17 CFR § 270.5b-3 - Acquisition of repurchase agreement or refunded security treated as acquisition of underlying securities.
(a) Repurchase Agreements. For purposes of sections 5 and 12(d)(3) of the Act (15 U.S.C. 80a–5 and 80a–12(d)(3)), 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.
(c) Definitions. As used in this section:
(1) Collateralized Fully in the case of a repurchase agreement means that:
(i) 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;
(ii) The investment company has perfected its security interest in the collateral;
(iii) 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;
(iv) The collateral consists entirely of:
(A) Cash items;
(B) Government Securities; or
(C) Securities that the investment company's board of directors, or its delegate, determines at the time the repurchase agreement is entered into:
(1) Each issuer of which has an exceptionally strong capacity to meet its financial obligations; and
For a discussion of the phrase “exceptionally strong capacity to meet its financial obligations” see Investment Company Act Release No. 30847, (December 27, 2013).
(2) Are sufficiently liquid that they can be sold at approximately their carrying value in the ordinary course of business within seven calendar days; and
(v) 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:
(i) 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
(4) Issuer, as used in paragraph (c)(1)(iv)(C)(1) of this section, means the issuer of a collateral security or the issuer of an unconditional obligation of a person other than the issuer of the collateral security to undertake to pay, upon presentment by the holder of the obligation (if required), the principal amount of the underlying collateral security plus accrued interest when due or upon default.
(5) 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 (15 U.S.C. 80a–2(a)(3)(C)), 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:
(i) The deposited securities are not redeemable prior to their final maturity;
(ii) The escrow agreement prohibits the substitution of the deposited securities unless the substituted securities are Government Securities; and
(iii) 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.
(6) 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.