[Federal Register Volume 65, Number 235 (Wednesday, December 6, 2000)]
[Proposed Rules]
[Pages 76189-76194]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-30975]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release No. IC-24775; File No. S7-20-00]
RIN 3235-AH57


Exemption for the Acquisition of Securities During the Existence 
of an Underwriting or Selling Syndicate

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing amendments to the rule under the 
Investment Company Act of 1940 that permits a registered investment 
company (``fund'') that has certain affiliations with an underwriting 
participant to purchase securities during an offering. The proposed 
amendments would expand the exemption provided by the rule to permit a 
fund to purchase government securities in a syndicated offering. The 
proposed amendments also would modify the rule's quantitative limit on 
purchases, to cover purchases by a fund as well as any account advised 
by the fund's investment adviser. These amendments are intended to 
respond to recent changes in the method of offering certain government 
securities, and to improve the effectiveness of the quantitative limit 
on fund purchases.

DATES: Comments must be received on or before February 15, 2001.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 5th Street, 
NW., Washington, DC 20549-0609. Comments also may be submitted 
electronically to the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-20-00; this file number 
should be included on the subject line if E-mail is used. Comment 
letters will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 5th Street, NW., Washington, DC 
20549. Electronically submitted comment letters also will be posted on 
the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: Curtis A. Young, Senior Counsel, or C. 
Hunter Jones, Assistant Director, at (202) 942-0690, Office of 
Regulatory Policy, Division of Investment Management, Securities and 
Exchange Commission, 450 5th Street, NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Commission today is requesting public 
comment on proposed 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'' or ``Act''). \1\
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    \1\ Unless otherwise noted, all references to ``rule 10f-3'' or 
any paragraph of the rule will be to 17 CFR 270.10f-3.
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I. Discussion

A. Background

    Section 10(f) of the Investment Company Act prohibits a fund from 
purchasing any security during an underwriting or selling syndicate if 
the fund has certain affiliated relationships with a principal 
underwriter \2\ for the security (``affiliated underwriter'').\3\ This 
provision was designed to protect funds and their investors from the 
``dumping'' of unmarketable securities on a fund in order to benefit 
the fund's affiliated underwriter.\4\ Section 10(f) is a broad

[[Page 76190]]

prohibition, and Congress included in the provision specific authority 
for the Commission to issue rules or orders exempting transactions from 
the prohibition, if consistent with the protection of investors.
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    \2\ See section 2(a)(29) of the Investment Company Act [15 
U.S.C. 80a-2(a)(29)] (definition of principal underwriter).
    \3\ Section 10(f) [15 U.S.C. 80a-10(f)] prohibits the purchase 
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. For purposes of this Release, a person that falls within one 
of these categories is referred to as an ``affiliated underwriter,'' 
even though the Investment Company Act defines the term ``affiliated 
person'' to include a broader set of relationships. See section 
2(a)(3) of the Investment Company Act [15 U.S.C. 80a-2(a)(3)]. 
Similarly, this Release refers to a fund that is subject to section 
10(f) as a result of its relationship with an ``affiliated 
underwriter'' as an ``affiliated fund.''
    \4\ See Investment Trusts and Investment Companies: Hearings on 
S. 3580 Before a Subcomm. of the Senate Comm. on Banking and 
Currency, 76th Cong., 3d Sess. 35 (1940) (statement of Commissioner 
Healy). 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. See Exemption for the Acquisition of 
Securities During the Existence of an Underwriting Syndicate, 
Investment Company Act Release No. 21838 (Mar. 21, 1996) [61 FR 
13630 (Mar. 27, 1996)] (``1996 Release''), at text accompanying n.2.
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    Rule 10f-3, which the Commission adopted in 1958 and last amended 
in 1997, permits a fund to purchase securities in a transaction that 
section 10(f) would prohibit, if certain conditions are met.\5\ The 
conditions of rule 10f-3 are designed to ensure that the purchases are 
not likely to raise the concerns that section 10(f) was enacted to 
address, and are thus consistent with the protection of investors.\6\
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    \5\ Rule 10f-3 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, are municipal securities with certain credit 
ratings, or are offered in certain foreign or private institutional 
offerings; (ii) the offering involves a ``firm commitment'' 
underwriting; (iii) the fund (together with other funds advised by 
the same investment adviser) purchases no more than 25 percent of 
the offering; (iv) the fund purchases the securities from a member 
of the syndicate other than its affiliated underwriter; (v) if the 
securities are municipal securities, the purchase is not a group 
sale; and (vi) the fund's directors have approved procedures for 
purchases under the rule and regularly review the purchases to 
determine whether they have complied with the procedures. See rule 
10f-3(b).
    \6\ See 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 Release'').
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B. Purchase of Government Securities

    When the Commission first adopted rule 10f-3 in 1958, one of the 
conditions of the rule was that the securities be registered under the 
Securities Act of 1933 (``Securities Act'') as part of a public 
offering.\7\ This condition served to assure that the fund did not 
purchase the securities through a private placement,\8\ and provided 
the basis for other conditions of the rule concerning the timing and 
conduct of the public offering.\9\ Since then, in response to changes 
in the methods of offering securities and other developments, we have 
revised the rule to permit the purchase of certain types of securities 
that are not registered under the Securities Act, such as municipal 
securities and securities offered through regulated foreign offerings 
or private institutional offerings. We determined that the 
circumstances in which these securities generally are offered, 
including the availability of relevant information about the issuer and 
the establishment of a uniform offering price, provided an effective 
substitute for the Securities Act registration requirement.\10\
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    \7\ See Notice of Proposal to Adopt Rule N-10F-3 Permitting 
Investment Companies to Purchase Securities Where Affiliates 
Participate in Underwriting, Investment Company Act Release No. 2744 
(July 15, 1958) (noting that proposed conditions were consistent 
with prior exemptive relief granted by the Commission).
    \8\ In private placements at that time, obtaining adequate 
information about the issuer and a fair price and other favorable 
terms for the securities depended mostly on the efforts of the 
purchaser. See Eli Shapiro and Charles R. Wolf, The Role of Private 
Placements in Corporate Finance 1-7 (1972).
    \9\ See, e.g., rule 10f-3(b)(2)(i) (requiring that securities be 
purchased at no more than the public offering price on the first day 
of the offering).
    \10\ See 1996 Release, supra note 4, at nn.31-51 and 
accompanying text. In addition, the other protections of rule 10f-3 
continued to apply to purchases of these types of securities.
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    Government securities,\11\ including securities issued by agencies 
or instrumentalities of the U.S. government,\12\ are not included in 
the types of securities that rule 10f-3 permits affiliated funds to 
purchase. Until recently, there has been little need to exempt the 
purchase of government securities from section 10(f), because these 
securities generally have not been offered through ``selling 
syndicates'' or underwritings that involve affiliated underwriters to a 
significant degree.\13\ In 1998, however, at least two government-
sponsored enterprises began to offer their securities through 
syndicated underwritings.\14\ Because rule 10f-3 does not provide an 
exemption from section 10(f) for affiliated funds to purchase 
government securities, affiliated funds have been unable to purchase 
securities in those offerings, and investors in those funds have been 
unable to benefit from the purchases their funds otherwise would have 
been able to make.\15\
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    \11\ The term ``government securities'' is defined by the 
Investment Company Act as ``any security issued or guaranteed as to 
principal or interest by the United States, or by a person 
controlled or supervised by and acting as an instrumentality of the 
Government of the United States pursuant to authority granted by the 
Congress of the United States; or any certificate of deposit for any 
of the foregoing.'' 15 U.S.C. 80a-2(a)(16). Government securities 
are exempt from the registration requirements of the Securities Act 
and from the reporting and other requirements of the Securities 
Exchange Act of 1934 (``Exchange Act''). See 15 U.S.C. 77c(a)(2), 
78c(a)(12)(A). Offers of or transactions in government securities 
are subject, however, to the anti-fraud provisions of the Securities 
Act and Exchange Act. See 15 U.S.C. 77q(a), 78j(b).
    \12\ Government securities may be issued by government-sponsored 
enterprises such as the Federal National Mortgage Association 
(``FNMA'') and by government corporations such as the Federal 
Deposit Insurance Corporation. See 31 U.S.C. 9101 (definition of 
``government corporation''); A. Michael Froomkin, Reinventing the 
Government Corporation, 1995 U. Ill. L. Rev. 543, 555-56.
    \13\ U.S. Treasury securities are sold through a system 
involving auctions and dealers, while government corporations 
primarily raise money through the Federal Financing Bank, which is 
part of the Department of Treasury. See U.S. Department of Treasury, 
Office of Market Finance, United States of America: U.S. Treasury 
Security Auctions (Aug. 12, 1998); Frank J. Fabozzi, Treasury and 
Agency Securities, in The Handbook of Fixed Income Securities 157 
(Frank J. Fabozzi ed., 1997). See also 12 U.S.C. 2285 (sale of 
government corporation securities by Federal Financing Bank). 
Purchases of government securities in these circumstances therefore 
probably would not involve an ``underwriting or selling syndicate'' 
under section 10(f). See Institutional Liquid Assets, SEC No-Action 
Letter (Dec. 16, 1981) (staff agreed that the broker-dealer, which 
participated with other broker-dealers in distributions of Federal 
Home Loan Bank notes, was not a principal underwriter in an 
``underwriting or selling syndicate'' for purposes of section 
10(f)).
    \14\ See Chris O'Leary, Fannie Mae to Launch Rival Treasury Note 
as Benchmark, Investment Dealer's Digest, Jan. 5, 1998, at 9; Adam 
Reinebach, Fannie Mae Sells $4 Billion Benchmark Notes Offering, 
Investment Dealer's Digest, Jan. 19, 1998, at 4, 5; Joshua Brockman, 
Wall Street Watch: Second Fannie Benchmark Issue Draws More 
Europeans, American Banker, Feb. 10, 1998, at 15; and Freddie Prices 
$400 MM Offering, National Mortgage News, Mar. 23, 1998, at 2.
    In response to these developments in the offering of government 
securities, the Commission has received a request to permit 
affiliated funds to purchase these securities in syndicated 
underwritings. See Memorandum from Brown & Wood to the Division of 
Investment Management, Securities and Exchange Commission (1998) 
(available to the public in File No. S7-20-00).
    \15\ A fund that is unable to purchase securities in a primary 
offering may be able to purchase the securities in the secondary 
market, but often at a higher price or with additional transaction 
costs. See 1997 Release, supra note 6, at text accompanying n.13.
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    The Commission is proposing to amend rule 10f-3 to permit 
affiliated funds to purchase government securities during the existence 
of an underwriting or selling syndicate for those securities.\16\ 
Government securities are high-quality investments, and therefore are 
unlikely to be dumped into a fund. Moreover, the circumstances under 
which government agencies offer their securities to the public appear 
to be an effective substitute for Securities Act registration for 
purposes of rule 10f-3. Government agencies generally must obtain 
approval from the Department of Treasury concerning the timing, price, 
and terms of the securities offering.\17\ In addition, information 
about these

[[Page 76191]]

securities typically is available to the public through prospectuses or 
similar offering documents,\18\ and these securities trade actively in 
the secondary market.\19\ Under the proposed amendments, the other 
restrictions of rule 10f-3, such as limitations on the price and 
quantity of securities purchased, would apply to the purchase of 
government securities by the fund.\20\
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    \16\ Proposed rule 10f-3(b)(1)(ii).
    \17\ The Department of Treasury establishes a general calendar 
for securities offerings that includes sale announcement, pricing, 
trading release, and settlement dates. See Department of the 
Treasury, Securities and Exchange Commission, and Board of Governors 
of the Federal Reserve System, Joint Report on the Government 
Securities Market D-1 (1992). See also 12 U.S.C. 2286 (Treasury 
authorization of issuance of government securities); 31 U.S.C. 9108 
(same).
    \18\ See U.S. General Accounting Office, Government-Sponsored 
Enterprises: Changes in Securities Distribution Process and Use of 
Derivative Products 48-49 (1993).
    \19\ Frank J. Fabozzi, Treasury and Agency Securities, in The 
Handbook of Fixed Income Securities 158 (Frank J. Fabozzi ed., 
1997). See also B.J. Reed and John W. Swain, Public Finance 
Administration 227 (1997).
    \20\ See rule 10f-3(b).
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    The Commission requests comment on the proposed amendments related 
to government securities. Should the rule include limitations on the 
purchase of government securities that do not apply to other securities 
purchased under the rule? For example, should rule 10f-3 require that 
government securities receive a certain credit rating from a Nationally 
Recognized Statistical Rating Organization (``NRSRO''), as is required 
for municipal securities? \21\ Should any of the limitations included 
in rule 10f-3 not apply to purchases of government securities?
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    \21\ See rule 10f-3(a)(3).
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C. Purchases Covered by the Percentage Limit

    One of the key conditions of rule 10f-3 is that a fund, together 
with any other fund advised by the fund's adviser, purchase no more 
than 25 percent of an offering (``percentage limit''). The purpose of 
the percentage limit is to provide an indication that a significant 
portion of an offering is being purchased by persons acting 
independently of the adviser. The existence of these purchasers 
demonstrates that the securities are not being ``dumped'' and suggests 
that the price of the securities is based on market forces.
    Since amending rule 10f-3 in 1997, we have become aware of a 
possible ``loophole'' in the rule that could permit an investment 
adviser to circumvent the percentage limit and compromise the 
effectiveness of the rule. Although the percentage limit requires that 
an adviser aggregate the purchases of all the funds that it advises, 
the rule does not require that the adviser also aggregate purchases by 
its other (i.e., non-fund) clients. As a result, if an adviser 
purchases most or all of an offering for its fund clients and non-fund 
clients, the percentage limit may not provide a reliable indicator of 
market forces.\22\ The adviser could use these controlled accounts to 
assure the success of the affiliated underwriting, thus undermining an 
important protection that section 10(f) provides fund shareholders.
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    \22\ The adviser, for example, could arrange for its fund 
clients to purchase 25 percent of an offering and for its non-fund 
clients to purchase the remaining 75 percent of the offering.
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    In order to assure the effectiveness of the percentage limit of 
rule 10f-3, we are proposing to amend the rule to include purchases by 
any other account over which the adviser has discretionary authority or 
exercises control. Therefore, if a fund purchases securities in 
reliance on rule 10f-3, the fund's purchases, aggregated with purchases 
by any other fund advised by the fund's adviser, and any other account 
over which the fund's adviser has discretionary authority or otherwise 
exercises control, could not exceed 25 percent of the offering.\23\
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    \23\ See proposed rule 10f-3(b)(7). In a different context, the 
Gramm-Leach-Bliley Act recently amended section 2(a)(19) of the 
Investment Company Act to include language that is parallel to the 
proposed rule amendments. As amended, a person is an ``interested 
person'' of a fund or adviser (and is therefore disqualified from 
being an independent director) if, among other things, she (or her 
affiliate) has executed portfolio transactions for the fund, any 
other fund advised by the fund's adviser, or ``any account over 
which the [fund's] adviser has brokerage placement discretion.'' 
Pub. L. No. 106-102, 113 Stat. 1338 (1999), to be codified at 15 
U.S.C. 6801-6809.
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    The Commission requests comment on the proposed amendment to the 
percentage limit. Should we increase the percentage in light of the 
changes that we are now proposing?

II. General Request for Comments

    Any interested persons wishing to comment on the rule changes that 
are the subject of this Release, to suggest additional changes, or to 
comment on other matters that might have an effect on the proposals 
contained in this Release, are requested to submit written comments. 
Comment is specifically requested whether the Commission should amend 
or eliminate conditions in rule 10f-3 other than those addressed in 
this Release.
    The Commission also requests comment whether the proposals, if 
adopted, would promote efficiency, competition, and capital formation. 
Comments will be considered by the Commission in satisfying its 
responsibilities under section 2(c) of the Investment Company Act.\24\ 
For purposes of the Small Business Regulatory Enforcement Fairness Act 
of 1996, \25\ the Commission also requests information regarding the 
potential impact of the proposed rule on the economy on an annual 
basis. Commenters are requested to provide data to support their views.
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    \24\ Section 2(c) requires the Commission, when it engages in 
rulemaking and is required to consider whether an action is 
consistent with the public interest, to consider, in addition to the 
protection of investors, whether the action will promote efficiency, 
competition, and capital formation. 15 U.S.C. 80a-2(c).
    \25\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
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III. Cost-Benefit Analysis

A. Purchase of Government Securities

    The proposed amendments to rule 10f-3 should, if adopted, increase 
the ability of funds to purchase securities during the existence of a 
syndicate in which an affiliated underwriter participates. The benefits 
to funds would include the ability to purchase government securities in 
syndicates involving an underwriter affiliated with the fund's 
investment adviser, without having to seek an exemptive order from the 
Commission. The potential benefits to fund investors would include 
better investment performance, and possibly lower fund expenses.
    The costs to funds and investors of the proposed amendments should 
be small. Funds would be required to determine whether purchases of 
government securities comply with the conditions of the rule. The 
additional cost of determining compliance with the rule's conditions, 
as applied to purchases of government securities, should be minimal. 
Funds also would be required to (i) maintain a written record of each 
purchase of government securities made in reliance on the proposed 
amendments and (ii) report those transactions on Form N-SAR. Rule 10f-3 
currently requires funds relying on the rule to comply with these 
recordkeeping and reporting requirements. The additional costs of 
complying with these requirements with respect to purchases of 
government securities made in reliance on the proposed amendments would 
be minimal and likely would be justified by the potential benefits to 
funds and investors described above.

B. Purchases Covered by the Percentage Limit

    The proposed amendments would require that the total of the fund's 
purchases in any offering purchased by the fund in reliance on the 
rule, aggregated with purchases in the offering by any other fund 
advised by the fund's adviser, and purchases in the offering by any 
other account over which the fund's adviser has discretionary authority 
or otherwise exercises control, not exceed 25 percent

[[Page 76192]]

of the offering. The proposed amendments will benefit funds and their 
investors by closing a loophole in the percentage limit. By doing so, 
the rule will reduce the likelihood that the fund's adviser is 
circumventing the percentage limit, and will thereby minimize the risk 
that fund investors will be harmed by the dumping of unmarketable 
securities into their funds.\26\ With respect to costs, the proposed 
amendments will require a fund or its adviser to monitor the purchases 
of non-fund accounts over which the fund's adviser has discretionary 
authority or otherwise exercises control. The cost of this monitoring 
is likely to be minimal, because this information should be readily 
available to the fund's adviser.
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    \26\ See supra Section I.C.
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C. Request for Comments

    The Commission requests comment on the potential costs and benefits 
of the proposed amendments and any suggested alternatives to the 
proposal. Data are requested concerning these costs and benefits.

IV. Paperwork Reduction Act

    Certain provisions of the proposed amendments to rule 10f-3 contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act of 1995 (44 U.S.C. 3501-3520) (``PRA''), and 
the Commission is submitting the proposed amendments to the Office of 
Management and Budget for review in accordance with 44 U.S.C. 3507(d). 
The title for the collection of information is ``Exemption for the 
Acquisition of Securities During the Existence of an Underwriting or 
Selling Syndicate.'' Rule 10f-3 contains currently approved collections 
of information under OMB control number 3235-0226. 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.

A. Purchase of Government Securities

    Rule 10f-3 permits a fund to purchase securities, from an 
unaffiliated underwriter, in an underwriting of securities in which an 
affiliated underwriter is a member of the underwriting or selling 
syndicate. The proposed amendments to rule 10f-3 would permit a fund to 
purchase government securities under the conditions of the rule.
    Rule 10f-3 requires the board of directors of a fund relying on the 
rule to approve procedures that are reasonably designed to ensure 
compliance with the conditions of the rule, and to approve changes to 
these procedures as necessary. The fund must maintain these procedures 
permanently in an easily accessible place. A fund that chooses to rely 
on the proposed amendments also may need to amend these procedures to 
account for purchases of government securities. The fund also must 
report on Form N-SAR any transactions under the rule and attach a 
written record of each transaction, and the board must review the 
transactions quarterly to determine compliance with the fund's 
procedures.\27\ Finally, a fund must retain written records of the rule 
10f-3 transactions and of the information reviewed by the board, for at 
least six years from the end of the fiscal year in which the 
transactions occurred. A fund would need to comply with these 
recordkeeping requirements in order to obtain the benefit of exemption 
from section 10(f) of the Act for purchases of government securities 
under the proposed amendments.
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    \27\ The written record must state (i) from whom the securities 
were acquired, (ii) the identity of the underwriting syndicate's 
members, (iii) the terms of the transactions, and (iv) the 
information or materials on which the fund's board of directors has 
determined that the purchases were made in compliance with 
procedures established by the board. See rule 10f-3(b)(9).
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    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, none of the 
information required to be collected or disclosed for PRA purposes will 
be kept confidential. If the records required to be kept under 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 Division of Investment Management estimates that 300 funds rely 
upon rule 10f-3 each year, and that 70 of those funds purchase 
government securities (although not all 70 funds would likely need to 
rely upon rule 10f-3 to purchase government securities). It is 
estimated that the recordkeeping burden for funds that rely on the 
proposed amendments to purchase government securities would increase by 
an estimated 0.25 hours per fund per year.\28\
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    \28\ The total additional burden of the proposed amendments 
concerning the purchase of government securities is estimated to be 
17.5 hours per year. This estimate is based on the following: 70 
funds x 0.25 hours = 17.5 hours.
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B. Purchases Covered by the Percentage Limit

    The recordkeeping burden for funds that rely on rule 10f-3 may 
minimally increase due to the condition that the total of the fund's 
purchases in any offering, aggregated with purchases of any other fund 
advised by the fund's adviser, and purchases by any other account over 
which the fund's adviser has discretionary authority or otherwise 
exercises control, not exceed 25 percent of the offering.

C. Comments

    The Commission solicits comments under 44 U.S.C. 3506(c)(2)(B) 
concerning: whether the proposed collection of information is necessary 
for the proper performance of the function of the Commission, including 
whether the information will have practical utility; the accuracy of 
the staff's estimate of the burden of the proposed collection of 
information; the quality, utility, and clarity of the information to be 
collected; and whether the burden of collection of information on those 
who are to respond, including through the use of automated collection 
techniques or other forms of information technology, may be minimized.
    Persons desiring to submit comments on the collection of 
information requirements should direct them to the Office of Management 
and Budget (``OMB''), Attention: Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Washington, DC 20503, and should also send a copy of their comments to 
Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 
5th St., NW., Washington, DC 20549-0609 with reference to File No. S7-
20-00. Requests for materials submitted to OMB by the Commission with 
regard to this collection of information should be in writing, refer to 
File No. S7-20-00, and be submitted to the Securities and Exchange 
Commission, Records Management, Office of Filings and Information 
Services, 450 5th Street, NW., Washington, DC 20549. OMB is required to 
make a decision concerning the collection of information between 30 and 
60 days after publication, so a comment to the OMB is best assured of 
having its full effect if the OMB receives it within 30 days of 
publication.

[[Page 76193]]

V. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding 
amendments to rule 10f-3 under the Investment Company Act. The 
following summarizes the IRFA.
    Section 10(f) prohibits investment companies from purchasing 
government securities from an affiliated underwriter during the 
existence of an underwriting or selling syndicate for that security, 
and authorizes the Commission to exempt transactions by rule or order 
from the prohibition. The Commission adopted rule 10f-3 to permit a 
fund to purchase securities from an unaffiliated member of an 
underwriting or selling syndicate when an affiliated underwriter is a 
member of the underwriting or selling syndicate. We are proposing 
amendments to rule 10f-3 in response to the recent syndicated 
underwriting of government securities issued by government-sponsored 
enterprises.\29\ The proposed amendments are designed to permit funds 
to purchase government securities in syndicated offerings, in 
accordance with other conditions of rule 10f-3.\30\ We are also 
proposing amendments in response to concerns that purchases by advisory 
clients other than funds may undercut the effectiveness of the 
percentage limit of the rule. To address this concern the Commission is 
proposing that the total of the fund's purchases in any offering, 
aggregated with purchases of any other fund advised by the fund's 
adviser, and purchases by any account over which the fund's adviser has 
discretionary authority or otherwise exercises control, not exceed 25 
percent of the offering.
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    \29\ See supra note 14.
    \30\ The amendments to rule 10f-3 are proposed by the Commission 
under the authority set forth in sections 10(f), 31(a) and 38(a) of 
the Investment Company Act.
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    A small business or small organization (collectively, ``small 
entity'') for purposes of the Investment Company Act is a fund that, 
together with other funds in the same group of related investment 
companies, has net assets of $50 million or less as of the end of its 
most recent fiscal year.\31\ Of approximately 3900 active funds, 339 
are small entities. Any of these 339 funds would be able to rely on the 
proposed amendments to rule 10f-3. It appears that the proposed 
amendments would affect small entities in the same manner as other 
entities subject to section 10(f), and that the proposed amendments 
increase flexibility for all funds.
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    \31\ Rule 0-10 [17 CFR 270.0-10].
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    The IRFA states that purchases of government securities made in 
reliance on rule 10f-3 would be subject to the existing and amended 
reporting and recordkeeping requirements of the rule.\32\ There are no 
rules that duplicate, overlap, or conflict with the proposed 
amendments. The IRFA also discusses the absence of any viable 
alternatives considered by the Commission in connection with the 
proposed amendments that might minimize the effect on small entities.
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    \32\ A fund would be required to report purchases of government 
securities on Form N-SAR, attach a written record of each 
transaction, and keep a copy of the written records of those 
transactions. See rule 10f-3(b).
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    The Commission encourages the submission of comments on matters 
discussed in the IRFA. Comment specifically is requested on the number 
of small entities that would be affected by the proposed rule 
amendments. Comment is also requested on the effect of the rule 
amendments on investment advisers and funds that are small entities. 
Commenters are asked to describe the nature of any effect and provide 
empirical data supporting the extent of the effect. These comments will 
be placed in the same public file as comments on the proposed rule 
amendments. A copy of the IRFA may be obtained by contacting Curtis A. 
Young, Securities and Exchange Commission, 450 5th Street, NW., 
Washington, DC 20549-0506.

VI. Statutory Authority

    The Commission is proposing to amend rule 10f-3 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), 80a-37(a)].

List of Subjects in 17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rule Amendments

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be 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-34(d), 80a-37, 80a-39 
unless otherwise noted;
* * * * *
    2. Amend Sec. 270.10f-3 by revising paragraphs (b)(1), (b)(4) and 
(b)(7).


Sec. 270.10f-3  Exemption for the acquisition of securities during the 
existence of an underwriting or selling syndicate.

* * * * *
    (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)) will be exempt from the provisions of that 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) Part of an issue of government securities, as defined in 
section 2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16));
    (iii)Eligible Municipal Securities;
    (iv) Securities sold in an Eligible Foreign Offering; or
    (v) Securities sold in an Eligible Rule 144A Offering.
* * * * *
    (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, are government securities 
(as defined in section 2(a)(16) of the Act (15 U.S.C. 80a-2(a)(16))), 
or are purchased pursuant to an Eligible Foreign Offering or an 
Eligible Rule 144A Offering, the issuer of the securities must have 
been in continuous operation for not less than three years, including 
the operations of any predecessors.
* * * * *
    (7) Percentage limit. The amount of securities of any class of such 
issue purchased by the investment company, aggregated with purchases by 
any other investment company advised by the investment company's 
investment adviser, and purchases by any other account over which such 
adviser has discretionary authority or otherwise exercises control, do 
not exceed the following limits:
    (i) If purchased in an offering other than an Eligible Rule 144A 
Offering, 25 percent of the principal amount of the offering of such 
class; or
    (ii) If purchased in an Eligible Rule 144A Offering, 25 percent of 
the total of:
    (A) The principal amount of the offering of such class sold by 
underwriters or members of the selling syndicate to qualified 
institutional buyers, as defined in Sec. 230.144A(a)(1) of this 
chapter; plus

[[Page 76194]]

    (B) The principal amount of the offering of such class in any 
concurrent public offering.
* * * * *

    By the Commission.
    Dated: November 29, 2000.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 00-30975 Filed 12-5-00; 8:45 am]
BILLING CODE 8010-01-P