IRS Issues Revenue Procedure On Securities Lending

Developments Of Note

IRS Issues Revenue Procedure on Securities Lending

SEC Issues Guidance on Treatment of Loaned Securities under

Regulation SHO

SEC No-Action Letter Permits Banks to Acquire Asset-Backed

Commercial Paper from Affiliated Money Market Funds under the

FRB's Liquidity Facility without Violating Section 17(a)(2) of

the 1940 Act

OCC Issues Interim Final Rule Concerning Risk-Based Capital

Treatment of Asset-Backed Commercial Paper Purchased from Money

Market Funds

Treasury Finalizes Terms of Temporary Guaranty Program for

Money Market Funds

FDIC Issues Interim Rule on Deposit Insurance Coverage of

Revocable Trust Accounts

OCC Updates Policy on Minority-Owned National Banks

Other Items Of Note

Massachusetts Adopts Regulations Mandating Comprehensive

Written Information Security Programs and Specific Computer

Security Requirements to Take Effect January 1, 2009

SEC Announces Registration for Annual CCOutreach National

Seminar for Chief Compliance Officers of Registered Funds and

Advisers

Developments Of Note

IRS Issues Revenue Procedure On Securities Lending

The Internal Revenue Service ("IRS") released Revenue

Procedure 2008-63, which provides that when a securities loan is in

default because the borrower (or an affiliate of the borrower) that

is unrelated to the lender goes bankrupt, no gain or loss will be

recognized if the lender applies the collateral to the purchase of

identical securities as soon as practicable (and in any event

within 30 days) after the default. The IRS said in this case it

would treat the purchase as an exchange to which Section 1058

applies, and the lender will receive the same nonrecognition

treatment it would have received if the borrower had returned

identical securities upon termination of the loan. Prior to the

issuance of the Revenue Procedure, it was generally believed that a

default would result in recognition of gain (regardless of the

reason for the default), and the IRS took that view in regulations

that it proposed in 1983 that have not yet been finalized or

withdrawn. The Revenue Procedure changes that result in the case of

a bankruptcy-related buy-in. The Revenue Procedure is effective for

tax years ending on or after January 1, 2008, but does not apply to

securities lending defaults for reasons other than bankruptcy of

the borrower or an affiliate or that are otherwise outside the

scope of the Revenue Procedure.

SEC Issues Guidance On Treatment Of Loaned Securities Under

Regulation SHO

The staff of the SEC (the "SEC staff") issued guidance

providing that securities out on loan will be deemed to be owned by

the lender for purposes of the SEC's short sale regulations,

and therefore can be sold long, if the lender issues a bona fide

recall of those securities within two days of the sale. Prior to

the guidance, lenders were concerned that they would not be deemed

to own securities on loan for purposes of the various SEC short

sale regulations, including Regulation SHO as amended by new Rule

204T, the SEC emergency short sale order banning short sales of

financial stocks, and the new temporary Form SH short sale position

reporting requirements. Prior to the SEC staff's issuance of

this guidance, many brokers were marking sales of securities that

were out on loan as short sales out of an abundance of caution due

to uncertainty regarding the long-short status of the sales. This

resulted in an increased chance of involuntary buy-ins by brokers

without pre-notice to lenders. As a result of this uncertainty,

many lenders had considered significantly reducing their

participation in securities lending programs, which could have

further impacted volume and liquidity of the markets. This guidance

from the SEC staff now makes clear that lenders will not be deemed

to have sold short when they sell securities out on loan, provided

a recall is effected within two days of the sale. This is

significant because new Rule 204T under Regulation SHO provides

that a broker can close-out a delivery failure on a long sale by

making a close-out purchase any time before trading begins on the

sixth settlement day after the long sale, which means that lenders

who sell their loaned securities long have three additional days to

buy themselves in so as to not experience a failure to deliver in

violation of Rule 204T. If the sale of loaned securities were

deemed "short," Rule 204T requires a failure to deliver

to be closed out no later than the beginning of trading on T+4.

These extra two days for long sales give lenders a greater chance

of receiving their loaned securities back from the borrower so that

they can deliver the shares before the close out date on T+6 and

thus reduces the likelihood that lenders will be bought-in

involuntarily by their clearing brokers.

SEC No-Action Letter Permits Banks To Acquire Asset-Backed

Commercial Paper From Affiliated Money Market Funds Under The

FRB's Liquidity Facility Without Violating Section 17(a)(2) Of

The 1940 Act

On September 25, 2008, the staff of the SEC's Division of

Investment Management issued a no-action letter to the Investment

Company Institute (the "ICI No-Action Letter") stating

that, subject to certain conditions, it would not recommend

enforcement action to the SEC under Section 17(a)(2) of the

Investment Company Act of 1940 (the "1940 Act") against a

U.S. depository institution, bank holding company (parent or

broker-dealer affiliate) or U.S. branch of a foreign bank (each, a

"bank") that is an affiliated person, or an affiliated

person of an affiliated person, of a registered investment company

that holds itself out as a money market fund (a "money market

fund") if the bank purchases from that money market fund

asset-backed commercial paper ("ABCP") pursuant to the

ABCP liquidity facility authorized by the FRB on September 19,

2008. (A discussion of the ABCP liquidity facility that is being

administered for the FRB by the Federal Reserve Bank of Boston (the

"FRB-Boston") is included in the September 23, 2008

Alert.)...