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33-9506

33-9506

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Published by: MarketsWiki on Dec 27, 2013
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SECURITIES AND EXCHANGE COMMISSION 17 CFR Parts 239, 270, and 274 Release Nos. 33-9506; IC-30847; File No. S7-7-11 RIN 3235-AL02 Removal of Certain References to Credit Ratings Under the Investment Company Act AGENCY:
 Securities and Exchange Commission.
ACTION:
 Final rule.
SUMMARY:
 The Securities and Exchange Commission (“Commission”) is adopting amendments to a rule and three forms under the Investment Company Act of 1940 (“Investment Company Act”) and the Securities Act of 1933 (“Securities Act”) in order to implement a  provision of the Dodd-Frank Wall Street Reform and Consumer Protection Act (“Dodd-Frank Act”). Specifically, rule 5b-3 under the Investment Company Act contains a reference to credit ratings in determining when an investment company (“fund”) may treat a repurchase agreement as an acquisition of securities collateralizing the repurchase agreement for certain purposes under the Investment Company Act. The amendments we are adopting today replace this reference to credit ratings with an alternative standard designed to retain a similar degree of credit quality to that in current rule 5b-3. The Commission is also adopting amendments to Forms N-1A, N-2, and N-3 under the Investment Company Act and Securities Act to eliminate the required use of  NRSRO credit ratings when a fund chooses to depict its portfolio holdings by credit quality.
DATES:
Effective Date:
 
[insert date 30 days after date of publication in the Federal Register]; Compliance Date: [insert date 180 days after date of publication in the Federal Register].
 FOR FURTHER INFORMATION CONTACT:
 Adam Bolter, Senior Counsel, Thoreau Bartmann, Branch Chief, or C. Hunter Jones, Assistant Director (202) 551-6792, Office of
 
2 Investment Company Rulemaking, Division of Investment Management, Securities and Exchange Commission, 100 F Street, NE, Washington, DC 20549-8549.
SUPPLEMENTARY INFORMATION:
 The Commission is adopting amendments to rule 5b-3 [17 CFR 270.5b-3] under the Investment Company Act.
1
 The Commission is also adopting amendments to Forms N-1A [17 CFR 239.15A and 17 CFR 274.11A], N-2 [17 CFR 239.14 and 17 CFR 274.11a-1], and N-3 [17 CFR 239.17a and 17 CFR 274.11b] under the Investment Company Act and the Securities Act.
2
 
Table of Contents
 I.
B
P
A
C
O
D
P
A
E
A
F
F
A
S
A
T
F
A
I.
 
B
ACKGROUND
 
The first use of a reference to ratings or rating agencies in Commission rules was in 1975, when the Commission adopted the term “nationally recognized statistical rating organization” (“NRSRO”) as part of amendments to the net capital rule for broker-dealers, rule 15c3-1 under the Securities Exchange Act of 1934 (“Exchange Act”) (the “Net Capital Rule”).
3
 The
1
 15 U.S.C. 80a. Unless otherwise noted, all references to statutory sections are to the Investment Company Act, and all references to rules under the Investment Company Act are to Title 17, Part 270 of the Code of Federal Regulations [17 CFR 270].
2
 15 U.S.C. 77a.
3
 
See
 Adoption of Uniform Net Capital Rule and an Alternative Net Capital Requirement for Certain Brokers and Dealers, Exchange Act Release No. 11497 (June 26, 1975) [40 FR 29795
 
3 Commission eventually included references to credit ratings issued by NRSROs in other rules under the securities laws, including the Investment Company Act.
4
 In addition, credit ratings by  NRSROs have been used as benchmarks in federal and state legislation, rules administered by other federal agencies, and foreign regulatory schemes.
5
 Even prior to the enactment of the Dodd-Frank Act,
6
 concerns about the wide-spread use of NRSRO credit ratings in statutes and regulations prompted the Commission to explore whether to eliminate references to credit ratings in Commission rules because of the potential overreliance by investors and, investment advisers and other financial professionals on these ratings, and whether there are practical alternatives to  NRSRO credit ratings that could be used as benchmarks in regulations.
7
 Section 939A of the Dodd-Frank Act requires each Federal agency, including the Commission, to “review any regulation issued by such agency that requires the use of an assessment of the credit-worthiness of a security or money market instrument and any references to or requirements in such regulations regarding credit ratings.”
8
 That section further provides
(July 16, 1975)]; 17 CFR 240.15c3-1. The Net Capital Rule prescribes minimum net capital requirements for broker-dealers and it uses NRSRO credit ratings to determine the amount of the charge to capital a broker-dealer must apply to certain types of debt instruments.
See
 17 CFR 240.15c3-1. The regulatory purpose was to provide a method for determining net capital charges on different grades of debt securities under the Net Capital Rule.
See
 17 CFR 240.15c3-1.
4
 
See, e.g.
, Acquisition and Valuation of Certain Portfolio Instruments by Registered Investment Companies, Investment Company Act Release No. 14983 (Mar. 12, 1986) [51 FR 9773 (Mar. 21, 1986)] (incorporating the concept of NRSROs into the definition of “eligible security” in rule 2a-7 (governing money market funds)).
5
 
See, e.g.
, Report to Congress on Credit Ratings, Board of Governors of the Federal Reserve System (July 2011); References to Credit Ratings in FDIC Regulations, Federal Deposit Insurance Corporation (July 2011); and Basel Committee on Banking Supervision, Stocktaking on the use of credit ratings, Joint Forum (June 2009).
6
 
See
 Pub. L. No. 111-203, 124 Stat. 1376 (2010).
7
 
See infra
 section II.A (discussing other Commission actions to remove references to credit ratings from its rules).
See also infra
 section II.B (discussing actions of other regulators to remove references to credit ratings from their rules).
8
 Pub. L. No. 111-203 § 939A(a)(1)-(2). Section 939A of the Dodd-Frank Act applies to all federal

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