Securities Lawyer's Deskbook                          published by The University of Cincinnati College of Law

Rule 5b-3 -- Acquisition of Repurchase Agreement or Refunded Security Treated as Acquisition of Underlying Securities

---

1. Repurchase Agreements. For purposes of sections 5 and 12(d)(3) of the Act, the acquisition of a repurchase agreement may be deemed to be an acquisition of the underlying securities, provided the obligation of the seller to repurchase the securities from the investment company is Collateralized Fully.
   
   
2. Refunded Securities. For purposes of section 5 of the Act, the acquisition of a Refunded Security is deemed to be an acquisition of the escrowed Government Securities.
   
   
3. Definitions. As used in this section:
   
   
   1. Collateralized Fully in the case of a repurchase agreement means that:
      
      
      1. The value of the securities collateralizing the repurchase agreement (reduced by the transaction costs (including loss of interest) that the investment company reasonably could expect to incur if the seller defaults) is, and during the entire term of the repurchase agreement remains, at least equal to the Resale Price provided in the agreement;
         
         
      2. The investment company has perfected its security interest in the collateral;
         
         
      3. The collateral is maintained in an account of the investment company with its custodian or a third party that qualifies as a custodian under the Act;
         
         
      4. The collateral consists entirely of:
         
         
         1. Cash items;
            
            
         2. Government Securities;
            
            
         3. Securities that at the time the repurchase agreement is entered into are rated in the highest rating category by the Requisite NRSROs; or
            
            
         4. Unrated Securities that are of comparable quality to securities that are rated in the highest rating category by the Requisite NRSROs, as determined by the investment company's board of directors or its delegate; and
            
            
      5. Upon an Event of Insolvency with respect to the seller, the repurchase agreement would qualify under a provision of applicable insolvency law providing an exclusion from any automatic stay of creditors' rights against the seller.
         
         
   2. Event of Insolvency means, with respect to a person:
      
      
      1. An admission of insolvency, the application by the person for the appointment of a trustee, receiver, rehabilitator, or similar officer for all or substantially all of its assets, a general assignment for the benefit of creditors, the filing by the person of a voluntary petition in bankruptcy or application for reorganization or an arrangement with creditors; or
         
         
      2. The institution of similar proceedings by another person which proceedings are not contested by the person; or
         
         
      3. The institution of similar proceedings by a government agency responsible for regulating the activities of the person, whether or not contested by the person.
         
         
   3. Government Security means any "Government Security" as defined in section 2(a)(16) of the Act.
      
      
   4. Refunded Security means a debt security the principal and interest payments of which are to be paid by Government Securities ("deposited securities") that have been irrevocably placed in an escrow account pursuant to an agreement between the issuer of the debt security and an escrow agent that is not an "affiliated person," as defined in section 2(a)(3)(C) of the Act, of the issuer of the debt security, and, in accordance with such escrow agreement, are pledged only to the payment of the debt security and, to the extent that excess proceeds are available after all payments of principal, interest, and applicable premiums on the Refunded Securities, the expenses of the escrow agent and, thereafter, to the issuer or another party; provided that:
      
      
      1. The deposited securities are not redeemable prior to their final maturity;
         
         
      2. The escrow agreement prohibits the substitution of the deposited securities unless the substituted securities are Government Securities; and
         
         
      3. At the time the deposited securities are placed in the escrow account, or at the time a substitution of the deposited securities is made, an independent certified public accountant has certified to the escrow agent that the deposited securities will satisfy all scheduled payments of principal, interest and applicable premiums on the Refunded Securities; provided, however, an independent public accountant need not have provided the certification described in this paragraph (c)(4)(iii) if the security, as a Refunded Security, has received a rating from an NRSRO in the highest category for debt obligations (within which there may be sub-categories or gradations indicating relative standing).
         
         
   5. NRSRO means any nationally recognized statistical rating organization, as that term is used in paragraphs (c)(2)(vi)(E), (F) and (H) of Rule 15c3-1 under the Exchange Act, that is not an "affiliated person," as defined in section 2(a)(3)(C) of the Act, of the issuer of, or any insurer or provider of credit support for, the security.
      
      
   6. Requisite NRSROs means:
      
      
      1. Any two NRSROs that have issued a rating with respect to a security or class of debt obligations of an issuer; or
         
         
      2. If only one NRSRO has issued a rating with respect to such security or class of debt obligations of an issuer at the time the investment company acquires the security, that NRSRO.
         
         
   7. Resale Price means the acquisition price paid to the seller of the securities plus the accrued resale premium on such acquisition price. The accrued resale premium is the amount specified in the repurchase agreement or the daily amortization of the difference between the acquisition price and the resale price specified in the repurchase agreement.
      
      
   8. Unrated Securities means securities that have not received a rating from the Requisite NRSROs.
      
      

	Notice to Users: The Deskbook is made available with the understanding that the University of Cincinnati College of Law is not engaged in rendering legal, accounting or other professional services. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. See Terms and Conditions of Use.   © Copyright 1998-2008, University of Cincinnati, All Rights Reserved  Contact: joseph.hodnicki@uc.edu