SEC Division of Investment Management staff letter: Merrill Lynch Asset Management

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  Our Ref. No. 96-242
  REPONSE OF TH OFFCE OF CHI COUNSEL Merr Lynch Asset Management

DMSION OF INESTMEN MANAGEMEN File No. 801-11583 Your letter of Januar 30, 1997 requests our assurace that we would not recommend enforcement action to the Commission under section 10(t) or 17(e)(2) of the Investment Company Act of 1940 (the "Investment Company Act"), or section 206(3) of the Investment Advisers Act of 1940 (the "Advisers Act"), if a registered investment company (each a "Fund") advised now or in the future by Merr Lynch Asset Management, L.P. ("MLAM"), Fund Asset Management, L.P. ("FAM"), or any investment advisory or investment management afilate of or successor to MLAM or FAM, purchases newly issued securities in trsactions in which Merr Lynch, Pierce, Fenner & Smith Incorporated ("Merr Lynch") acts as placement agent. Facts Merr Lynch, a registered broker-deaer, is a wholly owned subsidia of Merr Lynch & Co., Inc. ("ML & Co"). MLAM and FAM (together, the "Advisers"), bbtli registered investment advisers, also are wholly owned by ML & Co. Because Merr Lynch and the Advisers are under the common control of ML & Co., ML & Co. and each Adviser are afilated persons of each other. Because the Advisers are afilated persons of the Funds

they manage, Merr Lynch is an affilated person of an afilated person of each Fund.

You represent that, despite theft afiltion, Merr Lynch and the Advisers are separte entities and operate independently of each other. In parcula, you reresent that

Merr Lynch and the Advisers operate as independent profit centers, have separte offcers, diectors and employees, maita separte books and records, and are separtely capitaed. You represent that al investment decisions with respect to each Fund are made solely by one or more portolio managers who are officers or authori agents of the Fund, and

who are employed solely by one of the Advisers. Portolio managers purchase securities for their respective Funds that are consistent with that Fund's investment objectives, based solely on the investment merits and price of the security. You represent that a major determinant of these managers' compensation is the performance of the Funds they manage, and that in no instace is their compensation afected by the amount- of business the Funds

conduct with Merr Lynch.
You state that portolio managers, on behal of the Funds, often purchase new issues of securities placed directly by the issuer. In these transactions ("dit placement agency . i The definition of "affiliated person" is set forth in section 2(a)(3) of the Investment ! 1

Company Act.

-, trasactions"), the issuer often uses a placement agent to perform services that faciltate the sale of the securities. You explai that in diect placement agency trasactions, the placement agent, acting solely as agent for the issuer, agrees only to use its best efforts and incurs no liabilty if it fais to place the securities. The placement agent typicaly acts alone, rather than as par of a group formed specifcaly to sell the securities. In those trasactions in which there is more than one placement agent involved, the agents do not have joint responsibilty for, or a joint interest in, the outcome of the distribution.

You state that Merr Lynch frequently acts as placement agent in diect placement agency trasactions, and that the extent of Merr Lynch's parcipation in these trasactions has made it increasingly necssar for the Funds to be able to purchase seèurities in trasactions in which Merr Lynch acts as placement agent. Your request for relief covers trsactions in which a Fund may purchase securities in diect placement agency trsactions

in which Merr Lynch acts as placement agent, provided that trasactions in securities other than money market instrments (which are the subject of cert exemptive orders_.gted to

the ,Funds)2 are conducted in accordace with the following procedures adopted by each Fund's board of diectors, including by a majority of the Fund's diectors who are not interested persons of the Fund ("disinterested diectors"), prior to commencement of the 3 trasactions.

1. Pror to each trasaction, ML or FAM wil obta such inormation as it
   deems necessar to determine that the trasaction is in the best interests of the Fund. If firs other than Merr Lynch are also actig as placement agent, ML or FAM wil solicit a quote as to the security's price from at least ane other fir, and that quote wil be documented on the trade ticket. In each such instace, MLAM or FAM must determe that the terms of the purchase from Merr Lynch are at least as favorable as those obtaed from the other fir before proceeg with the trasaction. If no fir other than Merr Lynch is actig as placement agent, ML or F AM wil purchase the securities through Merr Lynch only if Merr Lynch reresents that the net price to be paid by the Fund for the 2y ou represent that trsactions in money market instrments wil comply with the terms of the relevant exemptive order, as it may be amended from time to tie, regardless of whether such trasactions may techncay be considered to be pricipal or agency trasactions. See CMA Tax-Exempt Fund etal., Investment Company Act ReI. No. 15475, Dec. 11, 1986 (notice of application) and Investment Company Act ReI. No. 15520, Jan. 5, 1987 (order); Merr Lynch Ready Assets Trust et al., Investment Company Act ReI. No. 18693, May 6, 1992 (notice of application) and Investment Company Act ReI. No. 18748, June 2, 1992 (order). 3 As par of these procedures, Fund portfolio managers and Merr Lynch traders involved in diect placement agency trsactions with Merr Lynch wil be specifcaly traed with respect to these procedures, and must be approved by the relevant Fund, Adviser, or Merr Lynch, respectively, to conduct these trasactions.

'e securities wil be no higher than the net price to be paid by other purchasers in a comparble trasaction of similar quantity with respect to the same securities. In each such instace, the receipt of this representation wil be documented on the trade ticket. 4
2. Merr Lynch wil not charge a Fund any greater commission or other

compensation than what is reasonable and customary for such trasactions, and in no instace

wil Merr Lynch's compensation excee one percent of the purchase price of the securities.
3. The Advisers wil maita the records neeed to confir compliance with

these procedures, including an itemied day recrd of al securities obtaed from Merr Lynch in its capacity as placement agent,S and a record showing on a day basis the percentage of the Fund's tota assets represented by securities acquired in diect placement agency trasactions generay, and . separtely, the percentage of such trasactions conducted

with Merr Lynch.
4. The Advisers wil report to each Fund's board of directors on a quarerly basis

every diect placement agency trsaction conducted, with Merr Lynch ,as placement agent. These reports wil conta, with respect to every trsaction, the name of the issuer, the price of the security, the compensation paid to Merr Lynch by the Fund, whether the trades were solicited, the percentage of the issue purchased by the Fund and by al other Funds in the aggregate, and, if applicable, the quote received from other firs actig as

placement agent for the same securities.6 In addition, the Advisers wil monitor these ,4In your letter, you rase issues that arse under sections W(t) and 17(e)(2) of

the Investment
Company Act and section 206(3) of the Advisers Act. We note that direct placement agency trsactions with Merr Lynch acting as placement agent may give rise to additional issues under these Acts, including section 36(a) of the Investment Company Act and other provisions of section 206 of the Advisers Act. Ths letter does not address these issues. Sy ou state these itemi day recrds wil show for each trsaction the name and quatity of securities purchased, the percentage of the issue purchased by the Fund individualy and by , al other Funds in the aggregate, the. unit purchase price, the compensation paid, the tie and date of the trsaction, and either (1) if firs other than Merr Lynch also are actig as placement agent for that security issuance, the price quoted from at least one such fir, the

name of that fir, and the time and date the quotation was recived, or (2) if no fir other than , Merr Lynch is acting as placement agent, that the representation that the net price to be paid by the Fund wil be no higher than the net price to be paid by other purchasers in comparble trasactions of simar quantity with respect to the same securities has been received from Merr Lynch. 6y ou represent that the Advisers wil preserve al records set forth in numbered pargraphs 3 and 4 above for a period not less than six yeas from the end of the last fiscal yea in which any trasactions occurred, the first two yeas in an easily accessible place. In addition, you

trasactions continuously and report promptly to the relevant Fund's board of diectors any instaces in which the procedures were not followed.

5. On at least a quarerly basis, the Fund's board of directors, includig a
   majority of the Fund's disinterested diectors, wil determine (1) whether diect placement agency trasactions with Meri Lynch have been, and wil continue to be, consistent with the best interests of the Fund and its shareholders, and (2) whether al of the trsactions

effected durig the past quarer complied with the procedures.7 In addition, a majority of either the Fund's board of diectors or the Fund's disinterested directors wil. amend or supplement these proceures with other measures at any tie if such actions appe to be

consistent with the best interests of the Fund and its shareholders.8 Further, the practice of engaging in diect placement agency trasactions with Merr Lynch may be termated at any time by a majority vote of either the Fund's board of directors or the Fund's disÙlterested dirtors.

Analysis

1. Sections 10(0 and 17(e)(2) of the Investment Company Act

Section 10(t) of the Investment Company Act, in relevant par, generay prohibits a
registered investment company from purchasing a security durig the existence of any underwriting or sellg syndicate when the company's investment adviser, or an afilte of

the investment adviser, is one of the pricipal underwriters of the security. Section 10(f)

was designed priary to prevent an underwriter from "dumping" securities on an afilte

investment company in order to stimulate the market in these securities or to relieve the underwriter or sellg syndicate of securities that are otherwise unmarketable. 9 represent that the Advisers wil preserve permanently in an easily accessible place a written copy of the procures adopted by each Fund's board of diectors and any modcations and

supplements subsequently made to them. Telephone converstion of Apri16, 1997 between

Rochelle Kauffman Plesset and Brian Kaplowitz of Brown & Woo.
7you reresent that the minutes of each board meetig at which these determinations ar to

be made wil reflect in.deta the reasons for the determinations.

~elephone conversation of March 6, 1997 between Rochelle Kauffman Plesset and Bri

M. Kaplowitz of Brown & Wood.
9See National Aviation Corp., 23 SEC 550, 552 (1946). See also Reprt of the Securities and Exchange Commission, Investment Trusts and Investment Companes, Par Thee, Chapter Vl, "Abuses and Deficiencies in the Organtion and Operation of Investment Trusts and

Investment Companes," H.R. Doc. No. 136, 77th Cong., 1st Sess. 2581, 2589 (1940) (discussing the frequent practice of investment company sponsors "dumping" unmarketable

Section 17(e)(2) of the Investment Company Act governs the purchase or sae of
securities on behal of a registered investment company when a person'afilated with the company acts as broker. These trasactions are regulated by placing a liit on the

compensation the afilated person may recive. Section 17(e)(2)(C) (which, assumig Merr Lynch is acting as broker withi the meag of section 17(e)(2), is applicable to the trasactions described in your letter), liits compensation to one percent of the purchase or

sale price of the securities. Congress designed section 17(e)(2) to addrss potentia confcts of interests that could arse when a broker arges a securities trasaction for an afilated investment company. You maita that section W(t) does not apply to investment company purchases of securities in diect placement agency trasactions in which the company's investment adviser, or an affilate of the investment adviser, acts as placement agent. You state that Congress intended section W(t) to apply-only when (1) securities in an underwritig ate sold through a syndicate organed for the purpose of distrbutig the securities, and (2) the investent company purchases securities from a syndicate member other than the afilated person. First, you maita that section W(t) does not apply to diect placement agency

trasactions becuse no syndicate is formed to distribute the securities. In your view, a syndicate exists only when two or more pares, organed in a group formed for the purpose of sellg an issue of securities, have a joint responsibilty for and a fmancia commitment to the distrbution of the issue (i. e., the underwriting is on a fir commitment (pricipal) rather thaI a best efforts (agency) basis). You maita that no syndicate exists in diect placement agency trasactions because the placem.ent agent typicaly acts alone and places the securities on a best efforts basis. Second, you contend that section W(t) does nót apply to an investment company's purchase of securities through an affilated person in the course of an underwriting. Instead, you maita that Congress intended section 17 to be the sole provision governg trsactions diectly between an investment company and its affilted persons. You thus conclude that the Funds may enter into dit placement agency trsactions in which Merr Lynch acts as placement agent provided that Merr Lynch complies with the compensation lits set forth in section 17(e)(2)(C). The sta has expressed the view that direct private placement trasactions can in some instaces present the same types of concerns that prompted Congress to enact section securities on affilted investment companes prior to the adoption of the Investment Company Act) ("SEC Report").

W(t).lO We believe, however, that your representations and the procedures you propose to follow adequately address these concerns. Based on the facts and representations in your letter and as described above, and without necessary agreeing with your legal analysis that section lO(t) does not apply to any direct placement agency trasaction involving an investment company and its affilated persons, we would not recommend that the Commission tae any enforcement action under
section 10(t) or 17(e)(2) if the Funds parcipate in direct placement agency trasactions in
which Merr Lynch acts as placement agent. Ths position is based parcularly on your representations that (1) Merr Lynch and the Advisers ar separte entities and operate independently of each other, (2) the manager's compensation is not affected by the amount of busmess the Fund conducts with Merr Lynch, (3) Merr Lynch wil incur no liabilty to . an issuer if it fais to place the securities, and (4) the trsactions wil be conducted in accordace with proceures, described above, that wil be approved by each Fund's board of

directors, includig a majority of the Fund's disinterested directors.
2. Section 206(3) of the Advisers Act

Section 206(3) makes it unlawful for any investment adviser, acting as pricipal for

its own account, knowingly to sell any security to or purchase any security from a client, or actig as broker for a person other than a client, knowingly to effect any sale or purchase of

any security for the account of such client, without disclosing to the client in writing before the completion of the trasaction the capacity in which he is acting and obtag the client's

consent to the trsaction. Section 206(3) is intended to address the potenti for self-deag

that could arse when an adviser acts as pricipal in a trsaction with clients or as agent in connection with a trasaction on behal of a client. U Congress' decision to addrss this 10JoOO Nuveen & Co. Incorporated (pub. avai. Jan. 24, 1989). Speifcaly, a placement

agent could" dump" unmarketable securities on an investment company with which it is afilted

in order to recive commissions and to enhance its reputation among issuers as being able to sell "dicult to place" securities and thus attct additional business. See SEC Report, supra note

9, at 2535-36 ("The control öf an investment company by an investment baner naturay impresses the client, who desirs to be fmance, with the resources that the investment baner may ca upon to make the fmancing operation successful, such as, sellg some of the securities to the investment company, securig the company's paricipation in the underwritig commitment, includig the company in trdig accounts or using the company's funds in stabiling the market. ").

USee Investment Trusts and Investment Companes: Heags on S. 3580 Before the Subcomm. of the Comm. on Bang and Currency, 76th Cong., 3d Sess. 320 (1940) ("I thi it is the Commission's recommendation that al self-deag between the investment counselor and the client should be stopped. ") (statement of David Schenker).

concern by requirg disclosure and client consent, rather than by prohibitig these types of trasactions, suggests that Congress recognied that some of these trasactions could be 12 beneficial to clients.

The Commission and the sta have applied section 206(3) to situations in which the adviser causes a client to enter into a pricipal or agency trsaction effected by a broker￾deaer that controls, is controlled by, or is under common control with, the adviser.13 Thus, becuse. the Advisers would cause the Funds to enter into diect placement agency trasactions in which Merr Lynch would act as placement agent, the trasactions would be subject to section 206(3). You state that the Advisers wil meet the disclosure and consent requirements of
section 206(3) by having a Fund's portolio manager, who is also an offcer or authoried

signatory of the Fund, enter into a trsaction on behal of the Fund, thereby providig the requir consentY You maita that, when a fund is organ as a corpration or as a Massachusetts business trst, it acts through its officers or agents, and that in the case of a portolio manager of a fund, the offcer or agent has full authority to purchase and sell securities. You also represent that such persons have knowledge of the inormation that is required to be disclosed under section 206(3).15 Thus, you assert that these persons ca 12Rule 206(3)-2 under the Advisers Act provides a non-exclusive method of complice with the provisions of section 206(3) in connection with cert agency cross trsactions for advisory clients. The rule permts an adviser or broker-deaer that controls, is controlled by or is under common control with the adviser to conduct agency cross trsactions without makg the.

reuired disclosure and obtag client consent prior to each trsaction, provided tht cert

conditions are met. The sae haror is unavaible when either the adviser or broker afilte (alone or collectively) remmends the trsaction to both the seller and the purchaser, and thus would be unavaible to Merr Lynch in connection with dit placement agency trsactions. 13See Agency Cross Trasactions for Advisory Clients, Advisers Act ReI. No. 589 (My 31, 1977), 42 FR 29300 (June 8, 1977); In the Matter of Calos Asset Management Inc., Advisers Act ReI. No. 1594 (Admin. Pr. File No. 3-9166) (Oct. 16, 1996); In the Matter of Concord Investment Company, Advisers Act ReI. No. 1585 (Admi. Proc. File No. 3-9109) (Sept. 27, 1996); Harmark & Co., ,Inc. (pub. avai. Nov. 11, 1973); Interplan Securities Corp. (pub. avai. Feb. 23, 1978).

, 14y ou maita that in this situation, imposing the disclosure requirements of section 206(3) would be tataount to requirg the portfolio manager to make written disclosures to hiself. l5Telephone conversation of March 6, 1997 between Rochelle Kauffman PIes set and Brian M. Kaplowitz of Brown & Wood.

receive notice and give consent for purposes of section 206(3), even if the person giving consent is also an employee of, or is otherwise affilated with, the adviser. Based on the facts and representations in your letter and as discussed above, we would not recommend that the Commission tae any enforcement action under section 206(3) if the Advisers cause the Funds to engage in diect placement agency trsactions in which Merr Lynch acts as placement agent. Ths position is based parculaly on your representation that the trasactions wil be conducted in accordace with procedures (in parcular, those described in numbered pargraphs 1, 4 and 5 of our response) approved by the'Fund's board of diectors, including a majority of the Fund's disinterested directors, prior to commencement of the trsactions. You should note that any dierent facts or circumstaces might reuire a dierent conclusion with respect to each of your questions.

R~Jd ~~~CM ~~
Rochelle Kauffman Plesset
Senior Counsel

B ROW N & WOO 0 LLP
ONE WORLD TRADE CENTER

NEW YORK, N.Y. 10048-0557

TELEPHONE: 212-839-5300

FACSIMILE: 212-839-5599

Investment Company Act of 1940

Section 10 (f)
Section 17 (e)
Investment Advisers Act of

1940 Section 206(3)

January 30, 1997

Office of Chief Counsel

Di vision of Investment Management

Securities and Exchange Commission

450 Fifth Street, N. W.

Judiciary Plaza

Washington, D. C. 20549

Re: Merrill Lvnch Asset Manaqement

Ladies and Gentlemen:

Set forth below is our revised and restated request on

behalf of Merrill Lynch Asset Management, L.P. ("MLAM") and Fund

Asset Management, L.P. ("FAM"), that you confirm that the

Division of Investment Management (the "Division") will not

recommend that the Securities and Exchange Commission (the

"Commission") take any enforcement action under Section 10 (f) or

Section 17 (e) of the Investment Company Act of 1940 (the

"Investment Company Act") or Section 206(3) of the Investment

Advisers Act of 1940 (the "Advisers Act") if registered

investment companies of which MLAM or FAM is the investment

adviser purchase newly issued securities in transactions in which

Merrill Lynch, Pierce, Fenner & Smith Incorporated ("Merrill

Lynch"), an affiliated person of MLAM and FAM, acts as placement

agent. i
The above request also is intended to encompass any

registered investment company organized in the future and

advised or managed by MLAM or FAM, or any investment

advisory or investment management affiliate or successor of

MLAM or FAM.

BWNY03/9304, i 2
LOS ANGELES. SAN FRANCISCO. WASHINGTON. BEIJING. SÃO PAULO. TOKYO REPRESENTATIVE OFFICE

AFFILIATED WITH BROWN & WOOD, A MULTINATIONAL PARTNERSHIP WITH OFFICES IN LONDON AND HONG KONG i

I . Backqround

A. Description of the Parties and the Subiect Transactions.

MLAM and FAM (together, the "Advisers") act as investment

adviser to over 130 registered investment companies (each a

"Fund"). Under each Fund's investment advisory or management

agreement, either MLAM or FAM, subject to the general supervision

of the directors or trustees of the. Fund, provides investment

advisory and management services.

Merrill Lynch, a wholly-owned subsidiary of Merrill Lynch &

Co., Inc. ("ML & Co."), is a registered broker-dealer and

conducts a diversified securities business. The Advisers, which

are also owned and controlled by ML&Co., are "affiliated persons"

of the Funds and of Merrill Lynch within the meaning of Section

2 (a) (3) of the Investment Company Act. Accordingly, Merrill Lynch is an affiliated person of an affiliated person of the

Funds.
Despite their affiliation, Merrill Lynch and the Advisers

operate as completely separate entities under the umbrella of the

ML & Co. holding company. While Merrill Lynch and the Advisers

are under common control, they have their own separate directors,

officers and employees, each is separately capitalized and each.

maintains its own separate books and records and operates as an

independent profit center2. Consequently, the Advisers operate

completely independently of Merrill Lynch in performing portfolio

management services.

In accordance with the foregoing, all purchase decisions by

the Funds are determined solely by the Advisers. In that regard,

investments for the Funds are the responsibility of one or more

indi viduals employed solely by MLAM or FAM, and who also are

officers or agents of the Fund concerned. These portfolio

managers are not employees of Merrill Lynch, and their lines of reporting responsibility are solely within MLA or FAM. In addition, a major determinant of their compensation is the

performance of the Fund or Funds over which they have

responsibility. In no instance is their compensation affected by

the amount of business done with Merrill Lynch.

The Funds purchase securities in accordance with their

investment objectives either as new issues or in secondary market

transactions. New issues of securities are often sold in

underwritten offerings. In other instances, securities may be

No director, officer or employee of the Funds is also a

director, officer or employee of Merrill Lynch.

BWNY03/9304,12

directly placed by the issuer. The circumstances surrounding direct placements purchased by the Funds are the subj ect of the instant no-action request. Our request is made on behalf of all

of the Funds and is intended to be relied upon for all types of

directly placed securities. We have attempted to provide some

general description of direct placement agency transactions and

of the procedures pursuant to which the Funds will engage in such

transactions with Merrill Lynch. However, we note that although

the transactions described herein are all conducted on an agency

basis, the nature and mechanics of direct placements of

securities may differ significantly depending on the type of

securities involved. Thus, a placement of tax-exempt securities

may be conducted in a manner different, for example, than a

placement of short-term U. S. government notes or equity securities. In direct placement agency transactions the issuer often

uses a securities firm or bank as placement agent, performing

services that facilitate the sale of the securities. The

placement agent acts solely as an agent for the issuer. As

discussed further herein, the agent does not participate in an

underwriting or selling syndicate as contemplated by Section

10 (f) of the Investment Company Act. Thus, in performing its

functions the placement agent agrees only to use its best efforts

and has no liability on account of any failure tp sell the

securities concerned; the agent does not commit to purchase

securities for its own account and incurs no financial risk in

the sales of the securities. In addition, the bank or securities

firm acts alone and in an individual capacity in selling the

securities, rather than as part of a group formed for that

purpose. Similarly, even where there is more than one entity

involved in a direct placement, such entities do not have the

joint responsibility for or joint interest in the outcome of the

distribution such as typically exists in a syndicate.

A Fund's determination of whether to purchase securities in

a direct placement agency transaction, as is the case with other

purchase decisions, depends on the investment merits and price of

the security. In making that determination, the portfolio

managers will review whatever information they believe necessary

to make an informed decision. As is the case with all purchase

transactions in the primary market, the degree to which the terms

of the transaction may be subj ect to negotiation will vary

depending, among other things, on the issuer, the type of

security involved and the other circumstances under which the

placement is made. That also will be the case in all

transactions with Merrill Lynch. Further, the Advisers undertake

that if and for so long as the Division is unable to concur as an

interpretative matter with the view that Section 10 (f) does not

apply to direct placement agency transactions, any such

BWNY03/9304,12 3

transactions with Merrill Lynch in securities other than money

market instruments of the type which are the subj ect of certain

exemptive orders granted to the Funds 3, will be conducted only

pursuant to procedures adopted by the boards of directors of the

Funds, including by a maj ority of those directors (" Independent

Directors") who are not "interested persons" of the Funds within

the meaning of Section 2 (a) (19) of the Investment Company Act.

The relevant procedures will be based generally on those

governing transactions of the Funds that are subj ect to Rule 10f-3 under the Investment Company Act and on the guidelines

adopted by certain of the Funds pursuant to the above exemptive

orders. These procedures will be substantially as follows:

1. Before any direct placement agency transaction may be

conducted with Merrill Lynch, MLAM or FAM, on behalf of the Fund,

will be required to obtain such information as it deems necessary

to determine that the transaction is in the best interests of the Fund. In addition:
(a) If firms other than Merrill Lynch are also placing the

securities under consideration, thenMLAM or FAM, on behalf

of the Fund, will be required to solicit a quote as to the

price of the relevant security from at least one such firm.

The quote will be documented on the trade ticket. In each

instance, a determination will be made that the terms of the

purchase from Merrill Lynch are at least as favorable as

those obtained from the other available sources, if any, and

such determination will be documented; and

(b) If no firm other than Merrill Lynch is placing the

securities under consideration, MLAM or FAM, on behalf of

the Fund, will purchase such securities through Merrill

Lynch only if Merrill Lynch first represents to MLAM or FAM,

as the case may be, that the net price being paid by the

Fund is no greater than the net price being paid for such

securities by any other customer of Merrill Lynch purchasing

such securities in a contemporaneous transaction of similar

quantity. Receipt of such representation will be, documented on the trade ticket. See Investment Company Act Release Nos. IC-15520 (tax exempt instruments) and 18748 (taxable instruments), January 5, 1987 and June 2, 1992, respectively. The Advisers undertake

that transactions in the above types of money market

instruments will comply with the terms of the relevant

exemptive order, as it may be amended from time to time,

regardless of whether such transactions may technically be

considered principal transactions or agency transactions.
)
BWNY03/9304,12 4

2. In no instance will the compensation to Merrill Lynch

for securities purchased by the Funds exceed one percent of the

purchase price of the securities purchased by the Funds.

Moreover, Merrill Lynch will not charge the Funds any greater

commission or other compensation than what is reasonable and

customary for such transactions.

3. The traders at Merrill Lynch and the Fund portfolio

managers involved in any direct placement agency transactions

with Merrill Lynch will be required to be thoroughly familiar

with these procedures, will be briefed specifically thereon and

will be approved specifically to conduct such transactions.

Responsibility for such briefings and approvals in the case of a

Fund and the Advisers will rest with the Secretary of the Fund

and counsel for the Advisers and, in the case of Merrill Lynch,

will rest with the Law and Compliance Division of Merrill Lynch.

In the training of personnel of Merrill Lynch, particular

emphasis will be given to the fact that a Fund is to be charged

no greater commission or other compensation than what is-

reasonable and customary for such transactions.

4. MLAM or FAM, on behalf of each Fund engaging in direct

placement agency transactions with Merrill Lynch, will be

required to maintain such records with respect to those

transactions as may be necessary to confirm compliance with these'

procedures. In that regard MLAM or FAM, on behalf of each Fund,

will maintain:

all purchases of

securities encompassed hereby, showing for each transaction:

the name and quantity of securities; the percentage of the

issue being purchased by the Fund and by all other Funds in

the aggregate; the unit purchase price; the commission or

other compensation paid; and the time and date of the

transaction. Such records also will: (i) for each

transaction in the specific security for which a firm other

than Merrill Lynch acts as placement agent, document the

quotation received from such other firm, including: the name

of the firm, the name of the securities, the price quoted,

(a) an itemized daily record of

and the time and date the quotation was received; and (ii) for each transaction in a specific security for which no

firm other than Merrill Lynch acts as placement agent,

document receipt of the representation described in

paragraph i (b) above; and
(b) a ledger or other record showing, on a daily

basis, the percentage (based on dollar amount) of the Fund's

total assets represented by securities acquired in direct

placement agency transactions generally, and separately, the

BWNY03/9304,lZ 5

percentage (based on dollar amount) of such transactions entered into with Merrill Lynch.

5. MLAM or FAM, on behalf of each Fund, will be required

to continuously monitor direct placement agency transactions with

Merrill Lynch and report immediately to the board of directors of

the relevant Fund any deviation from the above requirements.

6. MLAM or FAM will report to the board of directors of

each Fund on a quarterly basis each direct placement agency

transaction by that Fund with Merrill Lynch. Those reports will

include the name of the issuer, the price of the security, the

commission or other compensation paid to Merrill Lynch, an

indication of whether or not the trades were solicited, the

percentage of the issue purchased by the particular Fund and by

all other Funds, in the aggregate, and, if available, the

quotation received from other agents for the same securities.

7. The board of directors of each Fund, including-a

majority of the Independent Directors, will review no less

frequently than quarterly the Fund's participation in direct

placement agency transactions with Merrill Lynch and determine

(a) whether transactions effected during the prior quarter

complied with the above procedures, and (b) whether the Funds's

participation in direct placement agency transactions with

Merrill Lynch has been and continues to be in the best interests

of the Fund and its shareholders. The minutes of the board

meeting at which these determinations are made will reflect in

detail the reasons for the determinations.

8. The board of directors of each Fund, including a
   maj ori ty of the Independent Directors acting separately, have the ability at all times to amend or supplement the procedures, or to

terminate the ability of the Fund to engage in direct placement

agency transactions with Merrill Lynch.

B. Leqal Backqround.

Merrill Lynch is a major participant in the primary new

issue market for all types of securities. The extent of Merrill

Lynch's participation in these markets has made it increasingly

necessary for the Funds to be able to purchase securities in

transactions where Merrill Lynch acts as placement agent.

However, since, as noted above, the Funds and Merrill Lynch may

be considered second-tier affiliated persons, the Investment

Company Act places certain strictures on such purchases.

The Investment Company Act, in effect , divides purchase and

sale transactions between an investment company and its

BWNY03/9304,12 6

affiliated persons into two basic categories, principal

transactions and agency transactions. Principal transactions

with an affiliated person were viewed as so potentially harmful

to the investment companies involved that such transactions were

prohibited outright in Section 17 (a) of the Investment Company

Act. See S. Rep. No. 1775, 76th Cong., 3d Sess. 14 (1940).4

For example, Congress was concerned about the "unloading of securities upon (investment) companies" and the possibility that

affiliated persons may sell "worthless securities at extravagant

prices to their controlled companies." Id. at 7; H. R. Rep. No.

2639, 76th Cong., 3d Sess. 9 (1940). Congress saw that an

affiliated person holding valueless securities might be tempted

to use the investment company to avoid a loss of the amount paid

for such securities. Those concerns were not considered to exist

to the same degree, however, in the context of agency

transactions where the commission payable to the affiliated

person was appropriately limited; while problems such as the

"unloading" of securities could theoretically exist in those si tuations, Congress believed that the incentive to do so could be eliminated by restricting the amount by which the affiliated person could profit from such activities. Thus, as relevant here, the primary restriction that the Investment Company Act places on investment company purchases from an affiliated placement agent concerns the compensation of the agent. By acting as placement agent in direct placement agency

transactions, the affiliated person functions as a broker and,

therefore, is subject to Section 17 (e) (2) of the Investment

Company Act. Section 17(e) (2) provides that:

It shall be unlawful for any affiliated person of a

registered investment company, or any affiliated person

of such person . acting as broker, in connection

with the sale of securities to or by such registered

company or any controlled company thereof, to receive

from any source a commission, fee, or other

remuneration for effecting such transaction which

exceeds (A) the usual and customary broker's commission

if the sale is effected on a securities exchange, or

(B) 2 per centum of the sales price if the sale is

effected in connection with a secondary distribution of

such securities, or (C) 1 per centum of the purchase or

sale price of such securities if the sale is otherwise

effected unless the Commission shall, by rules and

regulations or order in the public interest and

Section 17 (b) authorizes the Commission to grant exemptions
from the provisions of Section 17 (a) .
BWNY03/9304,12 7

consistent with the protection of investors, permit a

larger commission. 5

Consequently, in the present situation, Merrill Lynch could not

receive compensation from any source in connection with its role

as placement agent for securities purchased by the Funds if such

compensation exceeded one percent of the purchase or sale

price.6
The Division previously confirmed the applicability of
Section 17 (e) (2) to direct placement agency transactions in the
no-action letter of John Nuveen & Co., Inc. (available January

24, 1989) (the "1989 letter"). A no-action position was

requested in the 1989 letter under Section 17 (e) in order that a

group of investment companies could purchase tax-exempt

securities in transactions involving as placement agent the

broker-dealer affiliate of the investment adviser to such

investment companies.

The 1989 letter also was submitted under Section 10 (f) of the Investment Company Act and Rule 206 (3) -2 of the Advisers Act.

Section 10 (f) of the Investment Company Act generally prohibits

an investment company from purchasing any securities from a

member of an underwriting syndicate of which an affiliated person

of the investment company is a participant. 7 In that regard,

Section 10 (f) prevents circumvention of the policies underlying

Section 17 (a) by an affiliated person indirectly engaging in

5 Agency transactions between an investment company and its affiliated persons not involving brokerage functions are subj ect to even gr~ater restrictions. Specifically, Section 17 (e) (1) prohibits any affiliated person of an investment company from accepting any compensation for acting as agent

in connection with the sale of any property by or to the

company.
6 The Advisers believe, for example, that the typical placement agent compensation in the case of long-term tax-exempt securities is in the range of 60 to 150 basis points (although the 100 basis point limit of Section 17 (e) (2) (C) would apply to transactions subject to the instant request). The compensation in the case of taxable

securities varies, depending on the type of security and

several other factors. As one example, the typical

compensation in the money market area is in the range of 5

to 12.5 basis points.

7 Rule 10f-3 under the Investment Company Act provides limited exemptive relief from the provisions of Section 10 (f) . BWNY03/9304.12 8

..~.;.

principal transactions through an ostensibly unrelated syndicate

member. Rule 206 (3) -2 under the Advisers Act provides a safe harbor from the provisions of Section 206 (3) of the Advisers Act.

That Section generally requires that an investment adviser make

certain written disclosures to and obtain the consent of its

client prior to engaging in any principal or agency transactions with the client. We are presently seeking a no-action position primarily

because of the need to clarify the applicability of Sections

10 (f) and 206 (3) to direct placement agency transact ions. The need for such clarification is not limited to the situation of the Funds. The ability to make the desired purchases is important to the investment company industry on the whole.

II. Discussion

A. Applicabilitv of Sections 10 (f) and 17 (e) to Direct Placement Aqencv Transactions

It is our view that direct placement agency transactions

involving an investment company and its affiliated persons are

not within the purview of Section 10 (f). Rather, we believe that

Section 17 (e) was intended by Congress to provide the necessary
protection against any potential abuses inherent in such

transactions. Our conclusion, as described in more detail below, is based primarily on a review of the role of Section 17 (e) in the statutory scheme and on an examination of the language and legislative history of Section 10 (f) itself. We respectfully request that the Division confirm our interpretation that Section 17 (e), but not Section 10 (f), applies to direct placement agency transactions. If the Division does not concur with our interpretation, however, we request that the Di vision not recommend that the Commission take any enforcement action under Section 10 (f) or Section 17 (e) if Merrill Lynch acts as placement agent in connection with purchases of Securities by the Funds. In this event, all transactions with Merrill Lynch of the type described in this request will be subj ect to procedures substantially as described above. 8 While it is not relevant to our legal analysis, we also note that the prospectuses or In addition, direct placement transactions with Merrill

Lynch would be appropriately reported to the Commission in

response to Item 77(0) of Form N-SAR. As mentioned earlier,

however, transactions in money market instruments will

instead comply with the procedures set forth in the

exemptive orders cited supra note 3.

BWNY03/9304,12 9

statements of additional information, or both, for each of the

Funds already disclose the possibility that the Funds may conduct

transactions on an agency basis with Merrill Lynch. Those

documents also disclose for Funds that are open-end investment

companies the aggregate dollar amount of brokerage commissions

paid to Merrill Lynch during the last fiscal year and such other

related information as is required by Form N-1A.

Section 10 (f) of the Act provides, in pertinent part:

No registered investment company shall knowingly

purchase or otherwise acquire, durinq the existence of

any underwritinq or sellinq syndicate, any security

a principal underwriter of which is an officer,

director, member of an advisory board, investment

adviser, or employee of such registered company, or is a person . of which any such officer, director, member of an advisory board, investment adviser, or employee is an affiliated person . (emphaSis added) An argument could be made that since Section 10 (f) was intended to regulate certain distributions of securities (i. e. , offerings involving an underwriting or selling syndicate), the

Section should be viewed as encompassing any type of transaction

that could be argued to have some element ofa distribution.

Under such a reading of Section 10 (f), that Section would govern

any primary market transaction in securities by an investment

company where an affiliated person of the company was involved.

We do not believe the Section may properly be read that broadly.

It is our view that Section 17 of the Investment Company Act, not

Section 10 (f), governs transactions directly between an

investment company and its affiliated persons. In addition, we

believe that Section 10 (f) applies only where there is a

syndicate organized for the distribution of the securities in

question. We believe the Section to be inapposite where

securities are directly placed either by a sole placement agent

or by more than one placement agents, provided that there is no

joint responsibility as between such agents to distribute the

issue and that there is lacking the type of financial risk that

characterizes a syndicate.

Transactions directly between an investment company and its

affiliated persons, whether agency transactions such as direct

placements or principal transactions, are provided for solely and

expressly by Section 17 of the Investment Company Act. Moreover,

as discussed earlier, the statutory scheme reflects a dichotomy

in which agency transactions are not viewed as presenting the

same potential for harm to an investment company as that

\ presented by principal transactions, whether such principal ) BWNY03/9304,12 10

transactions are engaged in directly by the affiliated person or,

as relevant here, indirectly through the use of an unrelated syndicate member. In that regard, Section 17 (e) (2) specifically reflects Congress' belief that where the affiliated person is

acting as broker, protection against potential conflicts of

interest is best afforded by limitations on the amount of

compensation that may be received by the affiliated person. See

H.R. Rep. No. 2639, 76th Cong., 3d Sess. 9, 17-18 (1940). See

also United States v. Deutsch, 451 F. 2d 98, 108 (2d Cir. 1971),

cert. denied, 404 U. S. 1019 (1972). Indeed, the Senate Report

accompanying the original bill stated that: "In general, agency

transactions are not affected . ., but brokerage commissions

are limited in the main to standard rates with provision for

special exemptions." See S. Rep. No. 1775, 76th Cong., 3d Sess.

14, 15 (1940).

There is no evidence that Congress believed that a primary

market transaction or any other transaction arguably resembling a

distribution of securities requires the application of Section

10 (f) to provide the necessary investor protection. Indeed,

Section 17 (e) (2) itself applies directly to distribution or

underwriting activities. While the Section refers only to a

person acting as "broker", it is common for a broker's activities

to include participation in a distribution or underwriting of

securi ties. Moreover, the Section expressly contemplates a

broker receiving compensation in connection with a secondary

distribution of securities where the broker's affiliated

investment company either purchases or sells securities in the

distribution. Participation ina secondary distribution, as with

any other distribution, involves underwriting activities. 9 As

recognized by David Schenker, Chief Counsel to the Commission' s

study of investment trusts and investment companies which led to

the enactment of the Investment Company Act, while Section 17 (e) generally prohibits an affiliated person acting as agent from

accepting any compensation with respect to purchases or sales by

Secondary distributions of securities, while not involving

the issuer as the seller of such securities, present many of

the same securities laws issues as primary offerings of

securities. For example, absent an available exemption,

secondary distributions require registration by the issuer

of the securities under the Securities Act of 1933. See

qenerall v, Loss and Seligman, Fundamentals of Securities

Regulation, 322-356 (3d. Ed. 1995). Primary and secondary

distributions are also viewed similarly under certain

provisions of the Securities Exchange Act of 1934. See,

~, Rule 10b-6 (paragraph (c) (5) of Rule 10b-6 brings

within the Rule's scope any type of distribution, whether

primary or secondary) .
BWNY03/9304,12 11

an investment company, such person "can act as broker for the

(investment company) and he can act as the underwriter or the

distributor of securities." See Investment Trusts and Investment

Com?anies: Hearinqs on S. 3580, Before the Subcomm. on Securities and Exchanqe of the Senate Comm. on Bankinq and Currency, 76th

Cong., 3d Sess. 262 (1940) (the "Senate Hearinqs"). We view that

statement, and the language of the Section itself, as treating

brokerage, underwriting and distribution activities in the

conjunctive, not the disjunctive. Similarly, one of the

principal iridustry participants in the development of the

Investment Company Act stated in a law review article written

shortly after enactment of the statute that:

Section 17 . limits the commission which any

affiliated person may receive when acting as broker for

an investment company. While he may act as broker in

the distribution of securities owned by an investment

company, he cannot act as distributor if the

transaction takes such form that the affiliated person

buys for his own account in making the distribution.

(emphasis added)

Jaretzki, The Investment Company Act of 1940, 26 Wash. U. L. Q.
303, 321-322 (1941) .10
Surely if Congress intended in Section 17 (e) to permit an

affiliated person of an investment company to receive

compensation for acting as broker in connection with purchases of

securities by the company in the context of a distribution,

Congress must not have intended at the same time to prohibit such

purchases through the application of Section 10 (f). It is a rule

of statutory construction that "unreasonableness of the result

produced by one among several possible interpretations of a

statute is reason for rej ecting that interpretation in favor of

another which would produce a reasonable result." 2A Sutherland Statutory Construction § 45.12 (4th Ed. 1984) ("Sutherland"). Similarly, since Section 17 (e) specifically refers to agency

transactions in the context of a distribution, it should be

viewed as controlling over the more general language contained in

Section 10 (f). Specific provisions in a statute control more

general provisions. See Sutherland at § 46.05. The Commission

has recognized the statutory interplay of Sections 10 (f) and 17.

We recognize that the situation posed by the cited language

might be construed as contemplating only circumstances where

the affiliated person is acting as broker in connection with

a sale of securities by the investment company. We note,

however, that Section 17(e) (2) refers both to purchases and

sales by the investment company.

BWNY03/9304,12 12

For example, the Commission stated in Investment Company Act

Release No. 14924 (January 29, 1986) (advance notice and request for comment with respect to Section 10 (f) and Rule 10f-3

thereunder) ("Release 14924") that:
When Congress was considering legislation in 1940

to regulate the investment company industry concern was

voiced over underwriters "dumping" otherwise unmarket￾able securities on affiliated investment companies,

either by forcing the investment company to purchase

unmarketable securities from the underwriting affiliate

itself, or by forcing or encouraging the investment

company to purchase such securities from another member

of the syndicate. Concern was also expressed over the

level of underwriting fees earned by affiliated underwriters in connection with the transactions. In response to these concerns, Congress included

section 10 (f) in the Investment Company Act to prevent

any registered investment company from purchasing or

otherwise acquiring any security during the existence

of any underwriting or selling syndicate where a

principal underwriter of the security is affiliated

with the investment company except under limited

circumstances. Since section 17 (a) prevents

an investment company from acquirinq any securities

directly from an affiliate or from an affiliate of an

affiliate, the purpose of section 10 (f) is to prevent

an investment company from acquiring any securities

from an unaffiliated member of the underwritinq

syndicate on the premise that the affiliate still has

the potential to pressure the investment company into

making the purchase in order to facilitate the

underwriting. (emphasis added)

Similarly, in Investment Company Act Release No. 21838

(March 21, 1996) ("Release 21838"), announcing proposed

amendments to Rule 10f-3, the Commission stated:

Even in the absence of section 10 (f), a fund effectively would be prohibited by Section 17 (a) of the Investment Company Act from purchasing securities directly

from its affiliated underwriters or from an affiliate of its

affiliate .... That section 10 (f) prevents a fund from

acquiring securities from an unaffiliated member of the

underwriting syndicate would seem to reflect the view that

the affiliated underwriter has the potential to pressure the

fund into acquiring the securities through another

underwriter in order to facilitate the underwriting ....

BWNY03/9304,12 13

While the quoted language alludes to principal transactions and,

therefore, to Section 17 (a), it follows logically that the

Commission would view Section 17 (e) as the sole provision

governing agency transactions directly between an investment

company and its affiliated persons.

The obvious question is that if Section 17 (e) governs agency

transactions between an investment company and its affiliated

persons even in a situation resembling a distribution, to what

transactions does Section 10 (f) extend? We believe the answer is

that Section 10 (f) was intended to cover only purchases (a)

during the existence of an underwriting or selling syndicate

(i.e., where two or more parties have a joint responsibility for

and a financial commitment to the distribution of the issue) and

(b) where the purchases are made from a member of the syndicate

other than the affiliated person.

That Section 10 (f) applies only to situations involving a

syndicate where the investment company purchases securities from

a syndicate member other than the affiliated person is made

evident by the express language of the Section. Section 10 (f) specifically states that it applies during the existence of an underwriting or selling "syndicate". While the Investment

Company Act does not define the term "syndicate", the meaning of

the term is clear. Webster's Third New International Unabridqed

Dictionarv defines "syndicate" as "a group of persons or concerns

who combine under a usually temporary agreement to carry out a

particular transaction ((such as) investment houses for

underwriting a bond issue) ." No syndicate exists where an

affiliated person is acting as a placement agent in a direct

placement of securities. Even where there is more than one

placement agent the j oint effort characteristic of an

underwriting would be lacking i for example, in a direct placement

agency transaction there are typically no agreements between the

agents coordinating the selling effort. Moreover, as the

Commission and its staff apparently have recognized, a syndicate

should not be deemed to exist under Section 10 (f) unless the

members thereof have a financial commitment to the distribution

or otherwise incur a financial risk in connection with the

securities being distributed. See Institutional Liquid Assets

(pub. avai'l. December 16, 1981).11 In Release 21838, supra

page 13, at note 64 thereof, the Commission cited the

Institutional Liquid Assets letter in stating that "it may not be

necessary for rule 10f-3 to'permit the purchase of u.S.

Government securities because the arrangements among distributors

We acknowledge, however, that the situation in Institutional

Liquid Assets did not involve purchases directly from an

affiliated person.

BWNY03/9304.12 14

of these securities may not always constitute underwriting or selling syndicates for purposes of section 10 (f) " . Accordingly, it would seem axiomatic that Section 10 (f) is not applicable to direct placement transactions that are conducted on an agency basis. It has been suggested that one construction of the statutory

language may be that the term "syndicate" relates only to the

term "selling" and not "underwriting". This construction cannot

be sustained either by plain English, by the rationale of Section 10 (f) or by a reading of the authorities interpreting Section 10 (f). For example, in Release 14924, the Commission regularly

deletes "selling" and refers to the term "underwriting

syndicate" . See Release 14924, supra page 13. In one instance,

the Commission reverses the order referring to a "selling or

underwriting syndicate". Id. Clearly, Section 10 (f) was

intended to apply during the existence of an underwriting

syndicate as well as a selling syndicate.

Our view of the scope of Section 10(f) also is supported

fully by the legislative history of the Section. A Commission

representative at the Senate hearings stated with respect to a

predecessor version of Section 10 (f) that the Section means "that

no registered investment company shall purchase any. . product

of the (affiliated) investment banker, even thouqh they do not

buy directly . " (emphasis added). See Senate Hearinqs at

223 (statement of L.M.C. Smith, Associate Counsel, Investment

Trust Study). Likewise, Jaretzki stated in his article that

Section 10 (f) "limits the purchase by an investment company of

securities sold or underwritten bv a syndicate where affiliated

persons are involved in the syndicate , even thouqh the purchase is not made from the affiliated person." See Jaretzki, supra,
page 12, at p. 319, note 50. (emphasis added)
Applying Section 10 (f) to agency transactions also would not

further the purposes of the Section. Congress intended the

Section to address concerns about affiliated persons "dumping"

securities (selling unsuitable securities to investment

companies) and "bailing out" (disposing of unwanted securities by

selling them to investment companies). See Re?ort of the

Securities and Exchange Commission, Investment Trusts and

Investment Companies, Part Three, Chapter VI I, H. R. Doc. No. 279, 76th Cong., 2d Sess. 2581, 2589 (1940). See also Senate Hearinqs

at 212-13; Investment Trusts and Investment Companies: Hearinqs

on H.R. 10065 Before a Subcomm. of the Comm. on Interstate and

Foreiqn Commerce, 76th Cong., 3d Sess. 111 (1940). The incentive

to engage in such activities in the context of an underwriting

syndicate is much the same as the incentive for an affiliated

person to sell unsuitable or unwanted securities as principal

directly to an investment company. The incentive is to avoid a

BWNY03/9304.12 15

risk of financial loss. Thus, Congress' purpose in enacting

Section 10 (f) was to close a loophole in the statutory scheme by

regulating situations where underwriters could pressure

affiliated investment companies to purchase underwritten

securities from unaffiliated persons.

The Commission too has recognized that Section 10 (f) is

intended to protect against the situation where an underwriter

has the incentive to in effect dump or bailout. For example, in

Investment Company Act Release No. 10592 (February 13, 1979)

(Rule 10f-3 proposing release), the Commission addressed the

possibility of an underwriter pressuring an affiliated investment

company to create an artificial market for a security, thus

reducing the underwriter's risk of loss created by the position

the underwriter holds in that security through its underwriting

obligation. Similarly, following a public hearing held on an

application filed by National Aviation Corporation for exemption

from Sections 17 (a) and 10 (f), the Commission stated that the

proposed transactions did not violate those Sections because:

The purchase (of securitiesJ by National Aviation

Corporation does not appear to have been proposed for

the purpose of stimulating the market in the securities

or for the purpose of relieving the

underwriting syndicate, or any member thereof, of

securities otherwise unmarketable.

23 S.E.C. 550, 552 (1946) (IlNational Aviation") 12 Similarly, in Release 21838, the Commission discussed the purposes of
Section 10 (f) as guarding against the possibility that Ilan
underwriter could ... ' dump' unmarketable securities on its

controlled fund ... " and that fund assets might Ilbe used to

absorb the risks of any underwriting in more subtle ways, such as

to facilitate price stabilization in connection with an

underwritingll. Release 21838, supra page 13, at text

accompanying note 21.
That the incentive for the types of abuses that exist during

the existence of an underwriting syndicate does not exist in the

case of agency transactions is particularly evident in direct

placement agency transactions. When a placement agent undertakes

to place an issuer's securities on an agency basis, it neither

expends nor risks its capital. Consequently, it does not own

securities that it may dump on the investment company, it has no

12 The Applicant in National Aviation sought exemption from

Section 10 (f), as well as Section 17 (a), apparently because

it sought to purchase securities from unaffiliated, as well

\ as affiliated, members of the syndicate. / BWNY03/9304,12 16

working capital to free up and it has no carrying costs to avoid.

A placement agent undertakes no obligation or responsibility with

respect to the distribution of the security except individually

to use its best efforts to find prospective buyers for the

security and assist in consummating the purchase and sale. These

statements are equally true whether there is only a single

placement agent involved in a transaction or there are several

such agents.
The limited risks and responsibilities of a placement agent

are quite different from those that arise from an underwriting

obligation where the affiliated person is part of a group

obligated to purchase and distribute the securities. Similarly i

the incentive for overreaching through dumping or bailing out is

obviously not significant in an agency transaction since the most

the affiliated person stands to lose is the opportunity to earn a

commission that is limited to one percent.13 There is no risk

of loss of principal because the placement agent does not own the

securities. In thisregardi if Congress had been concerned about dumping or bailing out in the agency context (i. e. i affiliated persons pressuring investment companies to purchase so that the

affiliated persons could earn commissions) i Congress undoubtedly

would have prohibited agency transactions in the same fashion

that it did principal transactions in Section 17 (a). There is no

reason why Congress would have relied upon Section 10 (f) to

prohibit agency transactions. 14

13 The one percent commission discussed above is less than the commissions that would be earned in a typical firm commitment underwriting for similar securities. 14 Similarly i since Section 17 (a) already prohibits principal transactions between an investment company and its

affiliated personsi it would be redundant to also prohibit

such transactions under Section 10 (f). That is an

unreasonable construction of the statute and should

therefore be avoided. See Sutherlàndi supra page 12. As

the Division stated in its denial of no-action relief under

Section 10 (f) to Cornerstone First Mortqaqe Bond Fund, Inc.

(pub. avail. August is, 1988) ("Cornerstone"): "An

underwriter that is affiliated with an investment company is

prevented by Section 17 (a) from selling any security as

principal to that company. The purpose of Section 10 (f)

isi where an affiliate is a member of the syndicate i to prevent an investment company from acquiring any

securities from an unaffiliated member of the syndicate .

" Cornerstone at note 4.

BWNY03/9304,12 17

The fact that Section 10 (f) is not applicable to independent

dealer offerings also has been recognized implicitly in several

exemptive orders granted by the Commission. Those orders permit

money market funds to conduct principal transactions with

affiliated persons under certain conditions. 15 A number of

issuers, including the Federal Home Loan Mortgage Corporation,

Federal National Mortgage Association, Student Loan Marketing

Association and the International Bank for Reconstruction and

Development, from time to time offer short-term notes on a

principal basis through dealers for sale to investors at fixed

prices determined by the issuer. The selling arrangements are

made separately with each dealer and do not involve the existence

of any underwriting or selling syndicate. The exemptive orders

permit the money market funds to purchase securities from the

affiliated dealer in primary fixed price dealer offerings. Each

of these orders was granted pursuant to the exemptive authority

contained in Sections 6 (c) and 17 (b), but not Section 10 (f) .
Finally, the contention that Section 10 (f) is applicable

only during the existence of an underwriting syndicate involving

a group of underwriters who have combined and have joint

responsibility to distribute an issue of securities is strongly

supported by the no-action letter issued by the Division to

Institutional Liquid Assets, supra page 14-15. Institutional

Liquid Assets is a money market fund advised by Goldman, Sachs &

Co. ( "Goldman Sachs"). Goldman Sachs was one of six primary

market broker-dealers through which short-term notes issued by

Federal Home Loan Banks (" FHLB") were distributed. The FHLB

notes were distributed through the primary market dealers on a

principal basis with compensation consisting of a .05% dealer

commission. Each dealer had independent arrangements with the FHLB and thus the various dealers had no joint responsibility as

to the distribution arrangements. ILA sought no-action relief

with respect to purchasing FHLB notes from the five

non-affiliated primary market dealers, arguing that while Goldman

Sachs was clearly a principal underwriter of the FHLB notes,

Section 10 (f) was not applicable
because no underwriting syndicate existed and Goldman Sachs would not be benefitted by purchases from the other dealers. The Division responded favorably to the no-action request. The Division reasoned that See Merrill Lvnch Readv Assets Trust, et al., Investment

Company Act Release Nos. 13550 (September 30, 1983) (notice)

and 13598 (October 26, 1983) (order); CMA Tax-Exempt Fund,

et al., Investment Company Act Release Nos. 15475 (December

11, 1986) (notice) and 15520 (January 5, 1987) (order) and

Shearson Agqressi ve Growth Fund, Inc., et al., Investment

Company Act Release Nos. 14904 (January 17, 1986) (notice)

and 14948 (February 20, 1986) (order).
BWNY03/9304,12 18

since Goldman Sachs had no financial commitment to purchase the

FHLB notes and did not face any financial risk in effecting the

transactions it should not be considered to be a member of an

underwriting or selling syndicate. 16 See also Release 21838 at

note 64.

In sum, it is respectfully submitted that purchases of

securities by an investment company in direct placement agency

transactions in, which the company's affiliated person acts as

placement agent are regulated solely and adequately by Section

17 (e) (2). It is further submitted that applying Section 10 (f) to

such transactions is inconsistent with the express language and

legislative history of Section 10 (f), the statutory design of the

Investment Company Act, the purposes underlying the Section, past

interpretations of the Section and the industry practice that has

developed.
B. Applicabili tv of Section 206 (3) to Direct Placement

Aqencv Transactions

Section 206 of the Advisers Act contains the antifraud

provisions of that statute. Subsections (1) and (2) are general

antifraud prohibitions. More specific is Section 206 (3), which

provides, among other things, that it is unlawful for an

investment adviser to knowingly sell a security to a client or

purchase a security from a client unless, prior to the completion

of the transaction, the adviser discloses to the client in

writing the capacity in which the adviser is acting and obtains

the consent of the client to the transaction. This prohibition

applies to both principal and certain agency transactions. 17

The 1989 letter, apparently in response to an inquiry from

the Division, sought no-action relief under Section 206 (3) on the

basis that the boards of directors of the investment companies

concerned had adopted procedures complying with substantially all

16 As noted above supra note 11, however, the Institutional Liquid Assets letter did not involve purchases from an affiliated person of the investment company. 17 Specifically, Section 206 (3) makes it unlawful for an investment adviser II acting as principal for his own account, , knowingly to sell any security to or purchase any security from a client, or acting as broker for a person other than such client, knowingly to effect any sale or purchase of any security for the account of such client, without disclosing to such client in writing before the completion of such transaction the capacity in which he is acting and obtaining the consent of the client to such transaction." BWNY03/9304,12 19

of the requirements of Rule 206 (3) -2 under the Advisers Act.

Rule 206 (3) -2 provides a safe harbor for compliance with Section 206 (3) in the case of agency-cross transactions, provided that

the conditions of the Rule are met. The 1989 letter sought the

Division's concurrence with the position that under the

circumstances, it was not necessary to meet paragraph (5) of the

Rule. Paragraph (5) specifies that neither the investment

adviser with respect to the transaction nor any person

controlling, controlled by or under common control with the

adviser may act as broker for both the advisory client and a

person on the other side of the transaction. That is, the issue

was whether, notwithstanding paragraph (5) of the Rule, the

broker-dealer parent of the investment adviser could act as

placement agent for issuers of the tax-exempt securities while

the adviser purchased such securities for the investment companies. The Division denied that request. We believe that the issues addressed in the 1989 letter concerning Rule 206 (3) -2 are irrelevant to the instant request.

Our request is that the Division confirm our view that the

requirements of the Section itself are met by the common industry

practice wherein the individual employed by an investment adviser

to engage in portfolio management on behalf of an investment

company is also an officer or otherwise an authorized person of

the investment company. In such capacity, the .officer or other

authorized person will, as explained below, provide the consent

required by the Section, obviating any need to rely on Rule

206(3)-2. Similarly, he or she will have access to such

information as is contained in disclosures made pursuant to the

Section.18 Thus, we respectfully request that the Division
confirm this interpretation or, al ternati vely, that the Division not recommend that the Commission take enforcement action under

Section 206 (3) if Merrill Lynch acts as placement agent with

respect to securities purchased by the Funds, provided that the

individual (s) employed by MLA or FAM purchasing such securities

for one or more of the Funds is also an officer or agent, of those

Funds.
Most management-type investment companies (including the

Funds) are organized as corporations or Massachusetts business

trusts. Such entities act through their officers or agents. In

the case of portfolio management for an investment company, such

an officer or agent has full authority to purchase, and sell

18 The disclosure requirements normally applicable under

Section 206 (3) have been set forth in various Commission

releases. See,~, Investment Advisers Act Release No. 40

(February 5, 1942) i Investment Advisers Act Release No. 470

(August 20, 1975).
)
BWNY03/9304,12 20

securities and, in so doing, effectively provide the company's

consent to the purchases and sales.

In effecting portfolio transactions for an investment

company, the individuals concerned must act solely in the best

interests of the company. Thus, for example, if a portfolio

manager or other authorized person receives payments improperly

in connection with the sale of portfolio securities to the

company, the investment adviser may be deemed to have committed a

fraud against the company. That was the situation in Carl L.

Lazzell, Investment Company Act Release No. 17808 (October 18,

1990) ("Lazzell"), in which the Commission brought an

administrative proceeding under various provisions of the Federal

securities laws, including Section 17 (e) of the Investment

Company Act and
Sections 206 (1) and (2) of the Advisers Act.

Similarly, Section 203 (f) of the Advisers Act would provide a

basis for the Commission to proceed against any individuals

violating their fiduciary duties to the company. 19 See also,

Benalder Bavse, Jr., Investment Company Act Release No. T8570

(February 26, 1992). The fiduciary obligations just described

are, however, different from the disclosure and consent

requirements of Section 206 (3). Given the dual capacity of the

portfolio management personnel, the consent required by the

Section will necessarily exist. In addition, imposing the

disclosure requirements of Section 206 (3) would be tantamount to

requiring the individual to make written disclosures to himself,

a strange result.20
19 Section 203 (f) provides, among other things, that "the Commission, by order, shall censure or place limitations on the activities of any person associated, seeking to become associated, or, at the time of the alleged misconduct, associated or seeking to become associated with an investment adviser, . if the Commission finds, on the record after notice and opportunity for hearing i that such censure, placing of limitations, suspension, or bar is in the public interest and that such person has committed or omitted any act or omission enumerated (in certain specified years of the

commencement of the proceedings under (the) sub-section .

provisions of Section 203) within ten

"
20 While the above cited proceedings were silent on this point, it may be because each of the portfolio managers in those proceedings acted as agents of both the investment company and the investment adviser, that no Section 206 (3) claim was included in the actions. BWNY03/9304,12 21

We note also that insofar as Section 17 (e) specifically sets

forth the requirements governing agency transactions between an

investment company and its investment adviser or affiliated

persons thereof, that Section supersedes any more general

requirements applicable to investment advisers under the Advisers

Act. See Sutherland, supra, page 12, at § 46.05. Similarly, it

would be a peculiar result to permit the above direct placement

agency transactions under Section 17 (e) of the Investment Company

Act but to prohibit them under Section 206 (3) of the Investment

Advisers Act.
Conclusion
For the foregoing reasons we believe that Section 10 (f) of the Investment Company Act is inapplicable to investment company

purchases of securities in transactions where an affiliated

person of the company acts as placement agent for such

securities. Section 10 (f) applies only in circumstances where an

investment company purchases securities during the existence of

an underwriting or selling syndicate of which the affiliated

person is a member, but where the purchases are made from a

syndicate member other than the affiliated person. Nevertheless,

such purchases remain subj ect to the provisions of Section

17 (e) (2) of the Investment Company Act and, in particular,

Subsection (C) thereof. If the Divisionis unable to concur with

our view regarding the appropriate interpretation of Section

10 (f), however, we believe that the circumstances described in this letter otherwise support a favorable "no-action" response.

We further believe that the requirements of Section 206 (3)

are met where the employee of the investment adviser who is

responsible for purchasing securities on behalf of an investment

company is also an officer or agent of the investment company'.

In those circumstances, the consent required by Section 206 (3)

will by definition be given.

If you have any further questions concerning this matter

please feel free to contact Thomas R. Smith, Jr. at (212)

839-5535 or Brian M. Kaplowitz at (212) 839-5370.

Very truly yours,

~11t /¡tf-l u¡
BWNY03/9304,12 22