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## Record

- **Collection:** Agency decision
- **Document type:** Agency decision

## Text

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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).

-~,~
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825 EIGHTH AVENUE

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niY 10019-7475

TEIEf+NONE: (212) 474.1060
FACSIMILE: 11121 474-3700
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WRITER'S DIRECT DIAL NUMBER

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OANICL P. GUNNINONAN
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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
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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.

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Source: Frix Law Library, https://www.frixlaw.com/law-library/documents/agency%3Asec%3Ae6c4caf21a66e578. Public record. Not legal advice.