May 9, 1997 Mr. Samuel Luque, Jr. Associate Director, Compliance National Association of Securities Dealers Regulation 1735 K Street, N.W.

Washington, D.C. 20006 Dear Mr. Luque: The Uniform Offering Circular (Circular)(31 CFR Part 356), setting out the terms and conditions under which the Department of the Treasury sells and issues marketable book-entry Treasury bills, notes, and bonds to the public, has been in effect since March, 1993. On July 16, 1996, the Department issued an amendment to the Circular that, among other things, defined the term "investment adviser" and, in a new section, 356.15, clarified how the provisions of the Circular apply to bids from investment advisers.1 Since that time, the Bureau of the Public Debt has received inquiries from auction participants indicating a need to reiterate and provide additional guidance on some of the amended provisions. The inquiries have centered around three issues: 1. Investment advisers' alternatives in bidding on behalf of controlled accounts; 2. Application of the investment adviser provisions to net long position reporting and auction award limitations; and 3. The responsibilities of auction tender submitters for the accuracy of the information provided to them by investment advisers. We are providing additional guidance and clarification on these issues to foster a better understanding of the auction rules and to help ensure that investment advisers submit accurate bids in Treasury securities auctions. As defined in � 356.2 of the Circular, an investment adviser is "any person or entity that has investment discretion for the bids or positions of a person or entity not considered part of the investment adviser under the bidder definitions in Appendix A" of the Circular.2 Investment discretion includes determining what, how many, and when securities will be purchased or sold. This attribute of investment discretion for the bids and positions of others in Treasury securities auctions is fundamental to establishing whether a person or entity is acting as an investment adviser. 1. Investment Advisers' Alternatives in Bidding for Controlled Accounts

Under � 356.15(a), whenever an investment adviser controls the bids or positions of another person or entity, those bids or positions are considered to be a "controlled account." Under the general rule in � 356.15(a), bids and positions

of controlled accounts are considered to be "separate from the bids and positions of any person or entity with which they would otherwise be associated under the bidder definitions in Appendix A" of the Circular. For example, if Company A's pension fund were controlled by an investment adviser, a bid for that fund would be considered separate from any bid that Company A might tender in an auction for its proprietary account. Therefore, the pension fund and the company's proprietary account could each bid noncompetitively for up to $1 million of Treasury bills in a particular auction. Another example is that the investment adviser could bid noncompetitively for the pension fund and Company A could bid competitively for its proprietary account. However, if both Company A's pension fund and its proprietary account were controlled by the same investment adviser, they would be considered to be a single person or entity for purposes of � 356.15 and thus treated as one controlled account. Therefore, the pension fund and the proprietary account would not be considered separate for purposes of bidding restrictions or award limitations. Under � 356.15(b), a controlled account is subject to the Circular's noncompetitive bidding restrictions and award limitations. In addition, a controlled account may not be bid for both noncompetitively and competitively in the same auction. Under these circumstances, an investment adviser would not be allowed to bid competitively for Company A's pension fund and noncompetitively for Company A's proprietary account, or vice versa, in the same auction. An investment adviser may bid for controlled accounts either in its own name or in the name of the controlled accounts. If the bids are in the investment adviser's name, the investment adviser is generally considered to be the bidder. If the bids are in the name of a controlled account, the controlled account is generally considered to be the bidder. Whether an investment adviser bids in its name or in the name of the controlled account has significance for noncompetitive bidding. If an investment adviser bids in its own name, it will be limited to the noncompetitive maximum amount for that auction, for example, $1 million in a bill auction. If the adviser bids in the names of the controlled accounts, it may bid for each account up to the noncompetitive maximum amount. 2. Net Long Position Reporting and Auction Award Limitations

Section 356.15(c) contains three essential provisions regarding bids and positions that should be included in, or excluded from, any reported net long position. First, the section states that, "in calculating the amount of its bids and positions ... the investment adviser must include, in addition to what would otherwise be included for the investment adviser as a bidder, ... all other competitive bids and positions controlled by the investment adviser." In other words, when calculating its total bids and positions for net long position reporting purposes, an investment adviser must combine its proprietary competitive bids and positions with all other

competitive bids and positions in the security being auctioned that it controls (i.e., controlled accounts). Noncompetitive bids are not included in the calculation. Second, "the investment adviser may exclude any net long position less than $100 million of any nonproprietary controlled account unless the adviser is placing a competitive bid for that account ..." If the investment adviser is placing a competitive bid for a controlled account, then, no matter how large or small the amount of that bid, the investment adviser must include any net long position of that account in its net long position calculation. However, for any controlled account for which the investment adviser is not bidding competitively, the investment adviser may exclude the account's net long position from its calculation if that position is less than $100 million. If the position is greater than or equal to $100 million, the investment adviser must include the controlled account's net long position in the investment adviser's net long position calculation. Third, "if any net long position less than $100 million of any nonproprietary account not being bid for is excluded, then all net short positions less than $100 million of nonproprietary accounts not being bid for must also be excluded." Therefore, an investment adviser may not use any such net short positions to offset its net long position. Example The following example illustrates these provisions. An investment adviser has five controlled accounts over which it exercises investment discretion. The adviser bids competitively in its own name for its own account and bids for the controlled accounts in the name of the controlled accounts. ENTITY Investment Controlled Controlled Controlled Adviser Acct. 1 Acct. 2 Acct. 3 COMPETITIVE AMT. BID NET LONG POSITION $1.5 Billion $600 Million $1.0 Billion $500 Million $ .5 Billion ($300 Million) short $0 $150 Million $950 Million $ 75 Million ($50 Million) short

Controlled Acct. 4 $0 Controlled Acct. 5 $0 $3.0 Billion

Assuming the investment adviser takes advantage of the $100 million exclusion provision, the net long position amount to be reported by the investment adviser would be $950 million. This amount is the sum of the positions of the investment adviser and controlled accounts 1, 2, and 3. The position of controlled account 4 need not be included because the account is not being bid for and its net long position is less than $100 million. Similarly, the position of controlled account 5 is not included because the account is not being bid for, its net position is less than $100 million, and the net long position of controlled account 4 was excluded. Assuming for the sake of simplicity that the investment adviser had bid for the controlled accounts in its own name and all the bids were

at the same competitive yield, the adviser would have submitted one competitive bid for $3 billion, and reported a net long position of $950 million. If the investment adviser had not taken advantage of the $100 million exclusion provision, the net long position amount to be reported by the investment adviser would have been $975 million. This is the sum of the positions of the investment adviser and controlled accounts 1 through 5. Limitation on Auction Awards Regarding the maximum auction award limitation of 35 percent of the public offering, � 356.22(b) states in part that, "When the bids and net long positions of more than one person or entity must be combined as required by � 356.15(c), such combined amount will be used for the purpose of this award limitation." The auction award in the example above is as follows. The example assumes all bids were at yields below the highest accepted yield, so that, except for the 35 percent maximum award limitation, they all would have been awarded in full. The example also assumes that the public offering amount for the auction was $10 billion. Accepted Auction Bids $3.000 Billion 35% Award Limit Net Long Position .950 Billion Less Net Long Position Total Bids & Positions $3.950 Billion Auction Award $3.500 Billion .950 Billion $2.550 Billion

This award of $2.55 billion is comprised of the following allocations: Investment Adviser Controlled Acct. 1 Controlled Acct. 2 Customer Confirmations Under � 356.24(d), "Any customer awarded a par amount of $500 million or more in an auction must furnish a confirmation ... to the Federal Reserve Bank to which the bid was submitted, no later than 10:00 a.m. on the day following the auction." When an investment adviser submits bids in its own name through one or more submitters, rather than directly to a Federal Reserve Bank, the adviser is a customer of that submitter(s). If the awards from all such bids from an investment adviser equals or exceeds $500 million in a particular auction, the investment adviser must confirm its auction bid(s) as required in � 356.24(d). Similarly, when an investment adviser submits bids in the name of a controlled account through one or more submitters rather than directly to a Federal Reserve Bank, the controlled account is a customer of that submitter(s). However, for purposes of � 356.24(d), since the investment adviser has investment discretion over a controlled account, if the awards from such bids meet the $500 million confirmation threshold, the investment adviser is responsible for confirming the customer bid(s) on behalf of the controlled account. Under such circumstances, the investment adviser must sign the confirmation as an "authorized representative" of the customer as provided in � 356.24(d). 3. Role of Submitters in Submitting Investment Adviser Bids $1.275 Billion $0.850 Billion $0.425 Billion

We have also received inquiries asking us to clarify the responsibilities

of a submitter when placing bids for investment advisers in the auctions. In such situations, investment advisers or their controlled accounts are considered to be customers as defined in the Circular. The requirements for depository institutions and dealers in submitting bids for customers are provided in � 356.14. This section details submitters' responsibilities to remit payment for securities awarded to customers, to provide a customer list, and for reporting the net long position of customers. We would like to reiterate the requirement of � 356.14(c)(1) since this may be particularly applicable in certain situations in which a submitter is submitting bids on behalf of an investment adviser. The paragraph states that, "A submitter or intermediary, when submitting or forwarding a competitive bid of $100 million or more for its customer, must inform that customer of the customer's net long position reporting obligation as described in � 356.13." If an investment adviser is bidding in the names of controlled accounts, it is sufficient for purposes of � 356.14(c)(1) for the submitter or intermediary to inform the investment adviser (on behalf of the controlled accounts) of the reporting obligation. Otherwise, there are no requirements for submitters that are unique to the situation in which a customer is an investment adviser or a controlled account of an investment adviser. For example, submitters are under no obligation to inquire about, or attempt to verify, the extent to which the bid or position amounts of any controlled accounts have been included in the bid or position amount reported by the investment adviser. However, as stated in � 356.14(c)(3), "If personnel of a submitter or intermediary who are directly involved in receiving or forwarding a customer's bid know that the position information provided by a customer is incorrect, the customer's bid shall not be submitted or forwarded by the submitter or intermediary." This letter is being sent to the Federal Reserve Banks of New York, Chicago and San Francisco; the National Association of Securities Dealers Regulation; the New York Stock Exchange; and the various federal bank regulatory agencies. Please distribute it to auction participants that, to your knowledge, may be affected by the investment adviser rules. Any questions regarding this letter, or any other questions about the Circular, should be directed to the Government Securities Regulations Staff at (202) 219-3632. This letter will be made available immediately to the public and it is also available for downloading from the Bureau of the Public Debt's web site at www.publicdebt.treas.gov. Sincerely, Kenneth R. Papaj Director, Government Securities Regulations Staff cc: Michael Macchiaroli Associate Director Division of Market Regulation Securities and Exchange Commission Stephanie S. Wolf Vice President and Associate General Counsel PSA the Bond Market Trade Association Dorothy Donohue

Assistant Counsel Investment Company Institute 1 61 FR 37007. The amendment was effective September 16, 1996. 2 This definition is substantially different from the definition in the Investment Advisers Act of 1940 (15 U.S.C. 80b-2(a)(11)), which basically defines an investment adviser as "any person who, for compensation, engages in the business of advising others ... as to the value of securities or as to the advisability of investing in, purchasing, or selling securities ...". ***** Identical letters sent to the following individuals/organizations: Mr. Raymond J. Hennessy Vice President Member Firm Regulation New York Stock Exchange 20 Broad Street, 21st Floor New York, NY 10005 Mr. Herbert A. Biern Deputy Associate Director Division of Banking Supervision and Regulation Board of Governors of the Federal Reserve Washington, D.C. 20551 Mr. Kurt Wilhelm Acting Chief National Bank Examiner for Capital Markets Office of the Comptroller of the Currency 250 E Street, S.W. Washington, D.C. 20219 Mr. Miguel Browne Deputy Assistant Director Securities Capital Markets and Trust Division of Supervision Federal Deposit Insurance Corporation 550 17th Street, N.W. Washington, D.C. 20429 Mr. Larry A. Clark Program Manager, Trust Office of Thrift Supervision 1700 G Street, N.W. Washington, D.C. 20552 Ms. Pauline E. Chen Vice President Federal Reserve Bank of New York 33 Liberty Street New York, New York 10045 Mr. James M. Rudny Assistant Vice President Cash/Fiscal & Wholesale Services Federal Reserve Bank of Chicago

P.O. Box 834 Chicago, Illinois

60690-0834

Ms. Paige Birdsall Assistant Vice President Federal Reserve Bank of San Francisco P.O. Box 7702 San Francisco, California 94120