Marianne McKeon, Esq., Dewey Ballantine LLP

The staff granted an exemption from NASD Rule 2790 with respect to purchases of “new issues” by the National Railroad Retirement Investment Trust.

November 9, 2006

Marianne McKeon, Esq.
Dewey Ballantine LLP
1301 Avenue of the Americas
Room 2544
New York, New York 10019

Re: Request for Exemption from Rule 2790

Dear Ms. McKeon:

This is in response to your letter dated March 21, 2006, as supplemented by your correspondence dated May 23, September 25, and October 6, 2006, in which you request an exemption from NASD Rule 2790 for your client, the National Railroad Retirement Investment Trust ("NRRIT" or "Trust").

Pursuant to paragraph (h) of Rule 2790, the staff, for good cause shown after taking into consideration all relevant factors, may conditionally or unconditionally exempt any person, security or transaction (or any class or classes of persons, securities or transactions) from Rule 2790 to the extent that such exemption is consistent with the purposes of the Rule, the protection of investors and the public interest. For the reasons set forth below, the staff exempts from Rule 2790 purchases, directly or indirectly, of "new issues" (as defined in Rule 2790) by NRRIT.

Background

Based upon your letter, supplemental correspondence and our subsequent telephone conversations, we understand the facts to be as follows. Railroad retirement benefits are a federal entitlement protected by statute. The Railroad Retirement Act of 1935 and the Railroad Retirement Act of 1937, both of which were superseded by the Railroad Retirement Act of 1974 ("1974 Act"), established the railroad retirement system to provide retirement, unemployment compensation, sickness, disability and survivor benefits for U.S. railroad employees. The U.S. Railroad Retirement Board ("RRB"), a Federal agency, has full responsibility for administering the railroad retirement system, including eligibility determinations and the calculation of beneficiary payments. Railroad retirement system funds that are not needed immediately to pay benefits or administrative expenses are invested to provide additional income for the system. Before 2001, investment of such funds was controlled directly by the RRB and was limited to interest-bearing U.S. government or U.S. government-guaranteed securities.

In 2001, however, the 1974 Act was amended to establish NRRIT.¹ NRRIT is authorized to invest railroad retirement funds in non-governmental assets (such as equities and debt securities), as well as government securities. NRRIT's sole purpose is to manage and invest railroad retirement assets. The Trust is exempt from federal income taxation pursuant to Section 501(c)(28) of the Internal Revenue Code ("IRC"). While NRRIT is not a department or agency of the federal government, the cash and investments held by the Trust are nevertheless assets of the federal government. Moreover, NRRIT is required to act solely in the interest of the RRB, and through it, the participants and beneficiaries of the programs funded under the 1974 Act. Currently, NRRIT manages approximately $30 billion in assets on behalf of about 634,000 beneficiaries and 255,000 active employees.

NRRIT has seven trustees all of whom are subject to fiduciary standards similar to those under the Employment Retirement Income Security Act ("ERISA"). The RRB may bring civil action to enjoin any act or practice of the Trust that violates the provisions of the 1974 Act, to obtain other appropriate relief to redress such violations or to enforce any provision of the 1974 Act, including action against the trustees with regard to their fiduciary responsibilities.

NRRIT's financial statements are required to be audited annually by an independent public accountant. The Trust must submit an annual management report to Congress on its operations, including a statement of financial position, a statement of operations, a statement of cash flows, a statement on internal accounting and administrative control systems, the independent auditor's report and any other information necessary to inform Congress about its operations and financial condition. NRRIT also must provide to the President, the RRB and the Office of Management and Budget a copy of the management report.

Railroad retirement plans under the 1974 Act are considered "governmental plans" as defined in Section 3(32) of ERISA, and thus such retirement plans, as well as the assets of such plans funded and invested through NRRIT, are excluded from ERISA coverage.

From time to time, NRRIT may have an opportunity to invest railroad retirement assets in new issues either directly by purchasing new issues or indirectly by investing in an entity, such as a hedge fund or fund of funds, that may purchase new issues. However, NRRIT is unable to determine whether persons that have a "beneficial interest" in the Trust are "restricted persons" as defined in Rule 2790, and thus cannot represent, as required by Rule 2790, that it is eligible to purchase new issues in accordance with the Rule, or that such purchases are in compliance with the Rule. As such, the Trust has been unable to invest in new issues. You are requesting an exemption from Rule 2790 for NRRIT so that it can invest railroad retirement assets in new issues.

Analysis

Rule 2790 protects the integrity of the public offering process by ensuring that: (1) members make bona fide public offerings of securities at the offering price; (2) members do not withhold securities in a public offering for their own benefit or use such securities to reward persons who are in a position to direct future business to members; and (3) industry insiders, including members and their associated persons, do not take advantage of their insider position to purchase new issues for their own benefit at the expense of public customers.

Paragraph (a) of Rule 2790 provides that, except as otherwise permitted under the Rule, a member (or an associated person) may not sell a new issue to an account in which a restricted person has a beneficial interest, a member (or an associated person) may not purchase a new issue in any account in which such member or associated person has a beneficial interest, and a member may not continue to hold new issues acquired as an underwriter, selling group member, or otherwise.

Subparagraph (c)(7) exempts from the Rule sales to and purchases by an ERISA benefits plan that is qualified under Section 401(a) of the IRC, provided that such plan is not sponsored solely by a broker-dealer. Subparagraph (c)(8) exempts from the Rule sales to and purchases by state or municipal government benefits plans that are subject to state and/or municipal regulation. The exemption in subparagraph (c)(8) was added because state and municipal government benefits plans are expressly excluded from ERISA coverage,² and do not raise concerns under Rule 2790.

Owing in part to its unique nature, the exemptions in subparagraphs (c)(7) and (8) do not technically apply to NRRIT, as it is neither an ERISA benefits plan nor a state or municipal government benefits plan. However, based on your representations and the facts as you have described them, the staff believes that the rationale for the exemptions for ERISA benefits plans as well as state and municipal government benefits plans applies equally to NRRIT.

Based on the unique facts and circumstances of NRRIT, the staff finds that granting an exemption to the Trust is consistent with the purposes of Rule 2790, the protection of investors and the public interest. For these reasons, the staff exempts from Rule 2790 purchases, directly or indirectly, of new issues by NRRIT.

If you have any questions on this matter, please do not hesitate to contact me at (202) 728-8902.

Very truly yours,

Afshin Atabaki
Assistant General Counsel

cc:

Gary L. Goldsholle
Vice President and
Associate General Counsel

Hans L. Reich
Senior Vice President and Regional Director
New York District Office

¹See 45 U.S.C. 231n(j) (2006) (added by Section 105 of the Railroad Retirement and Survivors' Improvement Act of 2001, P.L. 107-90).

² State and municipal government benefits plans are considered governmental plans as defined in Section 3(32) of ERISA, and thus are excluded from ERISA coverage.