[16440]
August 19, 2003
TO: TAX MEMBERS No. 45-03
SEC RULES MEMBERS No. 109-03
FIXED-INCOME ADVISORY COMMITTEE No. 14-03
MONEY MARKET FUNDS ADVISORY COMMITTEE No. 15-03
RE: DIVERSIFICATION GUIDANCE FOR REFUNDED BONDS
We are pleased to inform you that the Internal Revenue Service (“IRS”) has issued the
attached guidance (Revenue Ruling 2003-84)1 requested by the Institute2 regarding the
Subchapter M diversification status of a refunded bond held by a regulated investment
company (“RIC”) that invests primarily in state and local obligations. The refunding
transaction at issue involves US government securities (treated as “Government Securities”
under section 2(a)(16) of the Investment Company Act of 1940 (the “1940 Act”)) that are
irrevocably placed in escrow to make all future payments of principal and interest on the
refunded bond.3 The IRS ruling notes that the Securities and Exchange Commission (“SEC”)
has concluded, under Rule 5(b)-3, that the RIC’s investment in the refunded bond should be
treated as an investment in Government Securities for purposes of the diversification
requirements of the 1940 Act.4
In Rev. Rul. 2003-84, the IRS announces that it will follow the SEC’s conclusion for
purposes of the tax diversification requirements of section 851(b)(3). Specifically, the ruling
1 Rev. Rul. 2003-84 is attached to the electronic version of this memorandum.
2 See Institute Memorandum (No. 14923) to Tax Members No. 30-02, dated July 15, 2002.
3 The escrow agreement may permit certain limited substitutions of securities that also are Government Securities.
4 See Institute Memorandum (No. 13722) to SEC Rules Members No. 54-01, dated July 12, 2001. See also, SEC Release
No. IC-25058 (July 11, 2001).
Note: Not all recipients receive the attachment. To obtain a copy of the attachment, please visit our members website
(http://members.ici.org) and search for memo 16440, or call the ICI Library at (202) 326-8304 and request the
attachment for memo 16440.
2
holds that the RIC may treat its investment in the refunded bond as an investment in
government securities to the extent that the Securities and Exchange Commission treats the
refunded bond as a government security for purposes of Rule 5b-3.
Catherine Barré
Assistant Counsel
Attachment (in .pdf format)