On November 29, 2000, the Securities and Exchange Commission (the "Commission") proposed an amendment to Rule 10f-3 under the Investment Company Act of 1940 (the "1940 Act") to permit registered investment companies ("funds") to invest in Government securities [1] underwritten by an affiliated person. The amendment, which also proposes a broader change to one test in the existing rule, is summarized below.

Section 10(f) of the 1940 Act prohibits funds from purchasing securities during the existence of an underwriting or selling syndicate involving certain affiliated persons. This restriction was enacted primarily to prevent the dumping of unmarketable securities into funds. Rule 10f-3 under the 1940 Act exempts certain transactions in certain securities from the prohibitions of Section 10(f).

The proposed amendment would expand the exemption to allow affiliated funds to purchase Government securities during the existence of an underwriting or selling syndicate involving an affiliate. The Commission feels that this amendment is appropriate because such purchases are subject to protections that would prevent the abuses Section 10(f) was designed to prevent. First, Government securities are high-quality investments. Second, the approval that government agencies must obtain from the Department of Treasury is an effective substitute for Securities Act registration. Third, information about such offerings is publicly available. Fourth, Government securities are actively traded in the secondary market. These factors all suggest that the risk of dumping is remote.

While the primary purpose of the proposed amendment is to exclude purchases of Government Securities from the prohibition, the proposal also includes a global change affecting one of the percentage limitations of the present rule. Under the present rule, no more than 25% of an offering may be purchased by funds advised by the same adviser. The rule requires the aggregation of all purchases by funds advised by the same adviser, but does not currently require the aggregation of non-fund client purchases. The proposed amendment would require aggregation of all advisory clients, fund and non-fund, for purposes of the 25% limitation.

Because many fund complex affiliates purchase underwritten securities for fund and non-fund clients alike, this second proposed change is likely to require a change in compliance monitoring procedures. The first proposed change is likely to affect the relatively few--but growing--number of fund complexes with an affiliate involved in syndicated offerings of Government securities.

If you have any questions or would like additional information regarding the above matters, please do not hesitate to contact any of us.

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1) "Government security" is defined in Section 2(a)(16) of the 1940 Act as "...any 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 Government of the United States...."

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Prepared by:
Marco E. Adelfio, Co-Chair	(202) 887-1530
Elisa Metzger	(202) 887-1540
Ashley McMurry	(202) 887-8784