
[Federal Register Volume 77, Number 226 (Friday, November 23, 2012)]
[Rules and Regulations]
[Pages 70117-70121]
From the Federal Register Online via the Government Printing Office [www.gpo.gov]
[FR Doc No: 2012-28456]


-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release No. IC-30268; File No. S7-07-11]
RIN 3235-AL02


Purchase of Certain Debt Securities by Business and Industrial 
Development Companies Relying on an Investment Company Act Exemption

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

-----------------------------------------------------------------------

SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting a new rule under the Investment Company Act of 1940 
(``Investment Company Act'') to establish a standard of credit-
worthiness in place of a statutory reference to credit ratings that the 
Dodd-Frank Wall Street Reform and Consumer Protection Act (``Dodd-Frank 
Act'') removes. The rule will establish the standard of credit quality 
that must be met by certain debt securities purchased by entities 
relying on the Investment Company Act exemption for business and 
industrial development companies.

DATES: Effective date: December 24, 2012.

FOR FURTHER INFORMATION CONTACT: Anu Dubey, Senior Counsel, or Penelope 
Saltzman, Assistant Director (202) 551-6792, Office of Regulatory 
Policy, Division of Investment Management, Securities and Exchange 
Commission, 100 F Street NE., Washington, DC 20549-8549.

SUPPLEMENTARY INFORMATION: The Commission is adopting new rule 6a-5 [17 
CFR 270.6a-5] under the Investment Company Act.\1\
---------------------------------------------------------------------------

    \1\ 15 U.S.C. 80a-1. 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 part 270].
---------------------------------------------------------------------------

Table of Contents

I. Background
II. Discussion
III. Paperwork Reduction Act
IV. Economic Analysis
V. Final Regulatory Flexibility Analysis
Statutory Authority
Text of Rule

I. Background

    The Dodd-Frank Act was enacted on July 21, 2010.\2\ Section 939(c) 
of the Dodd-Frank Act removes a reference to credit ratings from 
section 6(a)(5) of the Investment Company Act and replaces it with a 
reference to ``such standards of credit-worthiness as the Commission 
shall adopt.'' \3\ To implement this mandate, last year the Commission 
proposed new rule 6a-5 under the Investment Company Act that would 
establish a credit-worthiness standard to replace the credit rating 
reference in section 6(a)(5) of that Act that the Dodd-Frank Act 
eliminates.\4\ We received one comment letter regarding proposed rule 
6a-5, which we discuss below.\5\ Today, we are adopting new rule 6a-5, 
which implements section 939(c) of the Dodd-Frank Act.
---------------------------------------------------------------------------

    \2\ Public Law 111-203, 124 Stat. 1376 (2010).
    \3\ Section 939(c) of the Dodd-Frank Act (amending section 
6(a)(5)(A)(iv)(I) of the Investment Company Act). This amendment to 
the Investment Company Act becomes effective on July 21, 2012. See 
section 939(g) of the Dodd-Frank Act.
    \4\ See References to Credit Ratings in Certain Investment 
Company Act Rules and Forms, Investment Company Act Release No. 
29592 (Mar. 3, 2011) [76 FR 12896 (Mar. 9, 2011)] (``2011 Proposing 
Release''). In that release, we also proposed amendments to replace 
references to credit ratings in rules 2a-7 and 5b-3 under the 
Investment Company Act and Forms N-1A, N-2, N-3 and N-MFP under the 
Investment Company Act and the Securities Act of 1933 (15 U.S.C. 
77a). Those proposed amendments would implement section 939A of the 
Dodd-Frank Act, which requires the Commission to review its 
regulations for any references to or requirements regarding credit 
ratings that require the use of an assessment of the credit-
worthiness of a security or money market instrument, remove these 
references or requirements, and substitute in those regulations 
other standards of credit-worthiness that we determine to be 
appropriate. We intend to address the proposed amendments to rule 
2a-7, rule 5b-3 and Forms N-1A, N-2, N-3 and N-MFP separately. Rule 
3a-7 under the Investment Company Act also contains a reference to 
ratings. In August 2011, in a concept release soliciting comment on 
the treatment of asset-backed issuers under the Investment Company 
Act, we sought comment on the role, if any, that credit ratings 
should continue to play in the context of rule 3a-7. See Treatment 
of Asset-Backed Issuers under the Investment Company Act, Investment 
Company Act Release No. 29779 (Aug. 31, 2011) [76 FR 55308 (Sept. 7, 
2011)] at Section III.A.1.
    \5\ The comment letters on the 2011 Proposing Release (File No. 
S7-07-11) are available at http://www.sec.gov/comments/s7-07-11/s70711.shtml. In addition, to facilitate public input on the Dodd-
Frank Act, we provided a series of email links, organized by topic 
on our Web site at http://www.sec.gov/spotlight/regreformcomments.shtml. The public comments we received in response 
to our solicitation for comment on Title IX of the Dodd-Frank Act 
(which includes sections 939 and 939A) are available on our Web site 
at http://www.sec.gov/comments/df-title-ix/credit-rating-agencies/credit-rating-agencies.shtml.
---------------------------------------------------------------------------

II. Discussion

    Business and industrial development companies (``BIDCOs'') are 
companies that operate under state statutes that provide direct 
investment and loan financing, as well as managerial assistance, to 
state and local enterprises.\6\ Because they invest in securities, 
BIDCOs frequently meet the definition of ``investment company'' under 
the Investment Company Act.\7\ In 1996, the Investment Company Act was 
amended to add section 6(a)(5) to exempt these companies from most 
provisions of the Act subject to certain conditions.\8\ The statutory 
exemption was premised on states having a strong interest in overseeing 
the structure and operations of these companies, thus rendering 
regulation under the Investment Company Act largely duplicative and 
unnecessary.\9\
---------------------------------------------------------------------------

    \6\ See Report of the Senate Committee on Banking, Housing and 
Urban Affairs to Accompany S. 479, S. Rep. No. 103-166, at 11 (1993) 
(``1993 Senate Report'').
    \7\ For purposes of the Investment Company Act, an ``investment 
company'' means any issuer that: (A) Is or holds itself out as being 
engaged primarily, or proposes to engage primarily, in the business 
of investing, reinvesting, or trading in securities; (B) is engaged 
or proposes to engage in the business of issuing face-amount 
certificates of the installment type, or has been engaged in such 
business and has any such certificate outstanding; or (C) is engaged 
or proposes to engage in the business of investing, reinvesting, 
owning, holding, or trading in securities, and owns or proposes to 
acquire investment securities having a value exceeding 40 per centum 
of the value of such issuer's total assets (exclusive of government 
securities and cash items) on an unconsolidated basis. 15 U.S.C. 
80a-3(a)(1).
    \8\ 15 U.S.C. 80a-6(a)(5); Public Law 104-290 Sec.  501, 110 
Stat. 3416, 3444 (1996). Section 6(a)(5)(B) provides that section 9 
and, to the extent necessary to enforce section 9, sections 38 
through 51, apply to a BIDCO as though the company were a registered 
investment company. Among other conditions to reliance on the 
exemption in section 6(a)(5), a BIDCO may not issue redeemable 
securities.
    \9\ See 1993 Senate Report, supra note 6, at 19 (further stating 
that states are well positioned to monitor these companies and 
address the needs of resident investors). Prior to the addition of 
section 6(a)(5), the Commission had granted orders to exempt BIDCOs 
from regulation under the Act. See, e.g., The Idaho Company, 
Investment Company Release Nos. 18926 (Sept. 3, 1992) (notice) and 
18985 (Sept. 30, 1992) (order).
---------------------------------------------------------------------------

    BIDCOs that seek to rely on the exemption in section 6(a)(5) are 
limited with respect to the types of securities issued by investment 
companies and companies exempt from the definition of investment 
company under section 3(c)(1) or 3(c)(7) of the Investment Company Act 
(``private funds'') that they may purchase. Specifically, section 
6(a)(5)(A)(iv) prohibits these BIDCOs from purchasing securities issued 
by investment companies and private funds other than debt securities 
that are rated investment grade by at least one NRSRO and securities 
issued by registered open-end investment companies that invest at least 
65 percent of their assets in investment grade

[[Page 70118]]

securities or securities that the fund determines are comparable in 
quality.\10\ This provision was intended to provide limited flexibility 
to invest capital not immediately needed for the company's long-term 
commitments.\11\ Although the legislative history of the provision does 
not specifically explain why Congress restricted BIDCOs to acquiring 
``investment grade'' debt of investment companies and private funds, as 
we noted in the 2011 Proposing Release, it may have been designed to 
limit BIDCOs to investing in debt securities of sufficiently high 
credit quality that they are likely to maintain a fairly stable market 
value and that could be liquidated easily, as appropriate, for the 
BIDCO to support its investment and financing activities.\12\
---------------------------------------------------------------------------

    \10\ 15 U.S.C. 80a-6(a)(5)(A), as in effect prior to July 21, 
2012 (exempting any company that is not engaged in the business of 
issuing redeemable securities, the operations of which are subject 
to regulation by the State in which the company is organized under a 
statute governing entities that provide financial or managerial 
assistance to enterprises doing business, or proposing to do 
business in that state if, among other things, the company does not 
purchase any security issued by an investment company or by any 
company that would be an investment company except for the 
exclusions from the definition of the term ``investment company'' 
under sections 3(c)(1) or 3(c)(7), other than (I) any debt security 
that is rated investment grade by not less than 1 nationally 
recognized statistical rating organization; or (II) any security 
issued by a registered open-end fund that is required by its 
investment policies to invest not less than 65% of its total assets 
in securities described in subclause (I) or securities that are 
determined by such registered open-end fund to be comparable in 
quality to securities described in subclause (I)).
    \11\ See 1993 Senate Report, supra note 6, at 20.
    \12\ See 2011 Proposing Release, supra note 4, at Section II.D.
---------------------------------------------------------------------------

    As described above, section 939(c) of the Dodd-Frank Act eliminates 
the credit rating reference in section 6(a)(5)(A)(iv) of the Investment 
Company Act. Instead of limiting BIDCOs to purchasing debt securities 
issued by investment companies and private funds that are rated 
``investment grade,'' the amendment requires such debt securities to 
meet ``such standards of credit-worthiness as the Commission shall 
adopt.''
    We do not understand that the statutory amendment was intended to 
change the standard of credit quality represented by an investment 
grade rating. Accordingly, we are adopting rule 6a-5, as proposed, to 
establish a standard of credit-worthiness designed to achieve the same 
degree of risk limitation as the credit rating it replaces. Rule 6a-5 
deems a BIDCO to have met the requirements for credit-worthiness of 
certain debt securities under section 6(a)(5)(A)(iv)(I) if the board of 
directors or members of the company (or its or their delegate) 
determines, at the time of purchase, that the debt security is (i) 
subject to no greater than moderate credit risk and (ii) sufficiently 
liquid that the security can be sold at or near its carrying value 
within a reasonably short period of time.\13\ The board of directors or 
members of a BIDCO (or its or their delegate) would have to make this 
determination at the time of acquisition of the securities.\14\ As a 
result of rule 6a-5, section 6(a)(5) of the Investment Company Act will 
also limit a BIDCO's investments in registered open-end funds to those 
funds that invest at least 65 percent of their assets in debt 
securities that meet our standard.\15\
---------------------------------------------------------------------------

    \13\ Rule 6a-5. The standard for credit-worthiness that we are 
adopting in rule 6a-5 is similar to the standard that we adopted in 
rule 10f-3 under the Investment Company Act. Rule 10f-3 defines 
eligible municipal securities as securities that are sufficiently 
liquid that they can be sold at or near their carrying value within 
a reasonably short period of time and either are subject to no 
greater than moderate credit risk or, if the issuer has been in 
operation for less than three years, the securities are subject to a 
minimal or low amount of credit risk. See rule 10f-3(a)(3).
    \14\ Rule 6a-5.
    \15\ Section 6(a)(5)(A)(iv)(II) (permitting a BIDCO to purchase 
any security issued by a registered open-end fund that is required 
by its investment policies to invest not less than 65% of its total 
assets in securities described in subclause (I) (i.e., securities 
that meet the standards of credit-worthiness that the Commission 
adopts) or securities that are determined by such registered open-
end fund to be comparable in quality to securities described in 
subclause (I)).
---------------------------------------------------------------------------

    The final rule does not, as one commenter suggested, include 
specific factors or tests that the board must apply in performing its 
credit analysis.\16\ We believe that the new credit quality standards 
(that the debt security be subject to no greater than moderate credit 
risk and be sufficiently liquid that it can be sold at or near its 
carrying value within a reasonably short period of time) are clear 
enough for a BIDCO's board or members (or its or their delegate) to 
understand the risks acceptable under the rule. We note that the number 
and scope of factors that may be appropriate to making a credit quality 
determination with respect to a security may vary significantly 
depending on the particular security. We are concerned that prescribing 
a list of specific factors in a rule today might function as a limit to 
the credit quality analysis that boards or members would undertake and 
may not address information that would be relevant to credit quality 
determinations regarding new types of debt securities that investment 
companies or private funds may issue and in which BIDCOs may invest in 
the future.\17\
---------------------------------------------------------------------------

    \16\ See Better Markets Comment Letter (Apr. 25, 2011) (``Better 
Markets Comment Letter'') (asserting that the proposed standard is 
vague and would undermine the reliability of a board's credit risk 
determinations and the board's accountability for such 
determinations).
    \17\ We also agree with this commenter, who acknowledged that a 
reliable and objective shorthand measure of credit risk that could 
be incorporated into Commission regulations is currently 
unavailable. See Better Markets Comment Letter.
---------------------------------------------------------------------------

    The standard we are adopting is designed to limit BIDCOs to 
purchasing debt securities issued by investment companies or private 
funds of sufficiently high credit quality that they are likely to 
maintain a fairly stable market value and may be liquidated easily, as 
appropriate, for the BIDCO to support its investment and financing 
activities.\18\ Debt securities (or their issuers) subject to a 
moderate level of credit risk would demonstrate at least average 
credit-worthiness relative to other similar debt issues (or issuers of 
similar debt).\19\ Moderate credit risk would denote current low 
expectations of default risk associated with the security, with an 
adequate capacity for payment by the issuer of principal and 
interest.\20\ In making their credit quality determinations, a BIDCO's 
board of directors or members (or its or their delegate) can also 
consider credit quality reports prepared by outside sources, including 
NRSRO ratings, that the BIDCO board or members conclude are credible 
and reliable for this purpose.
---------------------------------------------------------------------------

    \18\ See supra note 12 and accompanying text.
    \19\ See References to Ratings of Nationally Recognized 
Statistical Rating Organizations, Investment Company Act Release No. 
28939 (Oct. 5, 2009) [74 FR 52358 (Oct. 9, 2009)] at n.86 (release 
adopting amendments to rule 10f-3).
    \20\ Id.
---------------------------------------------------------------------------

III. Paperwork Reduction Act

    The Paperwork Reduction Act of 1995 (``PRA'') imposes certain 
requirements on federal agencies in connection with their conducting or 
sponsoring any collection of information as defined by the PRA. Rule 
6a-5 does not create any new collections of information.

IV. Economic Analysis

    As discussed above, we are adopting a new rule to implement section 
939(c) of the Dodd-Frank Act to replace a statutory reference to a 
credit rating with an alternative credit-worthiness standard. We 
considered the economic effects, including costs and benefits, of our 
proposed new rule in the 2011 Proposing Release and we discuss below 
the comment received related to our analysis.
    The Commission has discretion in adopting the alternative standard 
of credit-worthiness, and we undertake

[[Page 70119]]

below to discuss the economic effects of the new rule that are within 
our discretion under the Dodd-Frank Act, in addition to the economic 
effects of removing rating references from statutory provisions, as 
mandated by the Dodd-Frank Act itself. The two types of costs and 
benefits may not be entirely separable to the extent that our 
discretion is exercised to realize the benefits intended by the Dodd-
Frank Act. In evaluating the economic effects of new rule 6a-5, we 
compare section 6(a)(5) of the Investment Company Act, as currently in 
effect (which includes a reference to a rating), with the new rule we 
are adopting.
    Rule 6a-5 establishes a credit-worthiness standard under section 
6(a)(5)(A)(iv)(I) of the Investment Company Act. BIDCOs that seek to 
rely on the exemption in section 6(a)(5) of the Act are limited to 
investing in debt securities issued by investment companies and private 
funds if, at the time of purchase, the board of directors or members of 
the BIDCO (or its or their delegate) determines that the debt security 
is (i) subject to no greater than moderate credit risk and (ii) 
sufficiently liquid that the security can be sold at or near its 
carrying value within a reasonably short period of time.
    We anticipate that the adoption of rule 6a-5 may result in certain 
benefits. First, we do not understand that by amending section 6(a)(5), 
Congress intended to change the credit quality of the debt securities 
that BIDCOs may purchase and our rule is designed to establish a 
similar credit quality standard in order to achieve the same limitation 
on risk as the credit rating it replaces. In particular, the amended 
standard is designed to limit BIDCOs to purchasing debt securities 
issued by investment companies or private funds of sufficiently high 
credit quality that they are likely to maintain a fairly stable market 
value and may be liquidated easily, as appropriate, for the BIDCO to 
support its investment and financing activities. Second, the subjective 
credit quality standard in amended rule 6a-5 may provide BIDCOs greater 
flexibility in determining the pool of eligible debt securities in 
which they may invest. Finally, the credit quality standard in new rule 
6a-5 may further Congress' stated purpose of reducing reliance on 
ratings in the context of a BIDCO's purchase of certain debt 
securities.\21\
---------------------------------------------------------------------------

    \21\ See Report of the House of Representatives Financial 
Services Committee to Accompany H.R. 4173, H. Rep. No. 111-517, at 
871 (2010).
---------------------------------------------------------------------------

    We also recognize that BIDCOs may incur some costs as a result of 
the adoption of new rule 6a-5. These may be internal costs or costs to 
consult outside legal counsel to evaluate whether changes to any 
policies and procedures the BIDCOs may have currently for acquiring 
debt securities issued by investment companies or private funds may be 
appropriate in light of the new rule. We expect that, although not 
required by the Investment Company Act, as a matter of good business 
practice, directors or members of most BIDCOs that do not currently 
have them may prepare policies and procedures to make the credit 
quality and liquidity determinations required by the new rule. Staff 
estimates that BIDCOs will incur the costs of preparing the procedures 
for making determinations of credit quality and liquidity under the 
rule once, and directors and members of BIDCOs (or their delegates) 
will be able to follow these procedures for purposes of making future 
determinations under the rule. Commission staff estimated in the 2011 
Proposing Release that each BIDCO would incur, on average, an initial 
one-time cost of $1000 to prepare policies and procedures and an 
average of $1000 in annual costs for making credit determinations with 
respect to the acquisition of debt securities.\22\ We received no 
comments on those estimates. We note however, that under rule 6a-5, in 
evaluating whether debt securities issued by investment companies and 
private funds present moderate credit risk, boards of directors and 
members of BIDCOs (or its or their delegates) can consider credit 
quality determinations prepared by outside sources, including NRSRO 
ratings, that they conclude are credible and reliable for purposes of 
making these determinations, and we anticipate that many BIDCOs that 
invest cash in these types of debt securities will continue to do so. 
We expect that the ability to consider outside assessments will help 
minimize the burden on BIDCOs and contribute to a BIDCO's ability to 
make consistent and reliable credit quality determinations. 
Nevertheless, we recognize that some BIDCO boards or members may choose 
to hire consultants to assist in developing procedures and to make or 
oversee the determinations. Staff estimated in the 2011 Proposing 
Release that the cost to hire such consultants would be, on average, 
$8000 for each BIDCO.\23\ We received no comments on this estimate.
---------------------------------------------------------------------------

    \22\ See 2011 Proposing Release, supra note 4, at n.112. Staff 
does not have reliable data and is not aware of any databases that 
compile information regarding the number of existing BIDCOs. 
Moreover, we received no data from commenters. We note that some 
state regulators disclose the number of BIDCOs registered in the 
state on the regulators' Web sites. Of those that do, the number of 
registered BIDCOs ranges from one to 10. See, e.g., Louisiana Office 
of Financial Institutions at http://www.ofi.state.la.us/ (listing 10 
BIDCOs in a directory of active BIDCOs); California Department of 
Financial Institutions at http://www.dfi.ca.gov/directory/bidco.asp 
(listing one BIDCO in a directory of BIDCOs). We estimate that each 
BIDCO would incur on average a one-time burden of 4 hours for a 
senior business analyst (under board or member delegation) to 
develop policies and procedures for evaluating credit and liquidity 
risk (4 hours x $237 per hour = $948). The staff estimates that the 
internal cost for time spent by a senior business analyst is $237 
per hour. This estimate, as well as other internal time cost 
estimates made in this analysis, are derived from SIFMA's Management 
and Professional Earnings in the Securities Industry 2011, modified 
by Commission staff to account for an 1800-hour work week and 
multiplied by 5.35 to account for bonuses, firm size, employee 
benefits and overhead. Commission staff believes that additional 
costs incurred by boards or members for review of procedures would 
be incorporated into BIDCOs' overall board or member costs and would 
not add any particular costs. In addition, Commission staff 
estimates that a BIDCO board or member is likely to delegate the 
credit risk determinations, and that such determinations would take 
on average 1 hour of a senior business analyst's time (at $237 per 
hour) to evaluate the credit quality for each of an average of four 
investment company or private fund debt securities that a BIDCO 
would purchase each year (4 hours x $237 per hour) for a total cost 
of $948 per year. Staff has calculated these estimates using an 
internal cost estimate for a business analyst's time that is updated 
from the one used in calculating the estimates in the 2011 Proposing 
Release.
    \23\ See 2011 Proposing Release, supra note 4, at n.114 and 
accompanying text. Staff estimates that a BIDCO may need up to 16 
hours of consulting advice to assist in developing procedures and to 
make or oversee the proposed determinations. Staff estimates that 
this advice would cost a BIDCO $500 per hour based on an 
understanding of the rates typically charged by outside consulting 
firms resulting in an average cost of $8000 for each BIDCO.
---------------------------------------------------------------------------

    Adopting a new credit quality standard in place of the ratings 
requirement in section 6(a)(5)(A)(iv) of the Investment Company Act may 
result in other costs for BIDCOs and their investors. The minimum 
rating requirement in section 6(a)(5)(A)(iv) of the Act, before it was 
amended by the Dodd-Frank Act, established an objective standard that 
is easy to apply and may have limited BIDCOs from investing in 
securities that posed greater credit risks. The new rule instead 
requires BIDCO boards or members to assess credit quality by applying a 
subjective standard. We acknowledge that a BIDCO could invest in lower 
quality debt securities that it determines meets the standard in new 
rule 6a-5, and that it may be difficult for the Commission to challenge 
the determination of a BIDCO's directors or members (or their 
delegates). In addition, because credit quality assessments could 
differ across BIDCOs, the range of risk of investments may be broader 
than it is currently. We do not,

[[Page 70120]]

however, believe that the new rule is likely to lead BIDCOs to invest 
in riskier securities because the standard we are adopting is very 
similar to the standard articulated by the rating agencies for 
investment grade securities.\24\
---------------------------------------------------------------------------

    \24\ See Moody's Investor Service, Ratings Symbols and 
Definitions (June 2012), http://www.moodys.com/researchdocumentcontentpage.aspx?docid=PBC_79004, at 5 
(``Obligations rated Baa are judged to be medium-grade and subject 
to moderate credit risk and as such may possess certain speculative 
characteristics.''); FitchRatings, Definitions of Ratings and Other 
Forms of Opinion (Apr. 2012), http://www.fitchratings.com/web_content/ratings/fitch_ratings_definitions_and_scales.pdf, at 12 
(```BBB' ratings indicate that expectations of credit risk are 
currently low. The capacity for payment of financial commitments is 
considered adequate but adverse business or economic conditions are 
more likely to impair this capacity.'') The term ``investment 
grade'' is generally used to describe the categories `BBB' (or 
comparable) or above. See id., at 6.
---------------------------------------------------------------------------

    As part of our economic analysis, we considered alternatives to the 
standard that we are adopting in rule 6a-5. In particular, we 
considered including specific factors or tests that a fund board must 
apply in performing its credit analysis in the rule. As noted above, we 
believe that this alternative could function as a limit to a fund's 
credit quality analysis \25\ and thus might result in a less effective 
credit quality determination than a BIDCO would perform under the 
credit quality standard in the new rule, which could result in 
investments that expose the BIDCO to greater risk.
---------------------------------------------------------------------------

    \25\ See supra paragraph accompanying note 17.
---------------------------------------------------------------------------

V. Final Regulatory Flexibility Analysis

    The Commission has prepared the following Final Regulatory 
Flexibility Analysis (``FRFA'') in accordance with section 4(a) of the 
Regulatory Flexibility Act regarding new rule 6a-5, which we are 
adopting today to give effect to provisions of the Dodd-Frank Act.\26\ 
We prepared an Initial Regulatory Flexibility Analysis (``IRFA'') in 
conjunction with the 2011 Proposing Release in March 2011.\27\
---------------------------------------------------------------------------

    \26\ 5 U.S.C. 604(a).
    \27\ See 2011 Proposing Release, supra note 4, at Section VIII.
---------------------------------------------------------------------------

A. Need for and Objectives of the Rule and Form Amendments and New Rule

    As described more fully in Sections I and II of this Release, the 
Commission is adopting new rule 6a-5 to set forth a standard of credit-
worthiness for purposes of section 6(a)(5)(A)(iv) of the Investment 
Company Act, as anticipated by section 939(c) the Dodd Frank Act, which 
eliminates the investment grade standard from section 6(a)(5) of the 
Investment Company Act.

B. Significant Issues Raised by Public Comment

    In the Proposing Release, we requested comment on the IRFA. In 
particular, we sought comment on how many small entities would be 
subject to the proposed new rule and whether the effect of the proposed 
new rule on small entities subject to it would be economically 
significant. None of the comment letters we received specifically 
addressed the IRFA. None of the comment letters specifically addressed 
the effect of the new rule on small BIDCOs.

C. Small Entities Subject to the Rule and Form Amendments and New Rule

    New rule 6a-5 under the Investment Company Act would affect BIDCOs, 
including entities that are considered to be a small business or small 
organization (collectively, ``small entity'') for purposes of the 
Regulatory Flexibility Act. Under the standards adopted by the Small 
Business Administration, small entities in the financial investment 
industry include entities with $7 million or less in annual 
receipts.\28\ We do not have any data and are not aware of any 
databases that compile information regarding how many BIDCOs would be 
small entities under this definition. We also did not receive any 
comments from BIDCOs.
---------------------------------------------------------------------------

    \28\ 13 CFR 121.201.
---------------------------------------------------------------------------

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

    Rule 6a-5 imposes no reporting, recordkeeping or other compliance 
requirements.

E. Agency Action To Minimize Effect on Small Entities

    The Regulatory Flexibility Act directs us to consider significant 
alternatives that would accomplish our stated objectives, while 
minimizing any significant adverse effect on small entities. In 
connection with the new rule, the Commission considered the following 
alternatives: (i) Establishing different compliance standards or 
timetables that take into account the resources available to small 
entities; (ii) clarifying, consolidating, or simplifying compliance and 
reporting requirements under the rule for small entities; (iii) use of 
performance rather than design standards; and (iv) exempting small 
entities from all or part of the requirements.
    We believe that special compliance or reporting requirements for 
small entities, or an exemption from coverage for small entities, is 
not appropriate or consistent with investor protection or section 
939(c) of the Dodd-Frank Act, which rule 6a-5 implements. With respect 
to rule 6a-5, we believe that special compliance requirements or 
timetables for small entities, or an exemption from coverage for small 
entities, may create a risk that those BIDCOs could acquire debt 
securities that are not of sufficiently high credit quality that they 
would be likely to maintain a fairly stable market value or be 
liquidated easily, as we believe may have been intended for the BIDCO 
to support its long-term commitments. Further consolidation or 
simplification of rule 6a-5 for BIDCOs that are small entities is 
inconsistent with the Commission's goals of fostering investor 
protection. Finally, rule 6a-5 uses performance rather than design 
standards for determining the credit quality of specific debt 
securities.

Statutory Authority

    The Commission is adopting new rule 6a-5 under the authority set 
forth in section 38(a) of the Investment Company Act [15 U.S.C. 80a-
37(a)] and section 939 of the Dodd-Frank Act, to be codified at section 
6(a)(5)(A)(iv)(I) of the Investment Company Act [15 U.S.C. 80a-
6(a)(5)(A)(iv)(I)].

List of Subjects in 17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Rule

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

0
1. The authority citation for part 270 is amended by adding a sub-
authority in numerical order to read as follows:

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-
39, unless otherwise noted.
* * * * *

    Section 270.6a-5 is also issued under 15 U.S.C. 80a-
6(a)(5)(A)(iv)(I).

* * * * *

0
2. Section 270.6a-5 is added to read as follows:


Sec.  270.6a-5  Purchase of certain debt securities by companies 
relying on section 6(a)(5) of the Act.

    For purposes of reliance on the exemption for certain companies 
under section 6(a)(5)(A) of the Act (15 U.S.C. 80a-6(a)(5)(A)), a 
company shall be deemed to have met the requirement for credit-
worthiness of certain debt securities under section 6(a)(5)(A)(iv)(I) 
of the Investment Company Act (15 U.S.C. 80a-6(a)(5)(A)(iv)(I)) if, at 
the time of purchase, the board of directors

[[Page 70121]]

(or its delegate) determines or members of the company (or their 
delegate) determine that the debt security is:
    (a) Subject to no greater than moderate credit risk; and
    (b) Sufficiently liquid that it can be sold at or near its carrying 
value within a reasonably short period of time.

    By the Commission.

    Dated: November 19, 2012.
Elizabeth M. Murphy,
Secretary.
[FR Doc. 2012-28456 Filed 11-21-12; 8:45 am]
BILLING CODE 8011-01-P


