May 4, 1990
TO: CLOSED-END FUND MEMBERS NO. 18-90
INVESTMENT ADVISER ASSOCIATE MEMBERS NO. 16-90
INVESTMENT ADVISER MEMBERS NO. 17-90
SEC RULES MEMBERS NO. 34-90
UNIT INVESTMENT TRUST COMMITTEE NO. 23-90
INTERNATIONAL FUNDS TASK FORCE NO. 8-90
RE: SEC ADOPTS RULE 144A, CREATING SAFE HARBOR FOR RESALES
OF RESTRICTED SECURITIES
__________________________________________________________
The SEC has adopted Rule 144A, which provides a non-
exclusive safe harbor exemption from the registration
requirements of the Securities Act of 1933 for resales of
restricted securities to "qualified institutional buyers" as
defined in the Rule. A copy of the adopting release is
attached. Rule 144A, originally proposed in October 1988, was
reproposed by the SEC last July. The Institute submitted a
comment letter supporting adoption of the Rule and recommending
certain revisions, several of which were incorporated into the
final Rule. The Commission also has adopted amendments to
Rules 144 and 145 under the 1933 Act to redefine the required
holding period for restricted securities.
Rule 144A as adopted permits the resale to qualified
institutions of restricted securities that, when issued, were
not of the same class as securities listed on a U.S. securities
exchange or quoted on NASDAQ. A "qualified institutional
buyer" generally is an institution, acting for its own account
or for the account of other qualified institutional buyers,
that in the aggregate owns and invests on a discretionary basis
at least $100 million in securities of issuers not affiliated
with the institution. In the case of an investment adviser,
for example, this means that the adviser may count both
proprietary assets and discretionary assets under management
(except as noted below) in determining its eligibility as a
qualified institutional buyer; however, the adviser can rely on
the safe harbor only with respect to purchases made for its own
account or for the account of another qualified institutional
buyer. The eligibility threshold for registered broker/dealers
is $10 million.
For purposes of meeting the $100 million test, as the
Institute recommended in its comment letter on the reproposed
Rule, the value of securities owned by a registered investment
company may be aggregated with those of other registered
investment companies (except a unit investment trust whose
assets consist solely of shares of one or more investment
companies) or series thereof or separate accounts that have the
same or an affiliated investment adviser (or depositor, in the
case of a unit investment trust). The definition of "family of
investment companies" in the reproposed Rule did not include
funds with affiliated advisers and did not permit aggregation
of separate account assets with other investment company
assets. Under the final Rule, the following securities are
required to be excluded in determining the aggregate amount of
securities which a particular entity owns and invests in on a
discretionary basis: securities issued or guaranteed by the
United States or by an instrumentality of the United States
government, bank deposit notes and certificates of deposit,
loan participations, repurchase agreements, securities owned
but subject to a repurchase agreement, and currency, interest
rate and commodity swaps.
As the Institute proposed in its comment letters, the
adopting release indicates that with the adoption of Rule 144A,
the SEC is modifying its position with respect to the liquidity
of restricted securities and related limits on purchases of
such securities by open-end investment companies and unit
investment trusts. The Commission previously took the position
in an interpretive release that restricted securities generally
would be regarded as illiquid and thus subject to a limit of
10% of an open-end fund's assets. According to the Rule 144A
release, the liquidity of Rule 144A securities now will be a
question of fact for the fund's board of directors (or the
sponsor of a unit investment trust). The day-to-day
responsibility for making this determination may be delegated
to the fund's investment adviser as long as the board retains
sufficient oversight. It should be noted that some states
(notably Wisconsin) still impose limits and/or disclosure
requirements on investments in restricted securities.
The release states that the Commission is not requiring
fund directors to consider any particular factors in evaluating
the liquidity of Rule 144A securities at this time, but might
publish guidelines for this purpose in the future. Examples of
factors that the board should consider, according to the
release, would include (1) the frequency of trades and quotes
for the security, (2) the number of dealers willing to purchase
or sell the security and the number of other potential
purchasers, (3) dealer undertakings to make a market in the
security and (4) the nature of the security and the nature of
the marketplace trades (for example, the time needed to dispose
of the security, the method of soliciting offers, and the
mechanics of transfer).
Rule 144A does not apply to resales of securities of open-
end investment companies or unit investment trusts that are
registered or required to be registered under the Investment
Company Act of 1940. According to the release, however,
resales of privately placed investment company securities
pursuant to Rule 144A will not cause the issuer to lose the
private offering exemption under section 3(c)(1) of the 1940
Act, as long as after the resale, the securities are held by no
more than 100 beneficial owners. Similarly, a foreign
investment company will not violate section 7(d) of the 1940
Act if, after a resale pursuant to Rule 144A, its securities
are held by no more than 100 beneficial owners who are U.S.
residents.
In its final form, Rule 144A imposes an information
requirement on an issuer that is neither a reporting company
under the Securities Exchange Act of 1934 ("1934 Act"), nor
exempt from reporting pursuant to Rule 12g3-2(b) under the 1934
Act, nor a foreign government eligible to use Schedule B under
the 1933 Act. Thus the Rule is available in connection with
the resale of securities of such an issuer only if the holder
of the securities and a prospective purchaser designated by the
holder have the right to receive upon request, and the
purchaser has received at or prior to the time of sale if
requested, certain basic financial information about the
issuer. The Rule as reproposed imposed this obligation to
provide information on the seller of the securities. In its
comment letter on the reproposal, the Institute recommended
that the issuer, rather than the seller, be responsible for
providing the required information. The information required
to be provided includes (1) a brief statement of the nature of
the issuer's business and products and services it offers and
(2) the issuer's most recent balance sheet and profit and loss
and retained earnings statements, and similar financial
statements for such part of the two preceding fiscal years as
the issuer has been in operation (audited if reasonably
available).
Rule 144A becomes effective upon its publication in the
Federal Register.
Frances M. Stadler
Assistant General Counsel
Attachment