| Release No. 34-27231 September 8, 1989 |
 Table of Contents
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I. BACKGROUND
The Financial Institutions Reform, Recovery and Enforcement Act (the FIRRE Act) 1 was approved by Congress on August 4, 1989 and signed into law on August 9, 1989. The FIRRE Act provides for a comprehensive reform of the savings and loan industry, and establishes the Resolution Trust Corporation (RTC) and the Resolution Funding Corporation (Refcorp). 2 In addition, the FIRRE Act creates an Oversight Board of the RTC (the Oversight Board), whose function is to establish general policies for and oversee the activities of RTC.
RTC, which is specifically designated an instrumentality of the U.S. Government, 3 is charged with managing and resolving liquidation and other restructuring matters relating to Federal Savings and Loan Insurance Corporation (FSLIC) insured savings and loan associations that are or become insolvent during the period between January 1, 1989 and August 9, 1992. Under the management of a Directorate composed of government officials, Refcorp is a special purpose limited finance company formed to fund RTCs activities through the issuance of debt securities to the public, and nonvoting capital stock to Federal Home Loan Banks. Refcorps obligations are designated as not being issued by an instrumentality of the U.S. Government for purposes of the federal securities laws.
Financing for the resolution of matters relating to insolvent savings and loan associations will be obtained from public and private sources, including $20 billion from the Department of the Treasury and $30 billion from public offerings of debt securities to be issued by Refcorp. 4 Interest and principal payable on Refcorps obligations will be backed directly (with respect to interest) and indirectly (with respect to principal) by the Department of the Treasury. The funds to pay interest on Refcorps debt securities will come first from any cash revenues generated by: (1) earnings on Refcorps assets not used for other enumerated purposes; (2) proceeds, if any, received by RTC from liquidating dividends and receivership claims; (3) payments by the Federal Home Loan Banks; and (4) proceeds received by the FSLIC Resolution Fund from sales of assets. 5 To the extent that funds from these sources are insufficient to pay interest on Refcorps debt securities, the Secretary of the Treasury is directed to pay to Refcorp the amount of any shortfall. 6
Repayment of principal on the debt securities will be funded through proceeds received on maturity of zero-coupon Treasury securities that are required to be purchased and held by Refcorp specifically for this purpose. 7 Under the FIRRE Act, Refcorp is authorized only to issue debt securities in amounts that do not exceed the principal amount of the zero-coupon securities that is payable at maturity. 8 These zero-coupon Treasury securities must be held in a separate account, the Principal Fund, to ensure payment of principal on Refcorps securities. 9 Because of the linkage between Refcorps obligations and the Principal Fund, principal payable on maturity of Refcorps securities, while not backed by the full faith and credit of the U.S. Government, 10 will be completely backed by direct obligations of the U.S. Government.
II. DISCUSSION
Government securities, as defined in section 3(a)(42)(A) of the Exchange Act, 11 are exempted securities for purposes of the Exchange Act, 12 and therefore are not subject to the same reporting, registration, and regulatory provisions of the Exchange Act that apply to corporate securities. 13 Although the debt securities issued by Refcorp fall within the definition of government securities in section 3(a)(42)(A), they are not exempted securities for all purposes of the Exchange Act. The FIRRE Act provides that Refcorps securities:
[S]hall not be considered exempted securities within the meaning of section 3(a)(12)(A)(i) of the Securities Exchange Act of 1934, except that such obligations shall be considered to be exempted securities for purposes of section 15 of such Act. 14
Thus, while persons effecting transactions in Refcorps activities will not be required to register as broker-dealers under section 15(a) of the Exchange Act, 15 the securities, and persons selling and trading in the securities, would be subject to a host of other provisions of the Exchange Act that normally would not apply to government securities.
Among other provisions, underwriters selling the securities would be subject to the restrictions in section 11(d)(1) of the Exchange Act 16 preventing the extension of credit, by persons who are both brokers and dealers, during the distribution of a new issue of securities. A significant portion of the sales of new issues of government securities are financed by dealers through the use of repurchase agreements, which are regarded as an extension of credit. Applying section 11(d)(1) to Refcorps securities seriously would limit the ability of non-bank dealers to participate in the offering of such securities. Similar problems would be raised under section 7(c) of the Exchange Act, governing the initial margin that may be extended on securities. 17 Moreover, absent an exemption from section 15A of the Exchange Act, 18 trades in Refcorps securities also would be subject to rules of the National Association of Securities Dealers, Inc., including fair practice and advertising rules, that currently do not apply to sales of exempt government securities.
Secretary of the Treasury Nicholas F. Brady, as Chairman of the Oversight Board, has informed the Commission that the Oversight Board intends to list the securities on a national securities exchange. 19 Therefore, absent an exemption, Refcorps securities would need to be registered under section 12(a) of the Exchange Act, 20 and would be subject to the reporting requirements of section 13(a) of the Exchange Act, 21 the proxy provisions of sections 14(a) and 14(c) of the Exchange Act, 22 and the Commissions rules and regulations thereunder.
Concurrent with the publication of this release, the Commission has issued an Order (Order) 23 exempting Refcorps securities from the registration requirements of section 5 of the Securities Act. 24 The Order was issued under explicit Securities Act exemptive authority provided by the FIRRE Act. 25 The FIRRE Act also carefully preserved for these securities the Commissions exemptive authority contained in section 3(a)(12)(A)(v), 26 thus, in the Commissions view, countenancing an exemption of Refcorps securities from Exchange Act regulations applicable to non-exempt securities. In this connection, the Commission notes the colloquy of Senators Donald W. Riegle, Jr. and Jake Garn, urging the Commission to act quickly to assess the need for applying the registration provisions of the Securities Act and the Exchange Act to Refcorps securities. 27
More recently, the Oversight Board also has requested that the Commission exempt Refcorps securities from certain provisions of the Exchange Act discussed above. 28 The Application states that unless the Exchange Act regulatory issues are resolved promptly, the Board believes that the interest costs of Refcorps debt securities would increase substantially, and would ultimately increase the costs to taxpayers. The Board specifically noted that subjecting the Refcorp securities to sections 7, 8, and 11(d)(1) of the Exchange Act 29 would preclude the development of a market for repurchase transactions in the securities, restricting severely the ability of dealers to finance their positions.
III. RULE 3a12-10
As noted above, the debt securities of Refcorp are government securities within the meaning of section 3(a)(42) of the Exchange Act, 30 because payment of interest on the securities is assured by the Department of the Treasury. In addition, repayment of principal will be made through proceeds received on maturity from zero-coup on Treasury securities held by Refcorp solely for that purpose. Accordingly, the credit and investment risks to investors essentially are equivalent to those associated with direct obligations of the U.S. Government.
Because Refcorp will have no separate operations, and is not dependent on any cash generated by RTC, investors will be looking solely to the U.S. Government for repayment. The investment considerations pertaining to Refcorps securities will be almost identical to those relating to securities issued or guaranteed directly by the Department of the Treasury. Moreover, Refcorp is subject to substantial government regulation of its securities. In light of the similarities between the securities issued by Refcorp and other government securities, the Commission believes that it would be inconsistent to apply different regulatory requirements to Refcorps securities.
In order to regulate Refcorps securities in an equivalent manner to securities issued by the U.S. Government or quasi-governmental agencies, the Commission has determined to exercise its authority in section 3(a)(12)(A)(v) of the Exchange Act 31 to adopt Rule 3a12-10 (the Rule), which defines the securities as exempted securities for purposes of those provisions of the Exchange Act that by their terms do not apply to an exempted security or to exempted securities. The Commission deems the adoption of the Rule to be consistent with the public interest and the protection of investors.
IV. EMERGENCY RULEMAKING
Commission rulemaking is done pursuant to the procedures specified in the Administrative Procedure Act (APA). Under sections 553(b) and (c) of the APA, 32 notice of proposed rulemaking by the Commission generally must be given in the Federal Register, and interested persons must have the opportunity to submit written comments on the proposed rule. Under section 553(b)(3)(B) of the APA, however, the Commission may dispense with the notice and comment rulemaking process if it for good cause finds ... that notice and public procedure ... are impracticable, unnecessary, or contrary to the public interest. 33
The Application states that it is probable that Refcorp will be requested to provide funding for RTC in early October of 1989. The Oversight Board therefore requests that the Commission act by September 8, 1989 in order to assure that the orderly maintenance of savings and loan case resolutions and liquidity funding can continue. In addition, the legislative history of the FIRRE Act reveals that Congress intended the Commission to consider this matter promptly. 34
In this instance, the Commission believes that affording notice of, and opportunity for comment on, the Rule would delay unnecessarily the raising of funds needed for the management and liquidation of insolvent savings and loan associations. In light of the important policy objectives embodied in the FIRRE Act, and the limited likelihood that the adoption of Rule 3a12-10 will affect any private parties negatively, the Commission finds that observing the normal notice and comment procedures under the APA to adopt the Rule are impracticable, unnecessary, and contrary to the public interest. Accordingly, Rule 3a12-10 will become effective immediately upon publication in the Federal Register. 35
Although it is necessary for the Commission to use an expedited rulemaking procedure in order to comply with the Oversight Boards request, the Commission is interested in receiving comments on the Rule and would consider either amending or rescinding the Rule in light of the comments. Commentators are invited to express their views on any substantive differences between Refcorps securities and those of other governmental issuers that may require Refcorps securities to be treated differently for purposes of federal securities regulation.
V. EFFECTS ON COMPETITION
Section 23(a)(2) of the Exchange Act 36 requires that the Commission, in adopting rules under the Exchange Act, consider the anticompetitive effects of such rules, if any, and balance any anticompetitive impact against the regulatory benefits gained in terms of furthering the purposes of the Exchange Act. The Commission is of the view that Rule 3a12-10 will not result in any burden or competition that is not necessary or appropriate in furtherance of the purposes of the Exchange Act.
As stated above, the Commission believes that the exemptions provided to Refcorps debt securities pursuant to Rule 3a12-10 will encourage the development of liquid markets for these securities and will apply equally to all participants in those markets. Although the Rule may reduce some of Refcorps costs, and therefore provide a limited competitive advantage to Refcorp vis--vis issuers of non-exempted securities, the Commission believes that, among other things, the credit quality of these securities warrants their being treated in the same fashion as similar exempted government securities for purposes of Exchange Act regulation. 37
VI. LIST OF SUBJECTS IN 17 CFR PART 240
Reporting and recordkeeping requirements, securities.
VII. STATUTORY BASIS AND TEXT OF AMENDMENTS
Chapter II of Title 17 of the Code of Federal Regulations is amended by adding §240.3a12-10 as follows:
PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 1934
1.The authority citation for Part 240 is amended by adding the following citation:
Authority: Sec. 23, 48 Stat. 901, as amended, 15 U.S.C. 78w *** §240.3a12-10 also issued under 15 U.S.C. 78b and c.
2.By adding §240.3a12-10 as follows:
§240.3a12-10 Exemption of Certain Securities Issued by the Resolution Funding Corporation.
Securities that are issued by the Resolution Funding Corporation pursuant to section 21B(f) of the Federal Home Loan Bank Act (12 U.S.C. 1421 et seq.) are exempt from the operation of all provisions of the Act that by their terms do not apply to any exempted security or to exempted securities.
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
1 Pub. L. No. 101-73, -------- Stat. -------- (August 9, 1989). All provisions discussed in this release are included in Title V of the FIRRE Act (sections 501, 511, and 512), which amends the Federal Home Loan Bank Act, 12 U.S.C. 1421 et seq. (FHLBA).
2 See generally FHLBA sections 21A(b)(1)(A) and 21B(b) (establishing the entities, respectively).
3 FHLBA section 21A(b)(1)(A).
4 Refcorp expressly is authorized to issue bonds, notes, debentures and similar obligations in an aggregate amount not to exceed $30,000,000,000. FHLBA section 21B(f)(1). Net proceeds received from the offerings by Refcorp will be transferred to RTC through Refcorps purchase of RTCs nonvoting capital certificates, and will be used to finance the activities of RTC.
5 FHLBA section 21B(f)(2).
6 FHLBA section 21B(f)(2)(E)(i). The FIRRE Act appropriates to the Secretary of the Treasury, for fiscal year 1989 and all future fiscal years, the funds needed to satisfy the interest payments. See FHLBA section 21B(f)(2)(E)(iii).
7 The zero-coupon Treasury securities are backed by the full faith and credit of the U.S. Government. See FHLBA section 21B(g)(2)(A). The Oversight Board represents that the zero-coupon securities will be issued directly to Refcorp, so that amounts and maturities can and will be matched exactly to the principal amounts and maturity dates on the corresponding Refcorp obligations at the time of issuance. Letter from Nicholas F. Brady, Secretary, Department of the Treasury, to David S. Ruder, Chairman, SEC (September 6, 1989) (the Application), at 5.
8 FHLBA section 21B(f)(1).
9 FHLBA section 21B(f)(3).
10 See FHLBA section 21B(f)(10).
11 15 U.S.C. 78c(a)(42)(A). This section defines government securities to include securities which are direct obligations of, or obligations guaranteed as to principal or interest by, the United States.... (emphasis added). Because the Department of the Treasury is obligated to pay interest, Refcorps debt securities are government securities under the Exchange Act.
12 Section 3(a)(12)(A)(i) [15 U.S.C. 78c(a)(12)(A)(i)] provides that the term exempted security includes government securities as defined in section 3(a)(42) of the Exchange Act. Sections 3(a)(12)(A)(ii)-(iv) exempt additional securities.
13 See, e.g., Sections 7(f)(2)(B), 8(a), 11(d), and 12(a) [15 U.S.C. 78g(f)(2)(B), 78h(a), 78k(d) and 78l(a)]. Exempted securities remain subject to the antifraud provisions of the federal securities laws. See, e.g., Section 17(a) of the Securities Act of 1933 (Securities Act) [15 U.S.C. 77q(a)] and section 10(b) of the Exchange Act [15 U.S.C. 78j(b)] and Rule 10b-5 thereunder [17 CFR 240.10b-5].
14 FHLBA Section 21B(f)(8)(A)(ii).
15 15 U.S.C. 78o(a). They would be subject, however, to the provisions of section 15C of the Exchange Act [15 U.S.C. 78o-5] concerning government securities brokers and dealers.
16 15 U.S.C. 78k(d)(1).
17 15 U.S.C. 78g(c).
18 15 U.S.C. 78o-3.
19 See Application at 7.
20 15 U.S.C. 78l(a).
21 15 U.S.C. 78m(a) (Every issuer of a security registered pursuant to section 12 ... shall file with the Commission ... such annual reports ... and such quarterly reports ... as the Commission may prescribe.).
22 15 U.S.C. 78n(a) and 78n(c). Because Refcorp will not have a class of equity securities registered under section 12, however, compliance with sections 13(d) [15 U.S.C. 78m(d)], 13(e) [15 U.S.C. 78m(e)] and 16 [15 U.S.C. 78p] would not be required.
23 See Securities Act Release No. 6844 (September 8, 1989).
24 15 U.S.C. 77e.
25 FHLBA section 21B(f)(8).
26 Section 3(a)(12)(A)(v) [15 U.S.C. 78c(a)(12)(A)(v)] authorizes the Commission, by rule or regulation, consistent with the public interest and the protection of investors, to define securities as exempted securities in addition to those enumerated in sections 3(a)(12)(A)(i)-(iv) as exempted securities. The specific reference to section 3(a)(12)(A)(i) in the FIRRE Act indicates that Congress did not intend to impinge upon the Commissions ability to define exempted securities under section 3(a)(12)(A)(v).
27 135 Cong. Rec. S10212 (daily ed. August 4, 1989).
28 See Application at 9. A copy of the Application is contained in File S7-25-89.
29 15 U.S.C. 78g, 78h and 78k(d)(1), respectively.
30 See supra note 11.
31 See supra note 26.
32 5 U.S.C. 553(b) and (c).
33 5 U.S.C. 553(b)(3)(B).
34 As discussed above, in a colloquy on the Senate floor, Senators Riegle and Garn agreed that the Commission should act quickly regarding the exempt status of the debt securities to be issued by Refcorp. See supra note 27.
35 Because Rule 3a12-10 provides an exemption for Refcorps securities from certain provisions of the Exchange Act, the APA does not require thirty days notice prior to the Rules effective date. See 5 U.S.C. 553(d)(1).
36 15 U.S.C. 78w(a)(2).
37 The Regulatory Flexibility Act [5 U.S.C. 601 et. seq.] provides, with exceptions, that in connection with notice and comment rulemaking, agencies should prepare an Initial and Final Regulatory Flexibility Act Analysis examining the impact of the rule on small businesses. Because the Commission is using the expedited rulemaking procedures under section 553(b)(3)(B) of the APA, it has not prepared these analyses. Interested persons are invited, however, to submit views on any impact that the Rule may have on small businesses.
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