[Federal Register: November 21, 2002 (Volume 67, Number 225)]
[Notices]
[Page 70259-70260]
From the Federal Register Online via GPO Access [wais.access.gpo.gov]
[DOCID:fr21no02-139]
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SECURITIES AND EXCHANGE COMMISSION
Submission for OMB Review; Comment Request
Upon Written Request, Copies Available From: Securities and Exchange
Commission, Office of Filings and Information Services, Washington, DC
20549.
Extension:
Rule 0-1 [17 CFR 270.0-1], SEC File No. 270-472, OMB Control No.
3235-0531
Notice is hereby given that, pursuant to the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange
Commission (``Commission'') has submitted to the Office of Management
and Budget (``OMB'') a request for extension and approval of the
collection of information discussed below.
Investment companies (``funds'') are formed as corporations or
business trusts under State law and, like other corporations and
trusts, must be operated for the benefit of their shareholders.\1\
Funds are unique, however, in that they are ``organized and operated by
people whose primary loyalty and pecuniary interest lie outside the
enterprise.'' \2\ As described below, this ``external management'' of
most funds presents inherent conflicts of interest and potential for
abuses.
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\1\ See generally James M. Storey and Thomas M Clyde, Mutual
Fund Law Handbook 7.2 (1998).
\2\ Division of Investment Management, SEC, Protecting
Investors: A Half Century of Investment Company Regulation 251
(1992).
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An investment adviser typically organizes a fund and is responsible
for its day-to-day operations. The adviser provides the seed money,
officers, employees, and office space, and usually selects the initial
board of directors. In many cases, the investment adviser sponsors
several funds that share administrative and distribution systems as
part of a ``family of funds.'' As a result of this extensive
involvement, and the general absence of shareholder activism, many
investment advisers typically dominate the funds they advise.\3\
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\3\ See SEC, Report on the Public Policy Implications of
Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d. Sess.
12, 127, 148 (1966) (stating that funds generally are formed by
their advisers and remain under their control, and that advisers'
influence permeates fund activities).
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Investment advisers to funds are themselves generally organized as
corporations, which have their own shareholders. These shareholders
have an interest in the fund that is quite different from the interests
of the fund's shareholders. For example, while fund shareholders
ordinarily prefer lower fees (to achieve greater returns), shareholders
of the fund's investment adviser might want to maximize profits through
higher fees. And while fund shareholders might prefer that advisers use
brokers that charge the lowest possible commissions, advisers might
prefer brokers that will provide investment research in exchange for
commissions. These types of conflicts (and others) resulted in the
pervasive abuses in the fund industry that led Congress in 1940 to
enact legislation regulating the activities of mutual funds.\4\
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\4\ See Storey and Clyde, supra note 1.
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The Investment Company Act of 1940 (``Investment Company Act'' or
``Act'') establishes a comprehensive regulatory scheme designed to
protect fund investors by addressing the conflicts of interest between
funds and their investment advisers and other affiliated persons. The
Investment Company Act places significant responsibility on the board
of directors in overseeing the operations of the fund and policing
conflicts of interest.\5\
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\5\ For instance, Fund directors must approve investment
advisory and distribution contracts (15 U.S.C. 80a-15(a), (b), and
(c)).
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Independent fund directors represent the interests of shareholders,
acting as watchdogs for investors and providing a check on management.
On January 2, 2001, the Commission adopted amendments to ten exemptive
rules under the Act that were designed to enhance the effectiveness of
boards of directors of funds and to better enable investors to assess
the independences of those directors.\6\ In the Adopting Release, the
Commission amended rule 0-1 to add a definition of ``independent legal
counsel.'' The Adopting Release amended the exemptive rules to require
that any person who acts as legal counsel to the independent directors
of any fund relying on the rules must be an ``independent legal
counsel.'' This requirement was added because independent directors can
better perform the responsibilities assigned to them under the Act and
the rules if they
[[Page 70260]]
have the assistance of a truly independent legal counsel.
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\6\ Role of Independendent Directors of Investment Companies,
Investment Company Act Release No. 24816 (Jan. 2, 2001) [66 FR 3735
(Jan. 16, 2001)] (``Adopting Release'').
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Rule 0-1 provides that a person is an independent legal counsel if
a fund's independent directors determine (and record the basis for that
determination in the minutes of their meeting) that any representation
of the fund's investment adviser, principal underwriter, administrator
(collectively, ``management organizations'') or their ``control
persons'' \7\ during the past two years is or was sufficiently limited
that that it is unlikely to adversely affect the professional judgment
of the person in providing legal representation. In addition, the
independent directors must have obtained an undertaking from the
counsel to provide them with information necessary to make their
determination and to update promptly that information when the person
begins to represent, or materially increases his representation of, a
management organization or control person. Generally, independent
directors must re-evaluate their determination at least annually.
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\7\ A ``control person'' is any person--other than a fund--
directly or indirectly controlling controlled by, or under common
control, with any of the fund's management organizations. See 17 CFR
270.01(a)(6)(iv)(B).
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Any fund that relies on an exemptive rule in the Adopting Release
is required to use the definition of independent legal counsel
contained in rule 0-1. We assume that approximately 4,050 funds rely on
at least one of the exemptive rules annually.\8\ We further assume that
the independent directors of approximately one-third (1,336) of those
funds would need to make the required determination in order for their
counsel to meet the definition of independent legal counsel.\9\ We
estimate that each of these 1,336 funds would be required to spend, on
average, 0.75 hours annually to comply with the proposed recordkeeping
requirement concerning this determination, for a total annual burden of
approximately 1,002 hours. Based on this estimate, the total annual
cost for all funds of this proposed definition would be approximately
$22,712. To calculate this total annual cost, the Commission staff
assumed that two-thirds of the total annual hour burden (668 hours)
would be incurred by professionals with an average hourly wage rate of
$27 per hour, and one-third of that annual hour burden (334 hours)
would be incurred by clerical staff with an average hourly wage rate of
$14 \10\ per hour.\11\
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\8\ Based on statistics compiled by Commission staff, we
estimate that there are approximately 4,500 funds that could rely on
one or more of the exemptive rules. Of those funds, we assume that
approximately 90 percent (4,050) actually rely on at least one
exemptive rules annually.
\9\ We assume that the independent directors of the remaining
two-thirds of those funds will choose not to have counsel (but
instead rely in some circumstances on counsel who does not represent
them), so that no determination by the independent directors would
be necessary.
\10\ The Commission's estimates concerning the wage rate for
professional time and for clerical time are based on salary
information for the securities industry complied by the Securities
Industry Association. See Securities Industry Association, Report on
Management and Professional Earnings in the Securities Industry
(September 2001).
\11\ (668 x $27/hour) + (334 x $14/hour) = $22,712.
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These burden hour estimates are based upon the Commission staff's
experience and discussions with the fund industry. The estimates of
average burden hours are made solely for the purposes of the Paperwork
Reduction Act. These estimates are not derived from a comprehensive or
even a representative survey or study of the costs of Commission rules.
Compliance with the collection of information requirements of the
rule is mandatory and is necessary to comply with the requirements of
the rule in general. An agency may not conduct or sponsor, and a person
is not required to respond to, a collection of information unless it
displays a currently valid control number.
Please direct general comments regarding the above information to
the following persons: (i) Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Office of
Management and Budget, New Executive Office Building, Washington, DC
20503; and (ii) Kenneth A. Fogash, Acting Associate Executive Director/
CIO, Office of Information Technology, Securities and Exchange
Commission, 450 5th Street, NW., Washington, DC 20549. Comments must be
submitted to OMB within 30 days of this notice.
Dated: November 14, 2002.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. 02-29591 Filed 11-20-02; 8:45 am]
BILLING CODE 8010-01-P