SEC ALLOWS USE OF FED FACILITY TO PURCHASE CP FROM AFFILIATED FUNDS

The SEC granted No-Action Relief to allow banks that borrow from the Fed’s Commercial Paper Money Market Liquidity Facility to use the funds to purchase asset-backed commercial paper from affiliated funds at amortized cost. The Federal Reserve adopted the Liquidity Facility to allow banks to access funds on a nonrecourse basis to purchase asset-backed CP. Without the No-Action relief, a bank would be prohibited by Section 17 from purchasing paper from a fund managed by an affiliate of the bank. The Investment Company Institute, which requested the relief, argued that requiring a fund to find a third party would undermine the intent of the program because third parties would be less willing to purchase de-valued paper from an unaffiliated fund.

OUR TAKE: The Fed likely assumed that the facility would be used to purchase ABCP from affiliated funds. The SEC would have rendered the Facility moot if it failed to give the No-Action relief requested.
 
http://www.sec.gov/divisions/investment/noaction/2008/ici092508.htm