|
Final Rule:
|
Note: See the Correction with reference to the paragraph immediately below.
June 1, 2000 |
(ii) The board of directors of a Fund, including a majority of directors who are not interested persons, must approve the code of ethics of the Fund, the code of ethics of each investment adviser and principal underwriter of the Fund, and any material changes to these codes. The board must base its approval of a code and any material changes to the code on a determination that the code contains provisions reasonably necessary to prevent Access Persons from engaging in any conduct prohibited by paragraph (b) of this section. Before approving a code of a Fund, investment adviser or principal underwriter or any amendment to the code, the board of directors must receive a certification from the Fund, investment adviser or principal underwriter that it has adopted procedures reasonably necessary to prevent Access Persons from violating the investment adviser's or principal underwriter's code of ethics. The Fund's board must approve the code of an investment adviser or principal underwriter before initially retaining the services of the investment adviser or principal underwriter. The Fund's board must approve a material change to a code no later than six months after adoption of the material change.
(iii) If a Fund is a unit investment trust, the Fund's principal underwriter or depositor must approve the Fund's code of ethics, as required by paragraph (c)(1)(ii) of this section. If the Fund has more than one principal underwriter or depositor, the principal underwriters and depositors may designate, in writing, which principal underwriter ordepositor must conduct the approval required by paragraph (c)(1)(ii) of this section, if they obtain written consent from the designated principal underwriter or depositor.
(2) Administration of Code of Ethics.
(i) The Fund, investment adviser and principal underwriter must use reasonable diligence and institute procedures reasonably necessary to prevent violations of its code of ethics.
(ii) No less frequently than annually, every Fund (other than a unit investment trust) and its investment advisers and principal underwriters must furnish to the Fund's board of directors, and the board of directors must consider, a written report that:
(A) Describes any issues arising under the code of ethics or procedures since the last report to the board of directors, including, but not limited to, information about material violations of the code or procedures and sanctions imposed in response to the material violations; and
(B) Certifies that the Fund, investment adviser or principal underwriter, as applicable, has adopted procedures reasonably necessary to prevent Access Persons from violating the code.
(3) Exception for Principal Underwriters. The requirements of paragraphs (c)(1) and (c)(2) of this section do not apply to any principal underwriter unless:
(i) The principal underwriter is an affiliated person of the Fund or of the Fund's investment adviser; or
(ii) An officer, director or general partner of the principal underwriter serves as an officer, director or general partner of the Fund or of the Fund's investment adviser.
(d) Reporting Requirements of Access Persons.
(1) Reports Required. Unless excepted by paragraph (d)(2) of this section, every Access Person of a Fund (other than a money market fund or a Fund that does not invest in Covered Securities) and every Access Person of an investment adviser of or principal underwriter for the Fund, must report to that Fund, investment adviser or principal underwriter:
(i) Initial Holdings Reports. No later than 10 days after the person becomes an Access Person, the following information:
(A) The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership when the person became an Access Person;
(B) The name of any broker, dealer or bank with whom the Access Person maintained an account in which any securities were held for the direct or indirect benefit of the Access Person as of the date the person became an Access Person; and
(C) The date that the report is submitted by the Access Person.
(ii) Quarterly Transaction Reports. No later than 10 days after the end of a calendar quarter, the following information:
(A) With respect to any transaction during the quarter in a Covered Security in which the Access Person had any direct or indirect beneficial ownership:
(1) The date of the transaction, the title, the interest rate and maturity date (if applicable), the number of shares and the principal amount of each Covered Security involved;
(2) The nature of the transaction (i.e., purchase, sale or any other type of acquisition or disposition);
(3) The price of the Covered Security at which the transaction was effected;
(4) The name of the broker, dealer or bank with or through which the transaction was effected; and
(5) The date that the report is submitted by the Access Person.
(B) With respect to any account established by the Access Person in which any securities were held during the quarter for the direct or indirect benefit of the Access Person:
(1) The name of the broker, dealer or bank with whom the Access Person established the account;
(2) The date the account was established; and
(3) The date that the report is submitted by the Access Person.
(iii) Annual Holdings Reports. Annually, the following information (which information must be current as of a date no more than 30 days before the report is submitted):
(A) The title, number of shares and principal amount of each Covered Security in which the Access Person had any direct or indirect beneficial ownership;
(B) The name of any broker, dealer or bank with whom the Access Person maintains an account in which any securities are held for the direct or indirect benefit of the Access Person; and
(C) The date that the report is submitted by the Access Person.
(2) Exceptions from Reporting Requirements.
(i) A person need not make a report under paragraph (d)(1) of this section with respect to transactions effected for, and Covered Securities held in, any account over which the person has no direct or indirect influence or control.
(ii) A director of a Fund who is not an "interested person" of the Fund within the meaning of section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)], and who would be required to make a report solely by reason of being a Fund director, need not make:
(A) An initial holdings report under paragraph (d)(1)(i) of this section and an annual holdings report under paragraph (d)(1)(iii) of this section; and
(B) A quarterly transaction report under paragraph (d)(1)(ii) of this section, unless the director knew or, in the ordinary course of fulfilling his or her official duties as a Fund director, should have known that during the 15-day period immediately before or after the director's transaction in a Covered Security, the Fund purchased or sold the Covered Security, or the Fund or its investment adviser considered purchasing or selling the Covered Security.
(iii) An Access Person to a Fund's principal underwriter need not make a report to the principal underwriter under paragraph (d)(1) of this section if:
(A) The principal underwriter is not an affiliated person of the Fund (unless the Fund is a unit investment trust) or any investment adviser of the Fund; and
(B) The principal underwriter has no officer, director or general partner who serves as an officer, director or general partner of the Fund or of any investment adviser of the Fund.
(iv) An Access Person to an investment adviser need not make a quarterly transaction report to the investment adviser under paragraph (d)(1)(ii) of this section if all the information in the report would duplicate information required to be recorded under �� 275.204-2(a)(12) or 275.204-2(a)(13) of this chapter.
(v) An Access Person need not make a quarterly transaction report under paragraph (d)(1)(ii) of this section if the report would duplicate information contained in broker trade confirmations or account statements received by the Fund, investment adviser or principal underwriter with respect to the Access Person in the time period required by paragraph (d)(1)(ii), if all of the information required by that paragraph is contained in the broker trade confirmations or account statements, or in the records of the Fund, investment adviser or principal underwriter.
(3) Review of Reports. Each Fund, investment adviser and principal underwriter to which reports are required to be made by paragraph (d)(1) of this section must institute procedures by which appropriate management or compliance personnel review these reports.
(4) Notification of Reporting Obligation. Each Fund, investment adviser and principal underwriter to which reports are required to be made by paragraph (d)(1) of this section must identify all Access Persons who are required to make these reports and must inform those Access Persons of their reporting obligation.
(5) Beneficial Ownership. For purposes of this section, beneficial ownership is interpreted in the same manner as it would be under � 240.16a-1(a)(2) of this chapter in determining whether a person is the beneficial owner of a security for purposes of section 16 of the Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules and regulationsthereunder. Any report required by paragraph (d) of this section may contain a statement that the report will not be construed as an admission that the person making the report has any direct or indirect beneficial ownership in the Covered Security to which the report relates.
(e) Pre-approval of Investments in IPOs and Limited Offerings. Investment Personnel of a Fund or its investment adviser must obtain approval from the Fund or the Fund's investment adviser before directly or indirectly acquiring beneficial ownership in any securities in an Initial Public Offering or in a Limited Offering.
(f) Recordkeeping Requirements.
(1) Each Fund, investment adviser and principal underwriter that is required to adopt a code of ethics or to which reports are required to be made by Access Persons must, at its principal place of business, maintain records in the manner and to the extent set out in this paragraph (f), and must make these records available to the Commission or any representative of the Commission at any time and from time to time for reasonable periodic, special or other examination:
(A) A copy of each code of ethics for the organization that is in effect, or at any time within the past five years was in effect, must be maintained in an easily accessible place;
(B) A record of any violation of the code of ethics, and of any action taken as a result of the violation, must be maintained in an easily accessible place for at least five years after the end of the fiscal year in which the violation occurs;
(C) A copy of each report made by an Access Person as required by this section, including any information provided in lieu of the reports under paragraph (d)(2)(v) of this section, must be maintained for at least five years after the end of the fiscal year in which the report is made or the information is provided, the first two years in an easily accessible place;
(D) A record of all persons, currently or within the past five years, who are or were required to make reports under paragraph (d) of this section, or who are or were responsible for reviewing these reports, must be maintained in an easily accessible place; and
(E) A copy of each report required by paragraph (c)(2)(ii) of this section must be maintained for at least five years after the end of the fiscal year in which it is made, the first two years in an easily accessible place.
(2) A Fund or investment adviser must maintain a record of any decision, and the reasons supporting the decision, to approve the acquisition by investment personnel of securities under paragraph (e), for at least five years after the end of the fiscal year in which the approval is granted.
PART 239 - FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274 - FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
3. The authority citation for Part 239 continues to read, in part, as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37, unless otherwise noted.
* * * * *
4. The authority citation for Part 274 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.
5. Item 1 of Form N-1A [referenced in �� 239.15A and 274.11A] is amended by revising paragraph (b)(3) to read as follows:
FORM N-1A
* * * * *
Item 1. Front and Back Cover Pages
* * * * *
(b) * * *
(3) A statement that information about the Fund (including the SAI) can be reviewed and copied at the Commission's Public Reference Room in Washington, D.C., and that information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090. State that reports and other information about the Fund are available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov, and that copies of this information may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
* * * * *
6. Item 13 of Form N-1A [referenced in �� 239.15A and 274.11A] is amended by adding paragraph (f) and an instruction to read as follows:
Note: The text of Form N-1A does not, and the amendments to the form will not, appear in the Code of Federal Regulations.
FORM N-1A
* * * * *
Item 13. Management of the Fund
* * * * *
(f) Codes of Ethics. Provide a brief statement disclosing whether the Fund and its investment adviser and principal underwriter have adopted codes of ethics under rule 17j-1 of the Investment Company Act [17 CFR 270.17j-1] and whether these codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Fund.
Instruction: A Fund that is not required to adopt a code of ethics under rule 17j-1 of the Investment Company Act is not required to respond to this item.
* * * * *
7. Item 23 of Form N-1A [referenced in �� 239.15A and 274.11A] is amended by adding paragraph (p) and an Instruction to read as follows:
FORM N-1A
* * * * *
Item 23. Exhibits
* * * * *
(p) Codes of Ethics. Any codes of ethics adopted under rule 17j-1 of the Investment Company Act [17 CFR 270.17j-1] and currently applicable to the Fund (i.e., thecodes of the Fund and its investment advisers and principal underwriters). If there are no codes of ethics applicable to the Fund, state the reason (e.g., that the Fund is a Money Market Fund).
Instruction: A Fund that is a feeder fund also must file a copy of all codes of ethics applicable to the master fund.
* * * * *
8. Item 18 of Form N-2 [referenced in �� 239.14 and 274.11a-1] is amended by adding paragraph 5 and an instruction to read as follows:
Note: The text of Form N-2 does not, and the amendments to the form will not, appear in the Code of Federal Regulations.
FORM N-2
* * * * *
Item 18. Management
* * * * *
5. Codes of Ethics: Provide a brief statement disclosing whether the Registrant and its investment adviser and principal underwriter have adopted codes of ethics under Rule 17j-1 of the 1940 Act [17 CFR 270.17j-1] and whether these codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Registrant. Also explain in the statement that these codes of ethics can be reviewed and copied at the Commission's Public Reference Room in Washington, D.C., that information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090, that these codes of ethics are available on theEDGAR Database on the Commission's Internet site at http://www.sec.gov, and that copies of these codes of ethics may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
Instruction
A Registrant that is not required to adopt a code of ethics under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] is not required to respond to this item.
* * * * *
9. Item 24 of Form N-2 [referenced in �� 239.14 and 274.11a-1] is amended by adding new paragraph 2.r. to read as follows:
FORM N-2
* * * * *
Item 24. Financial Statements and Exhibits
* * * * *
2. * * *
r. copies of any codes of ethics adopted under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] and currently applicable to the Registrant (i.e., the codes of the Registrant and its investment advisers and principal underwriters). If there are no codes of ethics applicable to the Registrant, state the reason (e.g., the Registrant is a Money Market Fund).
* * * * *
10. Item 20 of Form N-3 [referenced in �� 239.17a and 274.11b] is amended by adding paragraph (d) and an Instruction to read as follows:
Note: The text of Form N-3 does not, and the amendments to the form will not, appear in the Code of Federal Regulations.
FORM N-3
* * * * *
Item 20. Management
* * * * *
(d) Provide a brief statement disclosing whether the Registrant and its investment adviser and principal underwriter have adopted codes of ethics under Rule 17j-1 of the 1940 Act [17 CFR 270.17j-1] and whether these codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the Registrant. Also explain in the statement that these codes of ethics can be reviewed and copied at the Commission's Public Reference Room in Washington, D.C., that information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090, that these codes of ethics are available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov, and that copies of these codes of ethics may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
Instruction: A Registrant that is not required to adopt a code of ethics under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] is not required to respond to this item.
* * * * *
11. Item 28 of Form N-3 [referenced in �� 239.17a and 274.11b] is amended by removing the word "and" at the end of paragraph (b)(14), removing the period at the end of paragraph (b)(15) and in its place adding a semicolon, removing the period at the end of paragraph (b)(16) and in its place adding "; and", and adding new paragraph (b)(17) to read as follows:
FORM N-3
* * * * *
Item 28. Financial Statements and Exhibits
* * * * *
(b) * * *
(17) copies of any codes of ethics adopted under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] and currently applicable to the Registrant (i.e., the codes of the Registrant and its investment advisers and principal underwriters). If there are no codes of ethics applicable to the Registrant, state the reason (e.g., the Registrant is a Money Market Fund).
* * * * *
12. Item 3 of Form N-5 [referenced in �� 239.24 and 274.5] is amended by removing the word "investment" both times that it appears in the introductory text and adding paragraph (i) and an Instruction after the Instruction to read as follows:
Note: The text of Form N-5 does not, and the amendments to the form will not, appear in the Code of Federal Regulations.
FORM N-5
* * * * *
Item 3. Policies with Respect to Security Investments
* * * * *
(i) Whether the registrant and its investment adviser and principal underwriter have adopted codes of ethics under Rule 17j-1 of the Investment Company Act of 1940 [17 CFR 270.17j-1] and whether these codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the registrant. Also explain that these codes of ethics can be reviewed and copied at the Commission's Public Reference Room in Washington, D.C., that information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090, that these codes of ethics are available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov, and that copies of these codes of ethics may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
Instruction: A registrant that is not required to adopt a code of ethics under Rule
17j-1 under the 1940 Act [17 CFR 270.17j-1] is not required to respond to this item.
* * * * *
13. The Instructions As To Exhibits of Form N-5 [referenced in �� 239.24 and 274.5] are amended by adding paragraph 13 to read as follows:
FORM N-5
* * * * *
INSTRUCTIONS AS TO EXHIBITS
* * * * *
13. Copies of any codes of ethics adopted under Rule 17j-1 under the Investment Company Act of 1940 [17 CFR 270.17j-1] and currently applicable to the registrant (i.e., the codes of the registrant and its investment advisers and principal underwriters). If there are no codes of ethics applicable to the registrant, state the reason (e.g., the registrant is a Money Market Fund).
* * * * *
14. Item 52 of Form N-8B-2 [referenced in � 274.12] is amended by adding paragraph (e) and an Instruction to read as follows:
Note: The text of Form N-8B-2 does not, and the amendments to the form will not, appear in the Code of Federal Regulations.
FORM N-8B-2
* * * * *
Policy of Registrant
52. * * *
(e) Provide a brief statement disclosing whether the trust and its principal underwriter have adopted codes of ethics under rule 17j-1 of the Act [17 CFR 270.17j-1] and whether these codes of ethics permit personnel subject to the codes to invest in securities, including securities that may be purchased or held by the trust. Also explain that these codesof ethics can be reviewed and copied at the Commission's Public Reference Room in Washington, D.C., that information on the operation of the Public Reference Room may be obtained by calling the Commission at 1-202-942-8090, that these codes of ethics are available on the EDGAR Database on the Commission's Internet site at http://www.sec.gov, and that copies of these codes of ethics may be obtained, after paying a duplicating fee, by electronic request at the following E-mail address: publicinfo@sec.gov, or by writing the Commission's Public Reference Section, Washington, D.C. 20549-0102.
Instruction: A trust that is not required to adopt a code of ethics under Rule
17j-1 under the Act [17 CFR 270.17j-1] is not required to respond to this item.
* * * * *
15. Part IX of Form N-8B-2 [referenced in � 274.12] is amended by adding paragraph A.(11) to read as follows:
FORM N-8B-2
* * * * *
IX
EXHIBITS
A. * * *
(11) Copies of any codes of ethics adopted under rule 17j-1 under the Act [17 CFR 270.17j-1] and currently applicable to the trust (i.e., the codes of the trust and its principal underwriters). If there are no codes of ethics applicable to the trust, state the reason (e.g., the trust invests only in direct obligations of the United States Government).
* * * * *
PART 275 - RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
16. The authority citation for Part 275 continues to read in part as follows:
Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-6a, 80b-11, unless otherwise noted.
* * * * *
17. Section 275.204-2 is amended by revising paragraph (a)(12)(i), redesignating paragraphs (a)(12)(ii) and (a)(12)(iii) as paragraphs (a)(12)(iii) and (a)(12)(iv), adding new paragraph (a)(12)(ii), redesignating newly designated paragraph (a)(12)(iii)(B) as paragraph (a)(12)(iii)(C), adding new paragraph (a)(12)(iii)(B), revising paragraph (a)(13)(i), redesignating paragraphs (a)(13)(ii) and (a)(13)(iii) as paragraphs (a)(13)(iii) and (a)(13)(iv), adding new paragraph (a)(13)(ii), redesignating newly designated paragraphs (a)(13)(iii)(B) and (a)(13)(iii)(C) as paragraphs (a)(13)(iii)(C) and (a)(13)(iii)(D), and adding new paragraph (a)(13)(iii)(B) to read as follows:
� 275.204-2 Books and records to be maintained by investment advisers.
(a) * * *
(12)(i) A record of every transaction in a security in which the investment adviser or any advisory representative (as defined in paragraph (a)(12)(iii)(A) of this section) of the investment adviser has, or by reason of the transaction acquires, any direct or indirect beneficial ownership, except:
(A) Transactions effected in any account over which neither the investment adviser nor any advisory representative of the investment adviser has any direct or indirect influence or control; and
(B) Transactions in securities that are: direct obligations of the Government of the United States; bankers' acceptances, bank certificates of deposit, commercial paper, and high quality short-term debt instruments, including repurchase agreements; or shares issued by registered open-end investment companies.
(ii) The record required by paragraph (a)(12)(i) of this section must state the title and amount of the security involved; the date and nature of the transaction (i.e., purchase, sale or other acquisition or disposition); the price at which it was effected; and the name of the broker, dealer, or bank with or through whom the transaction was effected. Any record required by paragraph (a)(12)(i) of this section also may contain a statement declaring that the record of the transaction will not be construed as an admission that the investment adviser or advisory representative has any direct or indirect beneficial ownership in the security. A transaction must be recorded no later than 10 days after the end of the calendar quarter in which the transaction was effected. An investment adviser will be considered to have made a record required by paragraph (a)(12)(i) of this section if:
(A) The investment adviser receives a broker trade confirmation or account statement in the time period required by this paragraph (a)(12)(ii);
(B) The broker trade confirmation, account statement or other records of the investment adviser contains all the information required by this paragraph (a)(12)(ii);
(C) The investment adviser keeps the broker trade confirmation, account statement, and other records containing the information required by this paragraph (a)(12)(ii); and
(D) All broker trade confirmations and account statements that are printed on paper and kept under paragraph (a)(12)(ii)(C) of this section are organized in a manner that allows easy access to and retrieval of any particular confirmation or statement.
(iii) * * *
(B) Beneficial ownership will be interpreted in the same manner as it would be under � 240.16a-1(a)(2) of this chapter in determining whether a person has beneficial ownership of a security for purposes of section 16 of the Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules and regulations thereunder.
* * * * *
(13)(i) Notwithstanding the provisions of paragraph (a)(12) of this section, an investment adviser that is primarily engaged in a business or businesses other than advising registered investment companies or other advisory clients, must maintain a record of every transaction in a security in which the investment adviser or any advisory representative (as defined in paragraph (a)(13)(iii)(A) of this section) of the investment adviser has, or by reason of the transaction acquires, any direct or indirect beneficial ownership, except:
(A) Transactions effected in any account over which neither the investment adviser nor any advisory representative of the investment adviser has any direct or indirect influence or control; and
(B) Transactions in securities that are: direct obligations of the Government of the United States; bankers' acceptances, bank certificates of deposit, commercial paper, and high quality short-term debt instruments, including repurchase agreements; or shares issued by registered open-end investment companies.
(ii) The record required by paragraph (a)(13)(i) of this section must state the title and amount of the security involved; the date and nature of the transaction (i.e., purchase, sale or other acquisition or disposition); the price at which it was effected; and the name of the broker, dealer or bank with or through whom the transaction was effected. Any record required by paragraph (a)(13)(i) of this section also may contain a statement declaring that the record of the transaction will not be construed as an admission that the investment adviser or advisory representative has any direct or indirect beneficial ownership in the security. A transaction must be recorded no later than 10 days after the end of the calendar quarter in which the transaction was effected. An investment adviser will be considered to have made a record required by paragraph (a)(13)(i) of this section if:
(A) The investment adviser receives a broker trade confirmation or account statement in the time period required by this paragraph (a)(13)(ii);
(B) The broker trade confirmation, account statement or other records of the investment adviser contains all the information required by this paragraph (a)(13)(ii);
(C) The investment adviser keeps the broker trade confirmation, account statement, and other records containing the information required by this paragraph (a)(13)(ii); and
(D) All broker trade confirmations and account statements that are printed on paper and kept under paragraph (a)(13)(ii)(C) of this section are organized in a manner that allows easy access to and retrieval of any particular confirmation or statement.
(iii) * * *
(B) Beneficial ownership will be interpreted in the same manner as it would be under � 240.16a-1(a)(2) of this chapter in determining whether a person has beneficial ownership of a security for purposes of section 16 of the Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules and regulations thereunder.
* * * *
By the Commission.
Jonathan G. Katz
Secretary
August 20, 1999
-[1]- Unless otherwise noted, all references to "amended rule 17j-1," "rule 17j-1, as amended," or any paragraph of the rule will be to 17 CFR 270.17j-1, as amended by this release, and all references to "amended rule 204-2," "rule 204-2, as amended," or any paragraph of the rule will be to 17 CFR 275.204-2, as amended by this release.
-[2]-15 U.S.C. 80a-17(j). An "affiliated person" of a rule 17j-1 organization includes: (i) any officer, director, partner, copartner, or employee of the rule 17j-1 organization; (ii) any person directly or indirectly controlling, controlled by, or under common control with the rule 17j-1 organization; (iii) any person owning five percent of the rule 17j-1 organization's voting securities; and (iv) any person in which the rule 17j-1 organization owns five percent or more of the voting securities. See Investment Company Act section 2(a)(3) [15 U.S.C. 80a-2(a)(3)].
-[3]- Prevention of Certain Unlawful Activities With Respect To Registered Investment Companies, Investment Company Act Release No. 11421 (Oct. 31, 1980) [45 FR 73915 (Nov. 7, 1980)] ("1980 Adopting Release").
-[4]- Amended rule 17j-1(b).
-[5]- Rule 17j-1 defines "access person" to include: (i) any director, officer, or general partner of a fund or of a fund's investment adviser, or any employee of a fund or of a fund's investment adviser who, in connection with his or her regular functions or duties, participates in the selection of a fund's portfolio securities or who has access to information regarding a fund's future purchases or sales of portfolio securities; or (ii) any director, officer, or general partner of a principal underwriter who, in the ordinary course of business, makes, participates in or obtains information regarding, the purchase or sale of securities for the fund for which the principal underwriter acts, or whose functions or duties in the ordinary course of business relate to the making of any recommendation to the fund regarding the purchase or sale of securities. Amended rule 17j-1(a)(1). The term "principal underwriter" is defined in section 2(a)(29) of the Act [15 U.S.C. 80a-2(a)(29)].
-[6]- Amended rule 17j-1(c)(1)(i).
-[7]- Amended rule 17j-1(c)(2)(i).
-[8]- Amended rule 17j-1(d)(1)(ii). The rule 17j-1 organization also must keep records of violations of its code of ethics and certain other records. See amended rule 17j-1(f).
-[9]- Personal Investment Activities of Investment Company Personnel and Codes of Ethics of Investment Companies and their Investment Advisers and Principal Underwriters, Investment Company Act Release No. 21341 (Sept. 8, 1995) [60 FR 47844 (Sept. 14, 1995)]. The Proposing Release was preceded by a Commission staff study of rule 17j-1 and an industry advisory group report. Division of Investment Management, SEC, Personal Investment Activities of Investment Company Personnel (1994) ("PIA Report"); Investment Company Institute, Report of the Advisory Group on Personal Investing (1994) ("ICI Advisory Group Report"). The Investment Company Institute is an association of funds representing approximately 95 percent of total fund assets under management in the United States.
-[10]- The comment letters and a summary of the comments prepared by Commission staff are available to the public in File No. S7-25-95. The Commission received additional comments on the rule proposal after the summary of comments was completed on September 11, 1997. These comments also are available to the public in File No. S7-25-95.
-[11]-In addition to the amendments described below, the amendments reorganize and add headings to the text of rule 17j-1 and replace the term "security" with "covered security" to make the rule easier to understand and use. The Commission also has changed the title of the rule from "Certain unlawful acts, practices, or courses of business and requirements relating to codes of ethics with respect to registered investment companies" to "Personal investment activities of investment company personnel" to reflect more clearly the substance of the rule.
-[12]- See 1980 Adopting Release, supra note 3, at text following n.2.
-[13]- Blackout period restrictions generally prohibit transactions by fund personnel in a security during a certain period of time before and after the fund trades in that security.
-[14]- ICI Advisory Group Report, supra note 9, at 31-42. The report also recommended that every code of ethics require prior approval of any acquisition of securities by investment personnel in a private placement and prohibit investment personnel from serving on the boards of publicly traded companies without prior authorization. Id. In order to implement these restrictions effectively, the report recommended that fund codes of ethics, among other things, require all access persons to: (i) "preclear" personal securities investments; (ii) direct their brokers to provide copies of confirmations of all personal securities transactions and periodic statements of all securities accounts; and (iii) certify annually that they have read and understand the code of ethics, and that they have complied with the requirements of the code. Id. at 42-49.
-[15]- See PIA Report, supra note 9, at 31-32.
-[16]- All references in this release to boards of directors include boards of trustees for funds organized as business trusts. See Investment Company Act section 2(a)(12) [15 U.S.C. 80a-2(a)(12)] (definition of "director" for purposes of the Investment Company Act).
-[17]- As used in this release, the term "independent directors" means directors who are not "interested persons" of the fund under the Investment Company Act. See Investment Company Act section 2(a)(19) [15 U.S.C. 80a-2(a)(19)] (definition of "interested person" for purposes of the Investment Company Act).
-[18]- Amended rule 17j-1(c)(1)(ii).
-[19]- Id. This change should not affect the substance of board action because, under the proposal, the same analysis would have been required by the board when it reviewed the code of an investment adviser or principal underwriter. See Proposing Release, supra note 9, at n.17 and accompanying text.
-[20]- Amended rule 17j-1(c)(1)(ii). Funds in a fund complex often have different fiscal year periods and, as a result, different schedules for meetings of their boards. The amendments to rule 17j-1 permit fund boards six months in which to approve material changes to codes in order to avoid requiring all funds in a fund complex to approve simultaneously a material change in their investment adviser's or principal underwriter's code of ethics. Id.
-[21]- The codes of ethics of some rule 17j-1 organizations only recite general principles, and the procedures (rather than the codes) of these organizations contain the specific restrictions, prohibitions, or requirements concerning an access person's personal investment activities. Under amended rule 17j-1, the board must approve a code based on its determination that the code contains provisions reasonably necessary to prevent access persons from violating the anti-fraud provisions of the rule. If a board can make this determination only if it takes into consideration the procedures, then the code must incorporate, or the board must explicitly approve, those procedures, as well as any subsequent material changes to those procedures.
-[22]- See Proposing Release, supra note 9, at text preceding n.18.
-[23]- See Division of Investment Management, SEC, Protecting Investors: A Half Century of Investment Company Regulation 253, 255-56 (1992); PIA Report, supra note 9, at 47.
-[24]-The proposed amendments did not specify the method by which the management of a rule 17j-1 organization should provide the report to the fund's board. Two commenters questioned whether the reports could be made orally. The Commission believes that the issues and certification report is important to board oversight of personal investment policies and will best serve the board in written form. We have therefore clarified in the amended rule that the management of each rule 17j-1 organization must furnish a written report to the fund board. See amended rule 17j-1(c)(2)(ii).
-[25]- Amended rule 17j-1(c)(2)(ii)(A). As suggested by two commenters, we are limiting the scope of the annual issues and certification report to material violations or matters. Nevertheless, even immaterial individual violations (such as late filings of transaction reports) may collectively suggest material problems with an organization's compliance systems. We therefore would expect the report to include any violations that are material in the aggregate. In addition, the requirement to report on issues under the code of ethics or procedures means that a report also should include significant conflicts of interest that arose involving the personal investment policies of the organization, even if the conflicts have not resulted in a violation of the code. For example, a fund would be required to report to the board if a fund portfolio manager is a director of a company whose securities are held by the fund.
-[26]- Amended rule 17j-1(c)(2)(ii)(B). Although the amendments require an issues and certification report to be provided to the board only once a year, more frequent reports by the management of a rule 17j-1 organization may be appropriate in certain circumstances, such as when there have been significant violations of a code or procedures, or significant conflicts of interest arising under the code or procedures. The report also may be used as an opportunity to propose changes to the code or to the procedures that must be approved by the board.
-[27]- Amended rule 17j-1(c)(2)(ii). In considering the report, the board should determine whether any action is required in response to the report.
-[28]- The board also may determine that the fund, investment adviser or principal underwriter is not appropriately implementing its code and procedures, as required by rule 17j-1, to prevent violations of the organization's code of ethics. See amended rule 17j-1(c)(2)(i).
-[29]- See amended rule 17j-1(a)(5) (defining the term "Fund" to include any registered investment company). Unlike other types of funds, a UIT typically does not employ an investment adviser or have a board of directors and has a relatively fixed portfolio of investments. See Investment Company Act section 4(2) [15 U.S.C. 80a-4(2)] (definition of "unit investment trust").
-[30]- See Proposing Release, supra note 9, at nn.30-31 and accompanying text.
-[31]- Amended rule 17j-1(c)(1)(iii).
-[32]- Id.
-[33]- Proposing Release, supra note 9, at n.38 and accompanying text.
-[34]- Amended rule 17j-1(d)(1)(i). In some cases, persons may have been reporting their securities holdings and brokerage accounts to their rule 17j-1 organizations before they become access persons. In such cases, we believe that an access person would satisfy the initial holdings report requirement, i.e., would not have to submit a report, if his or her rule 17j-1 organization maintains a record of the information required to be disclosed in the initial report and the access person confirms in writing (which writing may be electronic) the accuracy of the record within 10 days after becoming an access person.
-[35]- These commenters suggested limiting an initial holdings report to "investment personnel," as defined in the ICI Advisory Group Report. See infra note 48.
-[36]- Persons who currently are or who become access persons before the effective date of the amendments to rule 17j-1 are not required to file initial holdings reports. See infra note 98.
-[37]- Amended rule 17j-1(d)(1)(iii).
-[38]- Proposing Release, supra note 9, at n.42 and accompanying text. The Commission noted that the ICI Advisory Group Report recommended that access persons file reports listing all of their securities holdings upon commencement of employment and annually thereafter. See ICI Advisory Group Report, supra note 9, at 46.
-[39]- Using an annual holdings report, a rule 17j-1 organization should better be able to determine the securities holdings of all access persons each year and would not need, for example, to keep a "running count" of the holdings based on the initial holdings report and subsequent quarterly transaction reports. If holdings information were needed, for example, five years after a person becomes an access person, the Commission's examinations staff or a rule 17j-1 organization might have to piece together information from the initial holdings report and as many as 20 quarterly reports. Some rule 17j-1 organizations do, however, maintain a "running count" of their employees' current securities holdings and brokerage accounts. We believe that access persons at these organizations would satisfy their annual holdings report requirement by confirming annually, in writing (which may be electronic), the accuracy of the organization's record of information required to be disclosed in the annual holdings report, and recording the date of the confirmation.
-[40]-Proposing Release, supra note 9, at nn.43-46 and accompanying text. Under current rule 17j-1, the term "security" excludes certain securities, such as U.S. government securities and shares of open-end funds, that do not appear to present the same opportunities for fraudulent trading activities that rule 17j-1 was designed to prevent. See current rule 17j-1(e)(5). The amendments to rule 17j-1 change the term to "covered security" and expand the types of securities excluded from the definition. See amended rule 17j-1(a)(4) (discussed infra in section III.H of this release). The Commission has revised the term in order to avoid any confusion with the term "security" as defined under the Act. See Investment Company Act section 2(a)(36) [15 U.S.C. 80a-2(a)(36)].
-[41]- Amended rule 17j-1(d)(1).
-[42]- Amended rule 17j-1(d)(1)(i)(B), (ii)(B) and (iii)(B).
-[43]-This requirement is similar to a recommendation of the ICI Advisory Group Report that the National Association of Securities Dealers ("NASD") adopt a rule to require all broker-dealers to notify a fund when any of the fund's employees open a brokerage account. ICI Advisory Group Report, supra note9, at 44-45.
-[44]- Amended rule 17j-1(d)(1)(i).
-[45]-Proposing Release, supra note 9, at text following n.47.
-[46]- Amended rule 17j-1(d)(3) and (f)(1)(D).
-[47]-Proposing Release, supra note 9, at nn.32-34 and accompanying text. Five commenters emphasized that all funds should be given flexibility to determine their own policies and procedures governing personal investment activities. One of these commenters, however, supported specific basic requirements in codes, including restrictions on trading in IPOs and private placement offerings.
-[48]- Id. The report did not define the term "private placement." See supra notes 13and 14 and accompanying text for a discussion of the additional restrictions recommended in the report. The report defined "investment personnel" to include portfolio managers and employees who provide information and advice to a portfolio manager or who help execute a portfolio manager's decisions, such as securities analysts and traders. ICI Advisory Group Report, supra note 9, at 29-30.
-[49]- ICI, Report to the Division of Investment Management, U.S. Securities and Exchange Commission: Implementation of the Institute's Recommendations on Personal Investing 15-18 (1995) ("ICI Survey"). Approximately 66 percent of the fund complexes with funds that are ICI members (representing approximately 97 percent of ICI member assets under management) responded to the survey. Seventy-two percent of those fund complexes adopted the ban on investment personnel acquiring securities in an IPO. Sixty-nine percent adopted the ban on purchasing securities in private placements without prior approval. Fourteen percent of the fund complexes that responded to the survey adopted recommendations based on their particular circumstances, which in some cases provided for more stringent restrictions than those recommended by the ICI Advisory Group Report. Id.
-[50]- A "hot issue" IPO typically means an IPO in which the securities trade in the aftermarket at a premium over the offering price. See Rule IM-2110-1(a)(1) of the NASD Conduct Rules, NASD Manual (CCH) 4112 (1999) (introduction to rules on "free-riding" and "withholding").
-[51]- See Kathleen Weiss Hanley, William J. Wilhelm, Jr., Evidence on the Strategic Allocation of Initial Public Offerings, 37 Journal of Financial Economics 239 (1995) (suggesting that approximately 67 percent of shares in IPOs are allocated to institutional investors). See also Michael Siconolfi, Underwriters Set Aside IPO Stock for Officials of Potential Customers, Wall St. J., Nov. 12, 1997, at A1 ("It is no news that underwriters make most of the shares in hot IPOs available not to the little-guy investor but to institutions, such as mutual fund companies and pension funds that provide a lot of trading commissions and other business.").
-[52]- ICI Advisory Group Report, supra note 9, at 32.
-[53]- See, e.g., U.S. v. Ostrander, 999 F.2d 27 (2d Cir. 1993) (affirming conviction of portfolio manager, who purchased privately offered warrants of company whose securities she acquired for the fund, for accepting unlawful compensation for fund's purchase of property in violation of the Investment Company Act).
-[54]- See, e.g., In the Matter of Ronald V. Speaker and Janus Capital Corporation, Investment Company Act Release No. 22461 (Jan. 13, 1997) (investment adviser made $16,000 profit on same day purchase and sale of debentures in which fund could have invested, and failed to disclose transactions to the fund or obtain prior consent of the fund (or a disinterested employee authorized to waive the opportunity on the fund's behalf)).
-[55]- See ICI Advisory Group Report, supra note 9, at 32.
-[56]- See Ostrander, supra note 53.
-[57]- A fund portfolio manager who has invested in the private placement may have an opportunity to increase the value of his or her investment by causing the fund to invest in the public offering and contribute to its success. See ICI Advisory Group Report, supra note 9, at 33-34 (citing John Accola, Firms, Fund Exec Ties "Normal," Rocky Mountain News, Jan. 18, 1994, at 38A).
-[58]- Amended rule 17j-1(e). The rule is not limited to purchases of "covered securities" sold in an IPO or limited offering, but rather applies to purchases of all securities sold in an IPO or limited offering. See 15 U.S.C. 80a-2(a)(36) (definition of "security"). The rule generally defines an IPO to include an offering of securities registered with the Commission, the issuer of which, immediately before the registration, was not required to file reports with the Commission. Rule 17j-1(a)(6). This is the same definition used in section 12(f)(1)(G)(i) of the Securities Exchange Act of 1934 (the "Securities Exchange Act") [15 U.S.C. 78l(f)(G)(i)]. The definition of "limited offering" under the rule includes private placement offerings that are exempt from registration under section 4(6) of the Securities Act [15 U.S.C. 77d(6)] or under Regulation D [17 CFR 230.501-508], as well as offerings that are not public under section 4(2) of the Securities Act [15 U.S.C. 77d(2)]. Amended rule 17j-1(a)(8).
-[59]- A portfolio manager, for example, may have an opportunity to invest in an IPO of the fund adviser as a result of his or her service as an employee of the adviser, in an IPO of a mutual insurance company as a result of his or her ownership of a life insurance policy, or in an IPO of a spinoff company as a result of his or her ownership of stock in the company that spins off the issuer. In each case (and other similar cases), a fund or adviser could determine that the portfolio manager's access to the IPO did not result from his or her position with the fund.
-[60]- For example, a portfolio manager's purchase of privately offered securities issued by a small family business that is unlikely to make a public offering in the future would likely not raise a material conflict if the portfolio manager's fund is prohibited from investing in private placements. Similarly, an investment in an IPO in which all shares are allocated to investors on a non-discriminatory basis may not raise a material conflict. See Elizabeth Cochran, Taking a Seat at the IPO Table, Wash. Post, Jan. 7, 1999, at E1 (some online firms allocate IPO shares on a "first-come, first-served" basis or on a pro-rata basis to all interested investors); Lisa Bransten and Nick Wingfield, New Company Aims to Shift IPO Playing Field, Wall St. J., Feb. 8, 1999, at C1 (one online firm selling IPO shares will use a "Dutch auction" process to set the offering price and to allocate IPO stock to the highest bidding investors).
-[61]- For example, if a portfolio manager sought approval to invest in a private placement of securities of a business that might make a public offering in the future, the fund or adviser could decide to approve the investment subject to conditions designed to protect investors from potential conflicts. These conditions might require that the portfolio manager disclose his or her investment if the fund subsequently considers investing in the business, and that other investment personnel who have no personal interest in the issuer review any decision the portfolio manager may make regarding the fund's investment in the business. See ICI Advisory Group Report, supra note 9, at 33.
-[62]- We expect that funds and advisers will review these proposed investments on a case-by-case basis, except for those circumstances in which advance general approval may be appropriate because it is clear that conflicts are very unlikely to arise due to the nature of the opportunity for investing in the IPO or private placement. See supra text accompanying notes 59 and 60. The fund's inability to invest in the securities would not be a basis for concluding generally that the conflicts are unlikely to arise. See text accompanying note 53 supra.
-[63]- Some conflicts of interest must be reported to the fund's board of directors under rule 17j-1. See supra note 25; amended rule 17j-1(c)(2)(ii) (annual issues and certification report requirement).
-[64]- Amended rule 17j-1(f)(2).
-[65]- In deciding whether to approve securities transactions by investment personnel, the adviser should consider all conflicts that may cause the adviser and its investment personnel to violate their fiduciary obligations to the fund, other funds advised by the adviser, and other clients of the adviser. In the case of a proposed transaction in a security of limited availability, the adviser should consider whether the fund or other clients can invest in the security before approving the transaction. See Speaker, supra note 54; In the Matter of Kemper Financial Services, Inc. et al., Investment Advisers Act Release No. 1494 (June 6, 1995); In the Matter of Joan Conan, Investment Advisers Act Release No. 1446 (Sept. 30, 1994).
-[66]- Amended rule 17j-1(a)(7) defines "investment personnel" as: (i) any employee of a fund or its investment adviser (or any company in a control relationship with either) who, in connection with his or her regular functions or duties, makes or participates in making any recommendations regarding the purchase or sale of securities by the fund and (ii) any natural person in a control relationship to the fund or its investment adviser who obtains information concerning recommendations made to the fund regarding the purchase or sale of securities by the fund.
-[67]- See Proposing Release, supra note 9, at nn.50-51 and accompanying text.
-[68]- Two commenters opposed the requirement that a fund disclose whether fund personnel may invest in "securities, including securities that may be purchased or held by the fund" and noted that this phrase could imply that investment by fund personnel in these securities is inherently suspect. We believe this information is important for investors, and, as discussed below, we are adopting this requirement as proposed. Funds are free to provide additional disclosure that personal trading by fund personnel is not inherently unlawful.
-[69]- The SAI is the second part of Form N-1A, the form used to register open-end funds, of Form N-2, the form used to register closed-end funds, and of Form N-3, the form used to register separate accounts offering variable annuity contracts. The recent amendments to Form N-1A require a fund to send an SAI to requesting investors within three business days of a request. See Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 1998)], at text accompanying n.189 ("Amendments to Form N-1A"); Form N-1A [17 CFR 274.11A], Instruction 3 to Item 1(b)(1).
-[70]- See Amendments to Form N-1A, supra note 69, at text accompanying n.23 (stating that prospectus disclosure requirements are designed to include "essential information" about the fundamental characteristics and risks of investing in a fund, and to be limited to information "necessary for an average or typical investor to make an investment decision").
-[71]-Information in the EDGAR system is available through our Internet web site at <http://www.sec.gov>. Registration statements also can be reviewed and copied at the Commission's Public Reference Room in Washington, D.C.
A fund that is not required to have a code of ethics because, for example, it does not invest in covered securities as defined in amended rule 17j-1(a)(4), would not be required to file any code as an exhibit to its registration statement, but should indicate on its exhibit list the reason that it is not filing a code of ethics. See Form N-1A, Item 23(p). A fund that invests only in the securities of one other fund (such as a feeder fund in a "master\feeder" fund arrangement) would be required to file the codes of ethics applicable to the fund in which it invests because the feeder fund is a vehicle for investment in the underlying fund. Id. A management investment company that invests in the securities of other funds and exercises discretion regarding the funds in which it invests (such as a "fund of funds") would not, however, be required to file the codes of ethics of those other funds.
-[72]- Current rule 17j-1(c)(1); 15 U.S.C. 78p.
-[73]- 17 CFR 240.16a-1(a)(2). See Ownership Reports and Trading by Officers, Directors and Principal Security Holders, Securities Exchange Act Release No. 28869 (Feb. 8, 1991) [56 FR 7242 (Feb. 21, 1991)]. The rule provides that, for purposes of determining whether a person is the beneficial owner of more than 10 percent of a registered class of equity securities under section 16 of the Securities Exchange Act [15 U.S.C. 78p], ownership should be calculated according to standards of beneficial ownership outlined under section 13(d) ofthe Securities Exchange Act [15 U.S.C. 78m(d)] and the rules under section 13(d), subject to certain exclusions. 17 CFR 240.16a-1(a)(1). For all other purposes under section 16, beneficial ownership should be based on whether the person has a pecuniary interest in the equity security. 17 CFR 240.16a-1(a)(2).
-[74]- Amended rule 17j-1(d)(5). The amended rule also clarifies that the definition of beneficial ownership applies to any "covered security" the access person owns or acquires. Id. To the extent that the clarification differs from any previous guidance that the staff has given, that guidance is withdrawn. See MI Fund, Inc., SEC No-Action Letter (Aug. 18, 1981).
-[75]-Amended rule 204-2(a)(12)(iii)(B), (13)(iii)(B).
-[76]-These personnel are "affiliated persons" of a fund or of its investment adviser or principal underwriter. An "affiliated person" of an organization includes any officer, director, partner, copartner, or employee of the organization. See supra note 2.
-[77]- Amended rule 17j-1(b); see also section 17(j) [15 U.S.C. 80a-17(j)] (prohibiting violation of Commission rules in connection with purchase or sale of a "security held or to be acquired" by a fund). Under rule 17j-1, a "security held or to be acquired" by a fund includes a security that (i) is held or is being considered for purchase by the fund or its investment adviser for the fund at the time of the transaction, or (ii) was held or was considered for purchase by the fund or its investment adviser for the fund at any time during the 15 days before the transaction. Amended rule 17j-1(a)(10). The effect of this provision is to include a transaction in such a security within the scope of the rule's anti-fraud provision. Rule 17j-1 does not prohibit fund personnel from purchasing or selling these securities unless the transaction would defraud the fund (although codes of ethics may prohibit or limit such transactions). In addition, rule 17j-1 does not limit a fund's ability to purchase or sell a security as a result of transactions by fund personnel. While a transaction by fund personnel in a security that is outside the scope of the rule will not violate section 17(j) or rule 17j-1, such a transaction may nonetheless violate other anti-fraud provisions of the federal securities laws. See, e.g., section 17(a) of the Securities Act [15 U.S.C. 77q(a)], section 10(b) of the Securities Exchange Act [15 U.S.C. 78j(b)], rule 10b-5 [17 CFR 240.10b-5] thereunder, and section 206 of the Advisers Act [15 U.S.C. 80b-6].
-[78]-Proposing Release, supra note 9, at nn.59-61 and accompanying text.
-[79]- Amended rule 17j-1(a)(10). A security that is exchangeable for or convertible into a security that is held or to be acquired by a fund would include warrants to purchase or sell the security.
-[80]- Rule 17j-1 currently excepts "securities issued by the Government of the United States" from the definition. The Commission is not changing the securities subject to this exception, but is amending the exception to read "direct obligations of the Government of the United States" in order to conform the exception to the exception for these securities listed in rule 204-2(a)(12) and 204-2(a)(13) under the Advisers Act. Amended rule 17j-1(a)(4)(i).
-[81]- Amended rule 17j-1(a)(4)(ii). As amended, rule 17j-1 excludes from the definition of "covered security" "bankers' acceptances, bank certificates of deposit, commercial paper, and high quality short-term debt instruments, including repurchase agreements." Id. We interpret "high quality short-term debt instrument" to mean any instrument that has a maturity at issuance of less than 366 days and that is rated in one of the two highest rating categories by a Nationally Recognized Statistical Rating Organization.
-[82]- See amended rule 17j-1(c)(1)(i). Similarly, investment advisers and principal underwriters to these funds would not have to adopt codes of ethics unless the investment adviser or principal underwriter also provides services to a fund that must adopt a code of ethics under rule 17j-1. See also supra note 71.
-[83]- See amended rule 17j-1(d)(1). If, however, an access person is an access person of another organization that is covered by rule 17j-1, the access person would have to provide holdings and transaction reports to that organization.
-[84]- See amended rule 17j-1(d)(1)(i), (ii)(A) and (iii)(A) (reports limited to covered securities). The Proposing Release requested comment whether there are other types of securities that should be excepted from the scope of the rule. Commenters recommended several other types of securities that should be excepted, such as options and futures on broad-based market indices. The Commission does not believe that those recommended types of securities are insulated from the risks of market manipulation and the potential conflicts of interest that rule 17j-1 is intended to cover. The Commission therefore is not amending the rule's definition of "covered security" to exclude those securities.
-[85]- Amended rule 204-2(a)(12), (13).
-[86]- Rule 17j-1 currently excepts transactions in securities issued by the Government of the United States, bankers' acceptances, bank certificates of deposit, commercial paper and shares of registered open-end investment companies from its reporting requirements. Rule 204-2(a) currently excepts from its recordkeeping requirements only transactions in securities that are direct obligations of the United States.
-[87]- For a discussion of these exceptions, see supra section III.H of this release.
-[88]- Amended rule 204-2(a)(12), (13).
-[89]- Rule 17j-1 organizations that already are in compliance with these requirements do not have to satisfy the requirements of the rule again to meet these compliance dates. Thus, a rule 17j-1 organization that currently requires quarterly transaction, initial holdings and annual holdings reports containing the information required under amended rule 17j-1 and that already has identified and notified its access persons of those reporting obligations would not need to identify and notify the individuals again.
-[90]- See amended rule 17j-1(d)(4).
-[91]- See amended rule 17j-1(d)(3).
-[92]- See amended rule 17j-1(f)(4).
-[93]- See amended rule 17j-1(c)(1)(iii).
-[94]- See amended rule 17j-1(c)(2).
-[95]- See amended rule 17j-1(d)(1)(iii).
-[96]- The additional information required under this amendment is: (i) the date that the quarterly transaction report is filed; (ii) the name of any covered securities account established by the access person during that quarter; and (iii) the date the account was established. Amended rule 17j-1(d)(1)(ii)(A)(5), (B). Note that access persons need not file a quarterly transaction report if the information would duplicate information that their rule 17j-1 organization has received in a broker's confirmation or account statement. See amended rule 17j-1(d)(2)(v).
-[97]- See amended rule 17j-1(e), (f)(2).
-[98]- See amended rule 17j-1(d)(1)(i). Any person who has become an access person before March 1, 2000 need not file an initial holdings report, but must file the first of his or her annual holdings reports no later than the date specified above.
-[99]- See Amended Forms N-1A, N-2, N-3, N-5 and N-8B-2. A post-effective amendment made for the purpose of complying with these amendments may be made pursuant to rules 485(b) or 486(b) under the Securities Act [17 CFR 230.485(b), .486(b)], provided the post-effective amendment otherwise meets the conditions for immediate effectiveness under those rules.
-[100]- The estimated number of respondents may overstate the number of entities actually required to comply with the rule's requirements because money market funds, funds that invest only in securities excluded from the definition of "covered security" in rule 17j-1, and some investment advisers, principal underwriters, and access persons to those funds, do not have to comply with the rule's requirements concerning codes of ethics and transactions and holdings reports. See amended rule 17j-1(c)(1); 17j-1(d)(2)(i).
-[101]-Although the Proposing Release requested it, none of the comment letters provided data pertaining to the cost of complying with rule 17j-1.
-[102]- Because the amendments to rule 17j-1 expand the types of funds that are exempt from rule 17j-1, in certain cases a rule 17j-1 organization's costs could decrease under the amended rule.
-[103]- See current rule 17j-1(b)(1).
-[104]- We understand that fund directors generally receive compensation on the basis of the number of meetings that they attend. Therefore, no additional payment would be required for work performed during a regularly scheduled meeting.
-[105]- See amended rule 17j-1(c)(1)(ii).
-[106]- The cost estimate is based on our estimate that the report would take 2 hours of professional time (at $150 per hour) and 1 hour of support staff time (at $15 per hour) to prepare.
The amendments also require the procedures instituted by rule 17j-1 organizations to require review of transaction and holdings reports. The Commission believes that most funds already have review procedures in place and the cost of implementing additional procedures to review transaction and holdings reports would not be significant.
-[107]- The cost of including this disclosure in a post-effective amendment and filing the codes of ethics would be minimal for funds that submit their own filings through EDGAR. Funds that use outside contractors to submit EDGAR filings would incur some additional cost in filing the codes as exhibits. We estimate that approximately 40 percent of funds submit their own EDGAR filings. Thus, approximately 2,340 funds use outside contractors. We estimate that funds using outside contractors would file an average of 36 pages of exhibits at an average cost of $15 per page, for a total cost to funds of $1,263,600 (2,340 × 36 × $15 =$1,263,600) in the first year after the amendments to rule 17j-1 become effective.
-[108]- See infra note 118.
-[109]-This estimate assumes that each fund and adviser will receive, on average, 10 applications for review each year, each of which will take, on average, approximately 0.5 hours of professional time (at $150 per hour) to review (and, if necessary, document), for an annual cost of $750 per organization (5 × $150 = $750). These numbers may vary considerably depending on the fund or adviser and its personnel. The estimated annual cost of review and documentation is equal to the number of funds and advisers that must begin review multiplied by the number of hours per organization to review multiplied by the cost per hour to review, for a total of $900,000 (1,200 × 5 × $150 = $900,000).
-[110]- We have assumed that a new access person who files an initial holdings report would not have to file an annual holdings report in the same year. An access person may, however, have to file an initial and annual holdings report in the same year if the rule 17j-1 organization requires all access persons to file reports by the same date each year.
-[111]-Sixty-six percent of member fund complexes responded to the ICI Survey. ICI Survey, supra note 49, at 1. The Survey indicated that 66 percent of the fund complexes responding adopted the ICI Advisory Group Report recommendation that investment personnel disclose all personal securities holdings when they begin employment and annually thereafter. Id. at 30-31. An additional 11 percent of the responding fund complexes stated that they had adapted the disclosure requirements to their circumstances. Some of these adaptations have imposed more frequent reporting requirements or extended reporting requirements to all access persons. Id.
-[112]- We estimate that 275 of the 5,226 rule 17j-1 organizations are new this year. Access persons at those organizations would file an initial holdings report in the first year rather than an annual holdings report. Of the remaining 4,951 existing rule 17j-1 organizations, we estimate that 66 percent already have implemented initial and annual holdings report requirements for investment personnel, see supra note 111, and that investment personnel represent half of the access persons at these organizations. Therefore, the amendments would impose new reporting requirements on only half of the access persons at 66 percent of existing organizations. Based on the ICI Survey, we estimate that 5 percent of existing organizations currently require all access persons to submit initial and annual holdings reports. Therefore, the amendments would not impose new reporting requirements on any of the access persons at those organizations. (We do not know the precise percentage of funds that impose reporting requirements on all access persons, see supra note 111, so we have estimated 5 percent as the approximate midpoint of the 11 percent range of funds that adapted the reporting recommendations of the ICI Advisory Group Report.) We estimate that the remaining 29 percent of organizations (100 - (66 + 5) = 29) currently do not require any access persons to make personal holdings disclosures comparable to those required by the amendments to rule 17j-1. Therefore, the amendments would impose new reporting requirements on all the access persons at those organizations.
We estimate that, on average, a rule 17j-1 organization will have approximately 24 access persons (22 of whom would file an annual holdings report, and 2 of whom are new and would file an initial holdings report). Therefore, we estimate that the number of access persons who would have to begin filing annual reports as a result of the amendments to rule 17j-1 equalsthe sum of: all continuing access persons at 29 percent of 4,951 existing rule 17j-1 organizations (22 × 1,435 = 31,570) plus half of continuing access persons at 66 percent of existing rule 17j-1 organizations (11 × 3,268 = 35,948); or a total of 67,518 access persons.
-[113]- The estimated cost to the industry resulting from the rule's annual holdings report requirement equals the number of continuing access persons multiplied by the number of hours required to complete the report multiplied by the hourly cost of completing the report (67,518 × 0.5 × $150 = $5,063,850). The estimated cost of professional time ($150) is an average and could be significantly higher or lower for individual rule 17j-1 organizations and their access persons.
-[114]- See supra note 98.
-[115]- The estimated number of new access persons who would file initial holdings reports as a result of the amendments to rule 17j-1 equals the number of new access persons each year at existing rule 17j-1 organizations that do not have an initial holdings report requirement plus the number of new access persons at new organizations that do not have an initial holdings report requirement. Based on the ICI Survey, see supra note 112, we estimate the number of access persons each year who would have to submit an initial holdings report as a result of amendments to rule 17j-1 equals the sum of: all new access persons at 29 percent of 4,951 existing rule 17j-1 organizations (2 × 1,435); all access persons at 29 percent of 275 new rule 17j-1 organizations (24 × 79 = 1,896); half of new access persons at 66 percent of 4,951 existing rule 17j-1 organizations (1 × 3,268 = 3,268); and half of access persons at 66 percent of 275 new rule 17j-1 organizations (12 × 182); for a total of 10,218 access persons.
-[116]- The estimated cost to the industry of filing initial holdings reports equals the number of access persons required to file reports multiplied by the number of hours required to complete the report multiplied by the hourly cost to complete the report (10,218 × 1 × $150 = $1,532,700).
-[117]- See supra note 51 and accompanying text.
-[118]- According to the ICI Survey, 72 percent of fund complexes that responded to the Survey prohibit investment personnel from acquiring any securities in an IPO. In addition, approximately 14 percent of responding fund complexes have adapted the prohibition to their circumstances, in some cases adopting broader prohibitions, such as prohibiting purchases of securities in secondary market transactions or extending the prohibition to all access persons or all employees. ICI Survey, supra note 49, at 15-16. Approximately 69 percent of fund complexes responding to the Survey stated that they require prior approval before investment personnel may purchase securities in a private placement. An additional 14 percent of responding fund complexes stated that they have adapted this requirement to their situations, in some cases making the restrictions broader, such as by applying it to all access persons or employees in certain cases. Id. at 17-18. We estimate that after the amendments to rule 17j-1 become effective, investment personnel in approximately 25 percent of fund complexes will be subject to the restrictions on purchases of IPOs and private placements for the first time.
-[119]- See supra note 51 of this release. We are unable to quantify the number of investment persons who purchase securities in IPOs and private placements or the frequency of those purchases. The number may vary significantly among individual funds or advisers.
-[120]- 44 U.S.C. 3501 - 3520.
-[121]- Prior to the revisions to the PRA in 1995, requiring disclosure of information to third parties was not a "collection of information" under the PRA. See 44 U.S.C. 3502(3)(A) (definition of "collection of information").
-[122]- OMB control numbers are as follows: rule 17j-1 (3235-0224, expires Oct. 31, 2001); rule 204-2 (3235-0278, expires Apr. 30, 2000); Form N-1A (3235-0307, expires May 31, 2000); Form N-2 (3235-0026, expires Oct. 31, 2001); Form N-3 (3235-0316, expires Mar. 31, 2000); Form N-5 (3235-0169, expires Oct. 31, 2001); Form N-8B-2 (3235-0186, expires Oct. 31, 2001); and Form S-6 (3235-0184, expires Mar. 31, 2002).
-[123]- As required under any request for extension of approval, the Commission sought comment on the collection of information. See Existing Collection; Comment Request, OMB Control No. 3235-0224 [63 FR 37606 (July 13, 1998)]; and Submission for OMB Review; Comment Request, OMB Control No. 3235-0224 [63 FR 50608 (Sept. 22, 1998)].
-[124]- The Proposing Release requested comment on an annual holdings report and whether an annual holdings report would impose an undue burden on persons required to file the report. See Proposing Release, supra note 9, at n.42 and accompanying text.
-[125]- See supra notes 111-12 and accompanying text.
-[126]- The amendments also require access persons to disclose two new items of information in their quarterly transaction and initial holdings reports: the name of any broker, dealer or bank with whom they maintain a securities account, and the date the report is filed. Amended rule 17j-1(d)(1)(i)(B), (ii)(B). We believe this information will take little additional time to disclose.
-[127]- The Proposing Release sought comment regarding specific restrictions on personal investment activities, including prohibition on the purchase of securities in an IPO. See supra note 47.
-[128]- See supra note 118. Because this requirement and the requirement for access persons to provide an annual holdings report affect the paperwork burden estimate, the Commission has filed a "Paperwork Reduction Act Change Worksheet" with OMB to reflect the changes in the annual reporting burden.
-[129]- See supra note 100 and accompanying text for a discussion of the estimated number of funds, and investment advisers and principal underwriters to funds.
-[130]- As noted above, funds should have to prepare disclosures regarding codes of ethics after the initial disclosure only to the extent the codes are materially amended.
-[131]- See supra note 112 for an estimate of the average number of access persons at each 17j-1 organization. Under amended rule 17j-1, access persons of investment advisers to funds are exempt from filing quarterly transaction reports if the reports would duplicate information provided under rule 204-2 of the Advisers Act. Amended rule 17j-1(d)(2)(v). Thus, we estimate that the number of access persons filing quarterly transaction reports is equal to the average number of access persons for each rule 17j-1 organization multiplied by the total number of funds and principal underwriters of funds (24 × (3900 + 425) = 103,800).
-[132]- The number of access persons who are required to file quarterly transaction reports will vary depending on the personal investment activities of each access person. In addition, amended rule 17j-1 contains several exceptions to filing quarterly transaction reports, including an exception if the report would duplicate information contained in broker trade confirmations or account statements received by the rule 17j-1 organization. Amended rule 17j-1(d)(2)(v). Although a number of access persons may, on average, have transactions to report during more than one quarter each year, many access persons may not have to provide a quarterly transaction report because their rule 17j-1 organizations have received the information in a broker trade confirmation or account statement. Accordingly, we estimate that each access person, on average, would file one quarterly transaction report each year. Estimates concerning quarterly transaction reports are not included in the cost-benefit analysis because access persons currently are required to file quarterly transaction reports under rule 17j-1. See current rule 17j-1(c)(1), (2).
-[133]- We estimate that the number of access persons who would have to file initial holdings reports each year equals the average number of access persons at each new rule 17j-1 organization (275 × 24 = 6,600) plus the average number of new access persons at existing rule 17j-1 organizations (4,951 × 2 = 9,902), for a total of 16,502 (6,600 + 9,902 = 16,502). See supra note 112 and accompanying text.
-[134]- The number of access persons filing an annual report would not include new access persons. See supra note 110. Thus, we estimate that the number of access persons filing an annual report each year equals the number of existing rule 17j-1 organizations (5,226 - 275 = 4,951) multiplied by the average number of continuing access persons per organization (24 - 2 = 22), for a total of 108,922 (4,951 × 22 = 108,922).
-[135]- This estimate assumes that 75 percent of funds and advisers currently prohibit investment personnel from investing in IPOs. See supra note118.
-[136]- We also did not adopt a proposed exception to the initial holdings report requirement. The proposed amendments would have excepted access persons from filing initial holdings reports if the information would duplicate information already maintained by the person's rule 17j-1 organization. Under the amended rule, all new access persons must file an initial holdings report. As discussed in note 34 supra, however, an access person may satisfy the requirement by simply confirming information required to be in the report that is maintained by the person's rule 17j-1 organization. This change from the proposed amendments accounts for the remainder of the increase in burden hours.
-[137]- See supra note 107.
-[138]- As defined in rules adopted under the Investment Company Act for purposes of the Regulatory Flexibility Act, a small entity is an investment company with net assets of $50 million or less as of the end of its most recent fiscal year. 17 CFR 270.0-10 (1997). The Commission amended its definition of small entity under the Investment Company Act for purposes of the Regulatory Flexibility Act in 1998. See Definitions of "Small Business" or "Small Organization" Under the Investment Company Act of 1940, the Investment Advisers Act of 1940, the Securities Exchange Act of 1934 and the Securities Act of 1933, Securities Act Release No. 7548 (June 24, 1998), [63 FR 35508 (June 30, 1998)]. Because the IRFA for this proposal relied on the earlier definition (which was broader), the FRFA also relies on the earlier definition.
-[139]-As defined in rules adopted under the Investment Advisers Act for purposes of the Regulatory Flexibility Act, a small entity is an investment adviser that manages assets with a total value of $50 million or less, in discretionary or nondiscretionary accounts, as of the end of its most recent fiscal year and does not render other advisory services. 17 CFR 275.0-7 (1997). The FRFA relies on the definition of "small entity" under the Investment Advisers Act before it was amended in June 1998. See supra note 138.
-[140]- As defined in rules under the Securities Exchange Act for purposes of the Regulatory Flexibility Act, a small entity is a broker or dealer that had total capital of less than $500,000 on the date of its prior fiscal year. 17 CFR 240.0-10 (1997). The FRFA relies on the definition of "small entity" under the Securities Exchange Act before it was amended in June 1998. See supra note 138.
http://www.sec.gov/rules/final/ia-1815.htm
Home | Previous Page | Modified:06/01/2000 |