In a welcome (if belated) move, the IRS has issued a new “revenue procedure” that, under certain conditions, allows an investment company to “look through” its position in a repurchase agreement (repo) that is collateralized by Government securities. The effect is that the fund is permitted to treat the repo as a “Government security” for purposes of qualifying as a regulated investment company (RIC) under the asset diversification test of section 851(b)(3) of the Internal Revenue Code (the Code). As explained below, this action brings some welcome harmony to diversification testing under the Code and the Investment Company Act of 1940 (the ICA). A copy of the IRS pronouncement, Rev. Proc. 2004-28, is attached. The IRS position is effective for repo's held by a RIC on or after August 15, 2001.

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