The SEC staff recently granted affiliated broker-dealers (collectively, the “Broker-Dealer”) and related entities no-action relief from certain provisions of the Investment Company Act of 1940, as amended (the “1940 Act”), and the Securities Exchange of 1934, as amended (the “1934 Act”), with respect to a series of transactions contemplated in connection with settlements (the “Settlements”) previously reached by the Broker-Dealer with the SEC and certain state regulatory authorities. Pursuant to the Settlements, the Broker-Dealer is required to purchase auction preferred stock (“APS”), issued by certain registered investment companies and held by its current clients, at par value plus accrued and unpaid interest or dividends. (For additional background on APS, please see the July 1, 2008 Alert). The Broker-Dealer proposes to refinance its purchase of the APS by selling the APS it purchases to certain unregistered trusts (the “Trusts”) to be formed with the Broker‑Dealer’s involvement. In turn, the Trusts will sell (i) instruments similar to floating rate notes that are designed to be eligible for purchase by money market funds (the “Floaters”), and (ii) other residual securities, which will be purchased by an affiliate of the Broker-Dealer. The Floaters will include a liquidity facility under which a liquidity provider is contractually obligated to purchase Floaters from their holders in the event one of the periodic remarketings, which are a feature of the Floaters, fails.
Noting that the Floaters’ liquidity features are analogous to the liquidity features described in the Eaton Vance and Merrill Lynch no-action letters dealing with liquidity provider arrangements (the “Previous Relief”), the request for relief sought confirmation that the Floaters could be considered eligible investments for money market funds relying on Rule 2a-7 under the 1940 Act based on the similarity of their liquidity provider arrangements to those in the Previous Relief even though unlike in the Previous Relief the liquidity provider in the current instance could be an affiliate of the Broker‑Dealer. In addition to that confirmation, the SEC staff granted relief from:
various 1940 Act provisions that could cause the Broker‑Dealer or a Trust to be an affiliated person or affiliated person of an affiliated person of a Fund (and thus subject to various restrictions under the 1940 Act) as a result of the contemplated purchases of APS;
Section 12(d)(1)(A)(i) of the 1940 Act to the extent it could be deemed to limit a Trust’s purchase of APS; and
Section 14(e) and Regulation 14E of the 1934 Act, to the extent a Liquidity Provider’s offer to purchase Floaters could be deemed a tender offer.