursuant to

section 12(b) or 12(g) of the Securities Exchange Act

of 1934 (‘‘Exchange Act’’) or be required to file

reports pursuant to section 15(d) of the Exchange

Act, and (2) have filed all the material required to

be filed pursuant to section 13(a) or 15(d) of the

Exchange Act for the 12 months preceding the

offering).

Separate from the conditions included in rule

10f–3, Regulation S under the Securities Act [17

CFR 230.901–.904] contains certain limitations on

the availability of its safe harbor from registration

for foreign offers and sales by domestic issuers.

Rule 10f–3 exempts certain transactions only from

the prohibitions contained in section 10(f) of the

Investment Company Act. Nothing in this release

should be interpreted to suggest that the

requirements and limitations of Regulation S do not

apply to transactions permitted under rule 10f–3.

See Offshore Offers and Sales, Securities Act

Release No. 6863 (Apr. 24, 1990) [55 FR 18306 (May

2, 1990)]. The Commission recently proposed

amendments to Regulation S that would, if adopted,

treat equity securities of domestic issuers and

equity securities of foreign issuers with primary

trading markets in the United States as restricted

securities for purposes of rule 144 under the

Securities Act [17 CFR 230.144]. See Offshore

Offers and Sales, Securities Act Release No. 7392

(Feb. 20, 1997) [62 FR 9258 (Feb. 28, 1997)].

30 17 CFR 230.144A. In 1993, funds purchased

more foreign equity securities in rule 144A offerings

than did any other type of purchaser. See Securities

and Exchange Commission, Staff Report on Rule

144A 15 (1994) (‘‘Staff Report’’).

31Under rule 144A, the seller must reasonably

believe that the purchaser is a QIB. A QIB is an

institution of a type listed in rule 144A that owns

or invests on a discretionary basis at least $100

million of certain securities. See 17 CFR

230.144A(a)(1). Many funds qualify as QIBs in their

own right, and others qualify because they are part

of a ‘‘family’’ of funds that owns, in the aggregate,

at least $100 million of certain securities. 17 CFR

230.144A(a)(1)(iv).

32Although most foreign rule 144A placements

appear to be priced the same as concurrent foreign

offerings, there is no regulatory requirement that the

securities be priced in this manner. See Staff

Report, supra note 30, at 26. It has been suggested,

however, that most securities eligible for resale

pursuant to rule 144A are sold in underwriting

arrangements with terms and conditions

substantially similar to those applicable to

registered public offerings. See 1 Edward Greene et

al., U.S. Regulation of the International Securities

Markets: A Guide for Domestic and Foreign Issuers

and Intermediaries 141 (1993); see also Report of

The Advisory Committee on the Capital Formation

and Regulatory Processes, Appendix A at 39–42

(1996) (stating that rule 144A offerings bear

increasing resemblance to public offerings, and that,

due to the active participation of mutual funds as

buyers and sellers of rule 144A debt securities,

‘‘liquidity is readily available, even without

subsequent registration.’’ (footnote omitted)). Rule

144A requires an issuer to provide certain

information about itself that the purchaser of the

securities may request, including financial

information for its two most recent fiscal years of

operation. See 17 CFR 230.144A(d)(4). The rule

exempts from this information requirement foreign

governments and foreign private issuers that furnish

information to the Commission pursuant to rule

12g3–2(b) under the Exchange Act [17 CFR

240.12g3–2(b)]. See 17 CFR 230.144A(d)(4)(i).

33The adopted amendments define the phrase

‘‘Eligible Rule 144A Offering’’ in lieu of the phrase

‘‘Foreign Issuer Rule 144A Offering’’ because, as

discussed further below, the amendments permit

the purchase of securities of both foreign and

domestic issuers in Rule 144A offerings. Amended

rule 10f–3(a)(4) [17 CFR 270.10f–3(a)(4)]. In order

to clarify the nature of an Eligible Rule 144A

Offering, the definition specifies that the securities

must be sold in certain types of transactions exempt

from the registration requirements of the Securities

Act. Amended rule 10f–3(a)(4)(i) [17 CFR 270.10f–

3(a)(4)(i)]. The amended rule provides that the fund

may reasonably rely on the written statements of

securities, with certain modifications

from the proposal in response to issues

raised by commenters, as described

below.

In considering the proposed

amendments related to offerings of

foreign securities, the Commission also

focused on similar issues related to

domestic issuers that might sell their

securities outside the United States or

privately in unregistered offerings. The

Commission has concluded that rule

10f–3 should be extended to securities

of certain domestic issuers that are sold

in foreign offerings or that are exempt

from registration and eligible for resale

pursuant to rule 144A.25

1. Eligible Foreign Offerings

The amendments permit an affiliated

fund to purchase securities in a public

offering that is conducted under the

laws of a country other than the United

States (‘‘Eligible Foreign Offering’’).26

An Eligible Foreign Offering must be

subject to regulation by a foreign

financial regulatory authority, as

defined in the Investment Company Act,

in the country in which the public

offering occurs.27 The rule also requires

that financial statements of the issuer of

the securities that are prepared and

audited in a manner required or

permitted by the appropriate foreign

financial regulatory authority in the

country in which the Eligible Foreign

Offering occurs, for the two years prior

to the offering, must be made available

in connection with the offering.28

The rule, as proposed, would have

limited Eligible Foreign Offerings to

offerings by foreign issuers. The

Commission has decided to permit an

affiliated fund to purchase a domestic

issuer’s securities offered in an Eligible

Foreign Offering, provided that the

domestic issuer is a reporting issuer.29

This requirement is designed to provide

assurance that the issuer is not making

a foreign offering in order to avoid the

disclosure requirements of the U.S.

securities laws to facilitate the dumping

of securities on affiliated funds.

2. Rule 144A Offerings

Many fund purchases of foreign issuer

securities are made in offerings that are

exempt from the registration provisions

of the Securities Act and in which the

securities are eligible for resale pursuant

to rule 144A under the Securities Act

(‘‘rule 144A offerings’’).30 Rule 144A is

a non-exclusive safe harbor that

exempts from the registration provisions

of the Securities Act resales of securities

to certain institutions, known as

Qualified Institutional Buyers

(‘‘QIBs’’).31

A rule 144A offering of a foreign

issuer’s securities often is part of a

larger global offering. Sometimes a

global offering is divided into several

tranches—one for the issuer’s home

country, one for the United States, and

one or more for other countries. Other

times, there is a single home country

tranche from which limited amounts of

securities may be sold in the United

States and elsewhere. In both cases, the

price for the securities is uniform to all

purchasers, and the issuer prepares an

offering document that provides

detailed information about the issuer

and the offered securities.32

The proposed amendments would

have permitted a fund to purchase

securities in a ‘‘Foreign Issuer Rule

144A Offering,’’ subject to the other

conditions of rule 10f–3 (except for the

Securities Act registration requirement).

Most commenters supported this

proposal. The Commission is adopting

these amendments with a number of

changes that should accommodate a

greater variety of offering structures, in

a manner consistent with the protection

of investors.33
Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations 42405

the issuer or an underwriter in determining whether

this condition has been satisfied. See amended rule

10f–3(b)(3) [17 CFR 270.10f–3(b)(3)].

The amendments in no way affect the

determination that must be made by a fund’s board

of directors whether a security purchased by the

fund in a rule 144A placement is deemed a liquid

security for purposes of the fund’s liquidity

policies. See Resale of Restricted Securities,

Securities Act Release No. 6862 (Apr. 23, 1990) [55

FR 17933 (Apr. 30, 1990)].

34A purchasing fund under the rule need not be

a QIB. If there is a concurrent Eligible Foreign

Offering with respect to an Eligible Rule 144A

Offering, the percentage limit may be calculated by

reference to the securities sold in both offerings. See

amended rule 10f–3(b)(7)(ii) [17 CFR 270.10f–

3(b)(7)(ii)].

35See Rowe Price-Fleming International Inc., SEC

No-Action Letter (Apr. 12, 1996).

36For example, if an issuer offers multiple

classes, series or tranches of a security, with each

class, series or tranche having different maturity

dates, interest rates and yields, it would be

inappropriate to calculate the percentage limit with

respect to the total value of all of the securities

offered. Rather, the percentage limit would be

calculated with respect to each class, series or

tranche of the issue. With respect to municipal

securities, the Commission has stated in the past

that a single offering of municipal securities would

not be deemed to be separate classes of securities

for purposes of the percentage limit solely by virtue

of differing maturity dates. See Exemption of

Acquisition of Securities During the Existence of

Underwriting Syndicate, Investment Company Act

Release No. 10592 (Feb. 13, 1979) [44 FR 10580

(Feb. 21, 1979)] at n.21.

37Rule 10f–3(a)(2).

38See Investment Company Acquisition of

Securities Underwritten by an Affiliate of That

Company, Investment Company Act Release No.

14924 (Jan. 29, 1986) [51 FR 4386 (Feb. 4, 1986)]

at n.17 and accompanying text.

39Amended rule 10f–3(b)(2)(i) [17 CFR 270.10f–

3(b)(2)(i)]. As proposed, the amended rule provides

an exception from the pricing requirement in an

Eligible Foreign Offering if rights to purchase the

securities are offered as ‘‘required by law to be

granted to existing security holders of the issuer.’’

Id.

40The change in language from referring to the

day on which the securities are ‘‘offered to the

public’’ to referring to the day on which ‘‘any sales

are made’’ is not intended to make a substantive

change to this condition; rather, it is intended to

reflect the development of shelf registration as well

as current business practice and usage of the terms.

Sales would be made on the first day on which the

underwriter accepts orders to purchase the

securities—not the day on which the underwriter

purchases the securities from the issuer. The

amended requirement that the purchase must occur

‘‘prior to the end of the first day’’ conforms the rule

text to the Commission’s long-standing

interpretation of this condition. Id.

41Rule 10f–3 currently defines ‘‘municipal

securities’’ by reference to section 3(a)(29) of the

Exchange Act [15 U.S.C. 78c(a)(29)]. See rule 10f–

3(a)(1)(ii).

42See Municipal Securities Rulemaking Board

(‘‘MSRB’’) Rule G–11(a)(iii), MSRB Manual (CCH)

¶ 3551; see also The Galaxy Fund et al., Investment

Company Act Release No. 20660 (Oct. 26, 1994) [59

FR 54665 (Nov. 1, 1994)] (Notice of Application).

43By contrast, an affiliated fund may, under rule

10f–3, purchase a municipal security through an

order in which the fund designates one or more of

Continued

The proposed amendments would

have required that securities offered in

a Foreign Issuer Rule 144A Offering also

be offered in a concurrent Eligible

Foreign Offering. The Proposing Release

stated that the concurrent public

offering requirement was designed to

provide assurance that there would be a

widespread distribution of securities

that are fungible with the securities

purchased by the fund. One commenter

specifically supported this approach,

but several commenters opposed it,

stating that rule 144A offerings often do

not involve a concurrent foreign public

offering of securities of the same class.

In response to a request for comment,

several commenters also suggested that

the rule should permit affiliated funds

to purchase securities of domestic

issuers in rule 144A offerings. The

Commission has decided to amend rule

10f–3 to permit the purchase of

securities in rule 144A offerings of

foreign and domestic issuers, subject to

the other conditions of the rule.

The Commission is making two

additional changes that are reflected in

the definition of ‘‘Eligible Rule 144A

Offering.’’ The proposed amendments

would have required that securities

purchased in an Eligible Rule 144A

Offering be purchased ‘‘in the United

States.’’ This requirement has been

eliminated. Second, the proposed

amendments would have required that

the offer or sale be made ‘‘exclusively’’

to QIBs. Several commenters suggested

that the sale of a portion of the offering

to non-QIBs should not prevent an

affiliated fund from purchasing

securities in the offering. The amended

rule therefore does not include the

exclusivity requirement because, as

suggested by commenters, it may be

unnecessarily limiting. The percentage

limit as applied to an Eligible Rule 144A

Offering, however, would be measured

with respect to the portion of the

offering sold to QIBs.34

3. Calculation of Percentage Limit in

Global Offerings

Several commenters recommended

that the Commission clarify that the

percentage limit in the context of a

global offering applies to the entire

global offering rather than to the U.S.

portion of the offering. The Commission

staff has stated that in a global, multitranche offering of securities with

identical terms at an identical offering

price, with various closings that are

conditioned upon each other,

calculation of the percentage limit may

properly be based on the total amount

of the entire global offering.35

The Commission believes that this

approach is consistent with the purpose

of section 10(f) and rule 10f–3, and with

the protection of investors. This method

of calculating the percentage limit

would not be appropriate, however, in

an offering of different classes or series

of a security when each class or series

has different terms, whether conducted

in one country or in many countries.36

C. Price and Timing of the Purchase

Rule 10f–3 currently requires that a

security purchased in reliance on the

rule be ‘‘purchased at not more than the

public offering price prior to the end of

the first full business day after the first

date on which the issue is offered to the

public.’’ 37 This provision is intended to

provide assurance that the price paid by

the affiliated fund is no higher than that

paid by similarly situated but

unaffiliated purchasers, and that the

purchase occur before the underwriters

know if the offering is fully

subscribed.38

The amended rule clarifies this

language and provides that the

securities must be purchased ‘‘prior to

the end of the first day on which any

sales are made, at a price that is not

more than the price paid by each other

purchaser of securities in that offering

or in any concurrent offering of the

securities.’’ 39 The provision should be

applied to offerings registered under the

Securities Act, municipal offerings, and

to Eligible Foreign Offerings in the same

way as the pre-amendment provision.40

With regard to Eligible Rule 144A

Offerings, this provision requires funds

purchasing securities to pay no more

than the public offering price in any

concurrent public offering of the same

securities. In addition, the price that

funds pay for securities in the Eligible

Rule 144A Offering must not be higher

than that paid by other purchasers

(other than underwriters or members of

the selling syndicate) in the same

offering.

D. Group Sales

The proposed amendments to rule

10f–3 would have permitted the

purchase of municipal securities in

‘‘group sales.’’ 41 A ‘‘group sale’’ is a sale

of municipal securities resulting from a

‘‘group order,’’ which is an order for

securities for the account of all members

of a syndicate in proportion to their

respective participations in the

syndicate.42 Rule 10f–3 currently

prohibits a fund from purchasing a

security, directly or indirectly, from its

affiliated underwriter. This provision of

the rule permits a purchase from a

syndicate manager, but not if the

purchase is through a group sale.43 This
42406 Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations

the syndicate participants to receive credit for the

sale (also known as a ‘‘designated order’’), provided

that the fund does not designate its affiliated

underwriter as one of the recipients of the credit.

44 15 U.S.C. 80a–17(a).

45See MSRB Rule G–11(e), MSRB Manual (CCH)

¶ 3551.

46See Proposing Release, supra note 8, at n.57

and accompanying text (citing Public Securities

Association, Fundamentals of Municipal Bonds 80

(1990)).

47 In order to clarify that a purchase of municipal

securities in a group sale proposed to be permitted

by rule 10f–3 also would be exempt from the

prohibition against affiliate transactions contained

in section 17(a) of the Investment Company Act, the

Commission proposed new rule 17a–10, to exempt

any purchase of municipal securities in a group sale

that complied with rule 10f–3 from section 17(a)(1).

This rule is not being adopted.

48Proposing Release, supra note , at n.52.

49Amended rule 10f–3(b)(10) [17 CFR 270.10f–

3(b)(10)].

50See amended rule 10f–3(b)(6) [17 CFR 270.10f–

3(b)(6)].

51See., e.g., Burks v. Lasker, 441 U.S. 471, 484

(1979) (noting the importance of fund directors in

‘‘furnishing an independent check upon

management’’); Division of Investment

Management, U.S. Securities and Exchange

Commission, Protecting Investors: A Half Century

of Investment Company Regulation 251–260 (1992)

(describing the important functions of fund

directors as required by the Investment Company

Act and the rules thereunder).

52See amended rule 10f–3(b)(10)(ii) [17 CFR

270.10f–3(b)(10)(ii)] (requiring the board to make

and approve ‘‘such changes to the procedures as the

board deems necessary’’). See also Exemption of

Acquisition of Securities During the Existence of

Underwriting Syndicate, Investment Company Act

Release No. 10736 (June 14, 1979) [44 FR 36152

(June 20, 1979)] (stating that the ‘‘Commission

expects that investment company directors, in

establishing procedures under [rule 10f–3] and

determining compliance with such procedures, will

address the concerns embodied in section 10(f) of

the Act against overreaching and the placing of

otherwise unmarketable securities with an

investment company’’).

53Rule 10f–3(g) currently requires that a fund

attach to its report on Form N-SAR ‘‘a written

record of each [rule 10f–3] transaction, setting forth

from whom the securities were acquired, the

identity of the underwriting syndicate’s members,

the terms of the transaction, and the information or

materials’’ upon which the board determined that

the purchases were made in accordance with the

fund’s procedures concerning compliance with rule

10f–3. Reports on Form N-SAR are available for

public inspection from the Commission in hard

copy, and through the Commission’s Electronic

Data Gathering, Analysis and Retrieval (‘‘EDGAR’’)

database, which is accessible through the

Commission’s Internet Web site (http://

www.sec.gov).

provision is designed to ensure that a

purchase permitted by rule 10f–3 does

not violate section 17(a) of the

Investment Company Act, which

prohibits a fund from purchasing

securities from an affiliate or from an

affiliate of an affiliate.44

According to Municipal Securities

Rulemaking Board rules, a syndicate

that is offering municipal securities

must establish a priority by which

orders for the securities will be filled.45

The proposed amendments related to

group sales were based on the

assumption that group orders frequently

receive first priority,46 and that the

prohibition in rule 10f–3 on group sales

therefore could act to the detriment of

affiliated municipal bond funds by

preventing them from purchasing

municipal bonds in oversubscribed

offerings in which only group orders are

filled. The proposed amendments

would have permitted group sales if (1)

the syndicate were to establish that

orders designated as group orders would

have first priority, or that only group

orders would be filled and (2) at the

time of sale, the affiliated underwriters

were not committed to underwrite more

than 50% of the principal amount of the

offered securities.

Two commenters disagreed with the

factual premise of the proposed group

sale provision. These commenters stated

that group orders typically do not

receive first priority in offerings, but

rather that ‘‘designated orders’’ (orders

in which the purchaser designates one

or more members of the syndicate to

receive credit for the sale) often receive

first priority. One commenter suggested

that the proposed amendment could

have the unintended effect of

encouraging syndicate managers to give

group orders first priority in municipal

offerings when they otherwise would

not.

Under the current rule, an affiliated

fund may purchase municipal securities

through a designated order, as long as

the fund does not designate its affiliated

underwriter as the recipient of the

credit. In view of the availability of this

option, the Commission has determined

not to adopt the proposed group sale

amendments.47 The Commission

considered permitting group sales if the

offering were oversubscribed and only

group orders would be filled in the

offering, but concluded that it would be

impracticable to include such a

condition in the rule at the present time.

To the extent that the prioritization of

group orders poses an impediment to

the purchase of municipal securities

under rule 10f–3, funds may seek

exemptive relief from sections 10(f) and

17(a) as they have in the past, on a caseby-case basis.

E. Role of Fund Board of Directors

Rule 10f–3 currently requires fund

boards of directors to adopt procedures

pursuant to which a fund may purchase

securities in reliance on the rule. The

Commission proposed to amend the

requirement related to directors’ duties

to clarify that the directors must

approve, rather than adopt, procedures

for the purchase of securities pursuant

to rule 10f–3, in order to reflect more

accurately the role of the board in

approving policies and procedures

developed by fund management.48 Two

commenters specifically supported this

proposed amendment. The Commission

is adopting the amendment as

proposed.49

The Commission also requested

comment on the role of fund directors

in determining compliance with the

proposed foreign securities provisions,

and whether the existing requirements

for the establishment and review of

procedures are sufficient to cover the

proposed amendments. Several

commenters responded that the existing

requirement concerning board duties is

sufficient. The Commission has

determined not to adopt any substantive

change in the requirement concerning

board duties. Fund boards are

reminded, however, that changes in

procedures will likely be required to

accommodate purchases made under

the amendments to rule 10f–3,

including procedures concerning the

reasonableness of commissions, spread

or profit received by principal

underwriters.50

The Commission continues to

recognize the important role played by

the fund directors in safeguarding the

interests of fund investors.51 A fund’s

board should be vigilant in reviewing

the procedures and transactions as

required by rule 10f–3 as well as in

conducting any additional reviews that

it determines are needed to protect the

interests of investors, particularly if the

fund purchases significant amounts of

securities in reliance on rule 10f–3. For

example, the board should consider

monitoring how the performance of

securities purchased in reliance on rule

10f–3 compares to securities not

purchased in reliance on the rule, or to

a benchmark such as a comparable

market index. Such monitoring would

enable the board to determine not only

whether existing procedures are being

followed, but also whether the

procedures are effective in fulfilling the

policies underlying section 10(f).52

F. Reporting and Recordkeeping

The proposed amendments would

have eliminated the current requirement

in rule 10f–3 that a fund report any

transactions under rule 10f–3 to the

Commission in its semi-annual report

on Form N-SAR and attach to that form

certain written records of those

transactions.53 In view of the increase in

the percentage limit and the other

amendments the Commission is

adopting today, the Commission

believes that the current reporting
Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations 42407

54Amended rule 10f–3(b)(9) [17 CFR 270.10f–

3(b)(9)]. The Commission intends to monitor reports

concerning rule 10f–3 transactions and take

appropriate action in response to any problems that

arise.

55See Proposing Release, supra note, at n.684

(citing Institutional Liquid Assets, SEC No-Action

Letter (Dec. 16, 1981) (granting no-action relief

under section 10(f) to Goldman, Sachs, which had

sought relief in order to act as one of a limited

number of broker-dealers participating in a

distribution of Federal Home Loan Bank notes,

arguing that it should not be considered a member

of an ‘‘underwriting or selling syndicate’’ for

purposes of section 10(f))).

56See Institutional Liquid Assets, SEC No-Action

Letter (Dec. 16, 1981).

57Purchases of securities in foreign offerings and

rule 144A offerings, of course, are voluntary. If a

fund were to determine that the costs of a purchase

would outweigh the benefits, it could decide not to

purchase. 58 44 U.S.C. 3501–3520.

requirement will provide useful

information to the Commission in

monitoring compliance with the

amended rule. The Commission has

decided to retain the Form N-SAR

reporting requirement of rule 10f–3.54

As noted above, rule 10f–3 requires

that the information attached to Form

N–SAR include, among other things, the

terms of the transaction and the

information or materials upon which

the board of directors makes a

determination that all transactions

during the preceding quarter were

effected in accordance with the fund’s

procedures for ensuring compliance

with the rule. The information reported

pursuant to these provisions generally

should include the date of the purchase,

the maturity date and interest rate of

any series purchased, the number and

value of securities purchased (specific

as to each series if applicable), and the

aggregate number and value of securities

offered through the underwriting or

selling syndicate.

G. U.S. Government Securities

The Proposing Release requested

comment whether rule 10f–3 should be

amended to permit the purchase of

other types of securities, such as U.S.

government securities, that rule 10f–3

currently does not address, and the

extent to which the conditions of the

rule should apply to such purchases. In

requesting comment, the Commission

noted that it might not be necessary for

rule 10f–3 to permit the purchase of

U.S. government securities because the

arrangements among distributors of

these securities may not always

constitute underwriting or selling

syndicates for purposes of section

10(f).55 Two commenters suggested that

section 10(f) should not be interpreted

to prohibit fund purchases of securities

issued by agencies or instrumentalities

of the U.S. government if a fund affiliate

is a dealer in the primary distribution of

the securities and that, in the

alternative, the Commission should

amend rule 10f–3 to permit such

purchases.

The Commission has determined not

to adopt amendments to rule 10f–3

related to additional types of securities.

As noted above and in the Proposing

Release, section 10(f) does not apply to

certain types of offerings of U.S.

government securities.56 The

Commission has not received any

applications for exemptive relief with

respect to offerings of U.S. government

securities to which the section does

apply, which suggests that relief may

not be necessary at this time. Moreover,

in light of the variety of these types of

offerings and securities, and the unique

issues they may present under section

10(f), it may be more appropriate to

address these offerings of securities on

a case-by-case basis in connection with

individual requests for exemption.

III. Cost-Benefit Analysis

The amendments to rule 10f–3 would

increase the flexibility for funds to

purchase securities during the existence

of a syndicate in which an affiliated

underwriter participates. These

amendments should benefit funds,

which will be able to (i) purchase

securities of foreign and domestic

issuers in Eligible Foreign Offerings and

Eligible Rule 144A Offerings in reliance

upon rule 10f–3, without having to seek

an exemptive order from the

Commission and (ii) in many cases,

purchase more desirable quantities of

securities at advantageous prices. The

potential benefits to fund investors of

these proposed amendments are better

investment performance and lower costs

to the funds.

The costs of the amendments to funds

and investors are likely to be minimal.

Fund investment advisers and boards of

directors will be required to determine

whether purchases of securities in

foreign offerings and rule 144A offerings

comply with the standards in the

amended rule. Rule 10f–3, however,

currently has standards that must be

met for purchases permitted under the

rule. Thus, the additional cost of

complying with the standards related to

purchases of securities in foreign

offerings and rule 144A offerings are

likely to be minimal.57

Similarly, with respect to costs of

reporting rule 10f–3 transactions on

Form N–SAR, the increased

opportunities to purchase greater

quantities and types of securities may

result in an increased aggregate cost of

reporting for funds that purchase in

reliance on the rule. At the same time,

however, due to the increased number

of securities that are likely to be

purchased, the average compliance costs

(per security purchased) of reporting

rule 10f–3 transactions will probably

diminish.

The increased risk of the dumping of

unmarketable securities on affiliated

funds appears to be minimal. The

amendments are designed to loosen the

restrictions of rule 10f–3 while

maintaining those features of the rule

that protect investors. The Commission

is not aware of any evidence that

dumping has been problematic under

the current conditions of the rule, and

the Commission intends to monitor

transactions undertaken in reliance on

rule 10f–3 after the amendments become

effective.

Comment letters on the Proposing

Release did not provide empirical data

quantifying the dollar benefits of

amending the rule. Therefore, it is

difficult to estimate what effect, if any,

the rule amendments will have on the

prices of securities, on issuers’ capital

costs, or on the securities markets

generally. However, the amendments

are likely to increase efficiency in the

securities markets because the

amendments remove unnecessary

restrictions on certain market

participants. Funds with affiliated

underwriters likely will purchase a

larger proportion of their portfolios

through primary offerings and a smaller

proportion in the secondary market.

Conversely, other investors likely will

purchase a smaller proportion of their

portfolios in primary offerings and

larger proportions in the secondary

market.

IV. Paperwork Reduction Act

As set forth in the Proposing Release,

rule 10f–3 contains ‘‘collection of

information’’ requirements within the

meaning of the Paperwork Reduction

Act of 1995 (‘‘PRA’’).58 Accordingly, the

collection of information requirements

contained in the rule amendments were

submitted to the Office of Management

and Budget (‘‘OMB’’) for review

pursuant to section 3507(d) of the PRA.

No comments were received on the

proposal with respect to the PRA. The

collection of information requirements

are in accordance with section 3507 of

the PRA. An agency may not conduct or

sponsor, and a person is not required to

respond to, a collection of information

unless the agency displays a valid OMB

control number. OMB approved the

PRA request and assigned a control
42408 Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations

number of 3235–0226, with an

expiration date of May 31, 1999.

The collections of information under

rule 10f–3, and as required to be

reported on Form N–SAR, are necessary

for investment companies to obtain the

benefit of exemption from section 10(f)

of the Investment Company Act that

rule 10f–3 provides. As described in

more detail in the Proposing Release

and in this release above, the collections

of information are necessary to provide

the Commission with information

regarding compliance with rule 10f–3.

The Commission may review this

information during periodic

examinations or with respect to

investigations. Except for the

information required to be kept under

paragraph (b)(11)(ii) of rule 10f–3 as

amended, none of the information

required to be collected or disclosed for

PRA purposes will be kept confidential.

If the records required to be kept

pursuant to these rules are requested by

and submitted to the Commission, they

will be kept confidential to the extent

permitted by relevant statutory and

regulatory provisions.

The amendments to rule 10f–3 as

adopted do not impose a greater

paperwork burden upon respondents

than that estimated and described in the

Proposing Release. The retention of the

reporting requirement on Form N–SAR

will not increase the estimated burden

for respondents, because the proposed

elimination of this reporting

requirement was not calculated as a

reduction in burden for purposes of the

proposed amendments.

V. Summary of Regulatory Flexibility

Analysis

A summary of the Initial Regulatory

Flexibility Analysis (‘‘IRFA’’) was

published in the Proposing Release. No

comments were received on the IRFA.

The Commission has prepared a Final

Regulatory Flexibility Analysis

(‘‘FRFA’’) in accordance with 5 U.S.C.

604 regarding amendments to rule 10f–

3 under the Investment Company Act.

The FRFA discusses the need for, and

objectives of, the rule amendments. The

FRFA states that rule 10f–3 permits

funds to purchase securities

notwithstanding section 10(f) of the

Investment Company Act if certain

conditions are met. The amendments to

rule 10f–3 expand the circumstances in

which funds subject to section 10(f) may

purchase securities. The FRFA further

states that the amendments are designed

to increase the flexibility of funds to

purchase (i) quantities of securities that

are in the interest of fund investors and

(ii) certain domestic and foreign

securities that are not registered under

the Securities Act, while minimizing the

risk of abuses that section 10(f) was

enacted to address.

The FRFA estimates that out of

approximately 3,850 active investment

companies registered with the

Commission as of December 31, 1996, a

total of approximately 800 would be

considered small entities. The

amendments to rule 10f–3 would apply

to approximately 40 of these 800 small

entities. The FRFA indicates that the

proposed amendments would affect

small entities in the same manner as

other entities subject to section 10(f),

but that the amendments increase

flexibility for all funds.

Finally, the FRFA states that in

adopting the amendments the

Commission considered: (a) The

establishment of differing compliance

requirements that take into account the

resources available to small entities; (b)

simplification of the rule’s requirements

for small entities; (c) the use of

performance rather than design

standards; and (d) an exemption from

the rule for small entities. The FRFA

states that the Commission concluded

that different requirements for small

entities are not necessary and would be

inconsistent with investor protection,

and that the amended rule incorporates

performance standards to the extent

practicable. Cost-benefit information

reflected in the ‘‘Cost-Benefit Analysis’’

section of this Release also is reflected

in the FRFA. The FRFA is available for

public inspection in File No. S7–7–96,

and a copy may be obtained by

contacting C. Hunter Jones, Securities

and Exchange Commission, 450 Fifth

Street, N.W., Mail Stop 10–2,

Washington, D.C. 20549.

VI. Statutory Authority

The Commission is adopting

amendments to rule 10f–3 pursuant to

the authority set forth in sections 10(f),

31(a), and 38(a) of the Investment

Company Act [15 U.S.C. 80a–10(f), 80a–

30(a), 80a–37(a)].

Text of Rule

List of Subjects in 17 CFR Part 270

Investment companies, Reporting and

recordkeeping requirements, Securities.

For the reasons set out in the

preamble, Title 17, Chapter II of the

Code of Federal Regulations is amended

as follows:

PART 270—RULES AND

REGULATIONS, INVESTMENT

COMPANY ACT OF 1940

1. The authority citation for Part 270

continues to read, in part, as follows:

Authority: 15 U.S.C. 80a–1 et seq., 80a–37,

80a–39 unless otherwise noted;

* * * * *

2. Section 270.10f–3 is revised to read

as follows:

§ 270.10f–3. Exemption for the acquisition

of securities during the existence of an

underwriting or selling syndicate.

(a) Definitions.—(1) Domestic Issuer

means any issuer other than a foreign

government, a national of any foreign

country, or a corporation or other

organization incorporated or organized

under the laws of any foreign country.

(2) Eligible Foreign Offering means a

public offering of securities, conducted

under the laws of a country other than

the United States, that meets the

following conditions:

(i) The offering is subject to regulation

by a ‘‘foreign financial regulatory

authority,’’ as defined in section 2(a)(50)

of the Act [15 U.S.C. 80a–2(a)(50)], in

such country;

(ii) The securities are offered at a

fixed price to all purchasers in the

offering (except for any rights to

purchase securities that are required by

law to be granted to existing security

holders of the issuer);

(iii) Financial statements, prepared

and audited in accordance with

standards required or permitted by the

appropriate foreign financial regulatory

authority in such country, for the two

years prior to the offering, are made

available to the public and prospective

purchasers in connection with the

offering; and

(iv) If the issuer is a Domestic Issuer,

it meets the following conditions:

(A) It has a class of securities

registered pursuant to section 12(b) or

12(g) of the Securities Exchange Act of

1934 [15 U.S.C. 78l(b) or 78l(g)] or is

required to file reports pursuant to

section 15(d) of the Securities Exchange

Act of 1934 [15 U.S.C. 78o(d)]; and

(B) It has filed all the material

required to be filed pursuant to section

13(a) or 15(d) of the Securities Exchange

Act of 1934 [15 U.S.C. 78m(a) or 78o(d)]

for a period of at least twelve months

immediately preceding the sale of

securities made in reliance upon this (or

for such shorter period that the issuer

was required to file such material).

(3) Eligible Municipal Securities

means ‘‘municipal securities,’’ as

defined in section 3(a)(29) of the

Securities Exchange Act of 1934 [15

U.S.C. 78c(a)(29)], that have received an

investment grade rating from at least

one NRSRO; provided, that if the issuer

of the municipal securities, or the entity

supplying the revenues or other

payments from which the issue is to be

paid, has been in continuous operation
Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations 42409

for less than three years, including the

operation of any predecessors, the

securities shall have received one of the

three highest ratings from an NRSRO.

(4) Eligible Rule 144A Offering means

an offering of securities that meets the

following conditions:

(i) The securities are offered or sold in

transactions exempt from registration

under section 4(2) of the Securities Act

of 1933 [15 U.S.C. 77d(2)], rule 144A

thereunder [§ 230.144A of this chapter],

or rules 501–508 thereunder

[§§ 230.501–230.508 of this chapter];

(ii) The securities are sold to persons

that the seller and any person acting on

behalf of the seller reasonably believe to

include qualified institutional buyers, as

defined in § 230.144A(a)(1) of this

chapter; and

(iii) The seller and any person acting

on behalf of the seller reasonably

believe that the securities are eligible for

resale to other qualified institutional

buyers pursuant to § 230.144A of this

chapter.

(5) NRSRO has the same meaning as

that set forth in § 270.2a–7(a)(14).

(b) Conditions. Any purchase of

securities by a registered investment

company prohibited by section 10(f) of

the Act [15 U.S.C. 80a–10(f)] shall be

exempt from the provisions of such

section if the following conditions are

met:

(1) Type of Security. The securities to

be purchased are:

(i) Part of an issue registered under

the Securities Act of 1933 [15 U.S.C.

77a–aa] that is being offered to the

public;

(ii) Eligible Municipal Securities;

(iii) Securities sold in an Eligible

Foreign Offering; or

(iv) Securities sold in an Eligible Rule

144A Offering.

(2) Timing and Price.

(i) The securities are purchased prior

to the end of the first day on which any

sales are made, at a price that is not

more than the price paid by each other

purchaser of securities in that offering

or in any concurrent offering of the

securities (except, in the case of an

Eligible Foreign Offering, for any rights

to purchase that are required by law to

be granted to existing security holders of

the issuer); and

(ii) If the securities are offered for

subscription upon exercise of rights, the

securities shall be purchased on or

before the fourth day preceding the day

on which the rights offering terminates.

(3) Reasonable Reliance. For purposes

of determining compliance with

paragraphs (b)(1)(iv) and (b)(2)(i) of this

section, an investment company may

reasonably rely upon written statements

made by the issuer or a syndicate

manager, or by an underwriter or seller

of the securities through which such

investment company purchases the

securities.

(4) Continuous Operation. If the

securities to be purchased are part of an

issue registered under the Securities Act

of 1933 [15 U.S.C. 77a—aa] that is being

offered to the public or are purchased

pursuant to an Eligible Foreign Offering

or an Eligible Rule 144A Offering, the

issuer of the securities shall have been

in continuous operation for not less

than three years, including the

operations of any predecessors.

(5) Firm Commitment Underwriting.

The securities are offered pursuant to an

underwriting or similar agreement

under which the underwriters are

committed to purchase all of the

securities being offered, except those

purchased by others pursuant to a rights

offering, if the underwriters purchase

any of the securities.

(6) Reasonable Commission. The

commission, spread or profit received or

to be received by the principal

underwriters is reasonable and fair

compared to the commission, spread or

profit received by other such persons in

connection with the underwriting of

similar securities being sold during a

comparable period of time.

(7) Percentage Limit. The amount of

securities of any class of such issue to

be purchased by the investment

company, or by two or more investment

companies having the same investment

adviser, shall not exceed:

(i) If purchased in an offering other

than an Eligible Rule 144A Offering, 25

percent of the principal amount of the

offering of such class; or

(ii) If purchased in an Eligible Rule

144A Offering, 25 percent of the total of:

(A) The principal amount of the

offering of such class sold by

underwriters or members of the selling

syndicate to qualified institutional

buyers, as defined in § 230.144A(a)(1) of

this chapter, plus

(B) The principal amount of the

offering of such class in any concurrent

public offering.

(8) Prohibition of Certain Affiliate

Transactions. Such investment

company does not purchase the

securities being offered directly or

indirectly from an officer, director,

member of an advisory board,

investment adviser or employee of such

investment company or from a person of

which any such officer, director,

member of an advisory board,

investment adviser or employee is an

affiliated person; provided, that a

purchase from a syndicate manager

shall not be deemed to be a purchase

from a specific underwriter if:

(i) Such underwriter does not benefit

directly or indirectly from the

transaction; or

(ii) In respect to the purchase of

Eligible Municipal Securities, such

purchase is not designated as a group

sale or otherwise allocated to the

account of any person from whom this

paragraph prohibits the purchase.

(9) Periodic Reporting. The existence

of any transactions effected pursuant to

this section shall be reported on the

Form N–SAR [§ 274.101 of this chapter]

of the investment company and a

written record of each such transaction,

setting forth from whom the securities

were acquired, the identity of the

underwriting syndicate’s members, the

terms of the transaction, and the

information or materials upon which

the determination described in

paragraph (b)(10)(iii) of this section was

made shall be attached thereto.

(10) Board Review. The board of

directors of the investment company,

including a majority of the directors

who are not interested persons of the

investment company:

(i) Has approved procedures, pursuant

to which such purchases may be

effected for the company, that are

reasonably designed to provide that the

purchases comply with all the

conditions of this section;

(ii) Approves such changes to the

procedures as the board deems

necessary; and

(iii) Determines no less frequently

than quarterly that all purchases made

during the preceding quarter were

effected in compliance with such

procedures.

(11) Maintenance of Records. The

investment company:

(i) Shall maintain and preserve

permanently in an easily accessible

place a written copy of the procedures,

and any modification thereto, described

in paragraphs (b)(10)(i) and (b)(10)(ii) of

this section; and

(ii) Shall maintain and preserve for a

period not less than six years from the

end of the fiscal year in which any

transactions occurred, the first two years

in an easily accessible place, a written

record of each such transaction, setting

forth from whom the securities were

acquired, the identity of the

underwriting syndicate’s members, the

terms of the transaction, and the

information or materials upon which

the determination described in

paragraph (b)(10)(iii) of this section was

made.

By the Commission.
42410 Federal Register / Vol. 62, No. 152 / Thursday, August 7, 1997 / Rules and Regulations

Dated: July 31, 1997.

Margaret H. McFarland,

Deputy Secretary.

[FR Doc. 97–20747 Filed 8–6–97; 8:45 am]

BILLING CODE 8010–01–P

SOCIAL SECURITY ADMINISTRATION

20 CFR Part 416

[Regulations No. 16]

RIN 0960–AD86

Deeming in the Supplemental Security

Income (SSI) Program When an

Ineligible Spouse or Parent is Absent

From the Household Due Solely to

Active Military Service

AGENCY: Social Security Administration.

ACTION: Final rule.

SUMMARY: We are adding a rule on how

the income and resources of ineligible

spouses or parents affect the eligibility

and benefit amounts of Supplemental

Security Income (SSI) claimants and

recipients when those spouses or

parents are absent from their

households due solely to a duty

assignment as a member of the Armed

Forces on active duty. We are adding

this rule because the current rules do

not reflect the provision of the Social

Security Act (the Act), as amended by

the Omnibus Budget Reconciliation Act

of 1993 (OBRA 1993), that addresses

this situation.

DATES: This rule is effective September

8, 1997.

FOR FURTHER INFORMATION CONTACT:

Daniel T. Bridgewater, Legal Assistant,

Division of Regulations and Rulings,

Social Security Administration, 6401

Security Boulevard, Baltimore, MD

21235, (410) 965–3298 for information

about this rule.

For information on eligibility or

claiming benefits, call our national tollfree number, 1–800–772–1213.

SUPPLEMENTARY INFORMATION:

Regulations at § 416.1167(a) state that a

‘‘temporary’’ absence, for SSI deeming

purposes, occurs when an SSI claimant/

recipient, an ineligible spouse or parent,

or an ineligible child leaves the

household but intends to, and does,

return in the same month or the month

immediately following. If the absence is

temporary, we continue to consider the

person a member of the household for

deeming purposes.

Under our policy prior to October 1,

1993, an ineligible spouse or parent who

was absent from an SSI claimant’s or

recipient’s household for any reason,

including active duty military service,

and whose absence was not temporary

(§ 416.1167(a)), was not considered to be

a member of the household for deeming

purposes effective with the first day of

the month following the month the

spouse or parent left the household.

Section 13733(a) of OBRA 1993 (Pub.

L. 103–66) changed SSI policy, effective

October 1, 1993, on the treatment of

ineligible spouses and parents who are

absent from deeming households solely

because of active duty military

assignments. Under this legislation,

which added paragraph (4) to section

1614(f) of the Act, the service member

continues to be considered a member of

the household, absent evidence to the

contrary, for income and resources

deeming purposes. Current regulations

do not specifically address this

situation.

The change in the deeming rules

made by section 13733(a) of Public Law

103–66 was intended to prevent an

absent deemor’s active military service

from adversely affecting an SSI

claimant’s or recipient’s benefits. Prior

to the change in the deeming rules, and

under certain circumstances, it was

possible for an individual to receive a

smaller SSI benefit—or no benefit at

all—as a result of a spouse’s or parent’s

absence from the household due to

military service.

For SSI purposes, the treatment of an

ineligible spouse’s or parent’s earnings

differs depending on whether the

spouse or parent is considered to be

living in the same household as the SSI

recipient. If the spouse or parent is

considered to be living in the same

household as the SSI recipient, the

earnings are treated as earned income. If

the spouse or parent is not considered

to be living in the same household, any

earnings that are made available to the

household are treated as unearned

income. In the SSI program, more

generous exclusions apply to earned

income than to unearned income.

For example, under prior policy, if an

absent military member whose income

and resources were no longer deemed

sent wages home, or his or her wages

were directly deposited into a bank

account held jointly with other family

members, income so received by

household members was considered to

be unearned for SSI eligibility and

payment computation purposes. In

contrast, wages received while the

military deemor resided in the

household were considered to be earned

income for program purposes.

Accordingly, prior policy had the effect

of disadvantaging certain SSI claimants

and recipients.

As a result of section 13733(a) of

OBRA 1993, a military spouse’s or

parent’s absence from the SSI household

because of an active duty assignment is

generally not considered for program

purposes; the same deeming rules that

apply to ‘‘at home’’ spouses and parents

will generally apply to spouses and

parents who are temporarily absent from

the household due to active duty

military service. Therefore, we are

amending our regulations at § 416.1167

to reflect section 13733(a) of OBRA

1993.

The statute and the rule recognize that

circumstances may change, and an

absent service member who originally

intended to continue to live in the

deeming household may decide not to

do so. Taking this into consideration,

under the final rule, we provide that if

an absent service member’s intent to

continue to live in the household

changes, deeming stops beginning with

the month following the month in

which the intent changed.

We assume, absent evidence to the

contrary, that the absent service member

intends to return to the deeming

household upon conclusion of the

military assignment. ‘‘Evidence to the

contrary’’ is evidence indicating that the

service member does not intend to

return to the deeming household upon

conclusion of the military assignment.

Evidence to the contrary includes (but is

not limited to) a signed statement by the

‘‘at home’’ spouse or parent, or by the

absent service member, indicating that

the service member does not intend to

return to the deeming household. Other

examples of evidence to the contrary are

evidence of divorce or legal separation

that will result in the service member

not returning to the deeming household.

Also, diminished support from the

absent service member to the

household—e.g., an absent spouse who

no longer makes his or her military

wages available to the deeming

household—may be evidence that the

absent service member no longer

intends to return to the deeming

household.

On January 24, 1997, we published

this final rule as a proposed rule in the

Federal Register at 62 FR 3633 with a

60-day comment period. We received no

comments during the public comment

period. Therefore, we are publishing the

final rule unchanged from the proposed

rule.

Regulatory Procedures

Executive Order 12866

We have consulted with the Office of

Management and Budget and

determined that this rule does not meet