i `,,~ :~

g

,-

~

t ~

,:

~~

i `,,~ :~

APR

6 1995

~2ESPONSE OF THE OFFICE OF CHIEF COUNSEL

~)IVISION OF INVESTMENT MANAGEMENT

Our Ref. No. 95- 172-CC

C.i.ticorp Securities, Inc.

File No. 132-3

Your letter dated March 23, 1995 requests our assurance that

sion if a

sae would not recommend enforcement action to the Commis

your

in

bed

~~~usiness trust, organized and operated as descri

ment

Invest

the

under

er

regist

not

Letter (the "Trust"), does

ion

except

the

on

ce

relian

in

Act")

"1940

(the

190

!~~ompany Act of

7

3aRule

by

ed

y

provid

Erom the definition of investment compan

under the 1940 Act.

The Trust proposes to issue a single class of unrated

beneficial interests that will be sold only to qualified

ties

institutional buyers as defined in Rule 144A under the Securi

ed in the

Act of 1933 (the "Securities Act") and to persons involv

interests

cial

benefi

The

Trust.

the

of

ion

operat

or

organization

will have a targeted maturity of between two and seven years.

be used

Proceeds from the sale of the beneficial interests will

(~'Shortments

y

invest

qualit

high

-term,

short

n

certai

to acquire

i/

These

less.

or

days

31

of

term Assets") that have a maturity

on

ed

receiv

ds

procee

The

ty.

maturi

to

assets will be held

r

maturity of the Short-term Assets will be reinvested in simila

r.

strato

admini

party

Short-team Assets selected by a third-

In addition to investing in Short-term Assets, the Trust

paper issuers

will enter inLO standby commitments with commercial

Each

Trust.

the

of

ion

format

of

the

time

identified at the

Trust to

standby commitment will conditionally require the

purchase from a commercial paper issuer (1) specified asset- by a

ted

backed aecuzities or (2) notes or other securities suppor

ties

securi

backed

security interest 9.n specified asset(collectively, "Long-term Assets"). 2/

As compensation for entering into standby commitments, the

will be

Trust wi11 receive commitment fees. The commitment fees

of the

annum

per

calculated as a specified number of basis points

y

standb

The

ment.

principal amount of the standby commit

Longcommitment generally wil]. require the Trust to purchase the over

roll

to

unable

is

term Assets if the commercial paper issuer

1/

The Trust's Short-term Assets may include re~~urchase

agreements for government securities, A-1/P-1 commercial

paper or other corporate obligations rated A-~/P-1,

securities issued or guaranteed by the U.S. government or

its agencies, and dollar-denominated obligations issued or

guaranteed by U.S. and foreign banks with assets exceeding

$1 billion and rated A-1/P-1.

2/

The Trust will be permitted to hold Long-term assets that

consist of (or are supported by) asset-backed securities

that have not been registered under the Securities Act. The

Long-term Assets may be unrated.

r

- 2

maturing commercial paper by issuing new commercial paper. The

Trv.st will acquire Long-term Assets only in connection with

honoring commitments.

Each Trust investor will be entitled to receive the stated

amount of the beneficial interests upon their targeted maturity

(or potentially earlier or later if Long-term Asses are

acquired). 3/ In addition, each Trust investor will be entitled

Co receive a pro rata share of the (1) interest (or discount)

earned on Short-term Assets, (2) commitment fees generated by the

standby commitment, and (3) interest and similar distributions

earned on any Long-term Assets that are acquired.

Trust assets will be maintained in the name of an

independent trustee in its capacity as trustee for the Trust,

under the trustee's sole dominion and control. All payments

ed

received by the Trust will be deposited in one or more segregat

as

capacity

its

in

accounts maintained in the name of the trustee

of

the

control

and

dominion

sole

the

under

trustee for the Trust,

trustee. 4/

Nature of the Trust's Business and Its Assets

Rule 3a-7 excepts from the definition of investment company

an issuer that "is engaged in the business of purchasing, or

otherwise acquiring, and holding eligible assets and who does not

issue redeemable securities (and in activities related or

incidental thereto)," provided ghat certain conditions are met.

as

"Eligible assets" are defined in paragraph (b)(1) of Rule 3a-7

terms

their

by

that

g,

revolvin

or

fixed

"financial assets, either

or

convert into cash within a finite time period plus any rights

tion

distribu

timely

ar

g

other assets designed to assure servicin

of proceeds to the security holders." You believe that both the

Short-term Assets and Long-term Assets meet the definition of

eligible asses. We agree.

You also believe that the commitment fees received by the

Trust should be viewed as eligible assets because each commitment

fee will be structured as a series of periodic, fixed payments

over a finite time period equal to the length of the commitment.

We disagree. The commitment fees are in the nature of fees paid

to the Trust for providing a service (i.e., standing ready to

3/

If a commitment is called and the Trust acgLires Long-term

Assets, investors will be repaid in accordance with the

Trust's receipt of disCributions on the Long-term Assets.

4/

Paragraph (a)(4) of Rule 3a-7 imposes certain requirements

with respect to the appointment of an independent trustee

and the safekeeping of assets.

- 3 p~rchase the underlying Long-term Asset) and therefore, in our

view, do not qualify as eligible assets under the Rule. ~/

Any issuer that relies on Rule 3a-7 must be engaged solely

i~. the business of purcrasing, or otherwise acquiring, and

h~~lding eligible assets and in activities related or incidental

t~.ereta. ~/ It is the Division's view that the "elated or

i~,cidental~~ activities permitted by Rule 3a-7 include only those

a~;tivities that support or further, and therefore are secondary

tA~, the entity's business of purchasing, or otherwise acquiring,

tion

a~~d holding eligible assets. 7/ Accordingly, if the acquisi

or

to,

ry

seconda

is

issuer

an

by

assets

e

of

eligibl

a~~d holding

that

s,

busines

another

i~~ undertaken primarily in support of,

i~isuer may not rely on Rule 3a-7. Because we conclude that the

on

cA~mmitment fees are not eligible assets, the Trust may relx

an

is

ents

commitm

standby

Riltle 3a-7 only if entering into the

aP:ti.vity incidental ox related to the Trust's business of

aP:quiring and holding the Short- and Long-term Asses. You state

tHiat the Trust has received your opinion of counsel stating that,

.~

5~~

Tl:is position should not be read to mean that the right to

receive this type of fee could not, under certain

circumstances, be separately aecuritized and held as an

eligible asset by an entity relying on Rule 3a-7.

~,/

In the proposing release for Rule 3a-7, the Commission

stated that only issuers whose sole business is to hold a

pool of eligible assets and to issue non- redeemable

securities could rely on the rule. Investment Company Act

Rel. No. 18736 (May 29, 1992)(proposing Rule 3a-7). Rule

3a-7, as adopted, permits issuers also to engage in

activities that are "related or incidental" to the business

of acquiring and holding eligible assets. This change was

made in response to comments that an issuer's activities

during the operation of a structured financing are not

necessarily limited to acquiring and holding eligible assets

but also may include activities such as filing registration

statements, returning defective assets to the sponsor, and

servicing the assets (through the servicer as the

financings agent). Investment Company Act Rel. No. 19105

at n.23 and accompanying text (November 19, ~992)(adopting

Rule 3a-7).

~I/

The definition of eligible assets includes assets that are

necessary to assure the distribution of cash flow and/or

proceeds to securityholdera. Seg Adopting Release at nn. 16

& 18 and accompanying text. Therefore, the business of

holding eligible assets may legitimately include activities

such as the temporary management of an office building or

other properCy acquired as a result of a default on a

secured loan.

- 4 -

eased on the standard set forth above, the Trust may rely on Rule

~a-7 because (i) it will be engaged solely in the business of

~.cquiring and holding eligible assets and (ii} entering into the

~~tandby commitments is an activity related or incidental to that

~~usiness.

Next, paragraph (a)(3) of Rule 3a-7 permits an issuer to

~~cquire additional eligible assets or to dispose of eligible

fl~ssets only if certain conditionr~ are satisfied. First, the

~~cquisition or disposition must comply with the terms and

i~:onditions set forth in the agxnements, indentures, or other

~.nstruments pursuant to which the issuer's securities are issued.

1~Tith respect to the Trust's reinveatmenG of proceeds from

maturing Short-term Assets, you state that the Trust's

fl~dministrator will select new Short-term Assets from a list of

eligible obligors set forth in a schedule to the Trust Agreement,

u~ased on a set of investment criteria also specified in the Trust

~~,greement. Q/ You believe that these limitations placed on the

u:einvestment process will satisfy this condition. With respect

~:o the acquisition of Long-term Assets, you state that the Trust

k~,greement will permit investment only in Long-term Assets

aapecifically identified i.n the Trust Agreement as underlying the

sata~zdby commitments. 9/

Paragraph (a)(3) also states that eligible assets must not

~~e acquired or disposed of for the primary purpose of recognizing

"gains or decreasi:; losses resulting from market value changes.

"rou represent that the Tzuet will not be permitted to "trade"

~~Short-term Assets or Long-term Assets for any reason. 10/ The

"trust will sell Short-term Assets only in connection with the

:~,/

The administrator will be able to make changes to the list

of eligible obligors if necessary to satisfy the

requirements in the Trust Agreement concerning the minimum

credit standards within the pool of eligible obligors and

the minimum number of eligible obligors on the list.

~/

In addition, the acquisition or disposition of eligible

assets must not result in a downgrading of the rating of the

issuer's outstanding fixed-income securities.

Rule 3a-7(a)(3)(ii). Assuming the beneficial interests are

fixed-income securities, you believe that this condition

should not apply to the proposed transaction because the

beneficial interests will not be rated and the Trust will

not otherwise issue rated securities. We agree, although we

express no view on whether the beneficial interests are

fixed- income securities, as indicated in note 13 below.

10/

The Trust will be permitted to sell the collateral securing

the repurchase agreements referred to in footnote 1 if there

are defaults on the repurchase agreements.

- 5 -

~erm~nation of the Trust or as needed to honor commitments.

similarly, the Truat will sell Long-term Asaeta only in

connection with the termination of the Trust or the Trust's

argeted maturity. We agree that, under the circumstances

escribed above, the Trust will satisfy the requirements of

'aragraph (a)(3) of Rule 3a-7.

securities Issued by the Trust

As stated above, to qualify under Rule 3a-7, an issuer may

1940

~.ot issue redeemable securities. Section 2(a)(32) of the

than

~~ct defines "redeemable security" as any security, other

upon its

~~hort-term paper, under the term3 of which the holder,

to the issuer or to a person designated by the

tation

~presen

.ssuer, i~ entitled to receive approximately his proportionate

ent

~ihare of the issuer's current net assets, or the cash equival

issuing

be

not

will

Trust

the

that

believe

.

You

h:hereof

)

p~edeemable securities within the meaning of. Section 2(a)(32

to

ability

ors

invest

an

on

placed

ions

~~ecause of the limitat

~~ith~raw all or a portion of its investment from the Trust prior

~;o the targeted maturity date. 11/ Withdrawals will not b~

in

permitted during the first six months following an investment

be

will

days

180

of

~:he Trust, and, thereafter, a notice period

p°equired. In addition, no withdrawal requests will be honored

=lf, prior to the date of honor, the Trust hoe received notice

G:equiring it to honor a commitment to purchase Long-term Assets.

be

pie agree that, in these circumstances, the Trust will not

12/

ies.

securit

ble

redeema

~Lssuing

..11/

Investors will be permitted to sell their beneficial

interests a~ any time to qualified thirc3-party purchasers

that are not affiliated with the Trust ~r its administraCor,

bud only if other investors representing at least 51~ of the

remaining beneficial inCerests consent in writing to the

sale. Third-party purchasers will be subject to the same

limitations an resale of beneficial interests and withdrawal

from the Trust as initial investors. T'he Trust's

administrator may elect to create a private secondary market

for the beneficial interests. We expr~:ss no view on whether

the creation of a secondary market would require the

administrator to register as a broker- dealer under the

Securities Exchange Act of 1934.

12/

You assert that the Trust's beneficial interests should not

be considered redeemable because each beneficial interest

will be cashed out, if at all, based ran the stated dollar

amount of the beneficial interest plu:a accrued return, as

opposed to the fair market value of the Trust's assets. We

disagree. It is the staff's position that the net asset

value (or its equivalent) of fixed-income securities can be

calculated by reference to their stated dollar amount plus

- 6 Finally, paragraph (a)(1) of the Rule requires that the

'rust must issue eithez fixed-income securities or other

~~ecurities Chat entitle their holders to receive payments that

depend primarily on the cash flow from eligible assets. You

~~tate that the payments on the beneficial interests will be

derived from the interest earned on the Short-term Assets and the

~ieriodic receipt of commitment tees, and, if a commitment is

palled, from distriY,utiona on the Long-term Assets. You further

~itat~ that the commitment fees will not account for more than 15~

h~f the return on the beneficial interests. Therefore, although

ire have determined that the commitment fees are not eligible

~►s~ets, we agree that, regardless of whether a commitment is

~:a11ed, payments on the beneficial interests will depend

~~rimarily on the cash flow from eligible assets. 1~/

We would not recommend enforcement action to Che Commission

cif the Trust does not register under the 1940 Act in reliance on

Stule 3a-7. Our position is based on all the facts and

G^epresentations contained in your letter, particularly that the

"Crust has received your opinion of counsel that entering into the

gstandby commitments is an activity related or incidental to the

~~usinesa of acquiring and holding eligible assets, and the

+representation that the beneficial interests will be sold only to

^qualified institutional buyers and persons involved in the

~~rganization or operation of the Trust. Because this position is

q~ased on the facts and representations contained in your letter,

K~ny different facts or representations might require a different

~~~onclusion.

accrued return. See Donaldson, Lufkin & Jenrette Securities

Corporation (pub. avail. Sept. 23, 1994).

1~,/

You have not asked and we offer no view regarding whether

the beneficial interests are fixed-income securities as

defined in Rule 3a-7(b)(2).

-~,~

~~

v~

~ ~ ~ ~ ~ ~ I~ ~ ~ ~ ~ ~ ~ ~ ~i~ ~ ~ ~ ~ ~i~

CRAVATH, SWAINE St MOORE

95 17 X859

y~u~a~r

"~wu~ w. Door«

fU~PtR

. WTLLH

IUNT

p11CMAR0 M. ALllH

~~~'MOMAO R. OROML

~400[R7 D. JOI/[

~~1[110[RT L. CAMP

~~144[N ~INNCLSOH

„IOHA~p S. AOL~[

~~~AUI C. 5AUN0[R5

~~/ARTIN L. BLNZCL

'~fOUOUS O, eROADWAT[R

~~1MN C. 3T[P/'LN SON

~t 1.U( A. bHULMAN

f4{TUA11T W. OOlO

"iOMN W. WN11C

'iONN L. O[[NOOWCR

ntVAN p. CM[sl[R

~~ATNICIA OLOOH[DAN

'). COIUCR 1(IgNHAN

~:IICNAEL L. 9CHl[M

. oi~~cs~ic, a

~. ~AIIR

~LDIIICK

. LOWY

OIICNMAN

nuaw.

OUNO

[DWAIiD$

JIIM6pY

~. wcuc~

N A.O. 9CMWAR2, Jp

L SLSHAq

. RI/HIND

i[9

IIROWNWOCO

~2'

WORLDWIDE PLAZA

~~

825 EIGHTH AVENUE

~

NEW YORi(,

niY 10019-7475

TEIEf+NONE: (212) 474.1060

FACSIMILE: 11121 474-3700

7I MINO WILl1~N yTR[[T

LOHOOM (CSR 9DU LN0IAND

TLLLVNON[:IA•171.404~112i

lAC S~MIL[: ~~~171~OL0~1160

SUi~( tE00, AlIA PAC~IIC lINANC[ `OW[N

C~itOANK PLA2A

l GANO[N PpAD. CCNTgA~

MONO RONO

i[L[PHON['!SF-t 600•)200

►AC S~M~I[ Slt~7609.7212

WRITER'S DIRECT DIAL NUMBER

(212) 474-1200

'RQ\i l-~r~~y

/'~BY'

~~E.ti~ ~~~'~ 19 ~.

OANICL P. GUNNINONAN

Kg19 t. HEIHZELMAH

A. ROOl~N$ KIC$$lINO

ROOCR D. 7U HNCR

PHILIP A. O[LSTON

RORY O. MILISON

N[Il P. WESTRUCH

rRANC1S P. DApNOH

RICHARD W. CIARY

WILLIAM P. ROOL RS. JR.

JAMCS O. COOPCR

B~IPN[N L. OONDON

ROO[RT A. 1(INOlE ~1

OANI[l L. MOSL[V

OR[OORY M. SHAW

P[T[R $. WIL80N

JAN[5 C. VARpC 4l, m

ROB[RT H. oARON

M[VIN J. Oli[NAN

We represerf~Citico

W. CUYTON JONN SON

STCPH[N $. MA05CN

C. ALLEN PAHK[R

MANC $, gpS[H O[RO

WILl1AN 0. RAH NAN

LEW19 R. StEINBCA3

SU9AN W[SSTLR

WIll1AM N. WID[N

TIMOTHY O. MAS~AD

DAVID M[NCA00

ROWAN O. W1480H

JONH 1. OA~~H[Y

PCT[R T. pANlUR

9ANOM C. OOIOSTCIN

PAUL MICNA~E KI

TMONAb O. RAII[RTV

NBC NAiI 8. OO LDMAN

March 23, 19 5

ACT

~~~~~ L~____~

S~~oN

Rule 3a-7 of the

Investment Company Act of 194~ULE

~vJ~U_K~ IIVC.

u-̀''~~a~h Ladies and Gentlemen:

tI~

3a.~q~~—

~ /.[_ - ~7

Q' ~/ (~~

Pu~LIC

A`IATLABSLITY ~ ~F /

Securities, Inc.

ormation of a

e

("C]1~tiCOZp") in connection with

. The Trust

"Trust")

(the

trust

business

Del~iware or other

°eligible

in

investing

of

wild► be foamed for the purpose

of the

3a-7(b)(1)

aRS~ts", as such term is defined in Rule

in

Izvdlstment Company Act of 1940 (the "1940 Act's),

accdlydance with the terms and conaitions specified in the

tru~~t agreement (the "Trust Agreement") pursuant to which.

bend~ficial interests in the Trust (the "Beneficial

Int~~res~~") will be issued to investors (the "Investors").

To d►nhance the return to Investors, the Trust will provide

sta~l~dby commitments ("Commitments") to one or more

comrl(.ercial paper issuers id~ntifie3 a~ the time o~ the

for~ltation of the Trust. In effect, commercial paper issuers

wi1~l be paying commitment fees to the Trust in return for

the Trust's providing liquidity and assuming the credit risk

of tithe Long-term Assets described below under "Trust

AS~dItB". The assets that will be held by the Trust, the

Ben4~ficial Interests that will be issued by the Trust and

the foa~nation, operation and achna.nistration of the Trust are

dest~ribed below.

On behalf o~ Citicorp, w~ hereby request a

sta4tiement that the staff a~ the Division of Investment

Mari~Ugement (the "Staff") of the Securities and Bxchange

Comnliission (the "Co~mnission") will not recommend enforcement

actjlion to the Commission upon the facts provided in this

let4°er if the Trust does not register as an investment

2

company under the 1940 Act based on our opinion that the

Trust will qualify for the exclusion from the definition of

"investment company" provided by Rule 3a-7 under the 1940

Act ("Rule 3a-7n).

Trust Assets

The Trust will be permitted to hold two classes of

assets: "Short-term Asset" and "bong-term Assets".

Short-term Assets will consist of extremely short-tezm high

quality investments, such as repurchase agreements for

government securities ("Repos"), A-2/P-1 commercial paper or

other corporate obligations rated A-1/P-1, securities issued

or guaranteed by the United States Government or its

agencies and clollax~-denominated obligations issued or

guaranteed by U.S. and foreign banks with assets exceeding

$1 billion and rated A-1/P-1, in each case with maturities

of 31 days or less. Long-tezm Assets will consist of

(i) certificates and other securities issued by special.

purpose entities such as Standard Credit Card Master

Trust 1/ (collectively, ~~Asset-Backed Securities") or

(ii) notes or other securities issued by cocmnercial paper

issuers supported by a security interest in Asset-Backed

Securities. Long-tent► Assets will be acquired by the TrusC

~:~ly in connection with honoring Commitments, as more fully

deaci•ibed below. It is our opinion that both the Short-tezm

Assets and the Long-term Assets axe "eligible assets" within

the meaning of Rule 3a-7. Because the Trust's assets will

initially consist exclusively of highly-rated liquid

investments, Citicorp believes that the Trust will satisfy

1/ Standard Credit Card Master Trust has from time to

time issued asset-backed securities registered under the

Securities Act of 1933 (the "1933 Act"). (Seg, e•a•,

Registration Statement on Fonn S-3 No. 33-62180 filed with

the Connni.ssion on June 17, 1993} . The Trust will be

permitted to hold Long-term Assets that consist of (or are

supported by) Aese~-Backed Securities that have not bees

re

registered under the 1933 Act. If ~hi~ proposed structu

format

trust

this

use

s

to

intend

rp

Citico

sful,

succes

proves

range

to structure standby liquidity commitments for a wide

Assets

erm

Long-t

ngly,

accordi

and,

ity,

of users of liquid

y of

acquired by similar trusts could consist of a variet

secured

and

ties

Securi

Backed

securities, including Assetand unsecured notes that may or may not be rated.

agency standards fox providers of liquidity to

and A-1+/P-1 rated commercial paper programs.

Formation and Operation of Trust

The commercial paper issuer that desires to obta

liquidity for a commercial paper program through the trust

structure described in this letter will be involved in the

organization of the Trust as described below. The

commercial paper issuer will specify the commercial paper

program to which the Trust will be permitted to issue

Commitments. The Trust wil]. not be permitted to issue

Commitments to any other programs. The commercial paper

issuer will also require that the Trust be structured to

permit investment only in specified Lnng-teen Assets. The

Trust Agreement will limit the investment in Long-berm

Assets to specific Asset-Backed securities owned by the

commercial paper fssuer (or to notes or other securities

supported by a security interest in such specific

Asset-Hacked Securities). And, in general, the Trust will

be custom tailored, in consult=►tion with the conenercial

paper issuer, to meet the specific requirements of the

commercial paper issuer. Citicorp expects that issuers ma

find the Trust an attractive alternative to traditional

liquidity facilities provided by commercial banks and othe

financial institutions because the Trust should not be

subject to many of the ratings downgrade risks that

accompany traditional liquidity facilities.

The Trust Agreement will permit the Trust to take

the following types oiE actions: (i) invest and reinvest in

specified Short-tezm Assets; (ii) provide Commitments to a

specifi.ecl catrunerci.a]. paper program in exchange for

conuni.tment fees; and (iii) invest in specified Long-term

Assets.

The Trust will use the proceeds from the sale of

Beneficial Interests to acquire Short-term Assets, and it

will hold such Short-teen Assets to their maturity. The

proceeds received on maturity of the Short-term Assets will

}~e reinvested in similar Short-term Asset. The

reinvestment of proceeds from maturing Short-term Assets

will be essentially programmatic--new investments wi~.l be

selected by a third party administrator (thy

4

"Administrator"), 2/ who will make such selections from a

list of eligible obligors set forth in a schedule to the

Trust Agreement (the "Obligor List"), based on a set of

investment criteria also specified in the Trust Agreement.

The only discretion that will be available to the

Administrator will be to remove obligors from the Obligor

Liet and to add new obligors to the Obligor List.

Particular Short-tezm Assets will be selected far investment

over other Short-term Assets based solely on the credit

rating of Short-term Asset issuers, yield considerations and

limitations on acquiring more than a specified percentage of

assets from a single obligor. Bven these "decisions" will

be guided by requirements in the Trust Agreement that the

Txuat maintain minimum credit standards within the pool of

eligible obligors and that the Trust maintain a minimum

number of eligible obligors on the Obligor List. It is our

opinion that these limitations will satisfy the requirement

of Rule 3a-7(a)(3)(i), that "the assets are acquired or

disposed of in accordance with th@ t~xms and conditions set

forth in the agreements, indentures, or okher instruments

pursuant to which the issuer's securities are issued". ,~/

No rating will be sought for the Beneficial

Interests. Consequently, the Beneficial Interests will be

sold only to investors who satisfy the requirements of

Mule 3a-7(a)(2). Citicorp intends to comply with

Rule 3a~7(a)(2)tii) and, accordingly, the Beneficial

as

InteresCs will be sold to qualified institutional buyers

2/ It is expected that the Administrator will be an

investment banking or investment advi.~ory firni with

experience in buying, selling and evaluating short term

money-market assets.

~/ In order to prevent the Trust from being treated as

ent

an association taxable as a corporation, the Trust Agreem

will provide that if any of the Investors goes into

or"

bankruptcy (any such Investor bein5 an "Insolvent Invest

the

),

Svent"

vency

"Insol

~n

being

event

and any such

of

Administrator will promptly noCify each of the Investors

will

notice

which

Event,

ncy

Insolve

the

the occurrence of

state that the Trust will automatically terminate unless

within 30 days from the date that the Administrator sends

Investor

such notice, Investors other than the Insolvent

cial

Benefi

representing 51~ in stated amount of the

Interests held by such Investors shall have notified the

Administrator that they waive the Insolvency Bvent.

5

defined in Rule 144A under the 1933 Act [17 CFR 230.144A]

and to persons involved in the organization or operation of

the Trust or an affil~.ate, as defined in Rule 405 under the

19°3 Act [17 CFR 230.405], of such a person. 4/

Furthermore, because the BeneEirial Interests wi.11 not be

rated, it is our opinion that, assuming the Beneficial

Interests are fixed income securities, the requirement of

Ru~.e 3a-7(a)!3)(i.i), that "the acquisition ox disposition of

the asses does not result in a downgrading 3n the rating of

4/ Rule 3a-7(a)(2) provides as follows:

"~2) Securities sold by the issuer or any

thereof are fixed-income securities rated, at

riter

underw

the time of initial sale, in one of the four highest

categories assigned long-term debt or in an equivalent

short-term caCegory (within either of which there may be

sub-categories or gradations indicating relative standing)

by at least one nationally recognized statistical rating

organization that is not an affiliated person of the issuer

or of any person involved in the organization or operation

of the issuer, except that:

(i) any fixed-income securities may be sold to

accredited investors as defined in paragraphs (1), (2)

(3), and (7) of rule 501(a) under the Securities Act of

1933 [17 CFR 230.501(a)] and an.y entity in which all of

the equity owners come within such paragraphs; and

(ii) any securities may be sold to qualified

institutional buyers as defined in rule 144A under the

Securities Act [17 CFR 230.144A] and to persons (other

than any rating organization rating the issuer's

securities) involved in the organization or operation

of the issuer or an affiliate, as defined in rule 405

under the Securities Act [17 CFR 230.4A5J, of such

person;

grovided that the issuer or any underwriter thereof

effecting such sale exercises reasonable care to ensure that

such securities are sold and will be resold to persons

n;"

specified in paragraphs (a)(2)(i) and (ii) of this sectio

6

the issuer's outstanding fixed-income securities" does not

apply to this transaction. 5/

In the absence of a call on a Commitment, the

Trust (through the Administrator or other~rise) will not be

pexmi.tted to "trade" Short-tezm Assets for any reason. This

will prevent the Trust (through the Administrator or

otherwise) from managing the Trust's portfolio of Short-term

Assets Eor the purpose of recognizing gains or decreasing

losses resulting from market value changes in the Short-term

Assets held by it. ~/ It is our opinion that this

limitation will satisfy the requirement of

Rule 3a-7(a)(3)(iii), that "the assets are not acquired or

disposed of for the primary purpose of recognizing gains or

decreasing lasses resulting from market value changes".

Rule 3a-7(a)(1) requires that the Trust issue

securities" car "other securities which entitle

income

"fixedtheir holders to receive payments that depend primarily on

the cash flow from eligible assets~~. The Trust will satisfy

~/ In order to provide a form of liquidity acceptable

to rating agencies, the Trust mur~t be pezmitted to purchase

Long-term Assets without the imposition of a rating

condition on the obligation of the Trust to make a purchase.

6/ The Trust will be permitted to liquidate Short-term

Assets as needed to honor Commitments or in the event that

the Trust terminates because an Insolvency Bvent occurs

which is not waived by the Investors. The l~.quidation of

Short-term Assets might result in gains or losses; however,

the sale of Short-term Aeset~ will not be undertaken for the

purpose of recognizing gains or decreasing losses resulting

from market value fluctuations. Any sale of Short-term

Assets will be consummated only for the purpose of honoring

Commitments (Qr if required following an Insolvency Event).

Although the Trust will be permitted Co sell collateral

pledged. to it to secure Repos acquiredl by it if there are

defaults on such Repos, it is our opinion that such a

limited right to sell collateral securing Repos, which right

is triggered only by actions independent of the Trust's and

the Administrator's discretion (i•e•, defaults on the

Repos), is not for the purpose of recognizing gains or

decreasing losses resulting from market value fluctuations,

but rather simply reflects an integral aspect of epos. A

sale of Long-terns Assets may be cor~mummated in connection

ee footnote 9 infra.

with a targeted maturi~y.

7

the requirements of Rule 3a-7(a)(1) because, in the absence

of a call on a Commitment, the payments to Investors wild be

provided from (i) interest (in the form of payments or

discount) earned on the Short-term Assets and (ii) the

periodic receipt of commitment fees for providing

Cornmitmente. It is expected that the commitment fees wi11

account for less than fifteen percent of the return tee

Investors earned during periods prior to a call on a

Commitment. It is oiir opinion that a commitment fee should

be viewed as a financial asset that by its terms converts

into cash within a finite time period as required to satisfy

the definition of °eligible assets" in Rule 3a-7(x)(1)

because each comni.tment fee will be structured as a series

of payments of fixed amounts payable ~aeriodically over a

finite time period equal to the length of the Commitment.

If the Staff agrees with our opinion that a stream of

payments fox a commitment fee should b~ viewed as an

eligible asset, then payments to Investors will deper►d

~acclusively on the cash flow from eligible assets. Tf the

Staff does not agree with this analysis, it is our opinion

ghat the payments to Investors will depend primarily on the

cash flow from eligible assets because less than fifteen

percent of the return or yield to Investors (and less than

five percent of the total combined amount of payments to

Investors) will be provided from commitment tees, with the

balance being provided from payments received in respect of

Short-teen Assets and, if a Commitment ie called on,

Long-term Assets. In either case, the requirements o~

Rule 3a-7(a)(i), that payments to Investors "depend

primarily on the cash flow from eligible assets", will be

satisfied. 7/

7/ The Staff has taken the position that, under

Section 3(c)(5)(C) of the 1940 Act, a company is primarily

engaged in "purchasing or otherwise acquiring mortgagee and

other liens on and interests in real estate" if at least 55~

of such company's assets are invested in mortgages and other

interests in real estate and the remaining 45~ of the

company's assets are invested primarily in real estate-hype

pe, e.a., Bcono Lodges of America, Inc.,

interests.

publicly available December 22, 1989; Salomon Brothers Inc.,

publicly available June 17, 1985. Where, as here, the

payments from eligible assets will in all cases exceed 55~

by a substantial margin, the requirement of Rule 3a-7(a)(i)

should be easily satisfied if the interpretation of the word

"primarily" is applied uniforn►ly.

8

Bach Commitment will be Structured as an

agreement by +the Trust to purchase, on certain

conditions, Long-term Assets from the commercial paper

issuer that is a party to the Commitment. Q/ It is our

opinion that issuing a Comtrt~.tment and receiving a commitment

Fee ae part of a.-~ agreement to purchase on certain

conditions an eligible asset is an "activitCy] related or

incidental° to purchasing an eligible asset within the

meaning of Rule 3a-7(a). It is our opinion therefore that

the Trust will be engaged solely in the business of

purchasing, or otherwise acqu~.ring and holding, eligible

assets and in activities relayed or incidental thereto.

Following the acquisition by the Trust of

Long-Germ Assets pursuant to a Conrtnitment, the return to

Investors will be provided by payments to the Trust on the

Long-term Assets. The Long-tezm Assts acquired by the

'rust will not be tradeable by the Trust. ThP Trust will

hold the Long-berm Assets to maturity, paying Investors out

of distributions received by it from time to time on the

Lonq-term Assets. ~/

8/ In general, the condiCions will require the Trust to

purchase Long-teYm Assets Erom the conunercial paper issuer

if the commercial paper issuer is unable to roll-over

maturing commercial paper by issuing new commercial paper.

The proceeds received by the commercial paper issuer from

its sale of Long-term Assets to the Trust will be used by

the commercial paper issuer to retire maturing cr~mmercial

paper. We recognize that the Staff has expressed the view

that certain types of agreements to purchase securities may

themselves be considered securities for puxpases of the

1940 Act. See Investment Company Act of 1940, Release

No. 10666 (April 18, 1979). We do not believe the Staff

must determine whether or not the Commitments contemplated

by this letter are securities. Even if a Commitment were

considered to be a security for purposes of the 1940 Act, it

would be "issued" by the Trust to a commercial paper issuer

who was involved in the organization of the Trust and thus

the "security" would have been issued to a person expressly

permitted to hold iC by virtue of Rule 3a-7(a)(ii). See

footnote 4 supra.

~/ Although the Long-term Assets will not be tradeable

by the Trust, the Trust Agreement will permit the holders of

51~ in stated amount of the Beneficial Interests to direct

the Administrator to attempt to sell all or a portion of the

9

Securities Issued by the Trust

The Trust proposes to issue a single class of

Beneficial InteresCe which will be represented by trust

certificates. Bach Beneficial Interest will be denominated

in U.S. dollars, with a stated amount equal to the dollar

amount of the purchase price paid for the Beneficial

Interest. The return paid to Investors will consist of a

pro rata share of (i) interest (or discount) received on

Short-teen Assets, (11) conanitment fees received from

commercial paper issuers and (iii) interest and similar

distributions received in respect of Long-berm Assets. From

the perspective of Investors, the Trust ie an investment

vehicle that, because of the collection of both interest (or

discount) and commitment fees, may provide a yield or return

in excess of that available from traditional short-berm

money market investments. Although the higher return or

Long-term Assets then held by the Trust for the book value

of such Long-term Assets (i.e., the price that the Trust

paid to acquire the Long-terns Assets pursuant to a

Commitment) and to use the proceeds thereof to acquire

Short-term Assets. This right of direction will be

exercisable only in connection with the liquidation of the

Trust or to make a payment in connection with a targeted

maturity. This would enable the Trust, is a situation where

the targeted maturity date of the Beneficial Interests is

approaching, but some or all of the song-term Assets then

held by it prove unable to meet their expected maturities,

to obtain proceeds wiCh which to pay off the Beneficial

Interests on the targeted maturity date. To the extend that

such proceeds were insufficient to pay off all of the

Beneficial Interests in full, the proceeds would be applied

among the holders of the Beneficial Interests. We

nro ra

believe that because this mechanic limits the price at which

the Administrator can sell such Long-term Assets to ~t most

book value, at which price there may noC even be a buyer, it

does not enaY~le the Trust to recagnize gains or decrease

losses resulting from market value changes as prohibited by

Rule 3a-7(a)t3)(iii). The Trust will also be permitted to

liquidate Long-term Assets in the event that the Trust

terminates because an Insolvency Event occurs which is not

waved by the Investors. Such a liquidation of Long-term

AsaetB will not be under!-.ap~en for the purpose of recognizing

~~~sulting from market value

gaint~ or decreasing lo$~+

fluctuations.

10

yield is accompanied by a risk Chat the liquidity commitment

will be called upon, i~ is expected that Investors will

evaluate this risk as small. The Beneficial Interests will

have a targeted maturity of two to seven years. The Truat

will be prohibited from acquiring Short-term Assets with a

maturity date late,: than the earlier of (i) 31 days

following the date of acquisition and (ii} one business day

prior to the targeted maturity date. As a result of this

limitation, if a Coimni.tment is not called on, Investors will

be repaid on the targeted maturity date from the proceeds of

Short-term Assets. Tf a Cornni.tment is called on and

Long-term Assets are acquired, Investors will be repaid in

accordance with the receipt by the Trust of distributions on

the Long-term Assets, which could result ~.n a repayment of

the Beneficial Interests either before or after the targeted

maturity date. As outlined earlier i.n footnote 9, the

Long-team Assets may be sold at the direction of holders

representing 51$ in stated amount of the Beneficial

Interests for the puxpose of providing a pay-out at or near

the targeted maturity date. In addiCion, each Investor will

have a limited ability to withdxaw all or a portion of its

investment from the Trust prior to the targeted maturity

date.

Withdrawals from Che Trust will be subject to the

following procedures and limitations:

(i) no withdrawals will be permitted during the

first six months following an investment in the Trust;

(ii) each Investor will be permitted to send a

withdrawal request to the Trust requesting a withdrawal

date not earlier than 180 days after the date on which

the withdrawal request is received by the Trust; and

(iii) no withdrawal requests will be honored if,

prior to the date of honor, the Trust has received a

notice requiring it Co honor a Cotrnnitment to purchase

Long-textn Assets. 10/

10/ Although Investors will only be entitled to

withdraw their investment from the Trust pursuant to these

limitations, Investors will b~ permitted by the terms of the

Trust Agreement to se11 their Beneficial Interests (any such

Investor being a "Selling In~restor") to third party

purchasers who are not aFfiliated with the Trust or the

P,dministrator ("Independent Purchasers") at any time

11

The availability of the exclusion from the

definition of "investment company" provided by Rule 3a-7 is

limited to issuers who do not issue redeemable securities.

A redeemable security is defined 3n Section 2(a)(32) of the

1940 Act ("Sect~.on 2(a)(32)") as:

"any security, other than short-term paper, under the

terms of which the holder, upon ~.ts presentation ~o the

issuer ox to a perean designated by the issuer, is

entitled (whether absolutely or only out of surplus) to

receive approximakely his proportionate share of the

issuer's current net assets, or the cash equivalent

thereof".

Rased on the restrictions on withdrawals from the Trust

described above, it is our opinion that the Trust will not

be issuing redeemable securities within the meaning of

Section 2(a)(32).

First, Investors will have no right to make

presentation to the issuer or to a

withdrawals "upon

issuer". Withdrawals will not be

CY~e

by

person designated

permitted for a period of six months after an Investor first

invests in the Trust. Thereafter, a notice period of a

minimum of 180 days will be req►.iired. The Staff previously

has taken a no action position under Section 3(c)(5)(C) of

the 1940 Act where similar restrictions were imposed. See,

e•a•, Redwood Mortgage Investors VII, a California LTD

Partnership, publicly available January 5, 1990; California

Dentists' Guild Real Estate Mortgage Fund II, publicly

available January 4, 1990] Breen Mortgage Fund I, publicly

available January 20, 1988; and Smbarcadero Mortgage Fund I,

publicly available November 5, 1986. Although in Redwood

Mortgage Investors and California Dentists' Guild,

(subject to the limitations 3n Rule 3a-7(a)(2) and the

general limitations of the 1933 Act), but only it Investors

other than the Selling Investor representing 51~ in stated

amount of the Beneficial Interests of such Investors shall

have consented in writing to such sale. The Independent

Purchasers will be subject to the same limitations on resale

and withdrawal from the Trust that apply to the initial

Investors. In connection with the foregoing, the

Administrator will be permitted, at its sole discretion, to

attempt to create a private secondary market for the

Beneficial Interests of Selling Investors, composed entirely

of qualified institutional buyers.