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Proposed Rule:
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| # Funds Modifying Contracts | Staff Attorney Hours | Supervisory Attorney Hours | Total Burden hours | Cost per Staff Attorney Hour | Cost per Supervisory Attorney Hour | Total Cost of Burden Hours |
| 1,900 | 5 | 1 | 11,400 | $62 | $130 | $836,000 |
Proposed rule 17a-10 and the proposed amendments to rules 10f-3, 12d3-1, and 17e-1 would require virtually identical modifications to fund advisory contracts. The Commission staff assumes that funds will rely equally on the exemptions in all of these rules, and therefore the burden hours associated with the required contract modifications should be apportioned equally among the four rules. Therefore the estimated one-time burden hours associated with rules 17a-10, 10f-3, 12d3-1, and 17e-1 are 2,850 hours for each rule (11,400 total burden hours for all of the rules/ four rules), and the estimated one-time cost of these burden hours is $209,000 for each rule ($836,000/four rules).98
The staff estimates that a total of 60 funds will enter into subadvisory agreements each year after the first year in which the proposed rule and rule amendments are adopted.99 Assuming that each of these funds enters into a contract that permits it and its affiliated funds to rely on the exemptions in proposed rule 17a-10, and the proposed amendments to rules 10f-3, 12d3-1, and 17e-1, an estimated 360 burden hours (90 hours per rule) will be associated with these rules annually, with an associated cost of $26,400 ($6,600 per rule).100
Rule 17e-1
Based on an analysis of investment company filings, the staff estimates that approximately 293 investment companies use at least one affiliated broker and that each of these investment companies spends an estimated 12.5 hours per year (at a cost of $775 per year) complying with rule 17e-1's requirements that (i) the fund retain records of transactions entered into pursuant to the rule ("recordkeeping requirement"), and (ii) the fund's directors review those transactions quarterly ("review requirement").101 Based on conversations with representatives of investment companies, the staff estimates that the proposed amendments to rule 17e-1 would exempt approximately 40 percent of transactions that occur under rule 17e-1 from the rule's recordkeeping and review requirements. The Commission staff estimates, therefore, that the proposed amendments to rule 17e-1 would, in this respect, decrease the rule's information collection burden to 2,200 hours102 and $136,422 per year.103
Estimated Reduction in Burden Hours and Cost of Rule 17e-1
(effect of exemption from review and recordkeeping requirements)
| # Funds relying on rule 17e-1 | # Funds subject to recordkeeping and review requirements | Burden hours of recordkeeping and review requirements | Total Burden hours of recordkeeping and review requirements | Cost per hour of recordkeeping and review requirements | Total Cost of Burden Hours | |
| Current Rule | 293 | 293 | 12.5 | 3,663 | $62 | $227,106 |
| As proposed to be amended | 293 | 176 | 12.5 | 2,200 | $62 | $136,422 |
This reduction will be offset to some extent by the increase in estimated burden hours described above with respect to the required modifications of the funds' investment advisory contract. Therefore rule 17e-1, as proposed to be amended, would impose an estimated burden of 5,050 hours ($345,400) in the first year after the amendments are adopted, and an estimated burden of 2,290 hours ($143,000) in subsequent years.
We request comments on the accuracy of our estimates. Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) evaluate whether the proposed collections of information are necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (ii) evaluate the accuracy of the Commission's estimate of the burden of the proposed collections of information; (iii) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (iv) evaluate whether there are ways to minimize the burden of the collections of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.
Persons wishing to submit comments on the collection of information requirements of the proposed rules and rule amendments should direct them to the Office of Management and Budget, Attention Desk Officer of the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Room 10202, New Executive Office Building, Washington, DC 20503, and should send a copy to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609, with reference to File No. S7-13-02. OMB is required to make a decision concerning the collections of information between 30 and 60 days after publication of this Release; therefore a comment to OMB is best assured of having its full effect if OMB receives it within 30 days after publication of this Release. Requests for materials submitted to OMB by the Commission with regard to these collections of information should be in writing, refer to File No. S7-13-02, and be submitted to the Securities and Exchange Commission, Records Management, Office of Filings and Information Services, 450 Fifth Street, NW, Washington, DC 20549.
We have prepared an Initial Regulatory Flexibility Analysis ("IRFA") in accordance with 5 U.S.C. 603 regarding the proposed rule 17a-10 and the proposed amendments to rules 10f-3, 12d3-1, 17a-6, 17d-1, and 17e-1 under the Investment Company Act. The following summarizes the IRFA.
The IRFA summarizes the background of the proposed amendments. The IRFA also discusses the reasons for the proposed amendments and the objectives of, and legal basis for, the amendments. Those items are discussed above in the Release.
The IRFA discusses the effect of the proposed amendments on small entities. For purposes of the Regulatory Flexibility Act, a fund is a small entity if the fund, together with other funds in the same group of related funds, has net assets of $50 million or less as of the end of its most recent fiscal year.104 An investment adviser is a small entity if it (i) manages less than $25 million in assets, (ii) has total assets of less than $5 million on the last day of its most recent fiscal year, and (iii) does not control, is not controlled by, and is not under common control with another investment adviser that manages $25 million or more in assets, or any person (other than a natural person) that had total assets of $5 million or more on the last day of the most recent fiscal year.105 A portfolio company (i.e., a company in which a fund invests) is a small entity if its total assets on the last day of its most recent fiscal year were $5 million or less.106 The staff estimates, based upon Commission filings, that there are approximately 3,650 active registered management investment companies, of which approximately 200 are small entities, and may rely on the rule if they satisfy its conditions. The staff further estimates that there are approximately 7,560 registered investment advisers, of which approximately 430 are small entities.107
The IRFA states that proposed amendments to rules 17a-6 and 17d-1 would impose recordkeeping requirements on funds that engage in principal transactions or joint arrangements in reliance on the rule, when a Prohibited Participant has an interest in a party to the transaction or arrangement that is not material, in that the board of directors of the fund would be required to record in the minutes of its meetings the basis for the board's finding that the Prohibited Participant's interest is not material. The IRFA further explains that the exemptions in proposed rule 17a-10 and the proposed amendments to rules 10f-3, 12d3-1, and 17e-1 would be conditioned on the funds' advisory contracts including certain provisions.
The IRFA explains that we have not identified any federal rules that duplicate or conflict with the proposed rule and rule amendments. The IRFA states that the Regulatory Flexibility Act directs the Commission to consider significant alternatives that would accomplish the stated objectives, while minimizing any significant economic impact on small entities. The overall impact of the amendments would be to decrease the burdens on all entities, including small entities, because the burdens under the proposed amendments should be more than offset by the elimination of existing requirements. Therefore, the potential impact of the amendments on small entities should not be significant. For these reasons, alternatives to the proposed amendments and proposed new rule are unlikely to minimize any impact that the proposed amendments may have on small entities.108
We encourage comment with respect to any aspect of the IRFA. We specifically request comment on the number of small entities that would be affected by the proposed rule amendments, and the likely impact of the proposal on small entities. Commenters are asked to describe the nature of any impact and provide empirical data supporting the extent of the impact. These comments will be considered in connection with the adoption of the rule amendments, and will be placed in the same public file as comments on the proposed amendments themselves. A copy of the IRFA may be obtained by contacting William C. Middlebrooks, Jr., Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0506.
The Commission is proposing amendments to rules 10f-3, 12d3-1, 17a-6, 17d-1, and 17e-1 and new rule 17a-10 under the Investment Company Act pursuant to authority set forth in sections 6(c), 10(f), 17(b), 17(d), 31(a), and 38(a) of the Investment Company Act.
List of Subjects
17 CFR Part 270
Investment companies; reporting and recordkeeping requirements; securities.
For reasons set forth in the preamble, Title 17, Chapter II of the Code of Federal Regulations is proposed to be amended as follows:
PART 270 -- RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for Part 270 continues to read in part as follows:
AUTHORITY: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, unless otherwise noted;
* * * * *
2. Section 270.10f-3 is amended by:
a. Redesignating paragraph (b) as paragraph (c);
b. Adding paragraphs (a)(6), (a)(7), (a)(8), and new paragraph (b);
c. Revising the paragraph heading in newly redesignated paragraph (c); and
d. Revising newly redesignated paragraph (c)(7) to read as follows:
§ 270.10f-3 Exemption for the acquisition of securities during the existence of an underwriting or selling syndicate.
(a) * * *
(6) Managed Portion of a portfolio of a registered investment company means a discrete portion of a portfolio of a registered investment company for which a Subadviser is responsible for providing investment advice, provided that:
(i) The Subadviser is not an affiliated person of any investment adviser, promoter, underwriter, officer, director, member of an advisory board, or employee of the registered investment company; and
(ii) The Subadviser's advisory contract:
(A) Prohibits it from consulting with any subadviser of the investment company that is a principal underwriter or an affiliated person of a principal underwriter concerning securities transactions of the investment company; and
(B) Limits its responsibility in providing advice to providing advice with respect to such portion.
(7) Series of a Series Company means any class or series of a registered investment company that issues two or more classes or series of preferred or special stock, each of which is preferred over all other classes or series with respect to assets specifically allocated to that class or series.
(8) Subadviser means an investment adviser as defined in section 2(a)(20)(B) of the Act (15 U.S.C. 80a-2(a)(20)(B)).
(b) Exemption for purchases by Series Companies and Investment Companies with Managed Portions. For purposes of this section and section 10(f) of the Act (15 U.S.C. 80a-10(f)), each Series of a Series Company, and each Managed Portion of a portfolio of a registered investment company, is deemed to be a separate investment company. Therefore, a purchase or acquisition of a security by a registered investment company is exempt from the prohibitions of section 10(f) of the Act if section 10(f) of the Act would not prohibit such purchase if each Series and each Managed Portion of the company were a separately registered investment company.
(c) Exemption for other purchases. * * *
(7) Percentage limit.
(i) Generally. The amount of securities of any class of such issue to be purchased by the investment company, aggregated with purchases by any other investment company advised by the investment company's investment adviser, and purchases by any other account over which such adviser has discretionary authority or otherwise exercises control, does not exceed the following limits:
(A) If purchased in an offering other than an Eligible Rule 144A Offering, 25 percent of the principal amount of the offering of such class; or
(B) If purchased in an Eligible Rule 144A Offering, 25 percent of the total of:
(1) The principal amount of the offering of such class sold by underwriters or members of the selling syndicate to qualified institutional buyers, as defined in § 230.144A(a)(1) of this chapter; plus
(2) The principal amount of the offering of such class in any concurrent public offering.
(ii) Exemption from percentage limit. The requirement in paragraph (c)(7)(i) of this section applies only if the investment adviser of the investment company is, or is an affiliated person of, a principal underwriter of the security; and
(iii) Separate aggregation. The requirement in paragraph (c)(7)(i) of this section applies independently with respect to each investment adviser of the investment company that is, or is an affiliated person of, a principal underwriter of the security.
* * * * *
3. Section 270.12d3-1 is amended by revising paragraph (c) and adding paragraph (d)(9) before the Note:
§ 270.12d3-1 Exemption of acquisitions of securities issued by persons engaged in securities related businesses.
* * * * *
(c) Notwithstanding paragraphs (a) and (b) of this section, this section does not exempt the acquisition of:
(1) A general partnership interest; or
(2) A security issued by the acquiring company's promoter, principal underwriter, or any affiliated person of such promoter, or principal underwriter; or
(3) A security issued by the acquiring company's investment adviser, or an affiliated person of the acquiring company's investment adviser, other than a security issued by a Subadviser or an affiliated person of a Subadviser of the acquiring company provided that:
(i) Prohibited relationships. The Subadviser that is (or whose affiliated person is) the issuer is not, and is not an affiliated person of, an investment adviser responsible for providing advice with respect to the portion of the acquiring company that is acquiring the securities, or of any promoter, underwriter, officer, director, member of an advisory board, or employee of the acquiring company;
(ii) Advisory contract. The advisory contracts of the Subadviser that is (or whose affiliated person is) the issuer, and any Subadviser that is advising the portion of the acquiring company that is purchasing the securities:
(A) Prohibit them from consulting with each other concerning securities transactions for the acquiring company, other than for purposes of complying with the conditions of paragraphs (a) and (b) of this section; and
(B) Limit their responsibility in providing advice to providing advice with respect to a discrete portion of the acquiring company's portfolio.
(d) * * *
(9) Subadviser means an investment adviser as defined in section 2(a)(20)(B) of the Act (15 U.S.C. 80a-2(a)(20)(B)).
* * * * *
4. Section 270.17a-6 is revised to read as follows:
§ 270.17a-6 Exemption for transactions with portfolio affiliates.
(a) Exemption for transactions with portfolio affiliates. A transaction to which a Fund, or a company controlled by a Fund, and a Portfolio Affiliate of the Fund are parties is exempt from the provisions of section 17(a) of the Act (15 U.S.C. 80a-17(a)), provided that none of the following persons is a party to the transaction, or has a direct or indirect Financial Interest in a party to the transaction other than the Fund:
(1) An officer, director, employee, investment adviser, member of an advisory board, depositor, promoter of or principal underwriter for the Fund;
(2) A person directly or indirectly controlling the Fund;
(3) A person directly or indirectly owning, controlling or holding with power to vote five percent or more of the outstanding voting securities of the Fund;
(4) A person directly or indirectly under common control with the Fund, other than:
(i) A Portfolio Affiliate of the Fund; or
(ii) A Fund whose sole interest in the transaction is an interest in a Portfolio Affiliate of the Fund; or
(5) An affiliated person of any of the persons mentioned in paragraphs (a)(1) - (4) of this section, other than the Fund or a Portfolio Affiliate of the Fund.
(b) Definitions.
(1) Financial Interest.
(i) The term Financial Interest as used in this section does not include:
(A) Any interest through ownership of securities issued by the Fund;
(B) Any interest of a wholly-owned subsidiary of a Fund;
(C) Usual and ordinary fees for services as a director;
(D) An interest of a non-executive employee;
(E) An interest of an insurance company arising from a loan or policy made or issued by it in the ordinary course of business to a natural person;
(F) An interest of a bank arising from a loan or account made or maintained by it in the ordinary course of business to or with a natural person, unless it arises from a loan to a person who is an officer, director or executive of a company which is a party to the transaction, or from a loan to a person who directly or indirectly owns, controls, or holds with power to vote, five percent or more of the outstanding voting securities of a company which is a party to the transaction;
(G) An interest acquired in a transaction described in paragraph (d)(3) of § 270.17d-1; or
(H) Any other interest that the board of directors of the Fund, including a majority of the directors who are not interested persons of the Fund, finds to be not material, provided that the directors record the basis for that finding in the minutes of their meeting.
(ii) A person has a Financial Interest in any party in which it has a Financial Interest, in which it had a Financial Interest within six months prior to the transaction, or in which it will acquire a Financial Interest pursuant to an arrangement in existence at the time of the transaction.
(2) Fund means a registered investment company or separate series of a registered investment company.
(3) Portfolio Affiliate of a Fund means a person that is an affiliated person (or an affiliated person of an affiliated person) of a Fund solely because the Fund, a Fund under common control with the Fund, or both:
(i) Controls such person (or an affiliated person of such person); or
(ii) Owns, controls, or holds with power to vote five percent or more of the outstanding voting securities of such person (or an affiliated person of such person).
5. Section 270.17a-10 is added to read as follows:
§ 270.17a-10 Exemption for transactions with certain subadvisory affiliates.
(a) Generally. A person that is prohibited by section 17(a) of the Act (15 U.S.C. 80a-17(a)) from entering into a transaction with a Fund solely because such person is, or is an affiliated person of, a Subadviser of the Fund, or a Subadviser of a Fund that is under common control with the Fund, may nonetheless enter into such transaction, if:
(1) Prohibited relationship. The person is not, and is not an affiliated person of, an investment adviser responsible for providing advice with respect to the portion of the Fund for which the transaction is entered into, or of any promoter, underwriter, officer, director, member of an advisory board, or employee of the Fund.
(2) Advisory contract. The advisory contracts of the Subadviser that is (or whose affiliated person is) entering into the transaction, and any Subadviser that is advising the fund (or portion of the fund) entering into the transaction:
(i) Prohibit them from consulting with each other concerning securities transactions for the Fund; and
(ii) If both such Subadvisers are responsible for providing investment advice to the Fund, limit their responsibility in providing advice with respect to a discrete portion of the Fund's portfolio.
(b) Definitions.
(1) Fund means a registered investment company and includes a separate series of a registered investment company.
(2) Subadviser means an investment adviser as defined in section 2(a)(20)(B) of the Act (15 U.S.C. 80a-2(a)(20)(B)).
6. Section 270.17d-1 is amended by revising paragraphs (d)(5) and (d)(6) to read as follows:
§ 270.17d-1 Applications regarding joint enterprises or arrangements and certain profit-sharing plans.
* * * * *
(d) * * *
(5) Any joint enterprise or other joint arrangement or profit-sharing plan ("joint enterprise") in which a registered investment company or a company controlled by such a company, is a participant, and in which a Portfolio Affiliate (as defined in § 270.17a-6(b)(3)) of such registered investment company is also a participant, provided that:
(i) None of the persons identified in § 270.17a-6(a) is a participant in the joint enterprise, or has a direct or indirect Financial Interest in a participant in the joint enterprise (other than the registered investment company);
(ii) Financial Interest.
(A) The term Financial Interest as used in this section does not include:
(1) Any interest through ownership of securities issued by the registered investment company;
(2) Any interest of a wholly-owned subsidiary of the registered investment company;
(3) Usual and ordinary fees for services as a director;
(4) An interest of a non-executive employee;
(5) An interest of an insurance company arising from a loan or policy made or issued by it in the ordinary course of business to a natural person;
(6) An interest of a bank arising from a loan to a person who is an officer, director, or executive of a company which is a participant in the joint transaction or from a loan to a person who directly or indirectly owns, controls, or holds with power to vote, five percent or more of the outstanding voting securities of a company which is a participant in the joint transaction;
(7) An interest acquired in a transaction described in paragraph (d)(3) of this section; or
(8) Any other interest that the board of directors of the investment company, including a majority of the directors who are not interested persons of the investment company, finds to be not material, provided that the directors record the basis for that finding in the minutes of their meeting.
(B) A person has a Financial Interest in any party in which it has a Financial Interest, in which it had a Financial Interest within six months prior to the investment company's participation in the enterprise, or in which it will acquire a Financial Interest pursuant to an arrangement in existence at the time of the investment company's participation in the enterprise.
(6) The receipt of securities and/or cash by an investment company or a controlled company thereof and an affiliated person of such investment company or an affiliated person of such person pursuant to a plan of reorganization: Provided, That no person identified in § 270.17a-6(a)(1) or any company in which such a person has a direct or indirect Financial Interest (as defined in paragraph (d)(5)(iii) of this section):
* * * * *
7. Section 270.17e-1 is amended by revising paragraphs (b)(3) and (d) to read as follows:
§ 270.17e-1 Brokerage transactions on a securities exchange.
* * * * *
(b) * * *
(3) Determines no less frequently than quarterly that all transactions effected pursuant to this section during the preceding quarter (other than transactions in which the person acting as broker is a person permitted to enter into a transaction with the investment company by § 270.17a-10) were effected in compliance with such procedures;
* * * * *
(d) The investment company:
(1) Shall maintain and preserve permanently in an easily accessible place a copy of the procedures (and any modification thereto) described in paragraph (b)(1) of this section; and
(2) Shall maintain and preserve for a period not less than six years from the end of the fiscal year in which any transactions occurred, the first two years in an easily accessible place, a record of each such transaction (other than any transaction in which the person acting as broker is a person permitted to enter into a transaction with the investment company by § 270.17a-10) setting forth the amount and source of the commission, fee or other remuneration received or to be received, the identity of the person acting as broker, the terms of the transaction, and the information or materials upon which the findings described in paragraph (b)(3) of this section were made.
By the Commission.
Jill M. Peterson
Assistant Secretary
Date: April 30, 2002
_____________________
| 1 | We do not edit personal, identifying information, such as names or E-mail addresses, from electronic submissions. Submit only information you wish to make publicly available. |
| 2 | Unless otherwise noted, when we refer to rules 10f-3, 12d3-1, 17a-6, 17d-1, or 17e-1, or any paragraph of those rules, we are referring to the following sections of the Code of Federal Regulations in which each of these rules is published: 17 CFR 270.10f-3, 17 CFR 270.12d3-1, 17 CFR 270.17a-6, 17 CFR 270.17d-1, or 17 CFR 270.17e-1 respectively. |
| 3 | We use the term "fund" throughout this release to refer to registered investment companies, series of registered investment companies that are series companies, and business development companies, which are unregistered investment companies. |
| 4 | See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. On Banking and Currency, 76th Cong., 3d Sess. 37 (1940) (Statement of Commissioner Healy). |
| 5 | The Act defines an "affiliated person" of another person as (A) any person directly or indirectly owning, controlling, or holding with power to vote, five percent or more of the outstanding voting securities of such other person; (B) any person five percent or more of whose outstanding voting securities are directly or indirectly owned, controlled, or held with power to vote by such other person; (C) any person directly or indirectly controlling, controlled by, or under common control with such other person; (D) any officer, director, partner, copartner, or employee of such other person; (E) if such other person is a fund, any investment adviser of the fund or any member of its advisory board; and (F) if such other person is an unincorporated fund, not having a board of directors, the depositor of the fund. 15 U.S.C. 80a-2(a)(3). The term "control" means the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25 percent of the voting securities of a company is presumed to control such company. 15 U.S.C. 80a-2(a)(9). |
| 6 | A fund's investment adviser is, for example, a first-tier affiliate of the fund. A company that owns five percent of the voting securities of the fund's investment adviser is a second-tier affiliate of the fund. The prohibitions of the Act extend to second-tier affiliates to make those prohibitions more difficult to circumvent. See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. On Banking and Currency, 76th Cong., 3d Sess. 261 (1940) (Statement of David Schenker). |
| 7 | 15 U.S.C. 80a-17(a). The prohibition in section 17(a) also extends to promoters and principal underwriters for the fund and persons affiliated with the promoters and principal underwriters. Section 17(a) was recently amended to make it unlawful for a first- or second-tier affiliate to lend money or other property to a fund, or a company controlled by a fund, in contravention of such rules, regulations, or orders as the Commission, after consultation with and taking into consideration the views of the Federal banking agencies (as defined in section 3 of the Federal Deposit Insurance Act [12 U.S.C. 1813]), issues consistent with the protection of investors. 15 U.S.C. 80a-17(a)(4) (effective May 12, 2001). The Commission has not yet issued any rules or orders under this section. Section 17(a) applies to transactions between, among others, a fund and its portfolio affiliates. SEC v. General Time, 407 F.2d 65, 68 (2d Cir. 1968); Talley Industries, Inc., Investment Company Act Release No. 5953 (Jan. 9, 1970). |
| 8 | Section 17(d) of the Act makes it unlawful for first- and second-tier affiliates of a fund, the fund's principal underwriters, and affiliated persons of the fund's principal underwriters, acting as principal, to effect any transaction in which the fund or a company controlled by the fund is a joint or a joint and several participant "in contravention of such rules and regulations as the Commission may prescribe for the purpose of limiting or preventing participation by such registered or controlled company on a basis different from or less advantageous than that of such other participant." 15 U.S.C. 80a-17(d). Rule 17d-1(a) prohibits first- and second-tier affiliates of a fund, the fund's principal underwriter, and affiliated persons of the fund's principal underwriter, acting as principal, from participating in or effecting any transaction in connection with any joint enterprise or other joint arrangement or profit-sharing plan in which any such fund or company controlled by a fund is a participant "unless an application regarding such joint enterprise, arrangement or profit-sharing plan has been filed with the Commission and has been granted." Section 17(d) and rule 17d-1 apply to joint transactions of funds and, among others, their portfolio affiliates. SEC v. Talley Industries, 399 F2d 396, 402 (2d Cir. 1968). |
| 9 | 15 U.S.C. 80a-10(f). |
| 10 | Section 17(e)(1) of the Act prohibits an affiliated person acting as agent from accepting any compensation from any source (other than a regular salary or wage from a fund) for the purchase or sale of property to or for the fund, or companies controlled by the fund, except in the course of the person's business as an underwriter or broker. Section 17(e)(2) of the Act limits the remuneration that a person may receive when acting in reliance on section 17(e)(1)'s exemption for the brokerage business. 15 U.S.C. 80a-17(e). |
| 11 | Section 12(d)(3) of the Act generally prohibits any fund, and any company or companies controlled by a fund, from purchasing or acquiring any security issued by or any other interest in the business of any person who is a broker, a dealer, is engaged in the business of underwriting, or is either an investment adviser of an investment company or an investment adviser registered under the Investment Advisers Act of 1940. 15 U.S.C. 80a-12(d)(3), referring to 15 U.S.C. 80b. Rule 12d3-1 provides an exemption from this general prohibition, but the exemption does not extend to the acquisition of a general partnership interest or a security issued by the acquiring company's investment adviser, promoter, or principal underwriter, or any affiliated person of such investment adviser, promoter, or principal underwriter. See rule 12d3-1(c). |
| 12 | Average assets per fund grew from $346 million in 1990 to $852 million in 2000. Investment Company Institute, Mutual Fund Fact Book 63 (2001) ("ICI Fact Book"). Schedule 13D and 13G Reports [17 CFR 240.13d-101 and 13d-102] (reporting ownership of more than five percent of the voting stock of a security traded on an exchange) by funds grew during the same period from 510 (reporting ownership by approximately 65 funds in 450 issuers) to 1,378 (reporting ownership by 190 funds in 875 issuers). |
| 13 | Of the approximately 9,700 portfolios of open-end and closed-end investment companies reporting information on Form N-SAR [17 CFR 274.101] during the first six months of 2001, approximately 1,900 reported using at least one subadviser, and 520 reported using two or more subadvisers. |
| 14 | In 2000 there were 431 fund complexes. ICI Fact Book, supra note 12, at 63. Funds in a fund complex are under the common control of an investment adviser or other person when the adviser or other person exercises a controlling influence over the management or policies of the funds. 15 U.S.C. 80a-2(a)(9). See supra note 5. Not all advisers control the funds they advise. The determination of whether a fund is under the control of its adviser, officers, or directors depends on the relevant facts and circumstances. See Investment Company Mergers, Investment Company Act Release No. 25259 (Nov. 8, 2001) [66 FR 57602 (Nov. 15, 2001)] at n.11. Throughout this release we presume that the funds in a fund complex are under common control as funds that are not affiliated persons will not require and thus will not rely on most of the proposed exemptions. The exception is the exemption for transactions restricted by section 10(f) of the Act, which we describe in section I.B.3. |
| 15 | For example, in a fund complex with five funds controlled by a single investment adviser, if each fund has one subadviser and one portfolio affiliate, then every fund would have seven first-tier affiliates (one adviser, one subadviser, one portfolio affiliate, and four affiliated funds) and eight second-tier affiliates (four subadvisers of affiliated funds and four portfolio affiliates of affiliated funds). |
| 16 | For example, in a fund complex where multiple funds are under common control but are managed by different subadvisers, each subadviser is a first-tier affiliate of any fund that it advises, and a second-tier affiliate of all of the other funds. The restrictions on affiliate transactions apply to dealings between a fund and the subadvisers that are its second-tier affiliates even if the fund's own subadviser is a business competitor of the second-tier affiliate subadvisers. |
| 17 | These orders have been issued pursuant to our authority under sections 6(c), 10(f), and 17(b) of the Act. 15 U.S.C. 80a-6(c), 80a-10(f), and 80a-17(b). See, e.g., CDC IXIS Asset Management Advisers, L.P., Investment Company Act Release Nos. 25061 (July 12, 2001) [66 FR 37497 (July 18, 2001)] (notice) and 25103 (Aug. 8, 2001) (order); Frank Russell Investment Co., Investment Company Act Release Nos. 24820 (Jan. 3, 2001) [66 FR 2031 (Jan.10, 2001)] (notice) and 24847 (Jan. 30, 2001) (order); SEI Investments Management Corporation, Investment Company Act Release Nos. 24430 (Apr. 28, 2000) [65 FR 26246 (May 5, 2000)] (notice) and 24463 (May 23, 2000) (order); North American Security Trust, Investment Company Act Release Nos. 18860 (Jul. 22, 1992) [57 FR 33540 (Jul. 29, 1992)] (notice) and 18899 (Aug. 18, 1992) (order); State Street Bank and Trust Co., Investment Company Act Release Nos. 19784 (Oct. 13, 1993) [58 FR 53983 (Oct. 19, 1993)] (notice) and 19844 (Nov. 9, 1993) (order). |
| 18 | We are also taking this opportunity to redraft in plain English the rules that permit funds to enter into transactions and arrangements with their portfolio affiliates. |
| 19 | Today's proposal responds, in part, to a rulemaking petition submitted by the Investment Company Institute to the Commission in December 1998 ("ICI Petition"). A copy of that petition is available in the Commission's Public Reference Room, 450 5th Street, NW, Washington, DC (File No. S7-13-02). In November 2000 we proposed to amend rule 10f-3 to expand the exemption provided by the rule to permit a fund to purchase government securities in a syndicated offering. See Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Investment Company Act Release No. 24775 (Nov. 29, 2000) [65 FR 76189 (Dec. 6, 2000)]. We are reproposing certain aspects of the rule 10f-3 proposal in this Release, and are adopting other aspects of that proposal in a companion release that we are issuing today. See Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Investment Company Act Release No. 25560 (April 30, 2002). |
| 20 | The rules were designed to exempt transactions and arrangements from the prohibitions of section 17 when neither the parties to the transaction, nor any person with a financial interest in a party to the transaction, has the potential to overreach the investment company. See Investment Company Act Release No. 10698 (May 17, 1979) [44 FR 29908 (May 23, 1979)]. |
| 21 | Thus, for example, under current rule 17a-6 a fund whose first-tier portfolio affiliate merges with another company in which the fund invests may receive shares of the acquiring company (in exchange for its shares of the acquired company) in connection with the merger. However, the rule does not permit an identical transaction in which the acquiring company is an affiliated person of another fund in the fund complex. See Longleaf Partners Funds Trust, SEC Staff No-Action Letter (Apr. 9, 2001). |
| 22 | We adopted rule 17a-6 in 1961 to provide small business investment companies licensed by the United States Small Business Administration with an exemption from section 17(a)(1) and section 17(a)(3) for certain transactions with their portfolio affiliates. Investment Company Act Release No. 3361 (Nov. 17, 1961) [26 FR 11238 (Nov. 29, 1961)]. We amended the rule in 1964 to exempt from section 17(a) additional persons and transactions, including transactions involving all other types of investment companies and their portfolio affiliates that were "non-public" companies, and again in 1979 to extend the rule to transactions with portfolio affiliates that are public companies. Investment Company Act Release Nos. 3968 (Apr. 29, 1964) [29 FR 6152 (May 9, 1964)] and 10828 (Aug. 13, 1979) [44 FR 48657 (Aug. 20, 1979)]. |
| 23 | We amended rule 17d-1 in 1974 to permit joint transactions under conditions similar to those imposed by rule 17a-6. Adoption of Amendment to Rule 17d-1 Under the Investment Company Act of 1940 Exempting Certain Joint Transactions Involving Registered Investment Companies, Including SBIC Stock Option Plans, From the Application Requirements of the Rule, Investment Company Act Release No. 8542 (Oct. 15, 1974) [39 FR 37971 (Oct. 25, 1974)]. |
| 24 | In 1958 there were only five "multi-fund" open-end investment companies (series companies) and 29 "multi-company groups" (fund complexes). Wharton School of Finance and Commerce, A Study of Mutual Funds, H.R. Rep. No. 2274, 87th Cong., 2d Sess. 6, 42 (1962). As recently as 1980 few management investment companies were organized as series companies and there were only 120 fund complexes. ICI Fund Fact Book, supra note 12, at 63; Securities and Exchange Commission Annual Report for 1980, 48th Annual Report. In 2000, approximately 1,400 management investment companies were organized as series companies (with 7,000 portfolios) and there were approximately 430 fund complexes. ICI Fund Fact Book, supra note 12, at 63; Reports on Form N-SAR [17 CFR 274.101]. |
| 25 | Proposed rules 17a-6(a) and 17d-1(d)(5). |
| 26 | Rules 17a-6(a)(5)(ii) and 17d-1(d)(5)(i). |
| 27 | Rules 17a-6(b)(1) and 17d-1(d)(5)(iii). |
| 28 | Proposed rules17a-6(b)(1)(i)(H) and 17d-1(d)(5)(ii)(A)(8). Our proposed amendments would also require that the directors record the basis for their finding in the minutes of the board's meeting. Id. |
| 29 | Rule 17a-6 is not available if a Prohibited Participant "has, or within six months prior to the transaction had . . . or pursuant to an arrangement will acquire" a financial interest in a party to the transaction. Rule 17a-6(a)(ii). Rule 17d-1(d)(5) is not available if a Prohibited Participant "is, was or proposes to be" a participant in the joint enterprise through a financial interest in a person "who is, was or will be" a participant in the joint enterprise. Rule 17d-1(d)(5)(i). |
| 30 | Proposed rules 17a-6(b)(1)(ii) and 17d-1(d)(5)(ii)(B). Rule 17d-1(d)(6) includes references to the Prohibited Participants identified in current rule 17d-1(d)(5)(i) and to the definition of "financial interest" in current rule 17d-1(d)(5)(iii). We are proposing to amend rule 17d-1(d)(6) to conform these references to rule 17d-1(d)(5) as proposed to be amended. |
| 31 | Compare rule 15a-4(b)(2)(v) [17 CFR 270.15a-4(b)(2)(v)] (board of directors must find differences between interim advisory contract and previous contract to be immaterial) with rule 0-1(a)(6)(i)(A) [17 CFR 270.0-1(a)(6)(i)(A)] (majority of disinterested directors must reasonably determine in the exercise of their judgment that any representation of the fund's investment adviser, principal underwriter, administrator, or any of their control persons, since the beginning of the fund's last two completed fiscal years, is or was sufficiently limited that it is unlikely to adversely affect the professional judgment of person providing legal representation to the disinterested directors). |
| 32 | Rule 17d-1(d)(5)(ii) (In a joint enterprise, other than a merger of portfolio affiliates, neither a fund nor a company that a fund controls may commit in excess of five percent of its assets, except that a fund which is licensed by the Small Business Administration (SBA) under the Small Business Investment Act of 1958 may not commit more than 20 percent of its paid-in capital and surplus.) |
| 33 | See Notice of Proposal to Amend Rule 17d-1 Under the Investment Company Act of 1940 to Exempt Certain Joint Transactions Involving Registered Investment Companies, Including SBIC Stock Option Plans, From the Application Requirements of the Rule, Investment Company Act Release No. 8273 (Mar. 14, 1974) [39 FR 11312 (Oct. 25, 1974)]. |
| 34 | A fund licensed by the Small Business Administration under the Small Business Investment Act of 1958 would, however, still be subject to all SBA regulations regarding the percentage of its paid-in capital and surplus it could commit to a joint enterprise. See 13 CFR 107.740. |
| 35 | See Benjamin J. Haskin, Hiring and Oversight of Sub-Advisers, 5 The Investment Lawyer 8, 11 (1998) (describing subadvisory arrangements generally). |
| 36 | A subadviser is an "investment adviser" for purposes of the Act, which defines a fund's "investment adviser" as a person (other than a bona fide officer, director, trustee, member of an advisory board, or employee of the fund) who regularly furnishes advice to the fund with respect to the desirability of investing in, purchasing, or selling securities or other property, or is empowered to determine what securities or other property are to be purchased or sold by the fund. 15 U.S.C. 80a-2(a)(20). The investment adviser may act pursuant to a contract with a fund [15 U.S.C. 80a-2(a)(20)(A)] or pursuant to a contract with an investment adviser that has contracted with the fund. 15 U.S.C. 80a-2(a)(20)(B). |
| 37 | The section also prohibits principal transactions between the fund and affiliates of the common adviser (second-tier affiliates) and affiliates of the fund's own subadviser (second-tier affiliates). |
| 38 | The prohibition in section 17(e) also extends to affiliates of the common adviser and the fund's subadviser. |
| 39 | A fund therefore is prohibited from purchasing securities in an offering in which a participant in the underwriting or selling syndicate is under common control with the fund's adviser. |
| 40 | A fund is also prohibited from acquiring securities issued by an affiliated person of the common adviser or an affiliated person of the fund's subadviser if the affiliated person is a broker, dealer, investment adviser, or engaged in the business of underwriting. |
| 41 | See, e.g., CDC IXIS Management Advisers, L.P. et al., Investment Company Act Release Nos. 25061 (July 12, 2001) [66 FR 37497 (July 18, 2001)] (notice) and 25103 (Aug. 8, 2001) (order); AMR Investment Services Trust, et al., Investment Company Act Release Nos. 23773 (Apr. 7, 1999) [64 FR 18454 (Apr. 14, 1999)] (notice) and 23823 (May 4, 1999) (order); North American Security Trust, Investment Company Act Release Nos. 18860 (Jul. 22, 1992) [57 FR 33540 (July 29, 1992)] (notice) and 18899 (Aug. 18, 1992) (order); State Street Bank and Trust Co., Investment Company Act Release Nos. 19784 (Oct. 13, 1993) [58 FR 53983 (Oct. 19, 1993)] (notice) and 19844 (Nov. 9, 1993) (order). |
| 42 | See supra note 7 and accompanying text. |
| 43 | This second category of relief would thus be available only when a fund has one or more subadvisers which are responsible for managing a discrete portion of the fund's assets. The rule would permit the adviser of one portion of the fund to direct that portion to engage in a principal transaction with the subadviser of another portion of the fund's assets. See discussion below. |
| 44 | Proposed rule 17a-10(a)(1). |
| 45 | Proposed rule 17a-10(a)(2). We are not proposing to extend this condition to the fund's principal adviser, although subadvisers and their affiliated persons would be permitted to rely on the rule to enter into transactions and arrangements with a fund or portion of a fund with respect to which the principal adviser alone provides investment advice. We are concerned that in the context of the relationship between a principal adviser and a subadviser the condition could be interpreted in a manner inconsistent with the principal adviser's duty to oversee the conduct of subadvisers. Nonetheless, the principal adviser remains a fiduciary of the fund and may not collaborate with fund subadvisers for the purpose of overreaching the fund. |
| 46 | See Western Asset Management Co. and Legg Mason Fund Adviser, Inc., Investment Advisers Act Release No. 1980 (Sept. 28, 2001). |
| 47 | Section 17(e)(2) limits the remuneration that any affiliated broker of a fund may receive in connection with a securities transaction to (A) the usual and customary broker's commission for transactions effected on an exchange, (B) two percent of the sales price for secondary distribution, and (C) one percent of the purchase or sale price for other purchases or sales. |
| 48 | Rule 17e-1(a) and (b). The rule also requires that a majority of the directors of the fund not be "interested persons" of the fund, that those directors select and nominate any other disinterested directors, and any person who acts as legal counsel for the disinterested directors be an independent legal counsel. Rule 17e-1(c). Section 2(a)(19) identifies persons who are "interested persons" of a fund. 15 U.S.C. 80a-2(a)(19). |
| 49 | Rule 17e-1(d). |
| 50 | Agency Transactions by Affiliated Persons on a Securities Exchange, Investment Company Act Release No. 10605 (Feb. 27, 1979) [44 FR 12202 (Mar. 6, 1979)] at n.10 and accompanying text. |
| 51 | Funds are required to retain certain records of brokerage orders by or on behalf of the fund. See rule 31a-1(b)(5) [17 CFR 270.31a-1(b)(5)]. Our proposal is not intended to affect these or other recordkeeping requirements not included within rule 17e-1. |
| 52 | Proposed rules 17e-1(b)(3) and (d)(2). See supra Section I.B.1 (discussing conditions in proposed rule 17a-10). |
| 53 | Fund directors may, however, wish to continue to review these transactions as a matter of good business practice. |
| 54 | Section 10(f), in relevant part, prohibits a registered investment company from knowingly purchasing or otherwise acquiring, during the existence of any underwriting or selling syndicate, any security (except a security of which the company is the issuer) a principal underwriter of which is an officer, director, member of an advisory board, investment adviser, or employee of the company, or any person of which any of the foregoing are affiliated persons. |
| 55 | See Investment Trusts and Investment Companies: Hearings on S. 3580 Before a Subcomm. of the Senate Comm. On Banking and Currency, 76th Cong., 3d Sess. 35 (1940) (Statement of Commissioner Healy); Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Investment Company Act Release No. 24775, supra note 19, at n.4 and accompanying text; Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Investment Company Act Release No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7, 1997)] at n.1 and accompanying text. |
| 56 | Rule 10f-3 permits a fund to purchase securities in a transaction that otherwise would violate section 10(f) if, among other things: (i) the securities either are registered under the Securities Act of 1933 [15 U.S.C. 77a-aa], are part of an issue of government securities, are municipal securities with certain credit ratings, or are offered in certain foreign or private institutional offerings; (ii) the offering involves a "firm commitment" underwriting; (iii) the fund (together with other funds advised by the same investment adviser) purchases no more than 25 percent of the offering; (iv) the fund purchases the securities from a member of the syndicate other than its affiliated underwriter; (v) the fund's directors have approved procedures for purchases under the rule and regularly review the purchases to determine whether they have complied with the procedures. See rule 10f-3(b). |
| 57 | Rule 10f-3(b)(7). |
| 58 | See Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Investment Company Act Release No. 24775, supra note 19, at n.22 and accompanying text. |
| 59 | A fund may have multiple subadvisers because more than one subadviser has been retained to provide investment advice with respect to various portions of the fund. A fund may also have multiple subadvisers because the fund is one of several portfolios of a series company, and different subadvisers provide investment advice with respect to the assets of the different portfolios. |
| 60 | Unless otherwise noted, we will refer to a subadviser that is a principal underwriter, or an affiliated person of a principal underwriter of a security, as a "participant" in the underwriting or selling syndicate. |
| 61 | See, e.g., CDC IXIS Asset Management Advisers, L.P., Investment Company Act Release Nos. 25061(July 12, 2001) [66 FR 37497 (July 18, 2001)] (notice) and 25103 (Aug. 8, 2001) (order); AB Funds Trust, et al., Investment Company Act Release Nos. 24999 (June 7, 2001) [66 FR 31953 (June 13, 2001)] (notice) and 25054 (June 29, 2001) (order). |
| 62 | A portion of a fund's portfolio would be a "managed portion" if it is a discrete portion of the portfolio for which a subadviser is responsible for providing investment advice, and the subadviser (i) does not provide investment advice with respect to any other portion of the fund's portfolio, (ii) is prohibited by its advisory contract from consulting with any other investment adviser of the investment company that is a principal underwriter or affiliated person of a principal underwriter concerning securities transactions of the fund, and (iii) is not an affiliated person of any other investment adviser, or any promoter, underwriter, officer, director, member of an advisory board, or employee of the investment company. Proposed rule 10f-3(a)(6). |
| 63 | Proposed rule 10f-3(b). |
| 64 | Id. |
| 65 | The proposed amendments to rule 10f-3 would effectively permit a fund that is a series in a series company to purchase securities during an underwriting or selling syndicate in which an officer, director, member of an advisory board, investment adviser, or employee of a series other than the purchasing series is (or is an affiliated person of) a participant. The proposed amendments would also permit a fund to purchase securities during a syndicate in which an investment adviser of the fund is (or is an affiliated person of) a participant, if the investment adviser does not provide investment advice (or have the opportunity to influence investment decisions) for the portion of the fund's assets for which the securities are purchased. |
| 66 | Rule 10f-3(b)(7). |
| 67 | Proposed rule 10f-3(c)(7). |
| 68 | Id. If more than one investment adviser of a fund is a participant in the underwriting or selling syndicate then the percentage limit would apply independently with respect to each such investment adviser. Proposed rule 10f-3(c)(7)(iii). The percentage limit would not apply at all if a fund is prohibited from purchasing a security because a person other than the fund's investment adviser (e.g., an officer, director, or employee of the fund) is a participant in the underwriting or selling syndicate. Proposed rule 10f-3(c)(7)(ii). |
| 69 | See Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, supra note 19. |
| 70 | Several commenters opposed the proposed amendment on the grounds that it could limit funds' access to primary offerings. |
| 71 | With minor exceptions, section 12(d)(3) prohibits a fund from purchasing or otherwise acquiring "any security issued by or any other interest in the business of any person who is a broker, a dealer, is engaged in the business of underwriting, or is [an] investment adviser." |
| 72 | Paragraph (a) of rule 12d3-1 permits a fund to acquire any security issued by any person that, in its most recent fiscal year, derived 15 percent or less of its gross revenues from securities-related activities unless the fund would control such person after the acquisition. Paragraph (b)(3) of rule 12d3-1 permits a fund to invest up to five percent of the value of its total assets in the securities of an issuer that derives more than 15 percent of its gross revenues from securities-related activities. Rule 12d3-1(d)(1) defines "securities related activities" as a person's activities as a broker, a dealer, an underwriter, an investment adviser registered under the Investment Advisers Act of 1940 [15 U.S.C. 80b], or an investment adviser to a registered investment company. |
| 73 | Rule 12d3-1(c) provides that the rule does not exempt the acquisition of a security issued by the acquiring company's investment adviser, promoter, or principal underwriter, or any affiliated person of such investment adviser, promoter, or principal underwriter. Rule 12d3-1(d)(8) provides that any class or series of an investment company that issues two or more classes or series of preferred or special stock, each of which is preferred over all other classes or series with respect to assets specifically allocated to that class or series, shall be treated as if it is a registered investment company. Accordingly, a fund that is a series of a series company may rely on rule 12d3-1 to purchase securities issued by subadvisers (and persons affiliated with those subadvisers) of the other series of the series company. |
| 74 | Congress adopted section 12(d)(3) for two purposes: (i) to limit the exposure of funds to the entrepreneurial risks peculiar to investing in securities-related businesses and (ii) to prevent potential conflicts of interest and certain reciprocal practices. See Investment Trusts and Investment Companies, Hearings on S. 3580 before a Subcomm. Of the Comm. On Banking and Currency, 76th Cong., 3d Sess. 243 (1940). In 1940 most securities-related businesses were organized as privately held general partnerships. If a securities-related business failed, the fund, as a general partner, could have been held accountable for the partnership's liabilities. Rule 12d3-1 preserves these purposes: rule 12d3-1(c) effectively precludes a fund from acquiring, regardless of the source of its revenues, a general partnership interest in a broker, dealer, investment adviser, or underwriter. Today, however, virtually all securities firms are organized as corporations and not as general partnerships. |
| 75 | See, e.g., CDC IXIS Asset Management Advisers, L.P., Investment Company Act Release Nos. 25061 (July 12, 2001) [66 FR 37497 (July 18, 2001)] (notice) and 25103 (Aug. 8, 2001) (order). |
| 76 | Proposed rule 12d3-1(c)(3). See sections I.B.1. and I.B.3. of this Release (discussing proposed new rule 17a-10 and proposed amendments to rule 10f-3). |
| 77 | Proposed rule 12d3-1(c)(3)(i) and (ii). The ownership limits in rule 12d3-1(a) and (b) would continue to apply to the fund as a whole. |
| 78 | Supra notes 12-14. |
| 79 | See Mercury Asset Management International Ltd., Investment Company Act Release Nos. 23867 (June 9, 1999) [64 FR 32073 (June 15, 1999)] (notice) (application was originally filed Mar. 3, 1999) and 23887 (July 1, 1999) (order). |
| 80 | See Frank Russell Investment Company et al., Investment Company Act Release Nos. 24820 (January 3, 2001) [66 FR 2031 (Jan. 10, 2001)] (notice) (application was originally filed Aug. 21, 1999) and 24847 (Jan. 30, 2001) (order). |
| 81 | Expansion of the exemption in this manner may also impose costs by eliminating what has been a "bright line" prohibition and expanding the opportunities for harmful transactions. Commenters addressing the benefits of the rule's expansion should also address the potential costs. |
| 82 | Rule 17d-1(d)(5)(ii). |
| 83 | Despite the proposed removal of some aspects of board review required by rule 17e-1, it may be prudent for fund directors to continue to oversee and review the proposed exempted transactions as a matter of course. We would not, however, view any such additional oversight as a cost attributable to the proposed amendments to rule 17e-1. |
| 84 | Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996). |
| 85 | 15 U.S.C. 80a-2(c). |
| 86 | An additional proposed change to rule 17d-1(d)(5) would remove existing limitations regarding the percentage of a fund's assets that the fund could commit to a joint enterprise. If adopted, this amendment would bring rule 17d-1(d)(5) into line with rule 17a-6, which has no such limitations. Rule 17d-1(d)(5)(ii). |
| 87 | Rule 10f-3 (OMB Control No. 3235-0226) was adopted pursuant to authority set forth in sections 10(f), 31(a), and 38(a) of the Investment Company Act [15 U.S.C. 80a-10(f), 80a-30(a), and 80a-37(a)]. Rule 12d3-1 was adopted pursuant to authority set forth in sections 6(c) and 38(a) of the Act. [15 U.S.C. 80a-6(c)]. Rule 17a-6 was adopted pursuant to authority set forth in sections 6(c), 17(b), 31(a), and 38(a) of the Act [15 U.S.C. 80a-17(b)]. Rule 17d-1 was adopted pursuant to authority set forth in sections 6(c), 17(d), and 38(a). Rule 17e-1 (OMB Control No. 3235-0217) was adopted pursuant to authority set forth in sections 6(c), 31(a), and 38(a) of the Act. |
| 88 | See supra note 26. |
| 89 | Proposed rules 17a-6(b)(1)(H) and 17d-1(d)(8). Collection of this information is necessary to obtain the benefit of the exemption in the proposed rule amendments. |
| 90 | See supra note 12. For purposes of this analysis, the staff estimates that investment companies will enter into one principal transaction and one joint arrangement each year with each of their portfolio affiliates, and that in thirty percent of those transactions and arrangements a Prohibited Participant will have a financial interest in a party to the transaction that the board of directors of the affected investment company will consider for purposes of determining whether that financial interest is material. |
| 91 | 1,400 affiliate relationships x 1 principal transaction per year = 1,400 transactions under rule 17a-6. |
| 92 | 1,400 affiliate relationships x 1 joint arrangement per year = 1,400 joint arrangements under rule 17d-1(d)(5). In addition to expanding fund business opportunities by allowing funds to transact with a wider range of portfolio affiliates, we are also proposing to eliminate the limit imposed by rule 17d-1(d)(5) on the percentage of assets a fund can commit to any given joint enterprise. Rule 17d-1(d)(5)(ii). The staff does not anticipate that allowing funds to increase the size of their commitment to a joint transaction will result in an increase in the expected number of such transactions. |
| 93 | 1,400 transactions or arrangements x .30 (percentage of transactions or arrangements in which a Prohibited Participant is assumed to have a financial interest) = 420. |
| 94 | The staff estimates the hourly burden to comply with the board of director's obligation to make a finding as to the materiality of a prohibited person's financial interest in a transaction to be 11 hours. The staff estimates that funds will spend .2 hours complying with the requirement that the basis for the board's findings be recorded in the minutes of its meeting. |
| 95 | See supra note 13. |
| 96 | The fund's advisory contracts must include these conditions in order for the fund to obtain the benefit of the exemptions in the proposed rule and rule amendments. |
| 97 | (5 hours x $62 = $310) + (1 hour x $130 = $130) = $440. (5 attorney hours, 1 deputy general counsel hour). $440 x 1,900 funds=$ 836,000. |
| 98 | The proposed amendments to rule 17e-1 will also, as discussed below, decrease the burden hours associated with that rule. |
| 99 | Based on an analysis of investment company filings, the staff estimates that approximately 250 funds are created annually. Assuming that the number of these funds that will use the services of subadvisers is proportionate to the number of funds that currently use the services of subadvisers, then approximately 50 new funds will enter into subadvisory agreements each year. The Commission staff estimates, based on an analysis of investment company filings, that an additional 10 funds, currently in existence, will employ the services of subadvisers for the first time each year. |
| 100 | 6 hours x 60 funds=360 total hours. $440 x 60 funds= $26,400. |
| 101 | In calculating the total annual cost of complying with amended rule 17e-1, the Commission staff assumes that the entire burden would be attributable to professionals with an average hourly wage rate of $62 per hour. |
| 102 | 293 transactions x 12.5 hours = 3,663 hours if adopted; 60% of the 293 transactions (or 176 transactions) would proceed under rule 17e-1. 176 transactions (60% of the 293 transactions anticipated to be impacted by rule) x 12.5 hours = 2,200 hours. |
| 103 | 3,663 hours x $62 = $227,106; 2,200 hours x $62 = $136,422. |
| 104 | 17 CFR 270.0-10. |
| 105 | 17 CFR 275.0-7. |
| 106 | 17 CFR 240.0-10. |
| 107 | We estimate that 875 issuers are portfolio affiliates of funds. See supra note 12. We are unable to estimate the number of these issuers that are small entities. |
| 108 | Alternatives in this category would include: (i) establishing different compliance or reporting standards that take into account the resources available to small entities; (ii) clarifying, consolidating or simplifying the compliance requirements for small entities; (iii) using performance rather than design standards; and (iv) exempting small entities from coverage of all or part of the rule. |
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