RESPONSE:OFFICE OF CHIEF COUNSEL J.P. Morgan

[sandi66]

October 22,2008
Our Ref. No. 2008 1022 140
RESPONSE OF THE OFFICE OF CHIEF COUNSEL J.P. Morgan Securities Inc.
DIVISION OF INVESTMENT MANAGEMENT File No. 8-35008
By letter dated October 22,2008, you request interpretive guidance agd no-action relief aR under sections 2(a)(4 I), 10(f), 12(d)(3), 17(a)(2), 17(d), 17(e)(l), 34(b) and 35(d) of the
~nvestmentCompany Act of 1940 ("Act"), and rules 2a-4, 17d- 1 and 22c- 1 under the Act, for
certain sale and purchase transactions (the "Program"), described in your letter, in which
registered open-end investment companies that rely on rule 2a-7 under the Act ("Money Market
Funds") sell certain commercial paper, bank notes and certificates of deposit having remaining
maturities of 90 days or less (collectively, "Eligible Assets") at a price equal to their amortized
cost, to certain special purpose vehicles ("SPVs") that have entered into liquidity facilities with
the Federal Reserve Bank of New York ("Lender") and for which J.P. Morgan Securities Inc.
("JPMSI") is the structuring and referral agent and JPMorgan Chase Bank, N.A. ("Bank") is the
collateral agent, the depositary and issuing and paying agent, in exchange for cash and asset
backed commercial paper of the SPVs for which JPMSI is the placement agent ("Commercial .- -.<-;-
Paper Notes"). The SPVs will cease purchasing Eligible Assets on April 30,2009, unless the. ,- Program
is extended by the Lender.
You state that the Program is a temporary measure designed to respond to the current
illiquidity in the market for money market instruments and to alleviate the risk of forced sales by
Money Market Funds at substantial discounts fiom amortized cost in order to meet redemptions.
You also state that the board of directors of each Money Market Fund, including a majority of
the independent members, at least quarterly, will review the Money Market Fund's participation
in the Program during the preceding quarter, and make a determination whether continued
participation in the Program is in the best interests of the Money Market Fund and its
shareliolders.
Discussion
A. Sections 2(a)(41), 34(b) and 35(d) of the Act and Rules 2a-4
and 22c-1 under the Act
Rule 2a-7 under the Act provides the exemptions fiom sections 2(a)(41), 34(b3 and 35(d)
of the Act and rules 2a-4 and 22c-1 under the Act necessary to permit Money Market Funds to
use the amortized cost method of valuation, which facilitates the ability of Money Market Funds
to maintain a stable per share net asset value, typically $1.00. Your letter raises two concerns
under rule 2a-7 regarding the ability of a Money Market Fund to acquire Commercial Paper
Notes issued by the SPVs.
Definition of "Asset Backed Security. " Rule 2a-7(a)(3) defines "Asset Backed Security"
as a "fixed income security (other than a Government security [as defined in the Act]) issued by
a Special Purpose Entity (as defined in this paragraph), substantially all of the assets of which
consist of Qualifying Assets [as defined in the rule]." "Special Purpose Entity" is defined
generally as an "entity organized for the sole purpose of issuing securities that entitle their
holders to receive payments that depend primarily on the cash flow from Qualifying Assets, but
does not include a registered investment company."'
You state that the assets of the SPVs will be QualifLing Assets, and the Commercial
Paper Notes to be issued by the SPVs will entitle their holders to receive payments that depend
primarily on the cash flow from the Qualifying Assets. However, you expre'Ss conc'ern that the
SPVs may not be viewed as organized "solely" for the purpose of issuing asset-backed securities,
since it could be said that the principal purpose of the SPVs is to provide liquidity to Money
Market Funds in respect of certain of their assets. Accordingly, you request that we concur in
your view that the Commercial Paper Notes may be treated as "Asset Backed Securities" as
defined in rule 2a-7.
Based on the facts and representations in your letter, and in particular the fact that, while
the principal purpose of the Program is to provide liquidity to Money Market Funds, the SPVs
will not conduct any business other than issuing securities that entitle their holders to receive
payments that depend primarily on the cash flow from Qualifying Assets, we would not
recommend enforcement action to the Commission under sections 2(a)(41), 34(b) and 35(d) of
' + the
Act and rules 2a-4 and 22c-1 under the Act in connection with a Money Market Fund's
treatment of the Commercial Paper Notes as "Asset Backed Securities" as defined in rule 2a-7.
Diversijication. Rule 2a-7(c)(4)(i)(A) generally requires that, immediately after the
acquisition of any security, a taxable Money Market Fund (such as those expected to acquire the
Commercial Paper Notes) not have invested more than five percent of its "total assets," as
defined in the rule, in securities issued by the issuer of the security. Rule 2a-7(~)(4)(ii)(D)(l)
treats the special purpose entity (such as the SPV) as the issuer of an asset backed security and
therefore requires that rule 2a-7's diversification requirements be met with respect to the special
purpose entity. The rule creates an exception to this treatment, however, requiring a Money
Market Fund to "look through" the special purpose entity to any issuer of qualifying assets
whose obligations constitute ten percent or more of the principal amount of the qualifying assets
of the special purpose entity ("Ten Percent Specifically, a Money Market Fund must
treat each Ten Percent Obligor as if it issued a proportionate amount of the special purpose
entity.3 he Money Market Fund generally must determine periodically the number of Ten Percent
Obligors with respect to any asset backed securities that it holds.4
1 Rule 2a-7(a)(3).
2 Rule 2a-7(~)(4)(ii)(D)(l)(i).
3 Id.
4 Rule 2a-7(c)(9)(iv).
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You assert that there may be several Ten Percent Obligors for each such SPV, although
the concentration limitations applicable to the SPVs generally will preclude an SPV from
purchasing securities of an issuer if such purchase would result in more than fifteen percent of
the SPV's assets being invested in securities of such issuer. You explain that, because of the
nature of the SPVs and the Commercial Paper Notes, including the fact that the composition of
the collateral pool of each SPV will change over time (as frequently as every business day), and
the subordinated nature of the Commercial Paper Notes, the holder of a Commercial Paper Note
must assume that the entire amount of such security is exposed to the credit risk of each issuer
whose securities may be held by the SPV.
4. <
aR
.You assert that, as a consequence primarily of redemptions, a number of Money Market
Funds are close to or have exceeded the five percent diversification limitations for many of the
issuers that are expected to be included in the five proposed SPVs. Accordingly, if the Ten
Percent Obligor provisions discussed above are held to apply to the Commercial Paper Notes, the
benefits of the Program may be only partially available, or not available at all, to many Money
Market Funds which desire to participate in the Program. These Money Market Funds would be
limited by rule 2a-7's diversification requirements not as a result of an active investment
program but rather because of their efforts to fund redemption requests through access to the
liquidity the Program offers. You argue that for these Money Market Funds the diversification
tests are the most difficult to satisfy because as total assets in these Money Market Funds
decline, the percentage represented by each position in the entire Money Market Fund increases. ' .
In light of the foregoing, the unusual nature of the Commercial Paper Notes, the liquidity
issues confronting Money Market Funds that have led the Lender to support the creation of the
Program, and the temporary nature of the Program, you request that we give our assurance that
we will not recommend that the Commission take enforcement action under sections 2(a)(4 I),
34(b) and 35(d) of the Act and rules 2a-4 and 22c-1 thereunder if Money Market Funds investing
in the Commercial Paper Notes comply with rule 2a-7's diversification requirement through an
alternate method. Under this alternative method, Money Market Funds would not "look
through" the SPVs in conducting the rule 2a-7 diversification test by virtue of the otherwise
applicable requirements of rule 2a-7(~)(4)(ii)(D)(l)(i)in connection with acquisitions of
Commercial Paper Notes, provided the following conditions are met:
1. A Money Market Fund may not acquire Commercial Paper Notes issued by the
SPVs if it would result in such securities collectively (i.e., Commercial Paper Notes issued by all
the SPVs to the Money Market Fund added together) exceeding 2.5% of the Money Market Fund's
Total Assets (as defined in rule 2a-7(a)(25));
2. All Commercial Paper Notes must be "First-Tier Securities" as defined in rule
2a-7(a)(12) when acquired by a Money Market Fund; and
3. For purposes of the Money Market Fund making additional purchases of
securities of an issuer (where that issuer is one of the 10 issuers the securities of which may be
held by an SPV), the Money Market Fund must add the entire value of the Commercial Paper
Notes it holds to the value of other holdings of securities of the issuer held by the Money Market
Fund for diversification purposes.5
4. If a Money Market Fund purchases Commercial Paper Notes in the secondary
market (i.e., not in connection with a sale of Eligible Assets to an SPV pursuant to the Program),
it must treat such Commercial Paper Notes as set forth in condition 3 above for purposes of the
diversification requirements of rule 2a-7 (ie., prior to such purchase, it must consider the entire
value of each Commercial Paper Note as additional exposure to each of the issuers whose
securities may be held by the SPV that issued the Commercial Paper Note for diversification
purposes). ,.. e
Based on the facts and representations in your letter, and in particular the fact that the
Program is a temporary measure designed first and foremost to provide liquidity to Money
Market Funds, we would not recommend enforcement action to the Commission under sections
2(a)(41), 34(b) and 35(d) of the Act and rules 2a-4 and 22c-1 under the Act in connection with a
Money Market Fund's participation in the Program if the Money Market Funds investing in the
Commercial Paper Notes comply with rule 2a-7's diversification requirement through the
alternate method and subject to the conditions described above.
B. Section 12(d)(3) of the Act
Section 12(d)(3) of the Act generally prohibits a Money Market Fund from purchasing>or; ' .
otherwise acquiring any security issued by or any other interest in the business of any person
who is a broker, a dealer, is engaged in the business of underwriting, or is either an investment
adviser of an investment company or an investment adviser registered under the Investment
Advisers Act of 1940 (any such person, a "Securities-Related Issuer"). The prohibition in
section 12(d)(3) of the Act reflected Congress' concerns about a registered investment company's
exposure to the enterpreneurial risks of Securities-Related Issuers and the potential for conflicts
of interest and reciprocal practices.6
5 For example, if 4.5% of a Money Market Fund's net assets are accounted for by securities of
XYZ, and it acquires Commercial Paper Notes issued by an SPV (where one of the securities that may be
held by the SPV is XYZ) equal to 1%of the Money Market Fund's net assets, the Money Market Fund
would have a 5.5% exposure to XYZ and be precluded from making additional purchases of XYZ
securities unless and until its percentage exposure (including the exposure from the Commercial Paper
Notes) to XYZ is reduced below 5%. Likewise, if a Money Market Fund owns no securities of ABC and
acquires Commercial Paper Notes issued by an SPV (where one of the securities that may be held by the
SPV is ABC) having a value equal to 2% of the Money Market Fund's net assets, the Money Market
Fund would have a 2% exposure to ABC for purposes of computing the amount of ABC securities it may
purchase and be within the 5% diversification limit.
6 See Exemption of Acquisitions of Securities Issued by Persons Engaged in Securities Related
Businesses, Investment Company Act Release No. 19204 (Jan. 4, 1993)(citing) Investment Trusts and
Investment Companies: Hearings on S. 3580 before a Subcomm. of the Comm. on Banking and
Currency, 76th Cong., 3d Sess.243 (1940).
You state that certain of the Eligible Assets held by an SPV will be issued by Securities-
Related Issuers. You further state that, because Eligible Assets will be sold to an SPV by
multiple, unrelated Money Market Funds, a Money Market Fund may buy Commercial Paper
Notes of an SPV that holds Eligible Assets, sold to the SPV by another Money Market Fund, and
issued by a Securities-Related Issuer that is an affiliated person of the first Money Market Fund's
principal underwriter or investment adviser. You request ow assurance that we would not
recommend enforcement action to the Commission under section 12(d)(3) of the Act against a
Money Market Fund in connection with the Money Market Fund's participation in the Program.
Based on the facts and representations in your letter, and in particular the fact that the
Program is a temporary measure designed first and foremost to provide liqui3ity to-~oney e
Market' Funds, and without necessarily agreeing with your legal analysis, we would not
recommend enforcement action to the Commission against a Money Market Fund under section
12(d)(3) of the Act in connection with the Money Market Fund's participation in the Program.
C. Section 100 of the Act
Section 10(f) of the Act generally prohibits a Money Market Fund from purchasing or
otherwise acquiring, during the existence of any underwriting or selling syndicate, any security a
principal underwriter of which is an officer, director, member of an advisory board, investment
adviser, or employee of the Money Market Fund, or is a person of which any such officer,
director, member of an advisory board, investment adviser, or employee is an affiliated person. ' Section
10(f) was designed to protect registered investment companies from, among other things,
the "dumping" of unmarketable securities by persons in a position of influence over the
registered investment companies. You state that Money Market Funds for which J.P. Morgan
Investment Management Inc. ("JPMIM") or J.P. Morgan Investment Advisors Inc. ("JPMIA"),
companies under common control with JPMSI, serve as investment advisers ("Affiliated Money
Market Funds"), may wish to participate in the ~rogram.~
You state that JPMSI will enter into a commercial paper placement agreement with each
SPV and, in accordance with industry operational practice, will act as principal in the sales of
Eligible Assets to an SPV by the Money Market Funds. You also state that JPMSI and at least
one broker-dealer unaffiliated with JPMSI will be named as dealers for the Commercial Paper
Notes. You state that the transactions under the Program will be effected at the amortized cost
of the Eligible Assets, and JPMSI as placement agent will not earn a spread on the sales of
Eligible Assets to an SPV or the related issuances of Commercial Paper Notes, nor receive any
compensation from the SPV for its services as placement agent. You state that, for its services as
the structuring, referral and placement agent for an SPV, JPMSI will be paid a fee financed by
the spread between the interest payable on the Commercial Paper Notes and the loans made by
the Lender, on the one hand, and the interest earned on the Eligible Assets, on the other hand.
You state that JPMSI and the other dealer(s) for the Commercial Paper Notes will have separate
dealer agreements and none will be required to purchase or sell any particular amount of
Commercial Paper Notes for the SPVs. You contend that the dealers for Commercial Paper
Notes are not members of an underwriting or selling syndicate, and that the purchase of
Under section 2(a)(3)(C) of the Act, each of JPMIM and JPMIA is an affiliated person of JPMSI
by virtue of being under common control of J.P. Morgan Chase & Co. ("JPM").
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Commercial Paper Notes by the Affiliated Money Market Funds from JPMSI or another dealer is
not prohibited by section 1 O(f) of the Act.
Based on the facts and representations in your letter, and in particular the fact that the
Program is a temporary measure designed first and foremost to provide liquidity to Money
Market Funds, and without necessarily agreeing with your legal analysis, we would not
recommend enforcement action to the Commission against the Affiliated Money Market Funds
under section 10(f) of the Act in connection with an Affiliated Money Market Fund's
participation in the Program.
D. Sections 17(a)(2), 17(d) and 17(e) of the Act and Rule 17d-'1 under the Act
Section 17(a)(2) of the Act generally prohibits an affiliated person, or an affiliated person
of an affiliated person ("second-tier affiliate"), of a Money Market Fund, acting as principal,
from knowingly purchasing from the Money Market Fund any security or other property.
Section 17(d) of the Act generally prohibits an affiliated person or second-tier affiliate of a
Money Market Fund, acting as principal, fiom effecting any transaction in which the Money
Market Fund and the affiliated person or second-tier affiliate is a joint or a joint and several
participant, in contravention of such rules as the Commission may prescribe. Rule 17d-1 under
the Act generally prohibits any "joint enterprise or other joint arrangement or profit-sharing
plan," as defined in the rule. Section 17(e)(l) of the Act generally prohibits an affiliated person - -
"" -.-r
or a second-tier affiliate of a Money Market Fund, acting as agent, from accepting from any - .-.
"
source any compensation for the purchase or sale of any property to or for the Money ~ a r k e i '
Fund, except in the course of such person's business as an underwriter or broker. The provisions
of sections 17(a)(2), 17(d) and 17(e)(l) of the Act were designed to protect registered investment
companies from unfair dealing and overreaching by persons in a position of influence over the
registered investment companies.
With respect to any Affiliated Money Market ~und'thawt ishes to participate in the
Program, you state that JPMSI, as an affiliated person or a second-tier affiliate, may be
prohibited by section 17(a)(2) of the Act from purchasing Eligible Assets from the Affiliated
Money Market Fund in exchange for cash and Commercial Paper Notes. You also state that
participation by JPMSI, the Bank and the Afiliated Money Market Funds in the Program may
implicate rule 17d-1 under the Act. Finally, you state that the'c~rn~ensatiothna t JPMSI and the
Bank will receive in connection with the Program may implicate section 17(e)(l) of the Act.
You request our assurance that we would not recommend enforcement action to the Commission
under section 17(a)(2) of the Act if JPMSI purchases Eligible Assets from the
Affiliated Money Market Funds in exchange for cash and Commercial Paper Notes under the
Program, without seeking an order under section 17(b) of the Act. You state that, although you
believe that these transactions meet the standards for an order under section 17(b), the need for
the requested relief is both urgent and temporary. You also contend that the proposed
transactions will comply with rule 17a-9 under the Act, except that the Eligible Assets may
continue to be "eligible securities," as defined in rule 2a-7 under the Act, and the purchase price
will be paid with a combination of cash (90%) and Commercial Paper Notes (1 0%). You also
state that each proposed transaction will be effected only when (a) the amortized cost of the
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I
Eligible Assets being sold by an Affiliated Money Market Fund to an SPV is equal to or greater
than the market value of the Eligible Assets at the time of the transaction, and (b) JPMIM or
JPMIA determines, consistent with its fiduciary duties to the relevant Affiliated Money Market
Fund, that doing so would be in the best interests of the Affiliated Money Market Fund and its
shareh01der.s.~
You also request our assurance that we would not recommend enforcement action to the
Commission under section 17(d) of the Act and rule 17d-1 under the Act if JPMSI, the Bank and
the Affiliated Money Market Funds participate in the Program without seeking an order under
rule 17d-1 under the Act. You state that the Program was established to deal with an
unprecedented crisis in market liquidity for the benefit of the Money MarketTunds You also
state that the Affiliated Money Market Funds are among the largest in the industry, and that it
would be inappropriate for them to be precluded by the involvement of JPMIMfsand JPMIA's
affiliates in the design and operation of the SPVs, from accessing the additional liquidity
provided by the Program, to the extent JPMIM and JPMIA conclude that doing so is in the best
interests of the Affiliated Money Market Funds. You state that participation by a Money Market
Fund in the Program will not be on a basis different from or less advantageousthan that of other
participants.
Finally, you request our assurance that we would not recommend enforcement action to
the Commission against JPMSI and the Bank under section 17(e)(l) of the Act. You state that ..- .
"- "--r
neither JPMSI nor the Bank will be receiving compensation "for the purchase or sale of any -" - . < property
to or for" an Affiliated Money Market Fund that participates in the Program. You sfate '
that JPMSI will receive fees for its services as the structuring and referral agent from the SPVs,
and the Bank will receive compensation for its services as collateral agent, depositary and
issuing and paying agent for certain of the SPVs. Although you acknowledge that these fees will
depend, in part, on the extent to which the facilities are used by Money Market Funds, including
the Affiliated Money Market Funds, JPMSI and the Bank represent that the selectionby the
Lender of JPMSI to structure and implement the Program, and the selection of JPMSI and the
Bank to provide services in respect of the Program, and the structure of JPMSIfsand the Bank's
compensation for providing such services, were made without any regard to whether the
Affiliated Money Market Funds would participate in the Program. You also state that JPMSI
expects the vast majority of Money Market Funds participating in the Program to be unaffiliated
with JPM.
Based on the facts and representations in your letter, and in particular the circumstances
and purposes behind the Program and the terms on which the Affiliated Money Market Funds
would participate in the Program, and without necessarily agreeing with your legal analysis, we
would not recommend enforcement action to the Commission against JPMSI under section
17(a)(2)of the Act, or against JPMSI and the Bank under section 17(d) of the Act and rule 17d-1
under the Act, if the AEliated Money Market Funds participate in the Program. Based on the
facts and representations in your letter, and in particular (i) JPMSIfsand the Bank's
representations that the selection by the Lender of JPMSI to structure and implement the
Program, and the selection of JPMSI and the Bank to provide services in respect of the Program,
and the structure of JPMSI's and the Bank's compensation for providing such services, were
See Investment CompanyInstitute (SEC Staff No-Action Letter) (pub. avail. Sept. 25,2008).
7
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made without any regard to whether the Affiliated Money Market Funds would participate in the
Program, and (ii) the fact that JPMSI expects the vast majority of Money Market Funds
participating in the Program to be unaffiliated with JPM, we view the compensation that would
be paid to JPMSI and the Bank in connection with the Program to be outside the scope of section
17(e)(l) of the Act. You should note that any different facts or representations may lead us to a
different conclusion.
** -
Robert E. Plaze
Associate Director and Chief Counsel Associate Director

October 22,2008
Securities and Exchange Commission,
100 F Street, NE,
Washington, DC 20549.
Attention: Mr. Douglas Scheidt
Chief Counsel and Associate Director
Division of Investment Management
Re: Request for No Action Assurances Regarding Investments by
Money Market Funds in Asset Backed Commercial Paper
Issued by Special Purpose Vehicles that have Entered into
Liquidity Facilities with the Federal Reserve Bank of
New York
Dear Mr. Scheidt:
J.P. Morgan Securities Inc. ("JPMSI") and certain affiliates and various
money market fund industry participants have been working with representatives of the
Board of Governors of the Federal Reserve System and the Federal Reserve Bank of
New York (the "Federal Reserve") on the establishment of a temporary program (the
"Program") designed to provide liquidity to open-end management investment
companies registered with the Securities and Exchange Commission (the "Commission")
under the Investment Company Act of 1940, as amended (the "1940 Act7') that hold
themselves out as money market funds and are operated in compliance with Rule 2a-7
under the 1940 Act ("money funds"). The Program was announced by the Federal
Reserve on October 2 1,2008 as the Money Market Investor Funding Facility ("MMIF").
Securities and Exchange Commission
The Program may be expanded in the future to permit persons other than money funds to
sell eligible assets to the SPVs.
The Program raises certain interpretative and other issues under the 1940
Act and the rules thereunder for: (i) all money funds eligible to participate in it, and (ii)
the money funds (the "Funds") advised by J.P. Morgan Investment Management Inc. and
J.P. Morgan Investment Advisors Inc. (collectively, "JPMIM"). JPMIM and JPMSI are
wholly owned subsidiaries of JPMorgan Chase & Co ("JPM). In order to permit money
funds, including the Funds, to take advantage of the Program, we hereby respectfully
request that the Division of Investment Management (the "Division") provide the
interpretive and no action relief requested below.
I. Background
A. Description of the Program
The Program contemplates the establishment of special purpose vehicles
("SPVs") that will purchase eligible assets (consisting of commercial paper, bank notes,
and certificates of deposit issued primarily' by eligible banks, bank holding companies
and captive finance companies, having remaining maturities of 90 days or less, and
satisfying certain ratings criteria) from money funds. The eligible assets will be acquired
at prices equal to the selling money funds' acquisition cost as adjusted for amortization of
premium or accretion of discount through the date of its purchase by the SPV. The
purchase price paid to the money funds will be cash (up to 90% of the purchase price2)
and asset backed commercial paper ("Commercial Paper Notes") of the SPVs (at least
equal to 10% of the purchase price2). Each SPV will hold eligible assets of identified
I It is expected that commercial paper of two highly rated issuers that are not banks or bank holding
companies will be eligible assets.
2 The cash portion of the purchase price may be slightly less than 90%, and the Commercial Paper
Notes portion of the purchase price may be slightly more than lo%, due solely to rounding.
Securities and Exchange Commission -3issuers
(up to 1 03). Unless a corporate event (such as an acquisition) affects the issuers of
eligible assets held by an SPV, no SPV will own securities of an issuer whose securities
constitute eligible assets of another SPV.~In addition, after an initial "ramp up" period,
no SPV will purchase securities of an issuer if as a result of such purchase more than
15% of its assets would, on such purchase date, constitute securities of such issuer. Such
concentration limits were negotiated with industry participants and designed to result in
satisfactory ratings of the Commercial Paper Notes from three nationally recognized
statistical rating organizations ("NRsRos").~ JPMSI will be the structuring agent
("Structuring Agent") and referral agent ("Referral Agent") for each SPV, as well as the
placement agent (the "Placement Agent") for the sales of Commercial Paper Notes by the
SPVs.
The portfolio composition of the SPVs has been determined based upon
JPMSI's analysis of the most significant issuers of eligible assets meeting the ratings
criteria. Such issuers were grouped by JPMSI based on the amount of eligible assets
outstanding by the various issuers, the maximum size of the respective SPVs and the
geographic origins of the issuers, all in order to obtain reasonable diversification of asset
pools consistent with the desired ratings of the Commercial Paper Notes. Under the
Program, each SPV is expected to purchase any and all eligible assets tendered to it
subject to the issuer and concentration limits (after an initial "ramp up" period) and to the
pre-established limit on the SPV7s total size. However, each SPV will have the discretion
to accept or reject any security presented to it by the Referral Agent as satisfying the
3 Ten issuers will be specified for each SPV, and it is expected that each will hold eligible assets
issued by all 10 issuers. However, actual holdings will depend on what is sold to the SPVs by the
money funds that participate in the Program.
4 Several of the issuers whose securities constitute eligible assets of an SPV have entered into
agreements to acquire an issuer of eligible assets that may be held by another SPV. If these
acquisitions are completed, the obligations relating to some or all debt securities issued by the
acquired issuer may be assumed by the acquiring issuer.
5 It is expected that the Commercial Paper Notes of each of the SPVs will be rated A-1, P-1 and F1.
Securities and Exchange Commission -4applicable
eligibility requirements. No money fund participating in the Program will be
treated on a basis different fiom or less advantageous than that of the other participants.
If on a single day money funds seek to sell assets to an SPV in amounts that would cause
any such limit to be exceeded, the proposed sales by such money funds will be pro rated
by JPMSI as Referral ~ ~ e nThte~ re.la tive portfolio diversification is expected to differ
fiom time to time based on the maturity of eligible assets and the purchases by the SPVs
of available eligible assets.
The Federal Reserve Bank of New York (the "Lender") will enter into a
senior loan agreement with each SPV and will agree to lend it the money to finance up to
90%~of the purchase price of the eligible assets acquired from money funds (the
"Loans"). The Commercial Paper Notes will be issued to the money funds for the
balance of 10% or more7 of the purchase price. Each SPV will grant a security interest in
its assets to a collateral agent for the benefit of, inter alia, the Lender and the holders of
the Commercial Paper Notes. The Lender will have a right to payment that is senior to
the right of the holders of the Commercial Paper Notes (except with respect to interest
owing on any Loan exceeding a specified rate (the "Excess Loan Interest")) from
collections on the eligible assets held by the SPV. The holders of the Commercial Paper
Notes will have a right to payment that is junior to the payment rights of the Lender
6 The proration methodology to be used by the Referral Agent is designed to ensure that all money
funds wishing to participate in the Program are treated equally. It is expected that the proration
process will be iterative to the extent operationally feasible to allow money funds to maximize
their liquidity through participation in the Program. Such process will involve the Referral Agent
notifying each money fund whose sales would be subject to proration in respect of the securities of
an issuer ("Issuer A") of such fact and noting that the money fund may have the opportunity to
contribute other eligible assets on a non-pro rated basis. To the extent the contributions of other
eligible assets by money funds in a subsequent iteration results in additional capacity by an SPV to
accept additional eligible assets issued by Issuer A, all money funds subject to proration in the
earlier iteration will be permitted to contribute additional securities of Issuer A on a pro rata basis.
Minimum contribution amounts may be established for eligible assets for operational efficiency
reasons.
7 See supra note 2.
Securities and Exchange Commission -5(
except with respect to the Excess Loan Interest). The composition of the collateral pool
of each SPV will change over time as eligible assets mature and as additional eligible
assets are sold to the SPVs.
The Commercial Paper Notes will be "match funded" with each eligible
asset sold to the SPV (the Commercial Paper Note issued in partial payment for each
eligible asset will have the same maturity as the eligible asset)' and will bear interest at a
rate that is a specified amount (expected to be approximately 25 basis points) lower than
the interest rate on such related eligible asset. Following the maturity of all Commercial
Paper Notes issued by an SPV, in connection with the winding up of the SPV, and subject
to available funds, all money funds that sold eligible assets to the SPV will be entitled to
receive their pro rata share of a contingent interest payment equal to the payment that
such money funds would have received if the interest rate of each Commercial Paper
Note issued to such money fund had been a specified amount (expected to be
approximately 50 basis points) greater. Any amounts held by the SPV after the discharge
of all of its obligations including the payment of such contingent interest will be payable
to the Lender. Because the Commercial Paper Notes will be match funded, a
Commercial Paper Note will be issued in respect of each eligible asset sold to an SPV.
B. Separate Commercial Paper Placement Agreements
JPMSI and at least one broker-dealer that is not affiliated with JPMSI
("Unaffiliated Dealer") will enter into separate commercial paper placement agreements
with each SPV. JPMSI and the Unaffiliated Dealer(s) will be named as dealers for the
Commercial Paper Notes. Each dealer is expected to be involved in the secondary
market for the Commercial Paper Notes (a secondary market for the Commercial Paper
Notes may develop over time). JPMSI, in its capacity as Placement Agent, will
intermediate all of the sales of eligible assets by money funds to the SPVs in exchange
It is possible that the maturity date of the Commercial Paper Notes will be one day after the
maturity date of the related eligible asset.
8
Securities and Exchange Commission -6for
cash and Commercial Paper Notes. In accordance with industry operational practice,
the Placement Agent will act as principal in these transactions. The Placement Agent
will act as "riskless principal" in connection with all sales of eligible assets to SPVs and
all issuances of Commercial Paper Notes. Such transactions will be effected at the
money funds' amortized cost of the eligible assets. The Placement Agent will not earn a
spread on sales of eligible assets to the SPVs or the related issuances of Commercial
Paper Notes or receive any compensation from the SPVs for its services as Placement
~ ~ e n t . ~
C. Involvement of JPMSI and an Affiliate in the Program
As Structuring Agent JPMSI designed and coordinated all aspects of the
development of the Program, including negotiation of the various arrangements with the
Federal Reserve and industry participants and consultation with the NRSROs. As
Referral Agent JPMSI will be responsible for identifying eligible sellers and assets to the
SPVs including implementation of the concentration limits and ensuring that the
maximum capacity of each SPV is not breached, which is expected to involve proration
of proposed sales of eligible assets to the SPVs as discussed above. As Placement Agent
and a dealer, JPMSI will provide the services described in Section I(B). JPMorgan Chase
Bank, N.A. (the "Bank") will be the collateral agent and the depositary and issuing and
paying agent for certain of the SPVs, and a bank that is not affiliated with the Bank will
serve as the collateral agent and issuing and paying agent for the other SPVs. The holder
of the nominal equity in each SPV will be an affiliate of G.S.S. Holdings, Inc. ("GSS"),
an entity that is not affiliated with the Bank or any asset management company. An
Because of operational considerations relating to, among other thngs, the expected need of the
Referral Agent to pro-rate proposed purchases of eligible assets by the SPVs in light of their
concentration limits and the limit on each SPV's total assets, it is not considered to be
operationally practicable for there to be more than one dealer transacting with money funds on the
sales of eligible assets to each SPV.
9
Securities and Exchange Commission
affiliate of GSS will provide certain management and administrative services to the
SPVs.
D. Other Features of the Program
The fees and certain expenses of JPMSI (for its services as Structuring
Agent, Referral Agent, and Placement Agent for each SPV), the Bank, GSS, the
Unaffiliated Placement Agent(s), counsel, auditors, and other service providers will be
financed by the spread between the interest payable on the Commercial Paper Notes and
the Loans, on the one hand, and the interest earned on the eligible assets, on the other
hand.
In the event that the short-term debt rating of any issuer of eligible assets
held by an SPV is downgraded below A-1, P-1 or F1 or an issuer's long term-debt rating
is downgraded below A+, the SPV will no longer be entitled to purchase eligible assets or
to issue Commercial Paper Notes. In such circumstances the SPV will be entitled to
borrow money from the Lender only to the extent required to pay principal and interest
on any outstanding Loan until such time as all eligible assets issued by any downgraded
issuer have matured.
In the event of a payment default by an issuer with respect to an eligible
asset held by an SPV, the SPV will no longer be entitled to purchase eligible assets or to
issue Commercial Paper Notes. In such circumstances the SPV will continue to pay
amounts due on any outstanding Loan (except for Excess Loan Interest) and will cease
paying amounts due on all Commercial Paper Notes until such time as all Commercial
Paper Notes have matured, at which time it will pay, from all available funds, in the
following order of priority, all amounts owing to the Federal Reserve on any outstanding
Loan (except for Excess Loan Interest) and to the extent additional amounts are available,
all amounts owing on outstanding Commercial Paper Notes pro rata.
The SPVs will cease purchasing assets on April 30,2009, unless the
Program is extended by the Federal Reserve.
Securities and Exchange Commission
E. Program Goal
The Program is intended to respond to current illiquidity in the market for
money market instruments and to alleviate the risk of forced sales by money funds at
substantial discounts from amortized cost in order to meet redemptions. It is expected
that the cash received by the money funds from the SPVs will be used for investment in
Rule 2a-7 eligible money market instruments and to finance redemptions. Investments of
a portion of the cash received by money funds from the SPVs is expected to enhance the
liquidity of the commercial paper market, which is an important policy goal of the
Federal Reserve as evidenced by various recently announced initiatives including the
Federal Reserve's Asset-Backed Commercial Paper Money Market Fund Liquidity
Facility ("AMLF") and the Commercial Paper Funding Facility ("CPFF").
F. Board Review of Money Fund Participation in the Program
At least quarterly, the board of directors or trustees, including a majority
of the independent directors or trustees, of each money fund that wishes to rely on the
interpretative position and no action positions of the Division in response to this letter,
shall review the money fund's participation in the Program during the preceding quarter,
and make a determination whether continued participation in the Program is in the best
interests of the money fund and its shareholders.
11. Legal Analysis
A. Relief Applicable for All Funds
(i) Rule 2a-7 under the 1940 Act
(a) Definition of "Asset Backed Security"
Rule 2a-7(a)(3) defines "Asset Backed Security" as a "fixed income
security (other than a Government security [as defined in the rule]) issued by a Special
Purpose Entity (as defined in this paragraph), substantially all of the assets which consist
of Qualifying Assets [as defined in the rule]." "Special Purpose Entity" is defined as an
"entity organized for the sole purpose of issuing securities that entitle their holders to
Securities and Exchange Commission -9receive
payments that depend primarily on the cash flow from Qualifying Assets, but
does not include a registered investment company."'0
The assets of the SPVs will be Qualifying Assets, and the Commercial
Paper Notes to be issued by the SPVs will entitle their holders to receive payments that
depend primarily on the cash flow fi-om the qualifying assets. However, the SPVs will
arguably not be organized "solely" for the purpose of issuing asset-backed securities,
since it could be said that the principal purpose of the SPVs is to provide liquidity to
money funds in respect of certain of their assets. Accordingly, we respectfully request
the Division to concur in our view that the Commercial Paper Notes may be treated as
Asset Backed Securities (as defined in Rule 2a-7 under the 1940 Act).
(b) Portfolio DiverszJication
Rule 2a-7(c)(4)(i)(A) under the 1940 Act generally requires that,
immediately after the acquisition of any security, a taxable fund not have invested more
than 5% of its Total Assets (as defined in Rule 2a-7(a)(25)), invested in securities issued
by the issuer of the security. Rule 2a-7(~)(4)(ii)(D)(l)(i)p rovides an exception to the
general rule that an Asset Backed Security acquired by a fund ("Primary ABS") shall be
deemed to be issued by the Special Purpose Entity that issued the Primary ABS.
Specifically, any person whose obligations constitute ten percent or more of the principal
amount of the Qualifying Assets of the Primary ABS ("Ten Percent Obligor") shall be
deemed to be an issuer of the portion of the Primary ABS such obligations represent.
The determination of which persons are Ten Percent Obligors for purposes of this test
must be made on an ongoing basis if the Qualifying Assets of a Primary ABS change
over time.
Given the structure of the SPVs and the limitations on the number of
issuers of eligible assets for each (lo), it is expected that there will be several Ten Percent
10 Rule 2a-7(a)(3) under the 1940 Act.
Securities and Exchange Commission
Obligors for each such SPV (the concentration limitations applicable to the SPVs will
preclude an SPV from purchasing securities of an issuer if such purchase would result in
more than 15% of the SPV7s assets being invested in securities of such issuer). However,
because of the nature of the SPVs and the Commercial Paper Notes, including the fact
that the composition of the collateral pool of each SPV will change over time (as
frequently as every business day), and the subordinated nature of the Commercial Paper
Notes), the holder of a Commercial Paper Note must assume that the entire amount of
such security is exposed to the credit risk of each issuer whose securities may be held by
the SPV.
We understand that, as a consequence primarily of redemptions, a number
of money funds are close to or have exceeded the 5% limits in many of the issuers that
are expected to be included in the proposed SPVs. Accordingly, if the Ten Percent
Obligor provisions discussed above are held to apply to the Commercial Paper Notes, the
benefits of the Program may be only partially available, or not available at all, to many
money funds which desire to participate in the Program, not to carry out an active
investment program but rather to fund redemption requests through access to the liquidity
the Program offers. These are the money funds whose diversification tests are most
difficult to satisfy because as total assets in these funds decline, the percentage
represented by each position in the entire fund increases. We note that if a money fund
looking for additional liquidity could easily sell its holdings in the open market and use
the proceeds to meet redemptions, the result would still be an increase in the percentage
of other holdings (including those at 5%) consistent with the requirements of Rule 2a-7.
The Program, used for the same reason of meeting redemption requests, could be viewed
in a similar way. The money funds that participate would not be making an active
decision to buy the underlying names (other than as part of their credit analysis of the
Commercial Paper Notes) and would be receiving the Commercial Paper Notes as a
required consequence of the transaction.
In light of the foregoing, the unusual nature of the Commercial Paper
Notes, the liquidity issues confronting money funds that have led the Federal Reserve to
Securities and Exchange Commission -1 1-
support the creation of the Program, and the temporary nature of the Program, we request
that the Division give its assurance that it will not recommend that the Commission take
enforcement action under Sections 2(a)(41), 34(b) and 35(d) of the 1940 Act and Rules
2a-4 and 22c-1 thereunder" if money funds investing in the Commercial Paper Notes
comply with Rule 2a-7's diversification requirement through an alternative method and
subject to the conditions described below. Under this alternative method money funds
would not "look through" the SPVs in applying the Rule 2a-7 diversification test by
virtue of the otherwise applicable requirements of Rule 2a-7(~)(4)(ii)(D)(l)(i)in
connection with acquisitions of Commercial Paper Notes resulting from sales of eligible
assets by money funds, provided the following conditions are met:
1. A money fund may not acquire Commercial Paper Notes issued by
SPVs if it would result in such securities collectively (i.e.,Commercial Paper Notes
issued by all SPVs added together) exceeding 2.5% of the money fund's Total Assets (as
defined in Rule 2a-7(a)(25));
2. All Commercial Paper Notes must be First-Tier Securities (as defined
in Rule 2a-7(a)(12)) when acquired by a money fund; and
3. For purposes of making additional purchases of securities of an issuer
(where that issuer is one of the 10 issuers the securities of which may be held by a SPV),
the money fund must add the entire value of the Commercial Paper Notes it holds to the
I I As noted in footnote 1 in Eaton Vance Management (available June 13,2008), money funds that
do not meet, inter alia, the requirements of Rule 2a-7(c)(4) may violate Sections 34(b) and 35(d)
of the 1940 Act. See Rule 2a-7(b) under the 1940 Act. Section 34(b), in relevant part, prohibits
any person from making an untrue statement of material fact in a registration statement or other
document filed pursuant to the 1940 Act. Section 35(d) prohibits registered investment companies
from adopting as part of their name or title any words or words that the Commission finds are
materially deceptive or misleading. Money funds that fail to satisfy the requirements of Rule 2a-
7(c)(4) may also violate Rule 22c-1, which requires open-end registered investment companies to
sell and redeem their shares at a price based on current net asset value, if they use the amortized
cost method, as defined in Rule 2a-7(a)(2). Section 2(a)(41) and Rule 2a-4 provide definitions for
the terms "value" and "current net asset value" as used in the 1940 Act and the rules thereunder,
respectively.
12
Securities and Exchange Commission
value of other holdings of securities of the issuer held by the money fund for
diversification purposes.12
4. If a money fund purchases Commercial Paper Notes in the secondary
market (i.e., not in connection with a sale of eligible assets to an SPV pursuant to the
Program), it must treat such Commercial Paper Notes as set forth in condition No. 3
above for purposes of the diversification requirements of Rule 2a-7 (i.e., prior to such
purchase, it must consider the entire value of each Commercial Paper Note as additional
exposure to each of the issuers whose securities may be held by the SPV that issued the
Commercial Paper Notes for diversification purposes).
(ii) Section 12(d)(3) and Rule 12d3-1
Section 12(d)(3) of the 1940 Act generally prohibits a registered fund
from investing in securities issued by or any other interest in the business of any person
who is a broker, a dealer, is engaged in the business of underwriting, or is either an
investment adviser of an investment company or an investment adviser registered under
the Investment Advisers Act. Rule 12d3-1 under the 1940 Act provides exemptions from
such prohibition, but is not available to permit a registered fund to acquire securities
issued by the fund's principal underwriter, investment adviser or any affiliated person of
any such person.
While the securities of the SPVs will not be issued by affiliated persons of
any fund's investment adviser or principal underwriter, many funds are advised by
For example, if 4.5% of a money fund's net assets are accounted for by securities of XYZ, and it
acquires Commercial Paper Notes issued by an SPV (where one of the securities that may be held
by the SPV is XYZ) equal to 1% of the money fund's net assets, the money fund would have a
5.5% exposure to XYZ and be precluded from making additional purchases of XYZ securities
unless and until its percentage exposure (including the exposure from the Commercial Paper
Notes) to XYZ is reduced below 5%. Likewise, if a money fund owns no securities of ABC and
acquires Commercial Paper Notes issued by an SPV (where one of the securities that may be held
by the SPV is ABC) having a value equal to 2% of the money fund's net assets, the money fund
would have a 2% exposure to ABC for purposes of computing the amount of ABC securities it
may purchase and be within the 5% diversification limit.
Securities and Exchange Commission
affiliated persons of financial institutions that have significant securities related
businesses and are also major issuers of eligible assets. It could be argued that by
investing in Commercial Paper Notes issued by an SPV that holds eligible assets issued
by an affiliated person of its investment adviser or principal underwriter, a fund is
engaging in a transaction that implicates the prohibition in Section 12(d)(3). However,
the adoption of such a view might have a very adverse effect on such a fund, since it
would thereby be precluded from reducing its exposure to the securities of the nine
issuers held by the SPV that are not affiliates, and which would be held by no other SPV.
This would be contrary to the goals of the Program, and would also be unreasonable
given that the Commercial Paper Notes would be issued by an SPV to which the
affiliated money fund contributed no affiliated issuer assets (since it may not own such
assets), and the issuers of eligible assets for each SPV will be selected with a view to
obtaining the desired ratings from NRSROs, none of which will be an affiliated person of
the investing money market funds. Moreover, in light of the current market
circumstances, the high quality of all eligible assets held by an SPV and the policy of
Section 12(d)(3), which is to prevent funds fiom using their assets to support affiliates,
prohibiting a fund from contributing eligible assets issued by nine other issuers because
the tenth is an affiliated person would be inequitable. Accordingly, we respectfully
request that the Division give its assurance that it will not recommend that the
Commission take enforcement action under Section 12(d)(3) against a money fund in
connection with its participation in the Program.
B. Relief Applicable Only to the Funds Advised by JPMIM
The Bank and JPMSI have worked with the Federal Reserve to develop
the SPVs and Commercial Paper Notes to deal with an unprecedented crisis in market
liquidity for the benefit of the money fund industry. The Funds are among the largest in
the industry. It would be inappropriate for them to be precluded from accessing
additional liquidity from selling assets to the SPVs to the extent JPMIM concludes that
doing so is in the best interests of the Funds because of the involvement of JPMIM7s
affiliates in the design and operation of the SPVs. Accordingly, we respectfully request
Securities and Exchange Commission
the Division to provide interpretative or no action relief as discussed below to permit
such participation.
(i) Section 17(a)(2) of the 1940 Act
Section 17(a)(2) of the 1940 Act prohibits any affiliated person of a
registered investment company fi-om knowingly selling a security to, or purchasing a
security from, such registered investment company. As JPMSI is an affiliated person (as
defined under Section 2(a)(3) of the 1940 Act) of each of the Funds, without Section
17(a) relief the Funds would be precluded fkom participating in the Program.
The Division has granted such relief in a situation analogous to the
situation here. In Investment Company Institute (available Sept. 25,2008), the
Investment Company Institute ("ICY) requested assurance from the Division that it
would not recommend enforcement action to the Commission under Section 17(a) or the
rules thereunder, if a bank purchases a security from an affiliated money fund in
accordance with the terms of the AMLF program, which involved payment to the fund of
the amortized cost of each security. In its request letter, the ICI stated that while it
believed that the proposed transactions would meet standards for the Commission to issue
an exemptive order under Section 17(b) of the 1940 ~ c t ,in' ~lig ht of the temporary
nature of the relief and the potential immediacy of the need of it, it was requesting the
Division's no action assurances rather than an order exempting the transactions pursuant
to Section 17(b). In Investment Company Institute, the Division stated that based on the
facts and representations in the ICIYsle tter it would not recommend enforcement action
to the Commission under Section 17(a)(2) against any bank for engaging in the proposed
Section 17(b) of the 1940 Act authorizes the Commission to grant an order exempting a proposed
transaction from one or more of the provisions of Section 17(a) if: (1) the terms of the proposed
transaction, including the consideration to be paid or received, are reasonable and fair and to not
involve overreaching on the part of any person concerned; (2) the proposed transactions is
consistent with the policy of each registered investment company concerned; and (3) the proposed
transaction is consistent with the general purposes of the 1940 Act.
13
Securities and Exchange Commission -15transactions.
In reaching its conclusion the Division noted the ICI's representations that:
(i) the AMLF requirement that banks purchase securities from money funds in
accordance with the terms of the program addresses concerns about overreaching that
Section 17(a) was designed to prevent because each purchase will be effected at the
amortized cost of the security; (ii) the terms of the transactions would comply with the
terms of Rule 17a-9 under the 1940 ~ c t ,e'x~ce pt that the purchased securities may
continue to be "eligible securities" as defined in Rule 2a-7 under the 1940 Act; (iii) the
securities to be purchased from a fund would be determined by the hnd's adviser, and
such determination would be made consistent with the adviser's fiduciary duties to the
fund, and in the best interests of the fund's shareholders; and (iv) the fund will keep and
maintain records of these transactions as required by Rules 3 1 a-1 and 3 1 a-2 under the
1940 Act.
As in Investment Company Institute, the Program's requirement that the
Placement Agent effect sales of eligible assets by money funds to SPVs and related
issuances of Commercial Paper Notes at the amortized cost of the eligible assets
addresses concerns about potential overreaching. We further note that the terms of such
transactions would comply with the terms of Rule 17a-9 under the 1940 Act, except that
the securities involved may continue to be "eligible securities" and up to 90% of the
purchase price will be paid in cash, with the balance paid in Commercial Paper Notes. In
addition, a sale of eligible assets by the Funds to SPVs will be effected only when the
amortized cost of the eligible assets being sold to an SPV is equal to or greater than the
market value of the eligible assets at the time of the transaction, and the transaction is
determined by JPMIM to be consistent with JPMIM's fiduciary duty to the relevant Fund
Rule 17a-9 exempts from Section 17(a) the purchase of a security that is no longer an Eligible
Security, as defined in Rule 2a-7, from an open-end investment company holding itself out as a
"money market" fund, provided that: (1) the purchase price is paid in cash; and (2) the purchase
price is equal to the greater of the amortized cost of the security or its market price (in each case,
including accrued interest).