On September 25, 2008, the staff of the SEC’s Division of Investment Management issued a no-action letter to the Investment Company Institute (the “ICI No-Action Letter”) stating that, subject to certain conditions, it would not recommend enforcement action to the SEC under Section 17(a)(2) of the Investment Company Act of 1940 (the “1940 Act”) against a U.S. depository institution, bank holding company (parent or broker-dealer affiliate) or U.S. branch of a foreign bank (each, a “bank”) that is an affiliated person, or an affiliated person of an affiliated person, of a registered investment company that holds itself out as a money market fund (a “money market fund”) if the bank purchases from that money market fund asset-backed commercial paper (“ABCP”) pursuant to the ABCP liquidity facility authorized by the FRB on September 19, 2008. (A discussion of the ABCP liquidity facility that is being administered for the FRB by the Federal Reserve Bank of Boston (the “FRB-Boston”) is included in the September 23, 2008 Alert.) Section 17(a)(2) provides generally that it is unlawful for an affiliated person, or an affiliated person of an affiliated person, of a registered investment company knowingly to purchase from the registered investment company any security or other property. Under the 1940 Act, an affiliated person to a money market fund includes the investment adviser to such fund, and an affiliated person of an investment adviser usually includes any parent, sister or subsidiary company of the investment adviser.
The importance of the ICI No-Action Letter to a bank that is an affiliated person, or an affiliated person of an affiliated person, of a money market fund intending to purchase from the money market fund ABCP that meets the requirements of the ABCP liquidity facility is because the bank may not rely on Rule 17a-9 under the 1940 Act when making that purchase. Rule 17a-9 generally exempts from Section 17(a) of the 1940 Act a purchase of a security from a money market fund if, among other things, the security is not an Eligible Security, as defined in Rule 2a-7 under the 1940 Act. Under the ABCP liquidity facility, any ABCP bought from a money market fund with loan proceeds from the facility must be a First Tier Security (as defined in Rule 2a-7), and thus, an Eligible Security at the time the ABCP is pledged to the FRB-Boston.Any transaction involving a bank intending to rely on the ICI No-Action Letter must meet the following conditions: (a) the money market fund’s investment adviser must determine which ABCP will be purchased from the money market fund based on then-current market conditions and the fund’s redemption needs, (b) those determinations must be made consistent with the investment adviser’s fiduciary duty to the fund, and in the best interest of fund shareholders, and (c) the fund must keep and maintain records of the transactions as required by Rules 31a-1 and 31a-2 under the 1940 Act.