Federal Register

Friday,
October 9, 2009

Part IV

Securities and
Exchange
Commission

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17 CFR Parts 229, 230, 239 et al.
References to Ratings of Nationally
Recognized Statistical Rating
Organizations; Final Rule and Proposed
Rule

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Federal Register / Vol. 74, No. 195 / Friday, October 9, 2009 / Rules and Regulations

17 CFR Parts 240, 242, 249 and 270
[Release Nos. 34–60789, IC–28939; File Nos.
S7–17–08, S7–19–08]
RIN 3235–AK17, 3235–AK19

References to Ratings of Nationally
Recognized Statistical Rating
Organizations

Table of Contents

Securities and Exchange
Commission.
ACTION: Final rule.

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AGENCY:

SUMMARY: The Securities and Exchange
Commission (‘‘Commission’’) is
adopting amendments to certain of its
rules and forms to remove references to
securities credit ratings. The
Commission is eliminating certain
references to credit ratings issued by
nationally recognized statistical rating
organizations (‘‘NRSROs’’) in rules and
forms under the Securities Exchange
Act of 1934 related to the regulation of
self-regulatory organizations and
alternative trading systems, and in rules
under the Investment Company Act of
1940 that affect an investment
company’s ability to purchase refunded
securities and securities in
underwritings in which an affiliate is
participating. The Commission believes
that the references to credit ratings in
these rules and forms are no longer
warranted as serving their intended
purposes. The amendments are
designed to address concerns that
references to NRSRO ratings in
Commission rules may have contributed
to an undue reliance on those ratings by
market participants. In a companion
release, the Commission is re-opening
the comment period for certain other
proposed rule and form amendments
that would eliminate additional
references to NRSRO ratings.
DATES: Effective Date: November 12,
2009.
FOR FURTHER INFORMATION CONTACT: For
the rule and form amendments under
the Securities Exchange Act of 1934,
Michael Gaw, Assistant Director, at
(202) 551–5602, Brian Trackman,
Special Counsel, at (202) 551–5616, and
Sarah Albertson, Special Counsel, at
(202) 551–5647, in the Division of
Trading and Markets; for rules under the
Investment Company Act of 1940,
Penelope W. Saltzman, Assistant
Director, and Daniel K. Chang, Attorney,
at (202) 551–6792, in the Division of
Investment Management, at the
Securities and Exchange Commission,
100 F Street, NE., Washington, DC
20549.

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The
Commission is adopting amendments to
Rule 3a1– 11 under the Securities
Exchange Act of 1934 (the ‘‘Exchange
Act’’),2 Rules 300, 301(b)(5) and
301(b)(6) of Regulation ATS,3 Form
ATS–R 4 and Form PILOT.5 The
Commission also is adopting
amendments to Rules 5b–3 6 and 10f–3 7
under the Investment Company Act of
1940 (‘‘Investment Company Act’’).8
SUPPLEMENTARY INFORMATION:

SECURITIES AND EXCHANGE
COMMISSION

I. Introduction
II. Discussion
A. Amendments to Rules Under the
Exchange Act
1. Rule 3a1–1
2. Rules 300, 301(b)(5) and 301(b)(6) of
Regulation ATS
3. Form ATS–R and Form PILOT
4. Discussion
B. Amendments to Rules Under the
Investment Company Act
1. Refunded Securities (Rule 5b–3)
2. Affiliated Underwritings (Rule 10f–3)
III. Paperwork Reduction Act
IV. Cost-Benefit Analysis
V. Consideration of Burden on Competition
and Promotion of Efficiency,
Competition and Capital Formation
VI. Final Regulatory Flexibility Certification
and Analysis
VII. Statutory Authority
Text of Rule Amendments

I. Introduction
Last year the Commission issued
rulemaking initiatives in furtherance of
the Credit Rating Agency Reform Act of
2006.9 The Commission also proposed
to eliminate from certain Commission
rules and forms references to credit
ratings.10 The Commission proposed to
1 17

CFR 240.3a1–1.
U.S.C. 78a. Unless otherwise noted, all
references to rules under the Exchange Act will be
to Title 17, Part 240 or Part 242 of the Code of
Federal Regulations [17 CFR 240 or 17 CFR 242].
3 17 CFR 242.300, 242.301(b)(5), and
242.301(b)(6).
4 17 CFR 249.638.
5 17 CFR 249.821.
6 17 CFR 270.5b–3.
7 17 CFR 270.10f–3.
8 15 U.S.C. 80a. Unless otherwise noted, all
references to rules under the Investment Company
Act will be to Title 17, Part 270 of the Code of
Federal Regulations [17 CFR 270].
9 Public Law 109–291, 120 Stat. 1327 (2006). See,
e.g., Proposed Rules for Nationally Recognized
Statistical Rating Organizations, Exchange Act
Release No. 57967 (June 16, 2008) [73 FR 36212
(June 25, 2008)].
10 See References to Ratings of Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 58070 (July 1, 2008) [73
FR 40088 (July 11, 2008 (‘‘Exchange Act Proposing
Release’’)] (proposing amendments to rules and
forms under the Exchange Act); References to
Ratings of Nationally Recognized Statistical Rating
Organizations, Investment Company Act Release
No. 28327 (July 1, 2008) [73 FR 40124 (July 11,
2008)] (‘‘Investment Company Act Proposing
Release’’) (proposing amendments to rules under
2 15

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amend these rules and forms to address
concerns that the inclusion of
requirements relating to credit ratings
could create the appearance that the
Commission had, in effect, given its
‘‘official seal of approval’’ on ratings,
which could adversely affect the quality
of due diligence and investment
analysis and lead to undue reliance on
NRSRO ratings.11
Today the Commission is adopting
several of the amendments that we
proposed last year to rules and forms
under the Exchange Act and rules under
the Investment Company Act.12 The
Commission believes that the references
to credit ratings in these rules are no
longer warranted as serving their
intended purposes. These amendments
would reduce reliance on credit ratings
in our rules under the Exchange Act and
the Investment Company Act, consistent
with the protection of investors.
II. Discussion
A. Amendments to Rules Under the
Exchange Act
The Commission today is revising
Rule 3a1–1 under the Exchange Act; 13
Rules 300, 301(b)(5) and 301(b)(6) of
Regulation ATS; 14 Form ATS–R; 15 and
Form PILOT 16 to remove references to
NRSRO ratings. Each of these rules and
forms was adopted in 1998 as part of the
Commission’s new framework for the
regulation of exchanges and alternative
the Investment Company Act and Investment
Advisers Act of 1940 (‘‘Investment Advisers Act’’)).
See also Security Ratings, Securities Act Release
No. 8940 (July 1, 2008) [73 FR 40106 (July 11,
2008)] (proposing amendments to rules and forms
under the Securities Act of 1933 (‘‘Securities Act’’)
and the Exchange Act).
11 See Exchange Act Proposing Release, supra
note 10, at Section I; Investment Company Act
Proposing Release, supra note 10, at Section I. We
note that the Department of the Treasury similarly
has expressed concern that investors were overly
reliant on credit rating agencies, and that credit
ratings often failed to accurately describe the risk
of rated products. The Department of the Treasury
recommended that regulators reduce the use of
credit ratings in regulations and supervisory
practices wherever possible. See U.S. Department of
the Treasury, Financial Regulatory Reform—A New
Foundation: Rebuilding Financial Supervision and
Regulation 6, 46 (July 2009).
12 The Commission is deferring consideration of
action and reopening the comment period on other
proposed amendments to remove NRSRO ratings
references to rules under the Securities Act,
Exchange Act, Investment Company Act, and
Investment Advisers Act. See References to Ratings
of Nationally Recognized Statistical Rating
Organizations, Securities Act Release No. 9069,
Exchange Act Release No. 60790, Investment
Advisers Act Release No. 2932, Investment
Company Act Release No. 28940 (Oct 5, 2009)
(‘‘NRSRO Comment Re-Opening Release’’).
13 17 CFR 240.3a1–1.
14 17 CFR 242.300, 242.301(b)(5), and
242.301(b)(6).
15 17 CFR 249.638.
16 17 CFR 249.821.

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Federal Register / Vol. 74, No. 195 / Friday, October 9, 2009 / Rules and Regulations
trading systems (‘‘ATSs’’).17 That
framework provides the operator of a
securities market the choice whether to
register as a national securities exchange
or to register as a broker-dealer and
comply with the requirements of
Regulation ATS.
1. Rule 3a1–1

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The amendments to Rule 3a1–1 are
being adopted as proposed. Rule 3a1–
1(a) provides an exemption from the
Exchange Act definition of
‘‘exchange’’—and thus the requirement
to register as an exchange—for a trading
system that, among other things, is in
compliance with Regulation ATS.18
Rule 3a1–1(b) contains an exception to
the exemption from the exchange
definition. Under this exception, the
Commission may require a trading
system that is a ‘‘substantial market’’ to
register as a national securities exchange
if it finds that such action is necessary
or appropriate in the public interest or
consistent with the protection of
investors.19 Thus, pursuant to Rule 3a1–
1, the Commission may require a
‘‘dominant’’ ATS to register as an
exchange.20
Prior to the amendments being
adopted today, Rule 3a1–1 set forth
eight classes of securities in any one of
which an ATS might achieve
‘‘dominant’’ status: (1) Equity securities;
(2) listed options; (3) unlisted options;
(4) municipal securities; (5) investment
grade corporate debt securities; (6) noninvestment grade corporate debt
securities; (7) foreign corporate debt
securities; and (8) foreign sovereign debt
securities.21 Under the definitions that
were provided in Rule 3a1–1,
investment grade and non-investment
grade corporate debt securities have
three elements in common. They are
securities that: (1) Evidence a liability of
the issuer of such security; (2) have a
fixed maturity date that is at least one
year following the date of issuance; and
(3) are not exempted securities, as
defined in Section 3(a)(12) of the
17 See Exchange Act Release No. 40760 (Dec. 8,
1998) [63 FR 70844 (Dec. 22, 1998)] (‘‘Regulation
ATS Adopting Release’’).
18 See 17 CFR 240.3a1–1(a)(2).
19 See 17 CFR 240.3a1–1(b); Regulation ATS
Adopting Release, 63 FR at 70857.
20 Specifically, the Commission may—after notice
to an ATS and an opportunity for it to respond—
require the ATS to register as an exchange if, during
three of the preceding four calendar quarters, the
ATS had: (1) 50% or more of the average daily
dollar trading volume in any security and 5% or
more of the average daily dollar trading volume in
any class of securities; or (2) 40% or more of the
average daily dollar volume in any class of
securities. See 17 CFR 240.3a1–1(b)(1).
21 See 17 CFR 240.3a1–1(b)(3).

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Exchange Act.22 The distinguishing
characteristic of an investment grade
corporate debt security was that it has
been rated in one of the four highest
categories by at least one NRSRO.23 A
non-investment grade corporate debt
security under our rules was a corporate
debt security that has not received such
a rating.24
The Commission is revising Rule 3a1–
1 by replacing paragraphs (b)(3)(v) and
(b)(3)(vi), which define investment
grade corporate debt securities and noninvestment grade corporate debt
securities, respectively, with a single
category ‘‘corporate debt securities’’ in
paragraph (b)(3)(v).25 This new
definition retains verbatim the three
elements common to the existing
definitions of investment grade and
non-investment grade debt securities.
The 5% and 40% thresholds beyond
which the Commission could require an
ATS to register as an exchange also
remain unchanged.26 Under amended
Rule 3a1–1, the Commission can, for
example, determine that an ATS must
register as an exchange if the system
had—during three of the preceding four
calendar quarters—50% or more of the
average daily dollar trading volume in
any security and 5% or more of the
average daily dollar trading volume in
corporate debt securities, or 40% of the
average daily dollar trading volume in
corporate debt securities.27
2. Rules 300, 301(b)(5) and 301(b)(6) of
Regulation ATS
As proposed, the Commission is
making similar changes to Rules 300,
22 Compare 17 CFR 240.3a1–1(b)(3)(v) with 17
CFR 240.3a1–1(b)(3)(vi).
23 See 17 CFR 240.3a1–1(b)(3)(v).
24 See 17 CFR 240.3a1–1(b)(3)(vi).
25 Existing paragraphs (b)(3)(vii) and (b)(3)(viii)
are unchanged but redesignated as paragraphs
(b)(3)(vi) and (b)(3)(vii), respectively.
26 See supra note 19. While the percentage
thresholds remain unchanged, the dollar volume
needed to reach these thresholds has increased. For
example, under Rule 3a1–1 as it existed prior to
today’s action, an ATS that had 40% of the average
daily dollar trading volume in non-investment
grade corporate debt securities and 0% of the
average daily dollar trading volume in investment
grade corporate debt securities for three consecutive
months could have been required by the
Commission to register as an exchange. Under the
amended Rule 3a1–1, the Commission will not be
able to require the ATS to register as an exchange
because the ATS’s combined average daily dollar
trading volume in corporate debt securities would
be less than 40%.
27 The other six classes of securities—equity
securities, listed options, unlisted options,
municipal securities, foreign corporate debt
securities, and foreign sovereign debt securities—
remain unchanged. Therefore, as under Rule 3a1–
1 prior to today’s amendments, the Commission
may also determine that an ATS must register as an
exchange if the system exceeds the volume
thresholds in any of these other classes of
securities.

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301(b)(5) and 301(b)(6) of Regulation
ATS. Rule 300 sets forth definitions
used in Regulation ATS, including of
‘‘investment grade corporate debt
security’’ and ‘‘non-investment grade
corporate debt security.’’ 28
Rule 301(b)(5) of Regulation ATS
imposes a ‘‘fair access’’ requirement,
whereby an ATS that exceeds certain
volume thresholds in any class of
securities must establish written
standards for granting access to trading
on its system and not unreasonably
prohibit or limit any person in respect
to access to the services it offers.29 Prior
to today’s amendments, the fair access
standard applied if an ATS had 5% or
more of the average daily volume during
at least four of the preceding six
calendar months in any of the following:
(1) Any individual National Market
System stock (‘‘NMS stock’’); 30 (2) any
individual equity security that is not an
NMS stock and for which transactions
are reported to a self-regulatory
organization (‘‘SRO’’); (3) municipal
securities; (4) investment grade
corporate debt securities; or (5) noninvestment grade corporate debt
securities.
Rule 301(b)(6) of Regulation ATS 31
requires an ATS that exceeds certain
volume thresholds in any class of
securities to comply with standards
regarding the capacity, integrity and
security of its automated systems. Five
classes of securities were identified in
Rule 301(b)(6): (1) NMS stocks; (2)
equity securities that are not NMS
stocks and for which transactions are
reported to a SRO; (3) municipal
securities; (4) investment grade
corporate debt securities; and (5) noninvestment grade corporate debt
securities.32
The Commission is amending Rules
300, 301(b)(5) and 301(b)(6) as proposed
to establish a single class of ‘‘corporate
debt securities’’ and to eliminate the
existing separate classes of investment
grade and non-investment grade
corporate debt securities. Accordingly,
paragraphs (i) and (j) of Rule 300 are
replaced with a new paragraph (i)
defining ‘‘corporate debt security’’ to
mean any security that: (1) Evidences a
liability of the issuer of such security;
(2) has a fixed maturity date that is at
least one year following the date of
issuance; and (3) is not an exempted
security, as defined in Section 3(a)(12)
28 See

17 CFR 242.300(i) and (j).
17 CFR 242.301(b)(5).
30 See 17 CFR 240.600(a)(47) (defining ‘‘NMS
stock’’).
31 17 CFR 242.301(b)(6).
32 17 CFR 242.301(b)(6)(i).
29 See

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of the Exchange Act.33 Former
paragraphs (i)(D) and (i)(E) of Rule
301(b)(5) are replaced with a new
paragraph (i)(D) providing that an ATS
must comply with the access
requirements set out in Rule 301(b)(5) if,
with respect to corporate debt securities,
such system accounts for 5% or more of
the average daily volume traded in the
United States for the requisite number
of months. The 5% threshold at which
an ATS would have to grant fair access
to its system also remains unchanged.34
Former paragraphs (i)(D) and (i)(E) of
Rule 301(b)(6) are replaced with a new
paragraph (i)(D) providing that an ATS
must comply with the capacity, integrity
and security requirements of Rule
301(b)(6) if, with respect to corporate
debt securities, such system accounts
for 20% or more of the average daily
volume traded in the United States for
the requisite number of months. The
20% threshold and the other three
classes of securities remain unchanged.
As with the changes to Rule 3a1–1, the
other classes of securities referenced in
these rules remain unchanged.
3. Form ATS–R and Form PILOT
The Commission is making
corresponding amendments as proposed
to Form ATS–R and Form PILOT. Form
ATS–R is used by ATSs to report certain
information about their activities to the
Commission on a quarterly basis.35
Form ATS–R requires each ATS to
report the total unit volume and total
dollar volume in the previous quarter
for various categories of securities,
including—prior to today’s
amendments—investment grade and
non-investment grade corporate debt
securities. Consistent with the
amendments to Regulation ATS
described above, we are revising Form
ATS–R to eliminate the separate
categories for investment grade and noninvestment grade corporate debt
securities, and instead creating a single
category for ‘‘corporate debt securities.’’
As with the changes to Regulation
ATS, ‘‘corporate debt securities’’ is
defined in the instructions to Form
ATS–R to mean any security that: (1)
Evidences a liability of the issuer of
such security; (2) has a fixed maturity
date that is at least one year following
the date of issuance; and (3) is not an

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33 15

U.S.C. 78c(a)(12).
the Commission originally adopted
Regulation ATS, it set the fair access threshold at
20%. It later lowered the threshold to 5% in
connection with the adoption of Regulation NMS.
See Exchange Act Release No. 51808 (June 9, 2005)
[70 FR 37496, 37550 (June 29, 2005)].
35 Each ATS must file a Form ATS–R within 30
days of the end of each calendar quarter, and within
ten days of a cessation of operations. See 17 CFR
242.301(b)(9).
34 When

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exempted security, as defined in Section
3(a)(12) of the Exchange Act. Because
separate classes for investment grade
and non-investment grade corporate
debt securities are eliminated for
purposes of the thresholds in Rule 3a1–
1 and Rules 301(b)(5) and 301(b)(6) of
Regulation ATS, no purpose is served
by requiring ATSs to separately report
their trading volumes for investment
grade and non-investment grade debt
securities on Form ATS–R. The figures
for the separate classes will be added
together and reported as a single item on
the amended form. The Commission is
not making any other changes to Form
ATS–R.
Ordinarily, Section 19 of the
Exchange Act 36 and Rule 19–4
thereunder 37 require a SRO to file with
the Commission proposed rule changes
on Form 19b–4 regarding any changes to
any material aspect of its operations,
including any trading system. Rule 19b–
5 under the Exchange Act 38 sets forth a
limited exception to that requirement by
permitting an SRO to operate a pilot
trading system without filing proposed
rule changes with respect to that system
if certain criteria are met. One of those
criteria is that the SRO files a Form
PILOT in accordance with the
instructions on that form. Like Form
ATS–R, Form PILOT—prior to today’s
amendments—required quarterly
reporting of trading activity by classes of
securities, including investment grade
and non-investment grade corporate
debt securities. For the same reasons we
are amending Rule 3a1–1 and
Regulation ATS, we are also revising
Form PILOT to eliminate these two
categories, replacing them with a single
category of ‘‘corporate debt securities.’’
Corporate debt securities are defined
identically in Form PILOT and Form
ATS–R. The Commission believes that it
is appropriate to obtain trading volumes
from pilot trading systems for the
combined class of corporate debt
securities, and that separate reporting of
the two classes is not necessary to
adequately monitor the development of
pilot trading systems. The Commission
notes that, in over nine years since Rule
19b–5 and Form PILOT were adopted,
no SRO has ever established a pilot
trading system pursuant to Rule 19b–5
to trade corporate debt securities.
4. Discussion
In the Exchange Act Proposing
Release, the Commission sought
comment on proposed changes to
certain Exchange Act rules and forms,
36 15

U.S.C. 78s.
CFR 240.19b–4.
38 17 CFR 240.19b–5.
37 17

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including the changes to Rule 3a1–1,
Regulation ATS, Form ATS–R and Form
PILOT that the Commission is adopting
today. With respect to Rule 3a1–1 under
the Exchange Act and Rules 300,
301(b)(5) and 301(b)(6) of Regulation
ATS, the Commission sought comment
on whether, in light of the proposed
combination of investment grade and
non-investment grade corporate debt
securities into a single class, it should
adopt lower thresholds at which an ATS
that trades corporate debt securities
should be required to register as an
exchange. The Commission also
solicited comment on whether the
proposed amendments to Rule 3a1–1,
Regulation ATS, Form ATS–R and Form
PILOT would significantly affect
investors, market participants, the
national market system or the public
interest.
The Commission received many
comments broadly arguing that the
elimination of references to NRSRO
ratings would not reduce undue reliance
on the NRSROs and could have a
potentially destabilizing effect, but these
comments focused on NRSRO
references in rules where the NRSRO
credit rating was relied upon to
determine the credit risk or liquidity of
a particular security in order to achieve
the rules’ regulatory purpose. 39 For
39 The comment letters are available for public
inspection and copying in the Commission’s Public
Reference Room, 100 F Street, NE., Washington, DC
20549 on official business days between the hours
of 10 a.m. and 3 p.m. (File No. S7–17–08), and also
are available on the Commission’s Internet Web site
(http://www.sec.gov/comments/s7-17-08/s71708.
shtml). The Commission received 20 comments in
response to the Exchange Act Proposing Release.
Many of the comments commended the
Commission’s efforts to reform the credit rating
process, but opposed the proposals outlined in the
proposed rulemakings. See, e.g., Comment Letter of
Charles Schwab (Sept. 5, 2008) (labeling the
Commission’s proposed amendments to remove
NRSRO rating from its rules as premature and
ultimately destabilizing) (‘‘Schwab Comment
Letter’’); Comment Letter of the Securities Industry
and Financial Markets Ass’n. (Sept. 4, 2008)
(‘‘SIFMA Comment Letter’’) (noting that SIFMA has
not found that the possibility of undue reliance on
credit ratings supports the deletion of references to,
and the use of, credit ratings in regulations while
stating that the appropriate degree of use of credit
ratings by market participants is less of a regulatory
issue and more one of best practices within the
marketplace). One commenter also encouraged the
Commission to analyze the potential consequences
of removing particular references to ratings, as
opposed to a wholesale abandonment of NRSROratings based criteria. See Comment Letter of
Moody’s Investor Services (Sept. 5, 2008). Another
commenter encouraged the Commission to
withdraw the proposals from active consideration
until the Commission has coordinated with other
regulatory agencies to prevent the proposals from
conflicting with existing or proposed regulation of
other financial services industries. See Comment
Letter of Mortgage Bankers Ass’n. (Sept. 5, 2008).
In addition, the majority of commenters specifically
opposed the other proposed amendments in the
Exchange Act Proposing Release. The Commission

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example, one commenter suggested that
credit ratings are a necessary part of an
effective risk measurement, along with
each participant’s independent analysis
of credit risk, and questioned the
availability and quality of substitutes for
such ratings.40
In contrast, the amendments to
Regulation ATS and the related
Exchange Act rules discussed herein
simply use NRSRO ratings to categorize
trading activity into market segments for
purposes of these rules’ reporting and
other requirements. The two
commenters who expressly addressed
the specific changes that the
Commission is adopting in this release
raised no objection to the elimination of
references to NRSRO ratings in Rule
3a1–1, Regulation ATS, Form ATS–R
and Form PILOT.41 One commenter, an
NRSRO, was generally supportive of
these proposed changes, stating that the
current distinction between investment
grade and non-investment grade
corporate debt securities in these rules
and forms was ‘‘superfluous and can be
eliminated without any untoward
consequences for investors.’’ 42 The
other commenter was also generally
supportive of the proposals, and
advocated various additional rule
changes that, in its view, would
enhance transparency for investors in
fixed income securities.43
Consistent with the reasons set forth
in the Exchange Act Proposing Release
and based on the Commission’s
experience since the adoption of
Regulation ATS in 1998, the
Commission believes that distinguishing
investment grade corporate debt
is deferring action and seeking additional
comments on those other proposed amendments.
See NRSRO Comment Re-Opening Release, supra
note 12.
40 See Schwab Comment Letter (specifically
commenting on Rule 15c3–1 under the Exchange
Act (the ‘‘Net Capital Rule’’), Rule 2a–7 under the
Investment Company Act and Rule 206(3)–3T under
the Investment Advisers Act).
41 See Comment Letter of DBRS (Sept. 8, 2008)
(‘‘DBRS Comment Letter’’); Comment Letter of
Multiple-Markets (Sept. 5, 2008) (‘‘MultipleMarkets Comment Letter’’).
42 See DBRS Comment Letter.
43 See Multiple-Markets Comment Letter. The
commenter also suggested reducing the volume
threshold in Rule 3a1–1 for the determination of a
‘‘substantial market’’ and distinguishing market
centers based on client and product types, and a
corresponding reduction of the threshold in Rule
301(b)(6) for determining the applicability of
capacity, integrity, and security requirements. The
commenter also advocated that the Commission
undertake a review of electronic trading platforms
to evaluate fair access under Rule 301(b)(5). In
addition, the commenter encouraged the
Commission to make public the data filed on both
Forms ATS and ATS–R. Although these comments
go beyond the scope of the initial proposal, the
Commission will consider them in connection with
any future proposals in this area.

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securities and non-investment grade
corporate debt securities as separate
classes of securities under Rule 3a1–1,
Regulation ATS, Form ATS–R and Form
PILOT is no longer necessary. In each
case, as discussed, we believe that
combining all corporate debt securities
into a single class is appropriate.
Consolidated reporting is adequate for
Commission purposes and removal of
NRSRO references in these rules may
help marginally reduce any undue
reliance on credit ratings.
With regard to Rule 3a1–1, the
Commission believes that exceeding a
volume threshold for a combined class
of all corporate debt securities is a
sufficient indication of significant
trading activity that could warrant
requiring an ATS to register as an
exchange, and that it is not necessary to
assess trading volumes in the narrower
segments of investment grade and noninvestment grade corporate debt
securities. While the amendment to
Rule 3a1–1 adopted today increases the
dollar volume of trading in corporate
debt securities that an ATS must
execute before it is required to register
as an exchange, which could potentially
reduce the likelihood that an ATS
would be required to register as an
exchange,44 we believe that this change
is nevertheless appropriate. As noted
above, the Commission believes that
these NRSRO references are no longer
necessary and thus there is no need to
analyze ‘‘dominance’’ in separate
classes of investment grade and noninvestment grade corporate debt
securities. We specifically asked in the
Exchange Act Proposing Release
whether the Commission should lower
the threshold in Rule 3a1–1 for the
combined class of corporate debt
securities. The Commission received no
comments in response to this question
and no suggestion for an alternate
threshold. Following the amendment
adopted today, we will continue to
analyze for dominance in six other
classes of securities (in addition to the
new single class for corporate debt
securities).45
For the same reasons we are
amending Rule 3a1–1, we believe that
amending Rules 300, 301(b)(5) and
301(b)(6) of Regulation ATS is
appropriate because these NRSRO
references are no longer necessary to
serve their regulatory purpose and such
removal may help reduce any undue
reliance on credit ratings. The
supra note 25.
over ten years since adopting Rule 3a1–1, the
Commission has never determined to require an
ATS to register as an exchange because it has
become ‘‘dominant.’’

52361

Commission believes that a volume
threshold for a combined class of all
corporate debt securities is sufficient for
the fair access requirement and the
capacity, integrity and security
requirements. The Commission believes
that the purposes of Regulation ATS
will be fulfilled if investment grade and
non-investment grade corporate debt
securities are combined into a single
class. ATSs will continue to be subject
to the existing fair access requirement
and capacity, integrity and security
requirements with respect to the other
existing classes of securities set forth in
Rules 301(b)(5) and 301(b)(6) of
Regulation ATS.
For the reasons described above, the
Commission believes that the changes to
Rule 3a1–1, Regulation ATS, Form
ATS–R and Form PILOT that we are
adopting today to remove references to
NRSRO ratings are necessary and
appropriate in the public interest and
consistent with the protection of
investors. While the removal of the
distinction between investment grade
and non-investment grade corporate
debt in the context of ATS reporting
may marginally reduce the information
immediately available to the
Commission regarding corporate debt
traded, the Commission believes that
these specific references are not
necessary.46 Eliminating these
references may help marginally reduce
undue reliance on credit ratings and the
removal of these requirements relating
to credit ratings could marginally
reduce compliance costs for ATSs.
Moreover, as discussed above, the
Commission does not believe that the
broad concerns raised by many
commenters regarding the risks inherent
in removing NRSRO ratings and
replacing them with a substitute in
response to the Exchange Act Proposing
Release are applicable to the specific
changes being adopted in today’s
amendments. Finally, the Commission
notes that the two commenters who
specifically commented on these
changes supported them.
B. Amendments to Rules Under the
Investment Company Act
Four of the Commission’s rules under
the Investment Company Act (Rules 2a–
7, 3a–7, 5b–3 and 10f–3) and one rule
under the Investment Advisers Act of
1940 47 (‘‘Investment Advisers Act’’)
(Rule 206(3)–3T) reference credit ratings
by NRSROs. These rules use the credit
ratings issued by NRSROs in different

44 See
45 In

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46 The Commission retains the authority to
request more specific information regarding the
securities traded by ATSs. See 17 CFR 242.302–303.
47 15 U.S.C. 80b.

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contexts, and for different purposes, to
distinguish among various grades of
debt and other rated securities.
In July 2008, we proposed to amend
each rule to omit references to NRSRO
ratings and, except with respect to one
of the rules, substitute alternative
provisions that were designed to
achieve the same purpose as the
ratings.48 We received 66 comments on
the proposal.49 Six commenters
generally advocated eliminating
references to NRSRO ratings in
Commission rules.50 However, most
commenters opposed the amendments.
Many of those commenters supported
the Commission’s reevaluation of the
use of NRSRO ratings in its rules, but
suggested that the Commission continue
its evaluation pending implementation
of the additional requirements for
NRSROs that we recently adopted under
the Credit Rating Agency Reform Act.51
48 See Investment Company Act Proposing
Release, supra note 10, at Section III.
49 The comment letters are available for public
inspection and copying in the Commission’s Public
Reference Room, 100 F Street, NE., Washington, DC
20549 on official business days between the hours
of 10 a.m. and 3 p.m. (File No. S7–19–08), and also
are available on the Commission’s Internet Web site
(http://www.sec.gov/comments/s7-19-08/s71908.
shtml).
50 Comment Letter of Professor Frank Partnoy
(received Sept. 5, 2008) (‘‘I am submitting
comments to applaud the Commission’s proposed
rules, to indicate that there is strong academic
support for its proposal * * *.’’) (‘‘Partnoy
Comment Letter’’); Comment Letter of Lawrence J.
White, Professor of Economics, Stern School of
Business (Sept. 5, 2008) (‘‘White Comment Letter’’)
(‘‘I endorse [the] general spirit of the SEC’s
proposed rules and urge the SEC to go even further
and to eliminate the NRSRO category entirely.’’);
Comment Letter of the Government Finance
Officers Ass’n. (Sept. 5, 2008) (‘‘GFOA Comment
Letter’’) (‘‘We also generally support the
Commission’s proposals to deemphasize the
reliance on ratings throughout its Rules.’’);
Comment Letter of The Reserve (Sept. 5, 2008)
(advocating removal of the designation of any
entities as NRSROs); Comment Letter of Financial
Economists Roundtable (Dec. 1, 2008) (‘‘FER
Comment Letter’’) (‘‘strongly endors[ing]
eliminating from SEC regulations every prescriptive
mandate that is or would be based solely on credit
ratings set by NRSROs’’ but acknowledging a
division of opinion with regard to assessing the net
benefits of ‘‘quasi-safe-harbors (offered mainly to
officers and directors of money market mutual
funds) based on credit ratings’’); Comment Letter of
CFA Institute (Mar. 26, 2009) (‘‘CFA Institute
Comment Letter’’) (‘‘agree[ing] with the objectives
* * * to eliminate, modify or substitute references
to ratings assigned by an NRSRO in an effort to
reduce reliance on ratings that may have
inadvertently conveyed an ‘official seal of
approval’ ’’ but questioning the breadth of certain
proposed changes and urging retention of current
regulation for certain rules).
51 See, e.g., Comment Letter of the Investment
Company Institute (‘‘ICI Comment Letter’’) (Sept. 5,
2008); Comment Letter of the American
Securitization Forum (Sept. 5, 2008) (‘‘ASF
Comment Letter’’); Comment Letter of the Vanguard
Group (Aug. 1, 2008) (‘‘Vanguard Comment
Letter’’). We proposed and adopted rules under the
Credit Rating Agency Reform Act in 2007. See

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Most commenters also addressed
specific proposed rule amendments,
which we discuss in more detail below.
Today we are amending Rules 5b–3
and 10f–3 under the Investment
Company Act.52 As discussed further
below, we believe that these
amendments eliminate unnecessary
references to credit ratings. The
amendments may marginally reduce any
undue reliance on credit ratings and
may advance the goal of promoting
better analysis of underlying investment
decisions. In addition, because the
references are no longer necessary and
an adequate substitute exists for the
reference in Rule 10f–3, reliance on
credit ratings in these contexts is no
longer justified. We believe the
Oversight of Credit Rating Agencies Registered as
Nationally Recognized Statistical Rating
Organizations, Exchange Act Release No. 55231
(Feb. 2, 2007) [72 FR 6378 (Feb. 9, 2007)]
(proposing release); Oversight of Credit Rating
Agencies Registered as Nationally Recognized
Statistical Rating Organizations, Exchange Act
Release No. 55857 (June 5, 2007) [72 FR 33564 (June
18, 2007)] (adopting release). We also have, among
other things, adopted amendments to those rules
this year to impose additional requirements on
NRSROs to address concerns about the integrity of
their rating procedures and methodologies. See,
e.g., Amendments to Rules for Nationally
Recognized Statistical Rating Organizations,
Exchange Act Release No. 59342 (Feb. 2, 2009) [74
FR 6456 (Feb. 9, 2009)]. We believe, however, that
the amendments eliminating the references to
NRSRO ratings in certain rules would address our
separate concerns discussed above. See supra text
accompanying note 11.
52 As discussed below and in a companion
release, we are adopting amendments to Rule 5b–
3 with respect to investments in refunded
securities, and are deferring consideration of action
on and requesting further comment on,
amendments to Rule 5b–3 with respect to
investments in repurchase agreements. See NRSRO
Comment Re-Opening Release, supra note 12. We
are also requesting further comment on the
proposed amendments to Rule 3a–7 under the
Investment Company Act and Rule 206(3)–3T under
the Investment Advisers Act. See id. In June 2009,
as part of our proposal on money market fund
reform, we requested further comment on whether
we should eliminate the use of NRSRO ratings in
Rule 2a–7. See Money Market Fund Reform,
Investment Company Act Release No. 28807 at
Section II.A.a (June 30, 2009) [74 FR 32688 (July 8,
2009)] (‘‘Money Market Fund Proposing Release’’).
We also sought comment on what other alternatives
we could adopt to encourage more independent
credit risk analysis and meet the regulatory
objectives of the requirement in Rule 2a–7 regarding
NRSRO ratings. We asked whether we should
consider a roadmap for phasing in the eventual
removal of NRSRO references from the rule. We
specifically noted that we were considering an
approach under which a money market fund’s
board would designate three (or more) NRSROs that
the fund would look to for all purposes under Rule
2a–7 in monitoring whether a security held by a
fund continues to be an ‘‘eligible security’’ for
purposes of the rule. We are not pursuing this
approach with regard to the rules we are amending
today because Rules 5b–3 and 10f–3 require that
certain standards be met when the fund acquires
those securities, and do not require subsequent
monitoring of credit ratings by various NRSROs.
See Rule 5b–3(c)(iv); Rule 10f–3(a)(3).

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amendments to Rule 5b–3 are necessary
and appropriate in the public interest
and consistent with the protection of
investors and the purposes fairly
intended by the policy and provisions of
the Investment Company Act.53 We also
believe that the amendments to Rule
10f–3 are consistent with the protection
of investors.54
1. Refunded Securities (Rule 5b–3)
Under Rule 5b–3, a ‘‘refunded
security’’ is a debt security whose
principal and interest payments are to
be paid by U.S. government securities
that have been irrevocably placed in an
escrow account and are pledged only to
the payment of the debt security.55
Section 5(b)(1) of the Investment
Company Act limits the amount that a
fund that holds itself out as being
‘‘diversified’’ may invest in the
securities of any one issuer (other than
the U.S. Government). Rule 5b–3
permits a fund that acquires a refunded
security to treat it as an acquisition of
the escrowed government securities for
purposes of the diversification
requirements of Section 5(b)(1) of the
Act, if certain conditions are met.56
One of the conditions of Rule 5b–3 is
that an independent certified public
accountant (‘‘independent accountant’’)
must have certified to the escrow agent
that the escrowed securities will satisfy
all scheduled payments of principal,
interest, and applicable premiums on
the refunded securities.57 The rule
requires the certification by an
independent accountant (together with
the other conditions) to ensure that the
bankruptcy of the issuer of the prerefunded securities would not affect
payments on the securities from the
escrow account.58 This condition is not
required, however, if the refunded
53 See

Section 6(c) of the Investment Company

Act.
54 See

Section 10(f) of the Investment Company

Act.
55 Rule

5b–3(c)(4).
5b–3(b). Similarly under Rule 2a–7, a
money market fund may treat the acquisition of a
refunded security, as defined in Rule 5b–3(c)(4), as
the acquisition of the escrowed government
securities for purposes of Rule 2a–7’s
diversification requirements. Rule 2a–7(c)(4)(ii)(A),
(B), 2a–7(a)(20) (definition of ‘‘refunded security’’).
57 Rule 5b–3(c)(4)(iii).
58 See Treatment of Repurchase Agreements and
Refunded Securities as an Acquisition of the
Underlying Securities, Investment Company Act
Release No. 25058 (July 5, 2001) [66 FR 36156 (July
11, 2001)] (‘‘Rule 5b–3 Adopting Release’’), at text
accompanying n. 25 (explaining that the conditions
required in the definition of refunded security
correspond to those in the definition of the term in
Rule 2a–7); Revisions to Rules Regulating Money
Market Funds, Investment Company Act Release
No. 21837 (Mar. 21, 1996) [61 FR 13956 (Mar. 28,
1996)] (‘‘Rule 2a–7 1996 Amending Release’’), at
Section II.D.2.
56 Rule

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security has received a debt rating in the
highest rating category from an
NRSRO.59 The Commission included
this exception because in rating
refunded securities, NRSROs typically
require the same determination.60
Last year the Commission proposed to
eliminate the exception to the
certification requirement for securities
that have received the highest credit
rating from an NRSRO. Under the
proposed amendment, the accountant
certification condition would apply
uniformly to all refunded securities,
regardless of the securities’ credit rating.
We are amending Rule 5b–3, as
proposed, to eliminate the exception for
refunded securities with certain credit
ratings.61 Under the amended rule, an
independent accountant must have
certified to the escrow agent that the
deposited securities will satisfy all
scheduled payments of principal,
interest and applicable premiums on the
refunded securities.62 Thus, the same
standard will apply for securities with
the highest NRSRO debt rating as
currently apply to those that have
received lower or no ratings.
Three commenters objected to the
proposed amendment, asserting that
requiring funds to obtain independent
accountants’ certifications for refunded
securities is inefficient, could increase
fund expenses and could decrease
liquidity if funds choose not to bid on
refunded securities for which
certificates are not readily available.63
The amended rule, however, does not
require that funds obtain such a
certification. Rather, it requires that an
independent accountant certify to the
escrow agent that the escrowed
securities will satisfy all scheduled
payments. This requirement may be
met, for example, by the fund manager
confirming that a certification meeting
the requirements of the rule was
provided to the escrow agent.
Bond indentures or resolutions
authorizing the issuance of the refunded
bonds typically require that the escrow
agent receive a certificate from an
independent accountant that the
escrowed securities will satisfy all
scheduled payments on the refunded
securities. Fund managers could
confirm that the escrow agent has

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59 Rule

5b–3(c)(4)(iii).
Technical Revisions to the Rules and
Forms Regulating Money Market Funds, Investment
Company Act Release No. 22921 (Dec. 2, 1997) [62
FR 64968 (Dec. 9, 1997)], at Section I.B.2.c.
61 Amended Rule 5b–3(c)(4)(iii).
62 Id.
63 See Calvert Comment Letter (Sept. 5, 2008);
Letter of Connecticut Treasurer (Sept. 4, 2008)
(‘‘Connecticut Treasurer’s Comment Letter’’);
Oppenheimer Comment Letter (Sept. 4, 2008).
60 See

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received such a certification, and this
confirmation could come from any of
multiple sources at little expense, such
as the issuer’s Web site, a municipal
dealer’s Web site or the escrow agent’s
Web site.64 Moreover, and as explained
in the Proposing Release, a fund could
satisfy the certification requirement of
Rule 5b–3 by determining that a third
party such as an NRSRO, in the course
of evaluating an offering of refunded
securities, already has determined that
an independent accountant provided
the required certification to the escrow
agent.65
Because we understand that
accountant certifications are typically
provided during the course of a
refunding transaction, we believe that it
will not be difficult or expensive for
fund managers to confirm that the
certification has been provided to the
escrow agent. Thus, we do not believe
that eliminating the ratings requirement
exception in Rule 5b–3 is likely to result
in significant additional costs to
purchasers. Fund managers’ ability to
confirm without significant difficulty or
expense that the requisite certification
has been provided to the escrow agent
should address concerns that the
amendment could decrease the liquidity
of refunded securities as a result of
funds choosing not to bid on refunded
securities for which certificates are
unavailable.
2. Affiliated Underwritings (Rule 10f–3)
Section 10(f) of the Investment
Company Act prohibits a registered
fund from knowingly purchasing any
security for which an underwriter
having certain relationships with the
fund or its investment adviser
64 Although such information may not be readily
available from all of these sources today, issuers,
dealers, escrow agents or NRSROs are likely to
provide such information to meet the needs of fund
managers.
65 See Investment Company Act Proposing
Release, supra note 10, at text accompanying n.59.
Some rating agencies require certifications that we
understand meet the requirements of Rule 5b–3.
See, e.g., Moody’s Investors Services, Ratings
Methodology: Refunded Bonds (June 2007)
(available at http://www.moodys.com/moodys/cust/
research/MDCdocs/29/2006700000441141.pdf?doc_
id=2006700000441141&frameOfRef=municipal)
(‘‘The initial verification reports should be prepared
by an individual Certified Public Accountant (CPA),
a CPA firm, a Public Accounting Firm, or by
another entity with nationally recognized
proficiency in providing verification reports.
Importantly, the verification should be provided by
an entity independent of the issuer and refunding
transaction.’’); Fitch Ratings, Guidelines for Rating
Prerefunded Municipal Bonds (Apr. 2, 2009)
available at http://www.fitchratings.com/creditdesk
reports/report_frame.cfm?rpt_id=431370; Standard
& Poor’s, Criteria/Governments/U.S. Public
Finance: Defeasance (June 26, 2007) available at
http://www2.standardandpoors.com/portal/site/sp/
en/us/page.article/2,1,1,0,1204836565946.
html#ID199.

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52363

(‘‘affiliated underwriter’’) is acting as a
principal underwriter 66 during the
existence of an underwriting or selling
syndicate for that security.67 The
prohibition was designed to prevent the
‘‘dumping’’ of unmarketable securities
on affiliated funds, either by forcing the
fund to purchase unmarketable
securities from the underwriting affiliate
itself or by forcing or encouraging the
fund to purchase the securities from
another member of the syndicate.68
The Commission adopted Rule 10f–3
in 1958 to permit a fund that is affiliated
with a member of an underwriting
syndicate to purchase securities from
the syndicate if certain conditions are
met.69 The conditions are designed to
address the risks raised by purchases
that could benefit fund affiliates. For
example, one condition of the rule
requires that securities be purchased
before the end of the first day on which
any sales are made, at a price that is not
more than the price paid by each other
66 The term ‘‘principal underwriter’’ means (in
relevant part) an underwriter who, in connection
with a primary distribution for securities: (1) Is in
privity of contract with the issuer or an affiliated
person of the issuer; (2) acting alone or in concert
with one or more other persons, initiates or directs
the formation of an underwriting syndicate; or (3)
is allowed a rate of gross commission, spread, or
other profit greater than the rate allowed another
underwriter participating in the distribution. 15
U.S.C. 80a–2(a)(29).
67 Section 10(f) prohibits a registered fund from
knowingly purchasing a security during the
existence of an underwriting or selling syndicate if
a principal underwriter of the security is an officer,
director, member of an advisory board, investment
adviser, or employee of the fund or is a person of
which any such officer, director, member of an
advisory board, investment adviser, or employee is
an affiliated person. An affiliated person of a fund
includes, among others: (1) Any person directly or
indirectly owning, controlling, or holding with
power to vote, five percent or more of the
outstanding voting securities of the fund; (2) any
person five percent or more of whose outstanding
voting securities are directly or indirectly owned,
controlled, or held with power to vote by the fund;
and (3) any person directly or indirectly controlling,
controlled by, or under common control with the
fund. 15 U.S.C. 80a–2(a)(3)(A), (B) and (C).
68 See Report of the SEC, Investment Trusts and
Investment Companies, H.R. Doc. No. 279, 76th
Cong., 2d Sess., pt. 3, at 2581, 2589 (1939). The
sales were also used to alleviate certain of an
affiliated underwriter’s financial difficulties. For
example, an underwriter could benefit by rapidly
turning over its securities inventory to produce
working capital and to reduce the related expenses
of carrying the inventory. Congress also expressed
concern regarding the amount of underwriting fees
earned by the sponsors and affiliated persons who
placed the securities with the fund. See Hearings
on S.3580 Before a Subcommittee of the
Commission on Banking and Currency, 76th Cong.,
3d Sess. 209, 212–23 (1940).
69 Exemption of Acquisition of Securities During
Existence of Underwriting Syndicate, Investment
Company Act Release No. 2797 (Dec. 1, 1958) [23
FR 9548 (Dec. 10, 1958)]. The rule codified the
conditions of orders that the Commission had
granted prior to 1958 exempting certain funds from
Section 10(f) to permit them to purchase specific
securities.

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purchaser of securities in that offering
or in any concurrent offering of the
securities.70 In addition, the
commission, spread or profit received or
to be received by the principal
underwriters must be reasonable and
fair compared to the commission,
spread or profit received by other such
persons in connection with the
underwriting of similar securities being
sold during a comparable time period.71
The rule also requires public reporting
of securities purchases made in reliance
on the rule. A fund must report the
existence of any such purchases on
Form N–SAR, and provide a written
record of each transaction, setting forth
from whom the securities were
acquired, the identity of the
underwriting syndicate’s members, the
terms of the transaction, and the
information or materials on which the
board has made a determination that the
transaction complied with the
procedures approved by the board.72
We amended Rule 10f–3 in 1979 to
add municipal securities to the class of
securities that funds could purchase
under the rule.73 The rule defines
municipal securities that may be
purchased during an underwriting in
reliance on the rule (‘‘eligible municipal
securities’’) to include securities that
have an investment grade rating from at
least one NRSRO or, if the issuer or the
entity supplying the revenues or other
payments from which the issue is to be
paid has been in continuous operation
for less than three years (i.e., the
security is a less seasoned security), one
of the three highest ratings from an
NRSRO.74 The rating requirement was
designed to prevent the purchase of less
seasoned and lower quality securities,
and thereby reduce the risk of unloading
unmarketable securities on the fund.75
In July 2008, we proposed to
eliminate the references to NRSRO
ratings in Rule 10f–3 and substitute
70 See Rule 10f–3(c)(2) (also providing an
exception from the pricing provision for rights
offerings required by law in certain foreign
offerings).
71 See Rule 10f–3(c)(6).
72 See Rule 10f–3(c)(9).
73 Rule 10f–3(c)(1)(iii). See Exemption of
Acquisition of Securities During the Existence of
Underwriting Syndicate, Investment Company Act
Release No. 10736 (June 14, 1979) [44 FR 36152
(June 20, 1979)] (‘‘Rule 10f–3 1979 Adopting
Release’’).
74 Rule 10f–3(a)(3). As noted above, an investment
grade debt security is a security that has been rated
in one of the four highest categories by at least one
NRSRO. See supra text following note 22.
75 See Rule 10f–3 1979 Adopting Release, supra
note 73; Exemption of Acquisition of Securities
During the Existence of Underwriting Syndicate,
Investment Company Act Release No. 10592 (Feb.
13, 1979) [44 FR 10580 (Feb. 21, 1979)], at Section
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alternate provisions that require the
assessment of liquidity and credit risk.76
Those alternate provisions were
designed to achieve the same purpose as
that served by the references to credit
ratings, in addressing concerns that
funds might purchase less seasoned,
unmarketable securities in affiliated
underwritings.77
Most commenters on the proposed
amendments did not specifically
address the amendments to Rule 10f–3.
As noted above, some of those
commenters agreed generally with
eliminating references to NRSRO ratings
from Commission rules, while other
commenters did not.78 One commenter
specifically supported the proposed
amendments to Rule 10f–3.79 It noted
that, although the duty to make credit
determinations ‘‘may appear to require
expertise beyond typical board
experience, boards would be allowed to
rely on information and assessments
provided by other sources.’’ 80 Seven
commenters specifically opposed the
amendments to Rule 10f–3.81 Some
expressed concerns that the proposed
standards would likely increase the time
and costs of the board of directors’
oversight and could result in a lack of
consistency among funds as to what is
an eligible municipal security, and a
lack of transparency in the board’s
subjective determinations.82
Today we are adopting the
amendments as proposed, and we
address the concerns of commenters
below. The amended rule eliminates the
references to ratings and revises the
rule’s definition of ‘‘eligible municipal
security’’ to mean securities that are
sufficiently liquid that they can be sold
at or near their carrying value within a
reasonably short period of time.83 In
addition, the securities would have to
be either: (1) Subject to no greater than
moderate credit risk; or (2) if they are
76 See Investment Company Act Proposing
Release, supra note 10, at Section III.D.
77 See id. at Section III.
78 See supra note 50 and accompanying text;
Schwab Comment Letter; Calvert Comment Letter;
SIFMA Comment Letter.
79 See CFA Institute Comment Letter.
80 Id.
81 See, e.g., Independent Trustees of Fidelity
Fixed-Income Funds Comment Letter (Oct. 3, 2008)
(‘‘Fidelity Independent Trustees Comment Letter’’);
SIFMA Comment Letter; Realpoint Comment Letter
(Aug. 14, 2008).
82 See Fidelity Independent Trustees Comment
Letter; SIFMA Comment Letter. SIFMA also
asserted that the proposed amendment would
provide ‘‘little added benefit while creating
substantial market uncertainty.’’
83 For a discussion of the proposed amendments
to Rule 10f–3, see Investment Company Act
Proposing Release, supra note 10, at Section III.D.

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less seasoned securities, subject to a
minimal or low amount of credit risk.84
The standards we are adopting require
a level of liquidity and credit quality
that is very similar to that of the current
rule, but without the reference to
NRSRO ratings.85 These standards are
designed to address the investor
protection concerns that a fund and its
investors might be harmed by the fund’s
purchase of unmarketable securities in
an affiliated underwriting. A fund that
purchases municipal securities that are
sufficiently liquid should, by the terms
of the amended rule, be able to sell the
securities at or near their carrying value
within a reasonably short period of
time. Thus, the fund should be able to
sell the securities, and thereby unwind
its position and reduce its exposure,
relatively quickly. Furthermore,
securities that are subject to no greater
than moderate credit risk or, if less
seasoned, are subject to minimal or low
credit risk, are similarly less likely to be
unmarketable securities that have been
‘‘dumped’’ on the fund.86 Securities that
meet these quality standards are likely
to be more liquid, and thus able to be
sold relatively quickly by the fund.87
84 The amended rule defines ‘‘eligible municipal
securities’’ to mean ‘‘ ‘municipal securities’ as
defined in Section 3(a)(29) of the [Exchange Act],
that are sufficiently liquid such that they can be
sold at or near their carrying value within a
reasonably short period of time and either (i) [a]re
subject to no greater than moderate credit risk; or
(ii) [i]f the issuer of the municipal securities, or the
entity supplying the revenues or other payments
from which the issue is to be paid, has been in
continuous operation for less than three years,
including the operation of any predecessors, the
securities are subject to a minimal or low amount
of credit risk.’’ Amended Rule 10f–3(a)(3).
85 As discussed above, some commenters
expressed concerns about a possible lack of
consistency among funds as to what constitutes an
‘‘eligible municipal security’’ under the amended
rule. See supra note 82 and accompanying text.
Those commenters did not specify whether such
lack of consistency might directly affect funds or
investors, or might affect the municipal securities
markets in an indirect way. We believe that funds’
determinations as to whether particular securities
meet the amended rule’s standards of credit quality
and liquidity will be sufficiently consistent for the
purposes that Rule 10f–3 was adopted to promote,
i.e., the protection of funds and their investors from
the purchase of unmarketable securities.
86 A municipal security (or its issuer) subject to
a moderate level of credit risk would present
average creditworthiness relative to other municipal
or tax exempt issues or issuers. Moderate credit risk
also would denote current low expectations of
default risk, with an adequate capacity for payment
of principal and interest. Municipal securities
subject to minimal or low credit risk would be less
susceptible to default risk (i.e., have a low risk of
default) than those with moderate credit risk. These
securities (or their issuers) also would demonstrate
a strong capacity for principal and interest
payments and present above-average
creditworthiness relative to other municipal or tax
exempt issues (or issuers).
87 See M. David Gelfand, State and Local
Government Debt Financing § 8:72 (2nd. ed. 2007)

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Protection of the fund is further
provided by other existing provisions in
the rule that require the fund’s board of
directors, including a majority of
disinterested directors, to (1) approve
procedures under which the fund
purchases securities under the rule, (2)
approve any needed changes to those
procedures and (3) review purchases
quarterly to assure that they conformed
to the fund’s procedures.88 Those
provisions will continue to apply to
affiliated underwritings under the
amended rule,89 and the board’s
responsibilities with regard to fund
procedures will apply to the new
standards in the rule regarding liquidity
and credit quality.90
We believe that the standards
provided in the amended rule—that an
‘‘eligible security’’ must be sufficiently
liquid that it can be sold at or near its
carrying value within a reasonably short
period of time, and either subject to no
greater than moderate credit risk, or, if
less seasoned, subject to a minimal or
low amount of credit risk—are
sufficiently clear to permit a fund board
or fund investment adviser to
understand the risks acceptable under
the amended rule without significantly
increasing the time and costs of board
oversight. In addition, as we pointed out
when we proposed the amendments to
Rule 10f–3, the amendments may
emphasize for funds the need to
independently evaluate the credit risks
associated with the underwritten
security, and may possibly benefit funds
by enabling them to acquire a wider
range of securities, including unrated
securities, that present attractive
investment opportunities and the
requisite level of credit quality, even
though they do not meet the current
(noting that municipal securities trade largely on
the basis of creditworthiness).
88 See Rule 10f–3(c)(10)(i)–(iii). See also Rule 10f–
3 1979 Adopting Release, supra note 73 (‘‘[T]he
Commission expects that investment company
directors, in establishing procedures under the rule
and determining compliance with such procedures,
will address the concerns embodied in section 10(f)
of the Act against overreaching and the placing of
otherwise unmarketable securities with an
investment company.’’); Exemption for the
Acquisition of Securities During the Existence of an
Underwriting or Selling Syndicate, Investment
Company Act Release No. 22775 (July 31, 1997) [62
FR 42401 (Aug. 7, 1997)] (‘‘1997 Rule 10f–3
Adopting Release’’), at text following n.51 (‘‘A
fund’s board should be vigilant in reviewing the
procedures and transactions as required by rule
10f–3 as well as in conducting any additional
reviews that it determines are needed to protect the
interests of investors, particularly if the fund
purchases significant amounts of securities in
reliance on rule 10f–3.’’).
89 Rule 10f–3(c)(10); Investment Company Act
Proposing Release, supra note 10, at n.69 and
accompanying text.
90 See amended Rule 10f–3(a)(3), (c)(10)(i).

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rule’s ratings requirement.91 In
exercising caution to ensure compliance
with the revised standards, funds also
might limit their acquisitions of
municipal securities in reliance on the
amended rule to securities of higher
credit quality than required under the
current rule.
In developing procedures under the
rule, the board of directors may
incorporate ratings, reports, analyses,
opinions and other assessments issued
by third-parties, including NRSROs,
although an NRSRO rating, by itself
could not substitute for the evaluation
performed by the board. We would
expect the board to evaluate
assessments it intends to incorporate
and the third-party sources that provide
those assessments.92 The board could
then incorporate in its procedures those
third party assessments that it
determines are reliable. The ability to
incorporate outside assessments may
mitigate the potential increased burdens
about which some commenters
expressed concern.93
III. Paperwork Reduction Act
A. Rule and Form Amendments Under
the Exchange Act
Certain provisions of the amendments
to the forms contain ‘‘collection of
information’’ requirements within the
meaning of the Paperwork Reduction
Act of 1995 (‘‘PRA’’).94 The hours and
costs associated with preparing and
91 See Investment Company Act Proposing
Release, supra note 10, at Section VI.A.
92 When a fund’s determination with regard to a
security departs from ratings provided by NRSROs
(including ratings by ‘‘unsolicited’’ NRSROs), the
board may choose to require in its policies and
procedures that the fund document the rationale
underlying the determination. See Realpoint
Comment Letter (recommending that the
Commission require that a fund document when its
determinations differ from those of ‘‘unsolicited’’
NRSROs). We are not adopting such a requirement
because we believe the board should make the
determination regarding the extent to which it will
rely on the rating of any NRSRO as an appropriate
indication of credit quality or liquidity.
93 See supra note 82 and accompanying text. The
ability to rely on outside assessments also addresses
to some extent the concerns expressed by one
commenter about market uncertainties. See SIFMA
Comment Letter. Any remaining increase in
uncertainty (for funds and their shareholders) that
results from the exercise of discretion by funds and
their advisers in determining which municipal
securities to purchase under the amended rule, is
an inherent corollary of the flexibility added by the
rule amendments. We also note, with regard to
concerns about transparency, that investors and
fund analysts will continue to have access to
information about the securities that funds hold and
have purchased in reliance on rule 10f–3. See Form
N–SAR [17 CFR 274.101], Item 770 (reporting of
transactions effected in reliance on rule 10f–3);
Form N–CSR [17 CFR 274.128], Item 6(a)
(disclosure in shareholder reports of portfolio
holdings); Form N–Q [17 CFR 274.130], Item 1
(quarterly schedule of portfolio holdings).
94 44 U.S.C. 3501 et seq.

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52365

filing the disclosure, filing the forms
and schedules and retaining records
required by these regulations constitute
reporting and cost burdens imposed by
each collection of information. An
agency may not conduct or sponsor, and
a person is not required to respond to,
a collection of information unless it
displays a currently valid control
number. The titles of the affected
information forms are ‘‘Form ATS–R’’
(OMB Control Number 3235–0509) and
‘‘Form PILOT’’ (OMB Control Number
3235–0507). Responses to this collection
are mandatory for broker-dealers that
comply Regulation ATS (in the case of
Form ATS–R) and for SROs that operate
pilot trading systems (in the case of
Form PILOT). For the reasons discussed
below, we do not believe the
amendments will result in a material or
substantive revision to these collections
of information.95
The amendments to Form ATS–R and
Form PILOT revise the forms to require
that information which had been
reported as separate items (i.e.,
investment grade debt corporate debt
securities and non-investment grade
corporate debt securities) now will be
combined and reported as a single item
(i.e., corporate debt securities). In all
other respects, as discussed in the
Exchange Act Proposing Release, the
information collected on these forms
remains unchanged.96 Accordingly, the
Commission does not believe the
amendments will result in a substantive
or material revision to those collections
of information97 within the meaning of
the PRA.98 The Commission received no
comments on the PRA analysis in the
Exchange Act Proposing Release
applicable to Forms ATS–R and PILOT.
B. Rule Amendments Under the
Investment Company Act
Certain provisions of the amendments
to Rule 10f–3 contain ‘‘collection of
information’’ requirements within the
meaning of the PRA.99 The title for the
collection of information is ‘‘Rule 10f–
3 under the Investment Company Act of
1940, Exemption for the Acquisition of
Securities During the Existence of an
Underwriting and Selling Syndicate’’
(OMB Control No. 3235–0226).
Responses to this collection are
mandatory for funds that intend to rely
on Rule 10f–3. Records of information
made in connection with this
requirement are required to be
95 5

CFR 1320.5(g).
Exchange Act Proposing Release, 73 FR at
40097.
97 5 CFR 1320.5(g).
98 44 U.S.C. 3501 et seq.
99 44 U.S.C. 3501–3520.
96 See

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maintained for inspection by
Commission staff, but the collection will
not otherwise be submitted to the
Commission. There are currently no
approved collections of information for
Rule 5b–3, and the amendments we are
adopting today would not create any
new collections.
We requested comment on the
collection of information requirements
in the Investment Company Act
Proposing Release and submitted the
revisions to the collections of
information to OMB for review and
approval in accordance with 44 U.S.C.
3507(d) and 5 CFR 1320.11. We received
no comments that specifically addressed
the collection of information
requirements. An agency may not
conduct or sponsor, and a person is not
required to respond to, a collection of
information unless it displays a
currently valid control number.
Rule 10f–3 permits a fund that is
affiliated with a member of an
underwriting syndicate to purchase
securities from the syndicate if certain
conditions are met. In the case of a
municipal security, the security
generally must have received an
investment grade rating by at least one
NRSRO, or if it is a less seasoned
security, one of the three highest ratings
by an NRSRO. The amended rule
eliminates this condition and includes a
substitute therefor.100 Under the
amendment an ‘‘eligible municipal
security’’ means a security that is
sufficiently liquid that it can be sold at
or near its carrying value within a
reasonably short period of time, and is
either: (1) Subject to no greater than
moderate credit risk; or (2) if it is a less
seasoned security, subject to a minimal
or low amount of credit risk.
Rule 10f–3 also requires fund boards
to (1) approve procedures under which
the fund purchases securities in reliance
on the rule, (2) approve needed changes
to the procedures and (3) review
purchases quarterly to ensure they were
effected in compliance with the
procedures.101 Accordingly, fund
boards currently review purchases of
municipal securities made in reliance
on Rule 10f–3, and should continue to
do so under the amended rule.
In our most recent PRA submission,
Commission staff estimated that each
year, approximately 350 funds engage in
transactions in reliance on Rule 10f–
3.102 Staff further estimated that each
fund would, on average, take two hours
to review and revise, as needed, written
100 See

supra notes 83–84 and accompanying text.
10f–3(c)(10).
102 See Submission for OMB Review, Comment
Request, Rule 10f–3 [73 FR 13263 (Mar. 12, 2008)].
101 Rule

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procedures for these transactions. In the
Investment Company Act Proposing
Release, we stated that we believed that
any revisions funds would have to make
to comply with the proposed
amendment would be incorporated in
the two hours of review.103 Some
commenters asserted that the proposed
amendment would likely increase the
time and costs of the board of directors’
oversight.104
We continue to believe that the
specific changes a board might make to
the procedures that are designed to
comply with the amendments would
not be significant. As noted above, we
are adopting a standard regarding
liquidity and credit quality that is very
similar to that of the current rule.105 In
addition, directors may incorporate
securities quality assessments by third
party sources that the directors
determine are reliable in the procedures
they approve and their review of
municipal securities purchases made in
reliance on Rule 10f–3, which may
mitigate the potential increased burdens
on fund boards.106 Nevertheless, in
consideration of the comments, we
recognize that there may be an
additional one-time burden for fund
boards to review and approve revised
procedures designed to ensure
compliance with the amendment to
Rule 10f–3.107 Commission staff
estimates that each fund board would
incur a one-time burden of two hours
for a total burden for all fund boards of
700 hours at a cost of $2.8 million.108
Amortized over three years, this would
be an annual burden of 0.67 hours per
fund and 235 hours for all funds.109
IV. Cost-Benefit Analysis
A. Rule and Form Amendments Under
the Exchange Act
The Commission is sensitive to the
costs and benefits imposed by its rules.
103 See Investment Company Act Proposing
Release, supra note 10, at Section V.B.
104 See supra note 82 and accompanying text.
105 See supra text accompanying note 85.
106 See supra note 93 and accompanying text.
These concerns were expressed with respect to the
proposed amendments generally, and commenters
did not provide any estimates of the increased
burden that boards might incur under the proposed
amendments.
107 We do not anticipate the revised procedures
would require an increase in the current estimated
time the board spends each quarter to review
acquisitions of securities for compliance with Rule
10f–3.
108 These estimates are based on the following
calculations: 350 fund boards × 2 hours = 700
hours; 700 hours × $4000 = $2,800,000. The
estimate for the hourly cost for a fund board is
based on an average board size of 8 directors and
a cost of $500 per hour for each director.
109 This estimate is based on the following
calculation: 350 fund boards × 0.67 hours = 234.5
hours.

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The Commission notes that no
comments addressed the Commission’s
analysis of the costs and benefits
associated with the proposed
amendments to Rule 3a1–1, Regulation
ATS, Form ATS–R and Form PILOT
contained in the Exchange Act
Proposing Release.
1. Benefits
The amendments to Rule 3a1–1,
Regulation ATS, Form ATS–R and Form
PILOT eliminate the separate definitions
of and references to investment grade
corporate debt securities and noninvestment grade corporate debt
securities and replace them with a
single category, ‘‘corporate debt
securities.’’ The Commission believes
that the inclusion of requirements
relating to securities credit ratings are
no longer necessary to achieve the
regulatory purpose of these rules, and
may help marginally reduce any undue
reliance on credit ratings.
For reasons discussed above, the
Commission believes that it is no longer
necessary to assess trading volumes in
the narrower segments of investment
grade and non-investment grade
corporate debt securities to fulfill the
purposes of those rules and forms.
Broker-dealers that are subject to
Regulation ATS will no longer have to
purchase and keep track of credit ratings
solely for the purpose of Regulation
ATS. The other classes of securities and
the threshold levels themselves remain
unchanged. With respect to the changes
to Form ATS–R and Form PILOT, we
believe that combining investment grade
and non-investment grade corporate
debt securities into a single class for
purposes of those two forms will benefit
market participants by making reporting
slightly more streamlined and may
reduce undue reliance on references to
ratings issued by credit rating agencies.
At the same time, the Commission does
not believe that the amendments to
these rules and forms will significantly
affect market participants because the
total units and total dollar volume of
corporate debt securities transacted will
still be reported. In addition, the
removal of these requirements relating
to credit ratings reduces compliance
costs for ATSs.
2. Costs
The amendments to Rule 3a1–1,
Regulation ATS, Form ATS–R and Form
PILOT eliminate the separate definitions
of and references to investment grade
corporate debt securities and noninvestment grade debt securities and
replace them with a single category,
‘‘corporate debt securities.’’ We believe

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Federal Register / Vol. 74, No. 195 / Friday, October 9, 2009 / Rules and Regulations
that these changes will not impose any
significant costs on market participants.
The amendments to Rule 3a1–1 and
Regulation ATS will marginally reduce
the likelihood of an ATS meeting the
thresholds in those rules. For example,
under Rule 3a1–1 as it existed prior to
today’s action, an ATS that had 40% of
the average daily dollar trading volume
in non-investment grade corporate debt
securities and 0% of the average daily
dollar trading volume in investment
grade corporate debt securities for at
least four of the preceding six calendar
months could have been required to
register as an exchange. Under amended
Rule 3a1–1, the Commission can no
longer require the ATS to register as an
exchange, because its average daily
dollar trading volume in corporate debt
securities combined is less than 40%. A
potential cost of the amendments to
Rule 3a1–1 and Regulation ATS is that
an ATS that exceeded one of the
thresholds that existed prior to today
and thus would have become subject to
additional regulatory requirements (in
the case of Regulation ATS) or must
register as an exchange (in the case of
Rule 3a1–1) will no longer exceed the
threshold and will not have to meet the
attendant requirements. However, the
Commission believes that this
possibility is remote, and that the
amendments are unlikely to impose any
costs on investors, market participants
or the national market system generally.
We believe that any costs associated
with the changes to Form ATS–R and
Form PILOT will be minimal.
Respondents already determine and
report the total units and total trading
volume for investment grade and noninvestment grade corporate debt
securities separately. On the revised
forms, respondents will report them
together as a single item for ‘‘corporate
debt securities.’’ Combining the
categories of investment grade and noninvestment grade debt on these forms
will not significantly affect the level of
information available to the
Commission in monitoring ATSs. We
expect that any programming costs to
market participants to implement the
reporting changes to these forms will be
minimal and involve adding two
previously reported items together and
reporting the combined amount.
In addition, broker-dealers that are
subject to Regulation ATS will no longer
be required to purchase and keep track
of credit ratings solely for the purpose
of Regulation ATS. If broker-dealers
subject to Regulation ATS no longer
purchase credit rating data from
NRSROs, the amendments may
marginally reduce the revenues of
NRSROs that charge subscriber fees.

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However, we believe that the number of
broker-dealers subject to Regulation
ATS is small and these broker-dealers
represent a very small portion of
NRSRO customers. Further, these
broker-dealers may subscribe to NRSRO
ratings for other purposes. Therefore, we
believe that any impact on the revenues
of the NRSROs will likely be small.
Also, combining the categories of
investment grade and non-investment
grade debt on these forms also will
marginally reduce the level of
information available to the
Commission in monitoring ATSs. This
may marginally reduce the ability of the
Commission to stay abreast of changes
to the trading of corporate debt
securities. However, the Commission
believes that the elimination of this
detailed information will not
significantly affect monitoring of ATSs
because the Commission will still be
able to monitor the volume of corporate
debt traded by an ATS.
B. Rule Amendments Under the
Investment Company Act
As discussed above, the rule
amendments we are adopting today
eliminate certain references to NRSRO
ratings in Rules 5b–3 and 10f–3. The
amendments to Rule 5b–3 remove an
exception based on credit ratings. The
amendments to Rule 10f–3 substitute
references to alternative credit quality
and liquidity criteria that are similar to
that of the current rule. We prepared a
cost-benefit analysis in the Investment
Company Act Proposing Release, and
received comments relating to that
analysis.
1. Benefits
The amendments to Rules 5b–3 and
10f–3 are part of our larger initiative to
eliminate references to NRSRO ratings
from Commission rules where possible.
This initiative is designed to address the
concern that the inclusion in the
Commission’s rules and forms of
requirements relating to security ratings
could create the appearance that the
Commission had, in effect, given its
‘‘official seal of approval’’ on ratings,
which could adversely affect the quality
of due diligence and investment
analysis performed and lead to undue
reliance on ratings. We noted that the
proposed amendments to eliminate
ratings as a whole might result in
increased market efficiency by affording
funds access to securities that do not
meet the rating requirements in the
current rules, but that would satisfy the
credit risk and liquidity standards in the

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52367

proposed amendments.110 It is difficult
to estimate specifically the benefits of
the amendments to Rules 5b–3 and
10f–3 in isolation. We believe that the
amendments to these rules remove
unnecessary references to credit ratings,
which may reduce undue reliance on
credit ratings. Because these references
are no longer necessary, and an
appropriate substitute exists for the
reference in Rule 10f–3, reliance in
these contexts is no longer justified. In
addition, the amendment to Rule 10f–3
could emphasize the importance to
funds that acquire municipal securities
in an affiliated underwriting of making
an independent evaluation of the credit
risks associated with the underwritten
security. Finally, by moving away from
a required reliance on credit ratings in
our rules, funds may possibly benefit by
acquiring a wider range of securities
that present attractive investment
opportunities and the requisite level of
credit quality, even though they do not
meet the current rule’s ratings
requirement.
2. Costs
We anticipate that funds and
investment advisers may incur certain
costs as a result of the amendments we
are adopting today. These costs will
principally relate to the replacement of
the NRSRO ratings standard with the
new credit quality and liquidity criteria.
Commenters asserted that elimination of
a bright-line standard could create
additional costs and uncertainty in the
application of, compliance with, and
enforcement of the rule.111 They also
asserted that the subjective judgmentbased standard in the proposed
amendments might cause funds to
acquire securities that do not meet the
particular ratings requirement and that
could result in the concerns that the
rating requirements were designed to
address (e.g., poor liquidity or credit
quality). We understand these concerns.
However, we believe that the alternative
credit quality and liquidity criteria we
are substituting for NRSRO ratings will
achieve the same purpose the ratings
were designed to meet, and that they are
sufficiently clear to permit a fund board
and adviser to understand the risks
acceptable under the rules. In
determining a security’s credit quality
and liquidity, fund boards and advisers
will, of course, be free to incorporate
ratings, reports and analyses issued by,
third parties, including NRSROs. We
110 See Investment Company Act Proposing
Release, supra note 10, at Section VII.
111 See, e.g., Oppenheimer Comment Letter (‘‘a
subjective standard is difficult to apply, difficult to
test for compliance, and causes uncertainty
regarding enforcement’’).

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believe that most fund advisers, in the
ordinary course of managing portfolios,
already evaluate third party opinions,
including those of ratings agencies, that
provide assessments of the credit
quality and liquidity of debt
instruments. We also believe that the
boards and advisers of funds that rely
on Rule 10f–3 are likely to look to those
third parties in which they have
confidence when incorporating third
party assessments in making their
determinations. For these reasons, we
do not anticipate that the amendments
will result in significant costs or
compromise investor protection.
We are making changes today to two
rules under the Investment Company
Act, which are limited in scope. As
noted above, we believe that the
standards in the Rule 10f–3
amendments are similar to the NRSRO
ratings they replace. Thus, we believe it
is unlikely that the amendments will
result in unintended adverse
consequences or involve conflicts with
other regulations, as some commenters
have suggested.112 Those comments
appeared to address the consequences of
eliminating references to other rules,
such as Rule 2a–7 or the entire group of
rules we proposed to amend, the
consequences of which could be more
substantial.
Rule 5b–3. The amendments we are
adopting today eliminate references to
NRSRO ratings in the definition of
‘‘refunded security’’ in Rule 5b–3. We
anticipate that our elimination of
references to NRSRO ratings in the
definition of ‘‘refunded security’’ in
Rule 5b–3 is unlikely to result in
significant additional costs for funds
that rely on the rule.113 Under the
amendment, in order to meet the
definition of a ‘‘refunded security’’ for
purposes of the rule, an independent
accountant must have certified to the
escrow agent that the deposited
securities will satisfy all scheduled
payments of principal, interest and
applicable premiums on the refunded
securities.114 This standard will apply
to all securities regardless of their
rating.
Without providing specific estimates,
some commenters stated this
amendment could create higher costs for
funds and adversely affect the liquidity
of refunded securities by requiring them
to obtain an independent accountant’s
certification.115 The amended rule,
112 See, e.g., SIFMA Comment Letter; Comment
Letter of Institutional Money Market Funds Ass’n
(Sept. 5, 2008).
113 See supra Section II.A.2.
114 Amended Rule 5b–3(c)(4).
115 See, e.g., Calvert Comment Letter.

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however, does not require funds to
obtain accountants’ certificates, but
requires the escrow agent to have
received an accountant’s certification.
Commenters also indicated that it may
not always be clear whether the escrow
agent for a refunded security has
received the necessary certification,
thus requiring funds to incur costs
related to determining the certification
status of each refunded security.116 As
noted above, we understand that an
independent accountant typically
provides the escrow agent a certification
during the course of a refunding
transaction.117 We believe that fund
managers could consult any of multiple
sources at little expense to confirm the
escrow agent’s receipt of this
certification, including, for example, the
issuer’s Web site, a municipal dealer’s
Web site or the escrow agent’s Web
site.118 In addition, funds may be able
to satisfy the certification requirement
of Rule 5b–3 by confirming that an
NRSRO determined that an independent
accountant has provided the required
certification to the escrow agent.119 For
these reasons, we believe that
eliminating the ratings requirement
exception in Rule 5b–3 is unlikely to
result in additional costs to purchasers.
Based on our belief that the amendment
to Rule 5b–3 would not result in
additional costs or pose compliance
difficulties for fund managers, we do
not share commenters’ concerns that the
rule amendment could decrease the
liquidity of refunded securities.
Rule 10f–3. In the Investment
Company Act Proposing Release, we
stated that our belief that the proposed
amendment to Rule 10f–3 would not
impose costs on funds that rely on Rule
10f–3 to purchase municipal
securities.120 Some commenters asserted
that the proposed amendments might
increase the costs and time devoted to
board oversight of these transactions
and could result in a lack of consistency
among funds as to what is an eligible
municipal security, and a lack of
transparency in the board’s subjective
determinations.121 Rule 10f–3 requires
the fund’s board to determine that the
fund has procedures reasonably
designed to ensure that purchases are
made in compliance with the rule and
116 See, e.g., Connecticut Treasurer’s Comment
Letter.
117 See supra text preceding note 64.
118 See supra note 64 and accompanying text.
119 See supra note 65 and accompanying text.
120 See Investment Company Act Proposing
Release, supra note 10, at text preceding n.107.
121 See, e.g., Fidelity Independent Trustees
Comment Letter (‘‘The proposed standards, given
their emphasis on judgment, would likely increase
the time and costs devoted to that oversight.’’).

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to determine each quarter that
purchases made have been effected in
compliance with the procedures.122 As
noted above in our PRA analysis, we
currently estimate that boards spend, on
average, two hours each year revising
procedures designed to ensure
compliance with the rule and reviewing
transactions to determine whether they
have been effected in compliance with
the procedures.123 We anticipate that
the specific changes a board might make
to the procedures that are designed to
comply with the amendments would
not be significant because, as noted
above, we are adopting a level of credit
quality and liquidity that is very similar
to that of the current rule. In addition,
directors may use securities quality
assessments by outside sources that they
determine are reliable in the procedures
they approve and their review of
municipal securities purchases made in
reliance on Rule 10f–3. We anticipate
this ability to use assessments of third
parties may mitigate the potential
increased oversight burdens on fund
boards.124 After consideration of the
comments, however, we recognize that
fund boards may incur one-time costs to
approve revised policies and procedures
as a result of the amendment to Rule
10f–3. Staff estimates that a board may
take two hours to review and approve
revised procedures designed to ensure
that transactions entered into in reliance
on the rule comply with the amendment
to Rule 10f–3. Staff further estimates
that approximately 350 funds engage in
transactions in reliance on Rule 10f–3.
Staff estimates that boards of these
funds would incur one-time costs of
$8000 to review and approve revised
procedures for a total cost to all funds
of $2.8 million.125
We do not believe that the
amendments would significantly change
the amount of time the board would
spend to review transactions each
quarter. We believe that a fund adviser,
rather than the board, determines
whether a security meets the definition
of an eligible municipal security for
purposes of Rule 10f–3. We also believe
that the standards in the amended
definition are sufficiently clear to allow
a fund adviser to understand the risks
and level of liquidity acceptable under
122 Rule

10f–3(c)(10)(i), (iii).
supra text following note 102.
124 See supra text accompanying note 106. These
commenters did not provide any estimates of the
increased burden that boards might incur under the
proposed amendments.
125 This is based on the following calculation: 350
funds × 2 hours × $4,000 per hour of board time
= $2,800,000.
123 See

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the rule.126 Fund advisers may use
securities quality assessments by third
parties, including NRSROs, that the
board or adviser determines are reliable
in its review of municipal securities
purchases made in reliance on Rule
10f–3, which may offset concerns about
additional costs that may result from the
amendment. We do not believe that the
proposed amendments would result in
increased costs for advisers in
determining whether securities are
‘‘eligible municipal securities’’ under
the amended rule. When the board
performs its quarterly review of
transactions, we believe that the board
would focus on reviewing whether the
purchase was effected in compliance
with the procedures the board has
established.127 For these reasons, we
continue to believe that the standards
we are substituting with respect to
eligible municipal securities will not
require significantly greater
consideration of these transactions on
the part of the board than we have
previously estimated.
V. Consideration of Burden on
Competition and Promotion of
Efficiency, Competition and Capital
Formation

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A. Rule and Form Amendments Under
the Exchange Act
Section 3(f) of the Exchange Act 128
requires the Commission, whenever it
engages in rulemaking and is required to
consider or to determine whether an
action is necessary or appropriate in the
public interest, to consider whether the
action will promote efficiency,
competition and capital formation. In
addition, Section 23(a)(2) of the
Exchange Act 129 requires the
Commission, when promulgating rules
under the Exchange Act, to consider the
impact any such rules would have on
competition. Section 23(a)(2) further
provides that the Commission may not
adopt a rule that would impose a
burden on competition not necessary or
appropriate in furtherance of the
purposes of the Exchange Act. The
126 As discussed above, we believe that funds’
determinations as to whether particular securities
meet the amended rule’s standards of credit quality
and liquidity will be sufficiently consistent for the
purposes that Rule 10f–3 was adopted to promote,
i.e., the protection of funds and their investors from
the purchase of unmarketable securities. See supra
note 85. With regard to concerns about
transparency, we note that investors and fund
analysts will continue to have access to information
about the securities that funds hold and have
purchased in reliance on Rule 10f–3. See supra note
93.
127 See 1997 Rule 10f–3 Adopting Release, supra
note 88, at text following n.51.
128 15 U.S.C. 78c(f).
129 15 U.S.C. 78w(a)(2).

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Commission notes that no commenters
addressed the effect that the proposed
changes to Rule 3a1–1, Regulation ATS,
Form ATS–R and Form PILOT would
have on efficiency, competition and
capital formation.
We believe that the amendments to
Rule 3a1–1 under the Exchange Act and
Rules 300 and 301 of Regulation ATS
will not create any adverse impact on
efficiency, competition or capital
formation. The Commission believes
that the inclusion of requirements
relating to credit ratings are no longer
necessary to achieve the regulatory
purpose of these rules, and may help
marginally reduce any undue reliance
on credit ratings. Broker-dealers that are
subject to Regulation ATS will no longer
be required to purchase and keep track
of credit ratings solely for the purpose
of Regulation ATS. This reduces the
cost to comply with Regulation ATS.
However, we believe that any impact on
the revenues of the NRSROs will be
inconsequential. Therefore, these
changes should not impose any
additional burdens on competition.
The Commission believes that
combining investment grade and noninvestment grade corporate debt
securities into a single class of securities
for purposes of the thresholds in those
rules is unlikely to affect whether an
ATS crosses one of those thresholds.
Moreover, the other classes of securities
for which the thresholds are applied—
and the levels of the thresholds
themselves—remain unchanged.
Therefore, these changes should not
affect the development of ATSs or
capital formation.
The amendments being adopted today
also will increase the effective
thresholds for Rule 3a1–1(a) under the
Exchange Act and Rules 301(b)(5) and
301(b)(6) of Regulation ATS for systems
that trade corporate debt securities. The
Commission believes that these changes
will not impact whether any ATS
crosses one of these thresholds.
However, as outlined above,130 the
changes could have the effect of
reducing the regulatory requirements for
some ATSs at some time in the future
by potentially reducing the likelihood
that an ATS would be required to
register as an exchange. The
Commission believes that the efficiency
gains from combining the two categories
of investment-grade and non-investment
grade corporate debt into the single
category of corporate debt justifies these
risks.
The changes to Form ATS–R and
Form PILOT will simplify reporting for
ATSs and SROs that operate pilot

trading systems. Form ATS–R and Form
PILOT respondents are already required
to determine and report the volumes of
corporate debt securities. A single
reporting item for ‘‘corporate debt
securities’’ will replace the existing
separate entries for ‘‘investment grade
corporate debt securities’’ and ‘‘noninvestment grade corporate debt
securities.’’ Since respondents will no
longer have to keep track of ratings, the
calculation of these items does not force
the respondent to purchase credit
ratings solely for the purpose of Form
ATS–R or Form PILOT.
For the reasons discussed above, we
believe that the changes to Form ATS–
R and Form PILOT are unlikely to have
any significant impact on efficiency,
competition or capital formation.
B. Rule Amendments Under the
Investment Company Act
Investment Company Act Section 2(c)
requires us, when engaging in
rulemaking where we are required to
consider or determine whether an action
is necessary or appropriate in the public
interest, to consider, in addition to the
protection of investors, whether the
action will promote efficiency,
competition and capital formation.131
In the Investment Company Act
Proposing Release, we indicated our
belief that that the amendments to Rules
5b–3 and 10f–3 would not significantly
affect competition or have an adverse
affect on capital formation. We noted
that the proposed amendments to
eliminate ratings as a whole might have
some negative effect on efficiency by
eliminating an objective standard in
credit quality determinations, or might
result in increased market efficiency by
affording funds access to securities that
do not meet the rating requirements in
the current rules, but that they would
satisfy the credit risk and liquidity
standards in the proposed
amendments.132 We also stated that we
did not believe that the amendments to
Rules 5b–3 and 10f–3 would result in
significant costs to investment
companies, advisers or investors. We
did not receive any comments that
specifically addressed the effect of the
proposed amendments to Rules 5b–3
and 10f–3 on efficiency, competition
and capital formation.
As discussed above, the amendments
we are adopting today to Rules 5b–3 and
10f–3 are part of a larger initiative to
eliminate certain references to NRSRO
ratings from Commission rules. The
amendments to Rule 5b–3 remove an
131 15

U.S.C. 80a–2(c).
Investment Company Act Proposing
Release, supra note 10, at Section VII.
132 See

130 See

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exception based on credit ratings, and
do not require an analysis of liquidity or
credit quality. In the amendment to Rule
10f–3, we have substituted standards
that require a level of credit quality and
liquidity that is similar to the standards
in the current rule, but without
references to NRSRO ratings. These
standards are designed to achieve the
same purpose as ratings references were
designed to meet, with minimal costs
and consistent with the protection of
investors. We believe that the
amendments eliminate unwarranted
references to credit ratings, which may
reduce undue reliance on credit ratings
and advance the goal of promoting
better analysis of underlying investment
decisions. Because these references are
no longer necessary and an adequate
substitute exists for the reference in
Rule 10f–3, reliance on credit ratings in
these contexts is no longer justified.
With respect to the standards in
amended Rule 10f–3, in developing
procedures under the rule, boards may
incorporate ratings reports, analyses and
other assessments issued by third
parties, including NRSROs, although an
NRSRO rating, by itself, could not
substitute for the evaluation required to
be performed under the amendments to
the rules. For these reasons, we
continue to believe that the
amendments to Rules 5b–3 and 10f–3
are unlikely to result in any significant
impact on competition or capital
formation. We also believe that the
amendment to Rule 10f–3 which is
limited in scope, is unlikely to have a
significant effect on efficiency by
eliminating an objective standard in
credit quality determinations, or to
result in significant market efficiency by
affording funds access to securities that
do not meet the rating requirement in
the current rule but that would satisfy
the revised standards. Similarly,
because we believe that fund managers
will not have significant difficulty or
incur significant expense to confirm that
an escrow agent has received the
requisite certification from an
independent accountant, we do not
believe that the amendment to Rule 5b–
3 eliminating the exception to this
requirement for highly rated securities
is likely to have a significant effect on
efficiency.
VI. Final Regulatory Flexibility
Certification and Analysis
A. Rule and Form Amendments Under
the Exchange Act
Section 3(a) of the Regulatory
Flexibility Act of 1980 133 (‘‘RFA’’)
133 5

U.S.C. 603(a).

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requires the Commission to undertake
an initial regulatory flexibility analysis
of proposed rule amendments on small
entities unless the Commission certifies
that the rule, if adopted, would not have
a significant economic impact on a
substantial number of small entities.134
The Commission notes that no
comments addressed the effect that the
proposed changes to Rule 3a1–1,
Regulation ATS, Form ATS–R and Form
PILOT would have on small entities.
For purposes of Commission
rulemaking in connection with the RFA,
small entities include broker-dealers
with total capital (net worth plus
subordinated liabilities) of less than
$500,000 on the date in the prior fiscal
year as of which its audited financial
statements were prepared pursuant to
Rule 17a–5(d) under the Exchange
Act,135 or, if not required to file such
statements, a broker or dealer that had
total capital (net worth plus
subordinated liabilities) of less than
$500,000 on the last day of the
preceding fiscal year (or in the time that
it has been in business, if shorter); and
is not affiliated with any person (other
than a natural person) that is not a small
business or small organization.136
An ATS that complies with
Regulation ATS must, among other
things, register as a broker-dealer.137
Thus, the Commission’s definition of
small entity as it relates to brokerdealers also will apply to ATSs. An ATS
that approaches the volume thresholds
for investment grade or non-investment
grade corporate debt securities in Rule
3a1–1 or Regulation ATS would be very
large and thus unlikely to be a small
entity or small organization. With
respect to the proposed changes to Form
ATS–R, even if an ATS is a ‘‘small
entity’’ or ‘‘small organization’’ for
purposes of the RFA, the only change
being proposed to the form is to
eliminate the distinction between
investment grade and non-investment
grade corporate debt securities and to
require reporting for the combined class
of corporate debt securities. We believe
this will impose only negligible costs on
ATSs, even if they were small entities
or small organizations.
Similarly, SROs are the only
respondents to Form PILOT and are not
‘‘small entities’’ for purposes of the
RFA. Accordingly, no small entities
would be affected by the proposed
amendments to Form PILOT.
134 5

U.S.C. 605(b).
CFR 240.17a–5(d).
136 See 17 CFR 240.0–10(c).
137 See 17 CFR 242.301(b)(1).
135 17

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Under Section 605(b) of the RFA,138
we certified that, when adopted, the
rule amendments would not have a
significant economic impact on a
substantial number of small entities. We
included this certification in Part VIII of
the Exchange Act Proposing Release.
While we encouraged written comments
regarding this certification, no
commenters responded to this request
as it pertains to the action taken in this
release.
B. Rule Amendments Under the
Investment Company Act
This Final Regulatory Flexibility
Analysis (‘‘FRFA’’) has been prepared in
accordance with 5 U.S.C. 604. We
published in the Investment Company
Act Proposing Release an Initial
Regulatory Flexibility Analysis
(‘‘IRFA’’), which we prepared in
accordance with the RFA. It relates to
amendments to Rules 5b–3 and 10f–3
under the Investment Company Act.
The amendments remove references to,
and the required use of, NRSRO ratings
from these rules.
1. Need for and Objectives of the Rule
Amendments
The rule amendments are designed to
address the concern that the inclusion
in the Commission’s rules and forms of
requirements relating to security ratings
could create the appearance that the
Commission had, in effect, given its
‘‘official seal of approval’’ on ratings,
which could adversely affect the quality
of due diligence and investment
analysis and lead to undue reliance on
ratings.
2. Significant Issues Raised by Public
Comment
When the Commission proposed
amendments to Rules 5b–3 and 10f–3,
we requested comment on the proposal
and the accompanying IRFA. In
particular, we sought comments
regarding:
• The number of small entities that
might be affected by the amendments;
• The existence or nature of the
potential impact of the amendments on
small entities; and
• How to quantify the impact of the
amendments, including any empirical
data supporting the extent of the impact.
We received no comments that
addressed the proposed amendments’
impact on small entities.
3. Small Entities Subject to the Rule
Amendments
The amendments to Rules 5b–3 and
10f–3 will affect funds, including
138 5

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Federal Register / Vol. 74, No. 195 / Friday, October 9, 2009 / Rules and Regulations
entities that are considered to be small
businesses or small organizations
(collectively, ‘‘small entities’’) for
purposes of the RFA. Under the
Investment Company Act, for purposes
of the RFA, a fund is considered a small
entity if it, together with other funds in
the same group of related funds, has net
assets of $50 million or less as of the
end of its most recent fiscal year.139
Based on Commission filings, we
estimate that 122 investment companies
may be considered small entities. The
Commission staff estimates that all of
these investment companies may
potentially rely on Rules 5b–3 and 10f–
3.

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4. Reporting, Recordkeeping and Other
Compliance Requirements
The amendments to Rule 5b–3
eliminate the exception for certification
requirements in conditions relating to
the treatment of refunded securities, by
removing the exception for rated debt in
the definition of ‘‘refunded security.’’ 140
Under the amended rule, in order to
meet the definition of ‘‘refunded
security,’’ an independent accountant
must have certified to the escrow agent
that the deposited securities will satisfy
all scheduled payments of principal,
interest and applicable premiums on
any refunded securities.141 The
amendment eliminates the current
exception that does not require the
certification if the refunded security is
rated in the highest category by an
NRSRO.
The amendments to Rule 10f–3
eliminate references to NRSRO ratings
in the rule’s definition of ‘‘eligible
municipal security’’ and substitute
alternative provisions that require
securities to be sufficiently liquid that
they can be sold at or near their carrying
value within a reasonably short period
of time. In addition, the securities must
be either:
• Subject to no greater than moderate
credit risk; or
• If they are less seasoned securities,
subject to a minimal or low amount of
credit risk.142
Small entities registered with the
Commission as investment companies
seeking to rely on each of the rules will
be subject to the same requirements as
larger entities. As discussed in the IRFA
and in this FRFA, in developing the
amendments to Rules 5b–3 and 10f–3,
we considered the extent to which the
amendments will have a significant
139 17

CFR 270.0–10.
supra Section II.A.1.
141 Amended Rule 5b–3(c)(4)(iii).
142 Amended Rule 10f–3(a)(3).

impact on a substantial number of small
entities.
5. Commission Action To Minimize
Effect on Small Entities
The RFA directs us to consider
significant alternatives that may
accomplish our stated objective, while
minimizing any significant adverse
impact on small entities. In connection
with the amendments, we considered
several alternatives, including the
following:
(a) Different reporting or compliance
standards or timetables. We believe that
the credit quality and liquidity
considerations required by the
amendments to Rule 10f–3 should apply
to all funds relying on the rules,
including small entities. We believe that
special compliance requirements or
timetables for small entities are
unnecessary because the substituted
standards require a level of credit
quality and liquidity that is similar to
the standards in the current rule, but
without reference to NRSRO ratings.
Thus, these standards are designed to
achieve the same purpose that the
ratings were designed to achieve
without resulting in significant costs for
funds, including small entities. In
addition, funds that rely on Rule 10f–3
may continue to use or rely on NRSRO
ratings in making determinations under
the amended rule. Moreover, different
or special compliance requirements for
small entities consistent with the
Commission’s goal of removing
references to NRSRO ratings in the rule
may create a risk that those entities
could purchase securities with
insufficient liquidity and credit quality,
to the detriment of the fund and its
investors. As discussed above, we do
not believe that the requirement that the
escrow agent for all refunded securities
(not just those that are not top-rated)
have received an independent
accountant’s certification would result
in significant cost burdens for funds. We
believe that fund managers may be able
to obtain this information from multiple
sources at little expense, including, for
example, the issuer’s Web site, a
municipal dealer’s Web site or the
escrow agent’s Web site.143 In addition,
funds can satisfy the certification
requirement of Rule 5b–3 by
determining that an NRSRO required an
independent accountant to make the
same determination.144 Because we
understand that these certifications are
typically provided during the course of
refunding transactions, we believe that
it will not be difficult or expensive for

140 See

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143 See
144 See

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supra note 65 and accompanying text.

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52371

fund managers to confirm that the
certification has been provided to the
escrow agent.
(b) Clarification, consolidation or
simplification of reporting and
compliance requirements. Where we
have substituted alternative credit
quality and liquidity criteria for ratings
references in the amended rules, we
have endeavored to make the criteria as
clear and straightforward as possible.
We believe that the standards provided
by the amended rule are sufficiently
clear to permit a fund (or a fund adviser
conducting the analysis on behalf of the
fund board) to understand the risks
acceptable under the rule. The amended
rules are designed to minimize the
regulatory burden, consistent with the
Commission’s objectives, on all entities
eligible to rely on the respective rules,
including small entities.
(c) Performance rather than design
standards. Rules 5b–3 and 10f–3, as
amended, do not dictate any particular
design standards that must be employed
to meet the objectives of the rules. In
fact, the amendments to the rules
substitute a performance standard for
references to NRSRO ratings.
(d) Exempting small entities.
Continuing to require small entities to
rely exclusively on NRSRO ratings for
the credit quality and liquidity
determinations required by the
amendments to Rule 10f–3 would not be
consistent with the goals underlying our
amendments. Moreover, fund boards
may incorporate ratings reports,
analyses and other assessments issued
by third parties, including NRSROs, in
making their determinations, although
an NRSRO rating, by itself, could not
substitute for the evaluation required to
be performed under the amendments.
VII. Statutory Authority
The Commission is adopting
amendments to Rule 3a1–1, Rules 300
and 301 of Regulation ATS and Forms
ATS–R and PILOT under the Exchange
Act under the authority set forth in
Sections 3, 11A(c), 15, 17, 23(a) and
36(a)(1) of the Exchange Act [15 U.S.C.
78c, 78k–1(c), 78o, 78q, 78w(a) and
78mm(a)(1)]. The Commission is
adopting amendments to Rule 5b–3
under the Investment Company Act
under the authority set forth in Sections
6(c) and 38(a) of the Investment
Company Act [15 U.S.C. 80a–6(c) and
80a–37(a)]. The Commission is adopting
amendments to Rule 10f–3 under the
Investment Company Act under the
authority set forth in Sections 10(f),
31(a) and 38(a) of the Investment
Company Act [15 U.S.C. 80a–10(f),
80a–30(a) and 80a–37(a)].

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List of Subjects
17 CFR Parts 240, 242 and 249
Broker, Reporting and recordkeeping
requirements, Securities.
17 CFR Part 270
Investment companies, Reporting and
recordkeeping requirements, Securities.
Text of Rule Amendments

PART 242—REGULATIONS M, SHO,
ATS, AC AND NMS AND CUSTOMER
MARGIN REQUIREMENTS FOR
SECURITY FUTURES

For reasons set out in the preamble,
Title 17, Chapter II of the Code of
Federal Regulations is amended as
follows:

■

PART 240—GENERAL RULES AND
REGULATIONS, SECURITIES
EXCHANGE ACT OF 1934

Authority: 15 U.S.C. 77g, 77q(a), 77s(a),
78b, 78c, 78g(c)(2), 78i(a), 78j, 78k–l(c), 78l,
78m, 78n, 78o(b), 78o(c), 78o(g), 78q(a),
78q(b), 78q(h), 78w(a), 78dd–1, 78mm, 80a–
23, 80a–29 and 80a–37.

■

3. The authority citation for Part 242
continues to read as follows:

1. The authority citation for Part 240
continues to read in part as follows:

■

*

*
*
*
*
■ 2. Amend § 240.3a1–1 by revising
paragraphs (b)(3)(v), (b)(3)(vi) and
(b)(3)(vii) and by removing (b)(3)(viii) to
read as follows:
§ 240.3a1–1 Exemption from the definition
of ‘‘Exchange’’ under Section 3(a)(1) of the
Act.

*

*
*
*
*
(b) * * *
(3) * * *
(v) Corporate debt securities, which
shall mean any securities that:
(A) Evidence a liability of the issuer
of such securities;
(B) Have a fixed maturity date that is
at least one year following the date of
issuance; and
(C) Are not exempted securities, as
defined in section 3(a)(12) of the Act,
(15 U.S.C. 78c(a)(12));
(vi) Foreign corporate debt securities,
which shall mean any securities that:
(A) Evidence a liability of the issuer
of such debt securities;
(B) Are issued by a corporation or
other organization incorporated or
organized under the laws of any foreign
country; and
(C) Have a fixed maturity date that is
at least one year following the date of
issuance; and
(vii) Foreign sovereign debt securities,
which shall mean any securities that:
(A) Evidence a liability of the issuer
of such debt securities;

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4. Section 242.300 is amended by
revising paragraph (i), removing
paragraph (j) and redesignating
paragraph (k) as paragraph (j).
The revision reads as follows:

■

Authority: 15 U.S.C. 77c, 77d, 77g, 77j,
77s, 77z–2, 77z–3, 77eee, 77ggg, 77nnn,
77sss, 77ttt, 78c, 78d, 78e, 78f, 78g, 78i, 78j,
78j–1, 78k, 78k–1, 78l, 78m, 78n, 78o, 78p,
78q, 78s, 78u–5, 78w, 78x, 78ll, 78mm, 80a–
20, 80a–23, 80a–29, 80a–37, 80b–3, 80b–4,
80b–11 and 7201 et seq.; and 18 U.S.C. 1350,
unless otherwise noted.

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(B) Are issued or guaranteed by the
government of a foreign country, any
political subdivision of a foreign
country or any supranational entity; and
(C) Do not have a maturity date of a
year or less following the date of
issuance.

§ 242.300

Definitions.

*

*
*
*
*
(i) Corporate debt security shall mean
any security that:
(1) Evidences a liability of the issuer
of such security;
(2) Has a fixed maturity date that is at
least one year following the date of
issuance; and
(3) Is not an exempted security, as
defined in section 3(a)(12) of the Act (15
U.S.C. 78c(a)(12)).
*
*
*
*
*
5. Section 242.301 is amended by:
a. Adding the word ‘‘or’’ to the end of
paragraph (b)(5)(i)(C);
b. Revising paragraph (b)(5)(i)(D);
c. Removing paragraph (b)(5)(i)(E);
d. Adding the word ‘‘or’’ to the end
of paragraph (b)(6)(i)(C);
e. Revising paragraph (b)(6)(i)(D); and
f. Removing paragraph (b)(6)(i)(E).
The revisions read as follows:
§ 242.301 Requirements for alternative
trading systems.

*

*
*
*
*
(b) * * *
(5) * * *
(i) * * *
(D) With respect to corporate debt
securities, 5 percent or more of the
average daily volume traded in the
United States.
*
*
*
*
*
(6) * * *
(i) * * *
(D) With respect to corporate debt
securities, 20 percent or more of the

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average daily volume traded in the
United States.
*
*
*
*
*
PART 249—FORMS, SECURITIES
EXCHANGE ACT OF 1934
6. The authority citation for Part 249
continues to read, in part, as follows:

■

Authority: 15 U.S.C. 78a et seq. and 7201
et seq.; and 18 U.S.C. 1350, unless otherwise
noted.

*

*

*

*

*

7. Form ATS–R (referenced in
§ 249.638) is amended by:
■ a. In the instructions to the form,
Section B, revising the second term,
‘‘Investment Grade Corporate Debt
Securities,’’ and removing the third
term, ‘‘Non-Investment Grade Corporate
Debt Securities’’; and
■ b. In Section 4 of the form, revising
Line L, to read ‘‘Corporate debt
securities,’’ removing Line M and
redesignating Lines N and O as Lines M
and N.
The revision reads as follows:
■

Note: The text of Form ATS–R does not
and this amendment will not appear in the
Code of Federal Regulations.

Form ATS–R, Quarterly Report of
Alternative Trading System Activities
Form ATS–R Instructions
B. * * *
*
*
*
*
CORPORATE DEBT SECURITIES—
Shall mean any securities that (1)
evidence a liability of the issuer of such
securities; (2) have a fixed maturity date
that is at least one year following the
date of issuance; and (3) are not
exempted securities, as defined in
Section 3(a)(12) of the Exchange Act, (15
U.S.C. 78c(a)(12)).
*
*
*
*
*
*

8. Form PILOT (referenced in
§ 249.821) is amended by:
■ a. In the instructions to the form,
Section B, revising the second term,
‘‘Investment Grade Corporate Debt
Securities,’’ and removing the third
term, ‘‘Non-Investment Grade Corporate
Debt Securities’’; and
■ b. In Section 9 of the form, revising
Line J, to read ‘‘Corporate debt
securities,’’ removing Line K and
redesignating Lines L, M, N and O as
Lines K, L, M and N.
The revision reads as follows:
■

Note: The text of Form PILOT does not and
this amendment will not appear in the Code
of Federal Regulations.

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Federal Register / Vol. 74, No. 195 / Friday, October 9, 2009 / Rules and Regulations
Form PILOT, Initial Operation Report,
Amendment to Initial Operation Report
and Quarterly Report for Pilot Trading
Systems Operated by Self-Regulatory
Organizations
Form PILOT Instructions
B. * * *
*
*
*
*
*
CORPORATE DEBT SECURITIES—
Shall mean any securities that (1)
evidence a liability of the issuer of such
securities; (2) have a fixed maturity date
that is at least one year following the
date of issuance; and (3) are not
exempted securities, as defined in
Section 3(a)(12) of the Exchange Act, (15
U.S.C. 78c(a)(12)).
*
*
*
*
*
PART 270—RULES AND
REGULATIONS, INVESTMENT
COMPANY ACT OF 1940

Authority: 15 U.S.C. 80a–1 et seq., 80a–
34(d), 80a–37 and 80a–39, unless otherwise
noted.

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*

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*

*

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*

*
*
*
*
(c) * * *
(4) * * *
(iii) At the time the deposited
securities are placed in the escrow
account, or at the time a substitution of
the deposited securities is made, an
independent certified public accountant
has certified to the escrow agent that the
deposited securities will satisfy all
scheduled payments of principal,
interest and applicable premiums on the
Refunded Securities.
*
*
*
*
*
11. Section 270.10f–3 is amended by:
a. Revising paragraph (a)(3);
■ b. Removing paragraph (a)(5); and
■ c. Redesignating paragraphs (a)(6),
(a)(7) and (a)(8) as paragraphs (a)(5),
(a)(6) and (a)(7).
The revision reads as follows:
■

9. The authority citation for Part 270
continues to read in part as follows:

*

§ 270.5b–3 Acquisition of repurchase
agreement or refunded security treated as
acquisition of underlying securities.

■

■

*

10. Section 270.5b–3 is amended by
revising paragraph (c)(4)(iii) to read as
follows:

■

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52373

§ 270.10f–3 Exemption for the acquisition
of securities during the existence of an
underwriting or selling syndicate.

(a) * * *
(3) Eligible Municipal Securities
means ‘‘municipal securities,’’ as
defined in section 3(a)(29) of the
Securities Exchange Act of 1934 (15
U.S.C. 78c(a)(29)), that are sufficiently
liquid that they can be sold at or near
their carrying value within a reasonably
short period of time and either:
(i) Are subject to no greater than
moderate credit risk; or
(ii) If the issuer of the municipal
securities, or the entity supplying the
revenues or other payments from which
the issue is to be paid, has been in
continuous operation for less than three
years, including the operation of any
predecessors, the securities are subject
to a minimal or low amount of credit
risk.
*
*
*
*
*
By the Commission.
Dated October 5, 2009.
Elizabeth M. Murphy,
Secretary.
[FR Doc. E9–24364 Filed 10–8–09; 8:45 am]
BILLING CODE 8011–01–P

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