1 See Memorandum to SEC Rules Committee No. 21-96 (March 22, 1996).
May 9, 1996
TO: SEC RULES COMMITTEE No. 37-96
RE: DRAFT COMMENT LETTER ON PROPOSED AMENDMENTS TO RULE 10f-3
______________________________________________________________________________
Attached for your review is a draft comment letter on the SECs proposed amendments
to Rule 10f-3 under the Investment Company Act of 1940.1 Some of the positions expressed in
the draft letter and related issues for your consideration are briefly outlined below. Comments
on the proposed amendments must be filed by June 3rd. Please call the undersigned at (202)
326-5822 with any comments on the draft letter by Wednesday, May 22nd.
Quantitative Limits
The Commission has proposed to raise to 10% the current 4% limit on the amount of an
offering that any fund (or group of funds with the same investment adviser) may purchase
under Rule 10f-3. The draft letter recommends that the Commission eliminate the limit (except
in certain cases noted below). It suggests that if the limit is not eliminated, it should be raised
to 25%. If the percentage limit is eliminated, are there any other conditions that should
apply? For example, should the rule require a majority of independent directors and/or
prohibit interested directors from having any position with the affiliated investment
banking entity? Should the rule require that any transaction thereunder be consistent with
the stated policies of each fund or series participating (as under Rule 17a-7) or that the
directors determine that a funds participation in the transaction is in the best interests of
the fund (as under Rule 17a-8)? Is the 25% limit appropriate?
Foreign Securities
The draft letter supports the Commissions proposal to extend Rule 10f-3 to securities
issued in an "Eligible Foreign Offering." One of the conditions is that the securities be issued as
part of a "public offering" (unless they are Rule 144A securities). The letter suggests that,
instead of being limited to "public offerings" of foreign securities, the rule also should allow
funds to purchase foreign securities in non-public offerings, subject to a 15% limit on the
amount of the offering that an affiliated fund (or group of such funds with the same investment
adviser) may purchase. (The letter argues that this limit essentially would serve the same
purpose as the proposed "public offering" requirement.) Do members support this approach?
Should other conditions apply instead of a "public offering" requirement, such as a
minimum market float or listing requirement? Are the other proposed conditions for
Eligible Foreign Offerings (i.e., regarding regulation, disclosure and pricing) appropriate?
Rule 144A Securities
The draft letter supports allowing purchases of "Foreign Issuer Rule 144A Securities"
under the rule, but recommends extending the rule to domestic Rule 144A securities as well.
Consistent with the recommendations made with respect to foreign securities, the draft letter
suggests that domestic Rule 144A offerings and foreign Rule 144A offerings not involving a
concurrent public offering of securities of the same class be subject to a 15% limit on the amount
of the offering that funds may purchase. Do members agree with this recommendation? Is
the proposed definition of "Foreign Issuer Rule 144A Securities" otherwise appropriate? Are
there any additional or different conditions that should apply in the case of either foreign or
domestic Rule 144A securities?
Municipal Securities
The draft letter supports the SECs proposal to permit funds to purchase municipal
securities in group sales, but suggests that the proposed requirement that the affiliated
underwriter be committed to underwriting no more than 50% of the offering be deleted. The
letter recommends instead that the affiliated underwriters percentage participation in the
syndicate be limited to 50%. Does this proposed modification work? Should we suggest any
alternative conditions to address potential overreaching in the case of group sales of
municipal securities?
Other Matters
Are there other securities to which the rule should apply and, if so, under what
conditions? Do the other existing conditions of the rule make sense (e.g., only firm
commitment underwritings, seasoning requirement, rating requirement)? If not, how
should they be changed?
Frances M. Stadler
Associate Counsel
Attachment