SEC Division of Investment Management staff letter: Five Arrows Short-Term Investment Trust

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON. D.C. 20549

September 26, 1997 rjDi""'~ '- -" -: ...-=c- êA . 1- :. -="''...~H,'.~~... - .,,......~..." .__.......,."....,...'l...~.;i:..;..~.~¡ I' BETIOIZ ..,..-...'..~'...'..".. Mr. Geoffrey R. T. Kenyon 1l;m ~d:,'ii:'7 Goodwin, Procter & Hoar, LLP ."". . om'ifL:ìJJ - q 2Ce c; 7 :
Exchange Place "'.U.& "" ,¡, .;:..~":'-..ç-~.',~.-'F,:ï. - "-~'; .. . .~,-"!.~iJ!'".¿)~.:~; .. ....:
Boston, Massachusetts 02109-2681 -, . . ~ .
A.V.l",~, y. .,"",,,"' __,..,", "'"""~
Re: Five Arows Short-Term Investment Trust
Dear Mr. Kenyon:

Your letter of September 22, 1997 requests assurance that the Division of Investment Management ("Division") would not recommend enforcement action to the Securities and Exchange Commission ("Commission") if Five Arows Short-Term Investment Trost (the "Trust") operates its Foreign Currency Funds (defined below) as "money market funds" for purposes of compliance with rule 2a-7 under the Investment Company Act of 1940 (the "1940 Act") and for certain other purposes as described below and in more detail in your 1 letter.

1. Bac.kground

The Trust is an open-end management investment company organied as a Delaware business trust in series form. Rothschild International Asset Management Limited (the "Investment Manager") acts as the investment manager to the Trust. The Trust is authörized to issue shares representing interests in four separate series: the Pound Sterling Fund, the Deutsche Mark Fund, the Canadian Dollar Fund (collectively the "Foreign Currency Funds") and the U.S. Dollar Fund. Additional series of the Trust may be created as the Board of Trustees deems necessar or desirable. You state that you seek ths no-action position in connection with the thee existing Foreign Currency Funds, as well as any series that are 2 similarly organed in the future.

Capitalized terms used in this response and not otherwise defined have the meanng as set forth in rule 2a-7 as adopted on March 21, 1996. See Revisions to Rules Regulating Money Market Funds, Release No. IC-21837 (March 21, 1996) (61 FR 13956 (March 28, 1996)) ("Release 21837"). All citations to rule 2a-7 in this response are to the provisions of the rule as adopted in Release 21837. .:
You represent that the U.S. Dollar Fund currentlý operates as a "money market 2 fund" in accordance with the conditions of rule 2a-7.

2
The prospectus for the Foreign Currency Funds indicates that each is designed primarily for use by institutional investors to invest non-U.S. dollar-denominated short-term cash reserves. You represent that each Foreign Currency Fund is intended to operate as a "money market fund" in a particular country's base currency (the "Designated Currency").3 That is, each Foreign Currency Fund seeks to maintain a stable share price in it~ respective Designated Currency, similar to the stable $1.00 per share price that co~~en1pnal "money market funds" denominated in U.S. dollars seek to maintain.4 Each invests-un1y in securities denominated in its Designated Currency, seeks to maintain a constant net asset value expressed in its Designated Currency, and accepts, purchases and effects redemptions on1y in its Designated Currency. All required financial statements and other financial information with respect to the Foreign Currency Funds wil be expressed in their respective Designated Currency. 5 The Foreign Currency Funds currently do not hold themselves out as "money market funds" in reliance on rule 2a-7, but operate in accordance with amortized cost procedures in reliance on the Commission's 1977 release permitting the use of the amortized cost method for certain debt instruments.6 These procedures restrict the Foreign Currency Funds to investments in high quality debt instruments with a remainig maturity of 60 days or less. You state that the Trustees and the Investment Manager believe that ths 60-day maturity restriction wil, over time, materially reduce the potential return that the Foreign Currency Funds can achieve. The Division staff understands that, upon receipt of this letter, the Board of Trustees intends to revise the Trust's procedures in order to take advantage of the greater flexibilty provided by rule 2a-7's amortized cost method of pricing, and also comply with rule 2a-7 in all other respects, subject to the conditions and limitations set fort in your The Designated Currency is the Pound Sterling in the case of the Pound Sterling Fund, the Deutsche Mark in the case of the Deutsche Mark Fund, and the Canadian Dollar in the case of the Canadian Dollar Fund. 4 Simlar to conventiona "money m~rket funds," each Foreign Currency Fund's prospectus and advertising materials wil disclose that there can be no assurance that it wil be able to maintain a stable net asset value per share expressed in its Designated Currency. 5 While the financial statements and other financial information may be expressed in the Designated Currency, the basis for such presentation wil comply with United States Generally Accepted Accounting Principles. You also represent that the Trust has obtained Private Letter Rulings from the Internal Revenue Service permitting each Foreign Currency Fund to use its Designated Currency as its "functional currency" for tax purposes, thereby eliminating. fluctuations in currency exchange rates as a variable in computing capital gains or
losses in connection with investment activities. " 6 See Valuation of Debt Instruments By Money Market Funds and Certain Other Open-End Investment Companies, Release No. IC-9786 (May 31, 1977).

3 letter. 7 You also represent that the Foreign Currency Funds wil undertake to comply with the requirements of all other rules under the 1940 Act and all rules and forms under the Securities Act of 1933 (the "1933 Act") that are applicable to "money market funds" (e.g., Form N-1A and rule 482 under the 1993 Act). ..
II. Analysis

A. Currency Denomination

Rule 2a-7(c)(3)(i) limits "money market funds" to investments on1y in United States Dollar-Denominated securities. Paragraph (a)(28) of rule 2a-7 defines "United States Dollar-Denominated" to mean that all principal and interest payments on securities are payable in U.S. dollars, and that interest and principal payments, and the timing of those payments, do not vary or float with foreign currency values, interest rates on foreign currency borrowings, or any other interest rate or index expressed in a currency other than the U.S. dollar. You request the Division's assurance that it would not recommend enforcement action if the Foreign Currency Funds hold themselves out and otherwise operate as "money market funds" under rule 2a-7, even though they invest exclusively in securities denominated in their Designated Currency, rather than United States Dollar-Denominated securities as required by rule 2a-7(c)(3)(i). Rule 2a-Ts requirement that all "money market fund" investments be United States Dollar-Denominated is designed to eliminate a fund's exposure to losses caused by fluctuations in currency exchange rates and thereby decrease the likelihood that a fund would 8 Given that rule 2a-7 contemplates investments, not be able to maintain a stable share price.

sales and redemptions on1y in U.S. dollars, you suggest that the policy objectives underlying the rule could be achieved in the context of the Foreign Currency Funds on1y if all investments are denominated in the same currency in which all sales and redemptions of Foreign Currency Fund shares are effected. You assert that investments denominated in U.S. dollars or any curency other than a Foreign Currency Fund's Designated Currency would, in fact, impair a Foreign Currency Fund's abilty to maintain a stable share price.9 7 Procedures utilzing rue 2a-7's amortized cost method of pricing shares wil allow the

Foreign Currency Funds to invest in securities having remaining maturities of 397 days or less, but also wil require that each Foreign Currency Fund comply with the rule's other requirements. The Foreign Currency Funds also wil comply with the Commission's

advertising rules (e.g., rule 482 under the Securities Act of 1933) in the same manner as conventional "money market funds" denominated in U.S. dollars. See Release 21837, supra note 1, at nn. 164-65 and accompanying text. .:
9 We understand that, consistent with the definition-of "United States Dollar-Denominated" / I (continued. . .) 8

4

B. Designated Foreign Government Securities

Section 2(a)(16) of the 1940 Act defines "Governent security" as a security issued
or guaranteed as to principal or interest by the United States, or by a person controlled or supervised by and acting as an instrumentality of the U.S. Governent pursuant~to authority granted by Congress, or any certificate of deposit for any of the foregoïng~""The definition of "Governent Security" in paragraph (a)(13) of rule 2a-7 incorporates the definÍtion in section 2(a)(16) of the 1940 Act. The Trust's investment policies define "Designated Foreign Governent Securities" as securities issued or guaranteed by the same sovereign governent which issues a Foreign Currency Fund's Designated Currency, or by a person controlled or supervised by and acting as an instrumentality of such governent pursuant to authority granted by the country's appropriate legislative or executive body, or any certificate of deposit for any of the foregoing. Subject to the limitations and conditions set fort in your letter, you request assurance that the Division wil not recommend enforcement action if the Foreign Currency Funds treat Designated Foreign Governent Securities in the same manner as U.S-. Governent Securities for purposes of: (i) determining whether the funds are adequately diversified under paragraph (c)(4) of rule 2a-7;lO (ii) calculating the maturities of adjustable rate Governent Securities under paragraph (d)(l) of the rule;l1 and (ii) applying the rule's defintions of "Asset Backed Security," "Refunded Security" and "Collateralized Fully. "12 9(.. . continued) securities, a Foreign Currency Fund seeking to maintain a stable share price and otherwise operate as a "money market fund" under rule 2a-7 would invest only in securities that, under all circumstances, paid principal and interest in its Designated Currency and for which the interest rate, the principal repayment amount, and the timng of payments related to those securities did not vary or float with: (i) the value of a currency other than its Designated Currency; (ii) the rate of interest payable on borrowings denominated in a currency other than its Designated Currency; or (ii) any other interest rate or index expressed in a currency other than its Designated Currency. 10 You note that the Funds have elected to be classified as "non-diversified" funds and therefore are not subject to the diversification requirements of section 5(b)(1) of the 1940 Act. 11 Paragraph (d)(I) generally provides that variable rate Governent Securities have maturities equal to the period remaining until the next readjustment of the interest rate, and that floating rate Government Securities have a remaining maturity equal to one day. '

12 Paragraph (a)(2) of rule 2a-7 excludes Governent Securities from the definition of "Asset Backed Security." Paragraph (a)(18) of the rule generally defines "Refunded Securities" as securities whose payment is funded. and secured by Governent Securities placed in an escrow account. The definition of "Collateralized-Fully" in paragraph (a)(4) of the rule is discussed in Section II.C. of this response.

5
Rule 2a-7 treats "money market fund" investments in U.S. Governent Securities differently than other investments because U. S. Governent Securities are presumed to present little, if any, credit risks.13 You note generally that sovereign governents playa central role as the dominant issuer of debt securities in markets denominated in their own currency and that their securities are a benchmark or reference point for interest sates in those markets. You assert that absent political or economic turmoil, secllri_~"s issued by sovereign governents and denominated in their own currencies (i.e., domestic currency-denominated obligations) typically enjoy high credit ratings, are often the most liquid debt securities in their respective markets, and are the most common1y accepted collateral for institutional financial obligations such as repurchase agreements. You argue that such obligations are less risky than even the most creditworty private issuer because the obligations are ultimately backed by the governent's abilty to issue its own currency. You assert that investments in securities issued by some sovereign foreign governents, even when denominated in their own currencies, may present greater credit risks than investments in U.S. Governent securities. In order to miniize such credit risks and limit investments in foreign governent securities to those with credit risks. as￾comparable to U.S. Governent Securities as possible, you represent that the Foreign Currency Funds wil treat as Designated Foreign Governent Securities on1y those foreign governent securities that: (i) have a First Tier rating by the Requisite NRSROs with respectto the applicable governent's short-term domestic currency-denominted obligations;14 and (ii) are of sufficient credit quality in all other respects to qualify as First

Tier Securities under rule 2a-7. 15 You also acknowledge that the scope of activities carried out by intruentalities of foreign governents may be broader than those engaged in by

U.S. Governent agencies. In order to lessen this potential credit risk, you represent that governent securities other than direct obligations of the applicable foreign governent wil not be treated as Designated Foreign Governent Securities un1ess the Investment Manager 13 For example, the diversification provisions of rule 2a-7 do not apply to Governent Securities, and all Governent Securities are treated as First Tier Securities for purposes of the rule's credit quality provisions. See paragraphs (a)(ll) and (c)(4) of rule 2a-7. 14 You note that NRSROs typically do not rate U.S. or foreign governent securities on an issue-by-issue basis, but that ratings are typically assigned to broad categories of government-issued instruents, such as long- and short-term, domestic (i.e., local) and non-domestic (i.e., foreign) currency-denominated ratings categories. You represent that domestic currency-denominated obligations issued by the governents of the United

Kingdom, Germany and Canada currently possess First Tier ratings by the Requisite NRSROs. 15 All Governent Securities are First Tier Securities under paragraph (a)(ll) of rule 2a-7. For purposes of this response and in accordance with the stipulation contained in your letter, however, Designated Foreign Governent Securities must qualify as First Tier Securities under the same standards applicable to securities óf non-governmental issuers under paragraph (a)(ll).

6

determines that their credit quality is substantially equivalent to direct obligations of that governent. 16

C. Repurchase Agreements ..
Rule 2a-7 allows "money market funds" to "look through" a repurchase -agreement to the underlying collateral in determinig compliance with the rule's diversification limitations when the obligation of the counterpart is "Collateralized Fully." Paragraph (a)(4) of the rule provides that a repurchase agreement is "Collateralized Fully" if, among other thngs, it is collateralized by Governent Securities or other securities listed in the rule that permit the repurchase agreement to receive favorable treatment under applicable bankptcy laws. This provision is intended to ensure that securities collateralizing repurchase agreements can be liquidated promptly in the event of the bankptcy of the counterpart. You request that collateral comprised of Designated Foreign Governent Securities be accorded similar treatment as collateral comprised of U.S. Governent Securities for purposes of the rule's definition of "Collateralized Fully. " You represent that the Trust has been advised by its counsel that there is no general stay of creditors' rights applicable to repurchase agreements in bankptcy proceedings carried out under the applicable laws of Canada, Germany and the United Kingdom. You note that under these circumstances, the Trust generally would have an imediate right of access to collateral securing any repurchase agreements entered into by the Foreign Currency Funds. You represent that comparable assurances from counsel wil be obtained with respect to repurchase agreements entered into by any future series of the Trust that are organied similar to the Foreign Currency Funds, and which are collateralized with Designated Foreign Governent Securities.
III. Conclusion

The Division would not recommend an enforcement action if the Foreign Currency Funds hold themselves out and otherwise operate as "money market funds" for purposes of compliance with rule 2a-7, except that the Foreign Currency Funds invest on1y in securities denominated in their respective Designated Currency and treat Designated Foreign Governent Securities in a manner similar to the rule's treatment of Governent Securities. The Division also would not recommend an enforcement action if the Foreign Currency Funds operate as "money market fuds" for purposes of all other rules under the 1940 Act and the rules and forms under the 1933 Act that are applicable to "money market funds." These conclusions are based upon the facts and representations in your letter of September 22, 1997, and are furter subject to the conditions and limitations set fort therein. You .; 16 The Board of Trustees or other delegate authorized by paragraph (e) of rule 2a-7 also could make this determination.

7 should note that any different facts or representations might require different conclusions. Moreover, this response expresses our position on an enforcement action on1y and does not express any legal conclusions on the issues presented.

• • • • ,
        We note that you do not request, and we expressly do not interpret,--sëction 2(a)(16) of the 1940 Act to include Designated Foreign Governent Securities. The no-action position taen in this response relates solely to the application of rule 2a-7 to the Foreign Currency Funds. On1y securities issued or guaranteed by the U.S. Governent, or instrumentalities thereof, are "Governent securities" under section 2(a)(16) of the 1940 Act and related Commission rules.17 You also dò not request, and we would not agree, that securities issued by a foreign governent and denominated in U. S. dollars may be treated as "Governent securities" for purposes of section 2(a)(16) of the 1940 Act and paragraph (a)(13) of rule 2a-7. Finally, we would not agree that the Foreign Currency Funds may be treated as "money market funds" for purposes of any restrictions on a fund's investments in other funds that maybe imposed by statute, Commission rules or orders, or by.a-fund's own investment policies. ìZß-

Kenneth J. Berman
Associate Director
.:
17 See, e.g., J.P. Morgan Structured Obligations Corp. (July 27, 1994).

GOODWIN, PROCTER & HOAR LLP
COUNSELLORS AT LAW
EXCHANGE PLACE:
eOSTON. MASSCHUSETS 02109a28al
GISOFFREV R¡T. KENYO'" -d
T£L£PHON£ (6171 570-100
(1517) 570-1187 gkiinyanOgp/i.Qal1
~ T£L£COPltR lel71 523'1231
Invesen Compan Act . of 1940 - Rule 2a..7
Septembe 22; 1997
FEDERA ßXPRESS

Securties 'an Exchae Commsion
450 Fif Stret

Washion. DC 20549

Attntion: Robert Plaz an Kennth J. Berm
Ladies an Gentlemen;

'On beha of our clients. Five Arows Short-TcrInvestint Tru (the "Trut") and Rothchd Interntiona Asset MangemeII Lited (the "Investmen Mager'"), we herby request tht the Stff of the Division of Investment Manen of the Secties and Exchane Commsion conf tht the St woud not recmmend that th Commsion ta any enfrcent acton if non-U.S. dollar-denomite portlios of the Trt operate as ((money market funds" subject to the litations descnbed in ths letter,l Capita;7-e te

used below an not otbe defi sha have th niang provide in Rule 2a-7 as proposed to be amended.2.

1 AJ fu spec beow~ ea suç portlio woud op in colian wit Rule 23-7

wide th Inesent Comp Act of 1940, as am~ (th · 194 Act")' exct th it woud be pett (3) to inves in sees demite in it ow Desiat Cuy (as defi beOW). an (b) to uea Deste

Foreig Go~ent Secitis (as defi beow) coably to the way U.S. goven sectis ar tr

by convention U.S. c1011ar-domin:iled money market fuds.

Su portolios alo would opetate as "m.oney maket fu" in compliance with th reents of al

other rues under the
1940 Act and al rues an for unde the Secties Act of 1933, as amended (the "1933

Act"), tht are aplieable to money maket fuds (e.g., Form N.IA an Rule 482 under the 193~ Act).

However, in the absence of fuer relief, su portflios woud not be "money maket fuds" for puoses of the

investment restrctions applicable to othr entties under such la.ws.

2 See "Teccal Revisions to the Rules an~Forr Regultin Money Market FUnds," mvestIent Compan Act Releae 2.383 (Decmber 10, 1996). The proposed revisions enerated in that release ar (contiued.. .)

GOODWIN, PROCTER & HOAR LLP

,
Backgound
The Trust is an open-end management investment company, organied as a Delaware business trst with multiple series (each a "Fund"). The Trust currently is authorized to issue shares representing interests in four separate Funds: the Pound Sterling Fund, the Deutsche Mark Fund, the Candian Dollar Fund (collectively the "Foreign Currency Funds"), and the U.S. Dollar Fund. The Trustees of the Trust have the power to create such additional Funds as they deem necessar or desirable from time to time. Our client seeks relief in connection with the thee Foreign Cuency Funds currently in existence, as well as Funds organed in the future. Each Fund is designed primarily for use as a mean of investing short-term cash reserves in its respective base currency (its "Designated Currency"). Each Fund seeks to maintain a constat net asset value expressed in its Designated Currency and effects purchases and redemptions on1y in such Designated Currency. The Trust has received a private . letter ruling from the Intern Revenue Service which permts each Foreign Currency Fund to use its Designated Currency as its "fuctional curency" for ta purposes. This effectively enables each Foreign Currency Fund to elimte fluctuations in exchange rates as a varable in computing whether its investment activities have given rise to any capital gain or losses. For puroses of report fied pursuant to the Securities Exchange Act of 1934, as amended, all

required finncial statements and other finncial inormation with respect to a Fund wil be denomited in that Fund's Designated Cuency. The U.S. Dollar Fund is a "money maket fund" with the meang of Rule 2a-7 and operates in accordace with that Rule. The Foreign Currency Funds curently restrct their investments to high quality debt intrents with a remaing matuity of 60 days or less. 3 Accrdingly, they utiiz the amortiz cost method of pricing in accordance with the position

articulated in the Commssion's 1977 release permtting the use of amortiz cost pricing for 2(. . . continued) hereinfter referred to as the "Decmber 1996 Pr0p?sals." 3 As noted in the Trut's registration statement, the Funds' investments are made though a

\
\ master-feeder strctue. However" we do not believe that ths strctue has any signficance for the issues / presented in ths letter.

GOODWIN, PROCTER & HOAR LLP

certin intrents. 4

The Trustees of the Trust have adopted amortizd cost procedures with respect to each of the Foreign Currency Funds (the "Procedures").5 By prohibiting the Foreign Currency Funds from acquiring any security having a remaing matuity of more than 60 days, the Procedures impose substatially stricter maturity guidelines than are generally applicable to funds relying upon Rule 2a-7. The Trust and the Investment Manger believe tht over time ths restriction wil materially reduce the potential return that can be achieved by the Foreign Currency Funds for their shareholders. Whe the Proceures impose stricter maturity guidelines th does Rule 2a-7, the Procedures are otherwise consistent with Rule 2a-7 except

that (a) each Foreign Currency Fund must limt its investments to securities denomited in its Designated Currency, rather than United States Dollar-Denomiated securities and (b) a special category of securities, "Designated Foreign Governent Securities" is treated much the same as Governent Securities are treated under Rule 2a-7. The Procedures define a "Designted Foreign Governent Security" as a security issued or guaranteed by the same sovereign governent which issues the fund's Designated Currency, or by a person controlled or supervised by and acting as an intrentaity of such governent pursuant to authority

granted by the appropriate legislative or executive body in such country, or any certificate of deposit for any of the foregoing.6

Currency Denomination
The requirement that securities eligible for purchase by money market funds be 4 Investment Company Act Release 9786 (May 31, 1977). 5 Except as noted in ths letter, these procures are intended to track Rule 2a-7 in the form curently mandated for conventiona money market fuds. The effect of the December 1996 Proposals are fuer

discussed below. Promptly after the issuace of the requested no-action letter, the Procedures would be amended to reflect the term and conditions thereof. 6 Whe ths definition is based upon the defintion of Governent Securities in Section 2(a)(16) of the 1940 Act, the Trut and the Investment Adviser are aware that in some foreign countries the scope of activities caried out by governenta intrentaities and other governent-controlled entities is broader than in the

Unite States. In connection with receipt of the iequested relief, the Trut would be prepared to modify ths defintion to provide that a security would be not be a "Designted Foreign Governent Security" uness the security were determed by the Investment Manger to have a creditwortiness substatially equivalent to that of a direct obligation of the applicable governent.

GOODWIN, PROCTER & HOAR LLP

, denomited in U.S. Dollars predates Rule 2a-7.7 Over the years ths reqüfrement has received litte discussion in the Commssion's releases addressing Rule 2a-7. Nonetheless, it is clear that ths requirement exists in order to avoid the risk that fluctuations in exchange rates would undercut a fund's effort to maintain a stable net asset value.8 Prom a policy perspective, we believe that ths provision is best understood as a requirement that funds which seek to maintain a stable net asset value denomited in a paricular currency invest on1y in intrents denomited in that same currency, rather th an absolute requirement that such funds invest on1y in U.S. Dollar-Denomited Securities. We respectfully submit that where a fud seeks to maintain a stable net asset value in a currency other than the U.S. Dollar, it is appropriate that such fund avoid U.S. Dollar-Denomited Securities and limt its investments to intrents denomited in its base currency. Designated Foreign Government Securities It is clear under Section 2(a)(16) of the 1940 Act that "Government Securities" are defined solely by reference to the United States Governent. While we are not suggesting tht the Staff interpret Section 2(a)(16) of the 1940 Actto include Designated Foreign Governent Securities, we believe that there is a strong anlogy between Designated Foreign Governent Securities and Governent Securities which justifies a flexible approach to certin specific provisions of Rule 2a-7. The securities of a sovereign governent play a central role in the market for debt securities which are denomited in that governent's own currency. In general, the relevant governent is the domiant issuer of debt securities in the national market and its securities are the benchmk for all other debt securities issued in tht maket, e.g. as a reference point for interest rates. In general, securities of a sovereign governent are the most liquid debt securities in the applicable market, have a well dermed system for brokerage and safekeeping, and are the most common1y accepted form of collateral for intitutional finncial obligations such as repurchase agreements. Perhaps most importntly, the obligations of sovereign governents, when denomited in tht governent's own currency, are distinct from those of even the most 7 See, e.g. Fidelity Daily Income Trut, Investment Company Act Release, 10989 (Deèember 19, 1979) (exemptive order permttin~ the use of amortized cost pricing).

8 See Investment Company Act Release 21837, Revisions to Rules Regulating Money Market Funds (March 21, 1996), footnotes 164-65 and accompanying text.

c I
GOODWIN, PROCTER & HOAR LLP

, creditworty private issuer. Such obligations are ultimately backed by the--gõvernent's

abilty to issue the underlying currency; if necessary, a sovereign governent can pay its domestic-currency denomited debt by issuing more of its own currency.9 Although the domestic-currency denomited obligations of many foreign governents enjoy high credit ratings,1O some foreign governents are not considered to be nearly as creditworty as the United States, e.g. because they are subject to a high degree of political or economic turbulence. Accordingly, as a condition to the requested relief, the Trust is prepared to stipulate that the applicable governent, as to its domestic currency-denomited short-term obligations, wil have a First Tier rating by the Requisite NRSROs and that in all other respects all Designated Foreign Governent Securities purchased by a Foreign Curr-ency Fund wil be of suffcient credit quality to qualify as First Tier Securities. In light of the foregoing considerations, we believe that Designated Foreign Governent Securities should be treated comparably to Governent Securities for purposes of 9 . Ths logic applies only to domestic-curency denomied obligations. Where a governenta

obligation is denomited in the curency of another country, the obligation would be analogous to that of a private issuer. 10 NRSROs tyically do not rate U.S. and foreign governent securities on an issue-by-issue basis. Rather ratings tyicaly are provided to broad categories of intrents, Le. long- and short- term, domestic

curency-denomite and non-domestic curency-denomite. ,The Stadad & Poor's and Mooy's Investors Servce ratigs of obligations issued by the Candian, Germ and the United Kigdom governents and denomited in the applicable local curency are as follows:
Stadad & Poor's Mooy's
Count Long Term Short Term Long Term Short Term* Canda AA A-l+ Aal No rating Germany AAA A-l+ Aaa No rating United Kigdom AA A-l+ Aaa No rating ."

• Although Mooy's doe not rate domestic currency-denomirite short-tenn obligations of these countres, the foreign currency￾denomite short-tenn obligations of these countres each have a P-l rati. In general, a sovereign governent's domestic
  currency-denomite obligations are deemed to be at least as credit worty as its foreign currency-denomited obligations.

GOODWIN, PROCTER & HOAR LLP

, determg whether a fund is adequately diversified under Rule 2a-7(c)(4)(i)*lnd calculating the maturity of certin adjustable rate securities .12 Assumig adoption of the December 1996 Proposals, we also believe tht Designated Foreign Governent Securities should be treated comparably to Governent Securities in defining the term "Asset Backed Security," and "Refunded Security.,,13 While we believe that Designated Foreign Governent Securities should be treated comparably to Governent Securities in defining the term "Collateralized Fully," we recognie that ths issue raises an additional consideration. For some time the Commssion has focused upon the concern that a fund might experience delays as a result of the general stay of creditors rights that arises in many circumstances under U.S. bankptcy laws. The- Commssion's 1993 proposed amendment to Rule 2a-7 would have limted the types of acceptable collateral to certin specified types of securities. Under the December 1996 Proposals, collateral would be acceptable on1y if, upon insolvency of the counter part, the

repurchase agreement would qualify under a provision of applicable inolvency law providing an exclusion from any general stay of creditors rights.14 At your request, the Trust has sought the advice of local counsel concerng the treatment of repurchase agreements under the banptcy law of Canda, England, and Germany. The Trust has been advised that in a bankptcy carried out under the law of each of those countries, there is no general stay of creditors rights applicable to repurchase agreements, regardless of the type of collateral with which they are secured. Accordingly, under those circumstances the Trust would generally have an imediate right of access to the collateral securing the repurchase agreements. In connection with any futue Foreign Currency Fund, the Trust intends to seek comparable assurances from local counel. On behalf of the Trust, we thank you very much for your time and that of your colleagues in connection with ths matter. If you should have any furter questions regarding

11 The Foreign Curency Funds are not subject to the diversification requirements of Section 5(b)(1) of the 1940 Act because they have elected to be classified as "non-diversified." 12 See Rule 2a-7(d)(1). 13 Under the December 1996 Proposals, all Governent Securities would automatically be First Tier Securities. Consistent with the stipulation in the preceding paragraph, the Trust proposes that Designated Foreign Governent Securities would be First Tier Securities only if they met objective standads comparable to those applicable to securities of non-governentalissuers. under sub-section (a)(ll) of Rule 2a-7. 14 See Rule 2a-7(a)(4)(defintion of "Collateralized Fully")

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GOODWIN, PROCTER & HOAR LLP

, the foregoing, please do not hesitate to contact Jackson B.R. Galloway oft1S'~offce or me. Sincerely yours, GRTK/cbc Enclosure .::