SEC Division of Investment Management staff letter: Citicorp Securities

,- g
~ ,:
t ~ i `, , ~ ~~ APR 6
:~
~2ESPONSE OF THE OFFICE OF CHIEF COUNSEL ~)IVISION OF INVESTMENT MANAGEMENT Our Ref. No. 95-172-CC C.i.ticorp Securities, Inc. File No. 132-3 Your letter dated March 23, 1995 requests our assurance that sae would not recommend enforcement action to the Commission if a ~~~usiness trust, organized and operated as described in your Letter (the "Trust"), does not register under the Investment !ompany Act of 190 (the "1940 Act") in reliance on the exception Erom the definition of investment company provided by Rule 3a-7 under the 1940 Act. The Trust proposes to issue a single class of unrated beneficial interests that will be sold only to qualified institutional buyers as defined in Rule 144A under the Securities Act of 1933 (the "Securities Act") and to persons involved in the organization or operation of the Trust. The beneficial interests will have a targeted maturity of between two and seven years. Proceeds from the sale of the beneficial interests will be used to acquire certain short-term, high quality investments (~'Short￾term Assets") that have a maturity of 31 days or less. i/ These assets will be held to maturity. The proceeds received on maturity of the Short-term Assets will be reinvested in similar Short-team Assets selected by a third-party administrator. In addition to investing in Short-term Assets, the Trust will enter inLO standby commitments with commercial paper issuers identified at the time of the formation of the Trust. Each standby commitment will conditionally require the Trust to purchase from a commercial paper issuer (1) specified asset￾backed aecuzities or (2) notes or other securities supported by a security interest 9.n specified asset-backed securities (collectively, "Long-term Assets"). 2/ As compensation for entering into standby commitments, the Trust wi11 receive commitment fees. The commitment fees will be calculated as a specified number of basis points per annum of the principal amount of the standby commitment. The standby commitment generally wil]. require the Trust to purchase the Long￾term Assets if the commercial paper issuer is unable to roll over 1/ The Trust's Short-term Assets may include reurchase agreements for government securities, A-1/P-1 commercial paper or other corporate obligations rated A-~/P-1, securities issued or guaranteed by the U.S. government or its agencies, and dollar-denominated obligations issued or guaranteed by U.S. and foreign banks with assets exceeding $1 billion and rated A-1/P-1. 2/ The Trust will be permitted to hold Long-term assets that consist of (or are supported by) asset-backed securities that have not been registered under the Securities Act. The Long-term Assets may be unrated.

maturing commercial paper by issuing new commercial paper. The Trv.st will acquire Long-term Assets only in connection with honoring commitments. Each Trust investor will be entitled to receive the stated amount of the beneficial interests upon their targeted maturity (or potentially earlier or later if Long-term Asses are acquired). 3/ In addition, each Trust investor will be entitled Co receive a pro rata share of the (1) interest (or discount) earned on Short-term Assets, (2) commitment fees generated by the standby commitment , and (3) interest and similar distributions earned on any Long-term Assets that are acquired. Trust assets will be maintained in the name of an independent trustee in its capacity as trustee for the Trust, under the trustee's sole dominion and control. All payments received by the Trust will be deposited in one or more segregated accounts maintained in the name of the trustee in its capacity as trustee for the Trust, under the sole dominion and control of the trustee. 4/ Nature of the Trust's Business and Its Assets Rule 3a-7 excepts from the definition of investment company an issuer that "is engaged in the business of purchasing, or otherwise acquiring, and holding eligible assets and who does not issue redeemable securities (and in activities related or incidental thereto)," provided ghat certain conditions are met. "Eligible assets" are defined in paragraph (b)(1) of Rule 3a-7 as "financial assets, either fixed or revolving, that by their terms convert into cash within a finite time period plus any rights or other assets designed to assure servicing ar timely distribution of proceeds to the security holders." You believe that both the Short-term Assets and Long-term Assets meet the definition of eligible asses. We agree. You also believe that the commitment fees received by the Trust should be viewed as eligible assets because each commitment fee will be structured as a series of periodic, fixed payments over a finite time period equal to the length of the commitment. We disagree. The commitment fees are in the nature of fees paid to the Trust for providing a service (i.e., standing ready to 3/ If a commitment is called and the Trust acgLires Long-term Assets, investors will be repaid in accordance with the Trust's receipt of disCributions on the Long-term Assets. 4/ Paragraph (a)(4) of Rule 3a-7 imposes certain requirements with respect to the appointment of an independent trustee and the safekeeping of assets.

p~rchase the underlying Long-term Asset) and therefore, in our view, do not qualify as eligible assets under the Rule. ~/ Any issuer that relies on Rule 3a-7 must be engaged solely i~. the business of purcrasing, or otherwise acquiring, and hlding eligible assets and in activities related or incidental t~.ereta. ~/ It is the Division's view that the "elated or i~,cidental activities permitted by Rule 3a-7 include only those a~;tivities that support or further, and therefore are secondary tA~, the entity's business of purchasing, or otherwise acquiring, ad holding eligible assets. 7/ Accordingly, if the acquisition ad holding of eligible assets by an issuer is secondary to, or i~~ undertaken primarily in support of, another business, that i~isuer may not rely on Rule 3a-7. Because we conclude that the cA~mmitment fees are not eligible assets, the Trust may relx on Riltle 3a-7 only if entering into the standby commitments is an aP:ti.vity incidental ox related to the Trust's business of aP:quiring and holding the Short- and Long-term Asses. You state tHiat the Trust has received your opinion of counsel stating that, .~ 5~~ Tl:is position should not be read to mean that the right to receive this type of fee could not, under certain circumstances, be separately aecuritized and held as an eligible asset by an entity relying on Rule 3a-7. ~,/ In the proposing release for Rule 3a-7, the Commission stated that only issuers whose sole business is to hold a pool of eligible assets and to issue non-redeemable securities could rely on the rule. Investment Company Act Rel. No. 18736 (May 29, 1992)(proposing Rule 3a-7). Rule 3a-7, as adopted, permits issuers also to engage in activities that are "related or incidental" to the business of acquiring and holding eligible assets. This change was made in response to comments that an issuer's activities during the operation of a structured financing are not necessarily limited to acquiring and holding eligible assets but also may include activities such as filing registration statements, returning defective assets to the sponsor, and servicing the assets (through the servicer as the financings agent). Investment Company Act Rel. No. 19105 at n.23 and accompanying text (November 19, ~992)(adopting Rule 3a-7). ~I/ The definition of eligible assets includes assets that are necessary to assure the distribution of cash flow and/or proceeds to securityholdera. Seg Adopting Release at nn. 16 & 18 and accompanying text. Therefore, the business of holding eligible assets may legitimately include activities such as the temporary management of an office building or other properCy acquired as a result of a default on a secured loan.

eased on the standard set forth above, the Trust may rely on Rule ~a-7 because (i) it will be engaged solely in the business of ~.cquiring and holding eligible assets and (ii} entering into the ~~tandby commitments is an activity related or incidental to that ~~usiness . Next, paragraph (a)(3) of Rule 3a-7 permits an issuer to ~~cquire additional eligible assets or to dispose of eligible fl~ssets only if certain conditionr~ are satisfied. First, the ~~cquisition or disposition must comply with the terms and i~:onditions set forth in the agxnements, indentures, or other ~.nstruments pursuant to which the issuer's securities are issued. 1~Tith respect to the Trust's reinveatmenG of proceeds from maturing Short-term Assets, you state that the Trust's fl~dministrator will select new Short-term Assets from a list of eligible obligors set forth in a schedule to the Trust Agreement, u~ased on a set of investment criteria also specified in the Trust ~~,greement. Q/ You believe that these limitations placed on the u:einvestment process will satisfy this condition. With respect ~:o the acquisition of Long-term Assets, you state that the Trust k~,greement will permit investment only in Long-term Assets aapecifically identified i.n the Trust Agreement as underlying the sata~zdby commitments. 9/ Paragraph (a)(3) also states that eligible assets must not ~~e acquired or disposed of for the primary purpose of recognizing "gains or decreasi:; losses resulting from market value changes. "rou represent that the Tzuet will not be permitted to "trade" ~~Short-term Assets or Long-term Assets for any reason. 10/ The "trust will sell Short-term Assets only in connection with the :~,/ The administrator will be able to make changes to the list of eligible obligors if necessary to satisfy the requirements in the Trust Agreement concerning the minimum credit standards within the pool of eligible obligors and the minimum number of eligible obligors on the list. ~/ In addition, the acquisition or disposition of eligible assets must not result in a downgrading of the rating of the issuer's outstanding fixed-income securities. Rule 3a-7(a)(3)(ii). Assuming the beneficial interests are fixed-income securities, you believe that this condition should not apply to the proposed transaction because the beneficial interests will not be rated and the Trust will not otherwise issue rated securities. We agree, although we express no view on whether the beneficial interests are fixed-income securities, as indicated in note 13 below. 10/ The Trust will be permitted to sell the collateral securing the repurchase agreements referred to in footnote 1 if there are defaults on the repurchase agreements.

~erm~nation of the Trust or as needed to honor commitments. similarly, the Truat will sell Long-term Asaeta only in connection with the termination of the Trust or the Trust's argeted maturity. We agree that, under the circumstances escribed above, the Trust will satisfy the requirements of 'aragraph (a)(3) of Rule 3a-7. securities Issued by the Trust As stated above, to qualify under Rule 3a-7, an issuer may ~.ot issue redeemable securities. Section 2(a)(32) of the 1940 ~~ct defines "redeemable security" as any security, other than ~~hort-term paper, under the term3 of which the holder, upon its ~presentation to the issuer or to a person designated by the .ssuer, i~ entitled to receive approximately his proportionate ~ihare of the issuer's current net assets, or the cash equivalent h:hereof. You believe that the Trust will not be issuing p~edeemable securities within the meaning of. Section 2(a)(32) ~~ecause of the limitations placed on an investors ability to ~~ith~raw all or a portion of its investment from the Trust prior ~;o the targeted maturity date. 11/ Withdrawals will not b~ permitted during the first six months following an investment in ~:he Trust, and, thereafter, a notice period of 180 days will be p°equired. In addition, no withdrawal requests will be honored =lf, prior to the date of honor, the Trust hoe received notice G:equiring it to honor a commitment to purchase Long-term Assets. pie agree that, in these circumstances, the Trust will not be ~Lssuing redeemable securities. 12/ ..11/ Investors will be permitted to sell their beneficial interests a~ any time to qualified thirc3-party purchasers that are not affiliated with the Trust ~r its administraCor, bud only if other investors representing at least 51~ of the remaining beneficial inCerests consent in writing to the sale. Third-party purchasers will be subject to the same limitations an resale of beneficial interests and withdrawal from the Trust as initial investors. T'he Trust's administrator may elect to create a private secondary market for the beneficial interests. We expr~:ss no view on whether the creation of a secondary market would require the administrator to register as a broker-dealer under the Securities Exchange Act of 1934. 12/ You assert that the Trust's beneficial interests should not be considered redeemable because each beneficial interest will be cashed out, if at all, based ran the stated dollar amount of the beneficial interest plu:a accrued return, as opposed to the fair market value of the Trust's assets. We disagree. It is the staff's position that the net asset value (or its equivalent) of fixed-income securities can be calculated by reference to their stated dollar amount plus

Finally, paragraph (a)(1) of the Rule requires that the 'rust must issue eithez fixed-income securities or other ~~ecurities Chat entitle their holders to receive payments that depend primarily on the cash flow from eligible assets. You ~~tate that the payments on the beneficial interests will be derived from the interest earned on the Short-term Assets and the ~ieriodic receipt of commitment tees, and, if a commitment is palled, from distriY,utiona on the Long-term Assets. You further ~itat~ that the commitment fees will not account for more than 15~ h~f the return on the beneficial interests. Therefore, although ire have determined that the commitment fees are not eligible ~►s~ets, we agree that, regardless of whether a commitment is ~:a11ed, payments on the beneficial interests will depend ~~rimarily on the cash flow from eligible assets. 1~/ We would not recommend enforcement action to Che Commission cif the Trust does not register under the 1940 Act in reliance on Stule 3a-7. Our position is based on all the facts and G^epresentations contained in your letter, particularly that the "Crust has received your opinion of counsel that entering into the gstandby commitments is an activity related or incidental to the ~~usinesa of acquiring and holding eligible assets, and the +representation that the beneficial interests will be sold only to ^qualified institutional buyers and persons involved in the ~~rganization or operation of the Trust. Because this position is q~ased on the facts and representations contained in your letter, K~ny different facts or representations might require a different ~~~onclusion. accrued return. See Donaldson, Lufkin & Jenrette Securities Corporation (pub. avail. Sept. 23, 1994). 1~,/ You have not asked and we offer no view regarding whether the beneficial interests are fixed-income securities as defined in Rule 3a-7(b)(2).

--~,~
~~
~~~~ ~~~~~~~~ I~~~~ ~ ~~~~~ ~~~~~i~~~ ~~~~~~~i~ 95 17 X859 y~u~a~r fU~PtR . WTLLH IUNT . oi~~cs~ic, a ~. ~AIIR ~LDIIICK . LOWY OIICNMAN nuaw. OUNO [DWAIiD$ JIIM6pY ~. wcuc~ N A.O. 9CMWAR2, Jp L SLSHAq . RI/HIND i[9 IIROWNWOCO v~ ~2' CRAVATH, SWAINE St MOORE "~wu~ w. Door« p11CMAR0 M. ALllH ~~~'MOMAO R. OROML ~400[R7 D. JOI/[ ~~1[110[RT L. CAMP ~~144[N ~INNCLSOH „IOHA~p S. AOL~[ ~~~AUI C. 5AUN0[R5 ~~/ARTIN L. BLNZCL '~fOUOUS O, eROADWAT[R ~~1MN C. 3T[P/'LN SON ~t 1.U( A. bHULMAN f4{TUA11T W. OOlO "iOMN W. WN11C 'iONN L. O[[NOOWCR ntVAN p. CM[sl[R ATNICIA OLOOH [DAN '). COIUCR 1(IgNHAN ~:IICNAEL L. 9CHl[M 'RQ\i l- ~ry /'~BY' ~~E.ti~ ~~~'~ 19 ~. WORLDWIDE PLAZA ~~ 825 EIGHTH AVENUE ~ NEW YORi(, n TEIEf+NONE:
FACSIMILE:
7I MINO WILl1~N yTR[[T
LOHOOM (CSR 9DU LN0IAND
TLLLVNON[:IA•171.404~112i lAC S~MIL[: ~~~171~OL0~1160 iY 10019-7475 (212) 474.1060 11121 474-3700 SUi~( tE00, AlIA PAC~IIC lINANC[ `OW[N C~itOANK PLA2A l GANO[N PpAD. CCNTgA~ MONO RONO i[L[PHON['!SF-t 600•)200

• AC S~M~I[ Slt~7609.7212
  WRITER'S DIRECT DIAL NUMBER
  (212) 474-1200
  3 a.~q~~—
  OANICL P. GUNNINONAN
  Kg19 t. HEIHZELMAH
  A. ROOl~N$ KIC$$lINO
  ROOCR D. 7U HNCR
  PHILIP A. O[LSTON
  RORY O. MILISON
  N[Il P. WESTRUCH rRANC1S P. DApNOH RICHARD W. CIARY WILLIAM P. ROOL RS. JR. JAMCS O. COOPCR B~IPN[N L. OONDON ROO[RT A. 1(INOlE ~1 OANI[l L. MOSL[V OR[OORY M. SHAW P[T[R $. WIL80N JAN [5 C. VARpC 4l, m ROB[RT H. oARON M[VIN J. Oli[NAN W. CUYTON JONN SON STCPH[N $. MA05CN
  C. ALLEN PAHK[R
  MANC $, gpS[H O[RO
  WILl1AN 0. RAH NAN
  LEW19 R. StEINBCA3
  SU9AN W[SSTLR
  WIll1AM N. WID[N
  TIMOTHY O. MAS~AD
  DAVID M[NCA00
  ROWAN O. W1480H
  JONH 1. OAH [Y
  PCT[R T. pANlUR
  9ANOM C. OOIOSTCIN
  PAUL MICNA~E KI
  TMONAb O. RAII[RTV
  NBC NAiI 8. OO LDMAN
  March 23, 19 5
  ACT ~ ~~~~ - L~____~
  Rule 3a-7 of the SoN
  Investment Company Act of 194~ULE ~ /.[_ - ~7 ~vJ~U_K~ IIVC. u-''~~a~h Ladies and Gentlemen: Pu~LIC Q' ~/ (~~ AIATLABSLITY ~ ~F / tI~ We represerf~Citico Securities, Inc. ("C]1~tiCOZp") in connection with e ormation of a Del~iware or other business trust (the "Trust") . The Trust wild► be foamed for the purpose of investing in °eligible aRS~ts", as such term is defined in Rule 3a-7(b)(1) of the Izvdlstment Company Act of 1940 (the "1940 Act's) , in accdlydance with the terms and conaitions specified in the trut agreement (the "Trust Agreement") pursuant to which. bend~ficial interests in the Trust (the "Beneficial Intres~~") will be issued to investors (the "Investors"). To d►nhance the return to Investors, the Trust will provide sta~l~dby commitments ("Commitments") to one or more comrl(.ercial paper issuers id~ntifie3 a~ the time o~ the for~ltation of the Trust. In effect, commercial paper issuers wi1~l be paying commitment fees to the Trust in return for the Trust's providing liquidity and assuming the credit risk of tithe Long-term Assets described below under "Trust AS~dItB". The assets that will be held by the Trust, the Ben4~ficial Interests that will be issued by the Trust and the foa~nation, operation and achna.nistration of the Trust are dest~ribed below. On behalf o~ Citicorp, w~ hereby request a sta4tiement that the staff a~ the Division of Investment Mari~Ugement (the "Staff") of the Securities and Bxchange Comnliission (the "Co~mnission") will not recommend enforcement actjlion to the Commission upon the facts provided in this let4°er if the Trust does not register as an investment

company under the 1940 Act based on our opinion that the Trust will qualify for the exclusion from the definition of "investment company" provided by Rule 3a-7 under the 1940 Act ("Rule 3a-7n). Trust Assets The Trust will be permitted to hold two classes of assets: "Short-term Asset" and "bong-term Assets". Short-term Assets will consist of extremely short-tezm high quality investments, such as repurchase agreements for government securities ("Repos"), A-2/P-1 commercial paper or other corporate obligations rated A-1/P-1, securities issued or guaranteed by the United States Government or its agencies and clollax~-denominated obligations issued or guaranteed by U.S. and foreign banks with assets exceeding $1 billion and rated A-1/P-1, in each case with maturities of 31 days or less. Long-tezm Assets will consist of (i) certificates and other securities issued by special. purpose entities such as Standard Credit Card Master Trust 1/ (collectively, ~~Asset-Backed Securities") or (ii) notes or other securities issued by cocmnercial paper issuers supported by a security interest in Asset-Backed Securities. Long-tent► Assets will be acquired by the TrusC ~:~ly in connection with honoring Commitments, as more fully deaci•ibed below. It is our opinion that both the Short-tezm Assets and the Long-term Assets axe "eligible assets" within the meaning of Rule 3a-7. Because the Trust's assets will initially consist exclusively of highly-rated liquid investments, Citicorp believes that the Trust will satisfy 1/ Standard Credit Card Master Trust has from time to time issued asset-backed securities registered under the Securities Act of 1933 (the "1933 Act"). (Seg, e•a•, Registration Statement on Fonn S-3 No. 33-62180 filed with the Connni.ssion on June 17, 1993 } . The Trust will be permitted to hold Long-term Assets that consist of (or are supported by) Aese~-Backed Securities that have not bees registered under the 1933 Act. If ~hi~ proposed structure proves successful, Citicorp intends to use this trust format to structure standby liquidity commitments for a wide range of users of liquidity, and, accordingly, Long-term Assets acquired by similar trusts could consist of a variety of securities, including Asset-Backed Securities and secured and unsecured notes that may or may not be rated.

agency standards fox providers of liquidity to and A-1+/P-1 rated commercial paper programs. Formation and Operation of Trust The commercial paper issuer that desires to obta liquidity for a commercial paper program through the trust structure described in this letter will be involved in the organization of the Trust as described below. The commercial paper issuer will specify the commercial paper program to which the Trust will be permitted to issue Commitments. The Trust wil]. not be permitted to issue Commitments to any other programs. The commercial paper issuer will also require that the Trust be structured to permit investment only in specified Lnng-teen Assets. The Trust Agreement will limit the investment in Long-berm Assets to specific Asset-Backed securities owned by the commercial paper fssuer (or to notes or other securities supported by a security interest in such specific Asset-Hacked Securities). And, in general, the Trust will be custom tailored, in consult=►tion with the conenercial paper issuer, to meet the specific requirements of the commercial paper issuer. Citicorp expects that issuers ma find the Trust an attractive alternative to traditional liquidity facilities provided by commercial banks and othe financial institutions because the Trust should not be subject to many of the ratings downgrade risks that accompany traditional liquidity facilities. The Trust Agreement will permit the Trust to take the following types oiE actions: (i) invest and reinvest in specified Short-tezm Assets; (ii) provide Commitments to a specifi.ecl catrunerci.a]. paper program in exchange for conuni.tment fees; and (iii) invest in specified Long-term Assets. The Trust will use the proceeds from the sale of Beneficial Interests to acquire Short-term Assets, and it will hold such Short-teen Assets to their maturity. The proceeds received on maturity of the Short-term Assets will }~e reinvested in similar Short-term Asset . The reinvestment of proceeds from maturing Short-term Assets will be essentially programmatic--new investments wi~.l be selected by a third party administrator (thy

"Administrator"), 2/ who will make such selections from a list of eligible obligors set forth in a schedule to the Trust Agreement (the "Obligor List"), based on a set of investment criteria also specified in the Trust Agreement. The only discretion that will be available to the Administrator will be to remove obligors from the Obligor Liet and to add new obligors to the Obligor List. Particular Short-tezm Assets will be selected far investment over other Short-term Assets based solely on the credit rating of Short-term Asset issuers, yield considerations and limitations on acquiring more than a specified percentage of assets from a single obligor. Bven these "decisions" will be guided by requirements in the Trust Agreement that the Txuat maintain minimum credit standards within the pool of eligible obligors and that the Trust maintain a minimum number of eligible obligors on the Obligor List. It is our opinion that these limitations will satisfy the requirement of Rule 3a-7(a)(3)(i), that "the assets are acquired or disposed of in accordance with th@ t~xms and conditions set forth in the agreements, indentures, or okher instruments pursuant to which the issuer's securities are issued". ,~/ No rating will be sought for the Beneficial Interests. Consequently, the Beneficial Interests will be sold only to investors who satisfy the requirements of Mule 3a-7(a)(2). Citicorp intends to comply with Rule 3a~7(a)(2)tii) and, accordingly, the Beneficial InteresCs will be sold to qualified institutional buyers as 2/ It is expected that the Administrator will be an investment banking or investment advi.~ory firni with experience in buying, selling and evaluating short term money-market assets. ~/ In order to prevent the Trust from being treated as an association taxable as a corporation, the Trust Agreement will provide that if any of the Investors goes into bankruptcy (any such Investor bein5 an "Insolvent Investor" and any such event being ~n "Insolvency Svent"), the Administrator will promptly noCify each of the Investors of the occurrence of the Insolvency Event, which notice will state that the Trust will automatically terminate unless within 30 days from the date that the Administrator sends such notice, Investors other than the Insolvent Investor representing 51~ in stated amount of the Beneficial Interests held by such Investors shall have notified the Administrator that they waive the Insolvency Bvent.

defined in Rule 144A under the 1933 Act [17 CFR 230.144A] and to persons involved in the organization or operation of the Trust or an affil~.ate, as defined in Rule 405 under the 19°3 Act [17 CFR 230.405], of such a person. 4/ Furthermore, because the BeneEirial Interests wi.11 not be rated, it is our opinion that, assuming the Beneficial Interests are fixed income securities, the requirement of Ru~.e 3a-7(a)!3)(i.i), that "the acquisition ox disposition of the asses does not result in a downgrading 3n the rating of 4/ Rule 3a-7(a)(2) provides as follows:
"~2) Securities sold by the issuer or any underwriter thereof are fixed-income securities rated, at the time of initial sale, in one of the four highest categories assigned long-term debt or in an equivalent short-term caCegory (within either of which there may be sub-categories or gradations indicating relative standing) by at least one nationally recognized statistical rating organization that is not an affiliated person of the issuer or of any person involved in the organization or operation of the issuer, except that:
(i) any fixed-income securities may be sold to accredited investors as defined in paragraphs (1), (2) (3), and (7) of rule 501 (a) under the Securities Act of 1933 [17 CFR 230.501(a)] and an.y entity in which all of the equity owners come within such paragraphs; and (ii) any securities may be sold to qualified institutional buyers as defined in rule 144A under the Securities Act [17 CFR 230.144A] and to persons (other than any rating organization rating the issuer's securities) involved in the organization or operation of the issuer or an affiliate, as defined in rule 405 under the Securities Act [17 CFR 230.4A5J, of such person; grovided that the issuer or any underwriter thereof effecting such sale exercises reasonable care to ensure that such securities are sold and will be resold to persons specified in paragraphs (a)(2)(i) and (ii) of this section;"

the issuer's outstanding fixed-income securities" does not apply to this transaction. 5/ In the absence of a call on a Commitment, the Trust (through the Administrator or other~rise) will not be pexmi.tted to "trade" Short-tezm Assets for any reason. This will prevent the Trust (through the Administrator or otherwise) from managing the Trust's portfolio of Short-term Assets Eor the purpose of recognizing gains or decreasing losses resulting from market value changes in the Short-term Assets held by it. ~/ It is our opinion that this limitation will satisfy the requirement of Rule 3a-7(a)(3)(iii), that "the assets are not acquired or disposed of for the primary purpose of recognizing gains or decreasing lasses resulting from market value changes". Rule 3a-7(a)(1) requires that the Trust issue "fixed-income securities" car "other securities which entitle their holders to receive payments that depend primarily on the cash flow from eligible assets~~. The Trust will satisfy ~/ In order to provide a form of liquidity acceptable to rating agencies, the Trust mur~t be pezmitted to purchase Long-term Assets without the imposition of a rating condition on the obligation of the Trust to make a purchase. 6/ The Trust will be permitted to liquidate Short-term Assets as needed to honor Commitments or in the event that the Trust terminates because an Insolvency Bvent occurs which is not waived by the Investors. The l~.quidation of Short-term Assets might result in gains or losses; however, the sale of Short-term Aeset~ will not be undertaken for the purpose of recognizing gains or decreasing losses resulting from market value fluctuations. Any sale of Short-term Assets will be consummated only for the purpose of honoring Commitments (Qr if required following an Insolvency Event). Although the Trust will be permitted Co sell collateral pledged. to it to secure Repos acquiredl by it if there are defaults on such Repos, it is our opinion that such a limited right to sell collateral securing Repos, which right is triggered only by actions independent of the Trust's and the Administrator's discretion (i•e•, defaults on the Repos), is not for the purpose of recognizing gains or decreasing losses resulting from market value fluctuations, but rather simply reflects an integral aspect of epos. A sale of Long-terns Assets may be cor~mummated in connection with a targeted maturi~y. ee footnote 9 infra.

the requirements of Rule 3a-7(a)(1) because, in the absence of a call on a Commitment, the payments to Investors wild be provided from (i) interest (in the form of payments or discount) earned on the Short-term Assets and (ii) the periodic receipt of commitment fees for providing Cornmitmente. It is expected that the commitment fees wi11 account for less than fifteen percent of the return tee Investors earned during periods prior to a call on a Commitment. It is oiir opinion that a commitment fee should be viewed as a financial asset that by its terms converts into cash within a finite time period as required to satisfy the definition of °eligible assets" in Rule 3a-7(x)(1) because each comni.tment fee will be structured as a series of payments of fixed amounts payable ~aeriodically over a finite time period equal to the length of the Commitment. If the Staff agrees with our opinion that a stream of payments fox a commitment fee should b~ viewed as an eligible asset, then payments to Investors will deper►d ~acclusively on the cash flow from eligible assets. Tf the Staff does not agree with this analysis, it is our opinion ghat the payments to Investors will depend primarily on the cash flow from eligible assets because less than fifteen percent of the return or yield to Investors (and less than five percent of the total combined amount of payments to Investors) will be provided from commitment tees, with the balance being provided from payments received in respect of Short-teen Assets and, if a Commitment ie called on, Long-term Assets. In either case, the requirements o~ Rule 3a-7(a)(i), that payments to Investors "depend primarily on the cash flow from eligible assets", will be satisfied. 7/ 7/ The Staff has taken the position that, under
Section 3(c)(5)(C) of the 1940 Act, a company is primarily
engaged in "purchasing or otherwise acquiring mortgagee and other liens on and interests in real estate" if at least 55~ of such company's assets are invested in mortgages and other interests in real estate and the remaining 45~ of the company's assets are invested primarily in real estate-hype interests. pe, e.a., Bcono Lodges of America, Inc., publicly available December 22, 1989; Salomon Brothers Inc., publicly available June 17, 1985. Where, as here, the payments from eligible assets will in all cases exceed 55~ by a substantial margin, the requirement of Rule 3a-7(a)(i) should be easily satisfied if the interpretation of the word "primarily" is applied uniforn►ly.

Bach Commitment will be Structured as an agreement by +the Trust to purchase, on certain conditions, Long-term Assets from the commercial paper issuer that is a party to the Commitment. Q/ It is our opinion that issuing a Comtrt~.tment and receiving a commitment Fee ae part of a.-~ agreement to purchase on certain conditions an eligible asset is an "activitCy] related or incidental° to purchasing an eligible asset within the meaning of Rule 3a-7(a). It is our opinion therefore that the Trust will be engaged solely in the business of purchasing, or otherwise acqu~.ring and holding, eligible assets and in activities relayed or incidental thereto. Following the acquisition by the Trust of Long-Germ Assets pursuant to a Conrtnitment, the return to Investors will be provided by payments to the Trust on the Long-term Assets. The Long-tezm Assts acquired by the 'rust will not be tradeable by the Trust. ThP Trust will hold the Long-berm Assets to maturity, paying Investors out of distributions received by it from time to time on the Lonq-term Assets. ~/ 8/ In general, the condiCions will require the Trust to purchase Long-teYm Assets Erom the conunercial paper issuer if the commercial paper issuer is unable to roll-over maturing commercial paper by issuing new commercial paper. The proceeds received by the commercial paper issuer from its sale of Long-term Assets to the Trust will be used by the commercial paper issuer to retire maturing cr~mmercial paper. We recognize that the Staff has expressed the view that certain types of agreements to purchase securities may themselves be considered securities for puxpases of the 1940 Act. See Investment Company Act of 1940, Release No. 10666 (April 18, 1979). We do not believe the Staff must determine whether or not the Commitments contemplated by this letter are securities. Even if a Commitment were considered to be a security for purposes of the 1940 Act, it would be "issued" by the Trust to a commercial paper issuer who was involved in the organization of the Trust and thus the "security" would have been issued to a person expressly permitted to hold iC by virtue of Rule 3a-7(a)(ii). See footnote 4 supra. ~/ Although the Long-term Assets will not be tradeable by the Trust, the Trust Agreement will permit the holders of 51~ in stated amount of the Beneficial Interests to direct the Administrator to attempt to sell all or a portion of the

Securities Issued by the Trust
The Trust proposes to issue a single class of Beneficial InteresCe which will be represented by trust certificates. Bach Beneficial Interest will be denominated in U.S. dollars, with a stated amount equal to the dollar amount of the purchase price paid for the Beneficial Interest. The return paid to Investors will consist of a pro rata share of (i) interest (or discount) received on Short-teen Assets, (11) conanitment fees received from commercial paper issuers and (iii) interest and similar distributions received in respect of Long-berm Assets. From the perspective of Investors, the Trust ie an investment vehicle that, because of the collection of both interest (or discount) and commitment fees, may provide a yield or return in excess of that available from traditional short-berm money market investments. Although the higher return or Long-term Assets then held by the Trust for the book value of such Long-term Assets (i.e., the price that the Trust paid to acquire the Long-terns Assets pursuant to a Commitment) and to use the proceeds thereof to acquire Short-term Assets. This right of direction will be exercisable only in connection with the liquidation of the Trust or to make a payment in connection with a targeted maturity. This would enable the Trust, is a situation where the targeted maturity date of the Beneficial Interests is approaching, but some or all of the song-term Assets then held by it prove unable to meet their expected maturities, to obtain proceeds wiCh which to pay off the Beneficial Interests on the targeted maturity date. To the extend that such proceeds were insufficient to pay off all of the Beneficial Interests in full, the proceeds would be applied nro ra among the holders of the Beneficial Interests. We believe that because this mechanic limits the price at which the Administrator can sell such Long-term Assets to ~t most book value, at which price there may noC even be a buyer, it does not enaY~le the Trust to recagnize gains or decrease losses resulting from market value changes as prohibited by Rule 3a-7(a)t3)(iii). The Trust will also be permitted to liquidate Long-term Assets in the event that the Trust terminates because an Insolvency Event occurs which is not waved by the Investors. Such a liquidation of Long-term AsaetB will not be under!-.ap~en for the purpose of recognizing gaint~ or decreasing lo$~+ ~~~sulting from market value fluctuations.

yield is accompanied by a risk Chat the liquidity commitment will be called upon, i~ is expected that Investors will evaluate this risk as small. The Beneficial Interests will have a targeted maturity of two to seven years. The Truat will be prohibited from acquiring Short-term Assets with a maturity date late,: than the earlier of (i) 31 days following the date of acquisition and (ii} one business day prior to the targeted maturity date. As a result of this limitation, if a Coimni.tment is not called on, Investors will be repaid on the targeted maturity date from the proceeds of Short-term Assets. Tf a Cornni.tment is called on and Long-term Assets are acquired, Investors will be repaid in accordance with the receipt by the Trust of distributions on the Long-term Assets, which could result ~.n a repayment of the Beneficial Interests either before or after the targeted maturity date. As outlined earlier i.n footnote 9, the Long-team Assets may be sold at the direction of holders representing 51$ in stated amount of the Beneficial Interests for the puxpose of providing a pay-out at or near the targeted maturity date. In addiCion, each Investor will have a limited ability to withdxaw all or a portion of its investment from the Trust prior to the targeted maturity date. Withdrawals from Che Trust will be subject to the following procedures and limitations:
(i) no withdrawals will be permitted during the first six months following an investment in the Trust; (ii) each Investor will be permitted to send a withdrawal request to the Trust requesting a withdrawal date not earlier than 180 days after the date on which the withdrawal request is received by the Trust; and (iii) no withdrawal requests will be honored if, prior to the date of honor, the Trust has received a notice requiring it Co honor a Cotrnnitment to purchase Long-textn Assets. 10/ 10/ Although Investors will only be entitled to withdraw their investment from the Trust pursuant to these limitations, Investors will b~ permitted by the terms of the Trust Agreement to se11 their Beneficial Interests (any such Investor being a "Selling In~restor") to third party purchasers who are not aFfiliated with the Trust or the P,dministrator ("Independent Purchasers") at any time

The availability of the exclusion from the definition of "investment company" provided by Rule 3a-7 is limited to issuers who do not issue redeemable securities. A redeemable security is defined 3n Section 2(a)(32) of the 1940 Act ("Sect~.on 2 (a) (32) ") as:
"any security, other than short-term paper, under the terms of which the holder, upon ~.ts presentation ~o the issuer ox to a perean designated by the issuer, is entitled (whether absolutely or only out of surplus) to receive approximakely his proportionate share of the issuer's current net assets, or the cash equivalent thereof". Rased on the restrictions on withdrawals from the Trust described above, it is our opinion that the Trust will not be issuing redeemable securities within the meaning of
Section 2 (a) (32) .
First, Investors will have no right to make withdrawals "upon presentation to the issuer or to a person designated by CY~e issuer". Withdrawals will not be permitted for a period of six months after an Investor first invests in the Trust. Thereafter, a notice period of a minimum of 180 days will be req►.iired. The Staff previously has taken a no action position under Section 3(c)(5)(C) of the 1940 Act where similar restrictions were imposed. See, e•a•, Redwood Mortgage Investors VII, a California LTD Partnership, publicly available January 5, 1990; California Dentists' Guild Real Estate Mortgage Fund II, publicly available January 4, 1990] Breen Mortgage Fund I, publicly available January 20, 1988; and Smbarcadero Mortgage Fund I, publicly available November 5, 1986. Although in Redwood Mortgage Investors and California Dentists' Guild, (subject to the limitations 3n Rule 3a-7(a)(2) and the general limitations of the 1933 Act), but only it Investors other than the Selling Investor representing 51~ in stated amount of the Beneficial Interests of such Investors shall have consented in writing to such sale. The Independent Purchasers will be subject to the same limitations on resale and withdrawal from the Trust that apply to the initial Investors. In connection with the foregoing, the Administrator will be permitted, at its sole discretion, to attempt to create a private secondary market for the Beneficial Interests of Selling Investors, composed entirely of qualified institutional buyers.