Alert April 13, 2010

SEC Staff Provides Guidance Regarding Collateralization Requirements for Repurchase Agreements Held by Certain Joint Accounts Used by Affiliated Investment Companies

The Staff of the SEC’s Division of Investment Management (the “Staff”) recently issued a letter (the “Guidance”) stating that persons relying on the Staff’s Chase Manhattan no-action letter (pub. avail. July 24, 2001) (the “Chase Letter”) may continue to deem as “collateralized fully” repurchase agreements that are collateralized with securities rated in the highest ratings categories of certain nationally recognized statistical ratings organizations (“NRSROs”), or unrated securities of comparable quality, notwithstanding the recent amendments to Rule 2a-7 under the Investment Company Act of 1940, as amended (the “1940 Act”).  The Chase Letter, which permits affiliated registered investment companies to invest cash balances in joint accounts, includes a condition that if any asset in the joint account is used to acquire a repurchase agreement, the repurchase agreement must be “collateralized fully,” as that term is defined in Rule 2a-7.  The Staff issued the Guidance because the SEC’s recently adopted amendments to Rule 2a-7 carve back the Rule’s definition of “collateralized fully” to no longer include repurchase agreements that are collateralized with securities rated in the highest ratings categories of certain NRSROs, or unrated securities of comparable quality.  The Chase Letter is discussed in the July 31, 2001 Alert, and the recent amendments to Rule 2a-7 are discussed in the March 5, 2010 Alert.