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Rating:Regulators Highlight Repo Rules for Funds Not Rated 0.0 Email Routing List Email & Route  Print Print
Friday, May 07, 2004

Regulators Highlight Repo Rules for Funds

by: Theresa Sim

The Treasury department and the IRS would like to remind fund companies that, for the purpose of passing the IRS' asset diversification test as laid out in Section 851(b)(3), repurchase agreements and government securities are the same. The regulators issued a statement on Thursday highlighting that fact.

Section 851 of the Internal Revenue Code (IRC) defines regulated investment companies (RIC). 851(b)(3) of the IRC relates to asset diversification requirements that companies must comply with to be taxed as a RIC. Specifically, the section requires that RICs' assets must be at least 50 percent cash, Government securities, securities of other RICs, and any one security held in excess of five percent of total assets.

The section also stipulates that RICs can invest, at most, 25 percent of its assets in one security, excluding government securities.

"Applying the same, common-sense rule for both securities law and tax purposes will simplify compliance for mutual funds," said Gregory F. Jenner, acting assistant secretary for tax policy.

The SEC has allowed firms to treat the two as equivalents since August 15, 2001, under the Investment Company Act of 1940, Rule 5b3.

"The effect of this rule is that, for purposes of the definition of a diversified investment company in section 5 of the 1940 Act, if a repo is Collateralized Fully, a fund may (but need not) treat an investment in the repo as an investment in the underlying security or securities" wrote the Treasury about the SEC's rule. 

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