Financial Services Alert

Developments Of Note

SEC Adopts Rule Codifying Staff Positions Regarding The Treatment Of Repurchase Agreements And Refunded Securities As An Acquisition Of The Underlying Securities

The SEC adopted a new rule ("Rule 5b-3") under the Investment Company Act of 1940, as amended (the "1940 Act"), that permits an investment company, subject to certain conditions, to treat the acquisition of a repurchase agreement as an acquisition of the underlying securities for purposes of Sections 5(b)(1) and 12(d)(3) of the 1940 Act if the obligation of the seller to repurchase the securities from the investment company is fully collateralized (See Investment Company Act Release No. 25058 (July 5, 2001)). Section 5(b)(1) of the 1940 Act, which imposes limitations on the amo unt that a diversified investment company may invest in the securities of any one issuer (other than the U.S. Government) and Section 12(d)(3) of the 1940 Act, which prohibits an investment company from acquiring an interest in a broker, dealer or underwriter, may limit an investment company's ability to enter into repurchase agreements because entry into a repurchase agreement may be considered to be the acquisition of an interest in the counterparty. New Rule 5b-3 codifies and updates prior SEC interpretive and no-action letters. Rule 5b-3 also codifies the SEC's previous no-action position permitting an investment company, subject to certain conditions, to treat an investment in a "refunded security" as an investment in the escrowed U.S. government securities. Rule 5b-3 defines a "refunded security" as a debt security the principal and interest payments of which are to be paid in the form of U.S. government securities that have been irrevocably placed in an escrow account and are pledged only to the payment of the debt security. The effective date for Rule 5b-3 is August 15, 2001.

FTC Letter Permits Creditors To Obtain Credit Reports On The Principals Of Business Borrowers

The Federal Trade Commission ("FTC") staff issued a new letter stating that a business credit grantor has a permissible purpose (under the federal Fair Credit Reporting Act) to obtain a credit report on a principal of a business when that principal will be personally liable on the credit, as with a sole proprietor or when the principal will co-sign or guarantee the credit. This letter substantially reverses the position FTC staff took last summer in a letter referred to as the Tatelbaum letter. However, the...