Table of Contents
General Information
Glass-Steagall Act as Modified By
Gramm-Leach-Bliley Act
Applicability of Federal Securities
Laws to Banks and Bank Sponsored Securities Activities
Registration of
Bank Securities
Bank as Broker
Bank as Dealer
Bank as Underwriter
Bank as Principal
Underwriter
Bank as Municipal Bond
Underwriter
Bank as Clearing Agency
Bank as Municipal Securities Dealer
Bank as Municipal Securities Broker
Bank as Investment
Advisor
Bank as Investment Company
Collective Trust Funds
(general)
Collective Trust Funds (for Qualified Plans)
Other Collective
Trust Funds
Securities and Exchange Commission
SEC Staff Compliance
Guide to Banks
Dealer Statutory Exceptions and Rules
Securities Exchange Act
Section 28(e) and Soft
Dollars
Release No. 34-23170
SEC
No-Action Letter
Waiver of 12b-1 Fees for ERISA
Plans
SEC Rule 3a-4
Status of
Investment Advisory Programs
ICA of 1940
Release IC-22579
17 CFR Parts 270 and
274
SEC
Rule 3a-4
Safe Harbor for Wrap Accounts
SEC Regulation 270.3a-4
17 CFR 270.3a-4
SEC Rule 206(4)-6
Disclosure of Proxy Voting Policies and Records
SEC Rule 204-2
SEC
Rule 14a-1
Solicitation of Proxies Definitions
SEC Regulation
240.14a-1 *
SEC
Rule 14a-13
Shareholder Communications
- Beneficial Owners
SEC Regulation
240.14a-13 *
SEC
Rule 14b-1
Shareholder
Communications - Brokers and Dealers
SEC Regulation
240.14b-1 *
SEC
Rule 14b-2
Shareholder
Communications - Banks
and Fiduciaries
SEC Regulation
240.14b-2 *
SEC
Rule 14c-1
Shareholder Communications -
Section 14(C)
Definitions
SEC Regulation
240.14c-1 *
SEC
Rule 14c-7
Shareholder Communications
- Copies of Materials
SEC Regulation
240.14c-7 *
* codified at 17 CFR
Part 240 -- General Rules and Regulations -- Securities Exchange Act of
1934.
NASD Rule
2711
Research Analysts and
Research Reports
Links to Securities Law, Regulations, and
Miscellaneous Statutes
The following items can be found in
the three volume FDIC Rules and Regulations.
Securities Act of 1933:
To provide full and fair disclosure of the character of securities sold in
interstate and foreign commerce and through the mails, and to prevent frauds
in the sale thereof, and for other purposes.
Securities Exchange Act of 1934:
To provide for the regulation of securities exchanges and of
over-the-counter markets operating in interstate and foreign commerce and
through the mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Investment Company Act of 1940:
To provide for the registration and regulation of investment companies and
investment advisers, and for other purposes.
Investment Advisers Act of 1940:
To provide for the registration and regulation of investment companies and
investment advisers, and for other purposes.
FDIC Part 344: Recordkeeping and Confirmation Requirements for
Securities Transactions.
SEC Rule 240.10b-5:
Employment of manipulative and deceptive devices
SEC Rule 240.13f-1:
Reporting by institutional investment managers of information with respect
to accounts over which they
exercise investment
discretion
SEC Rule 249.325: Form 13F, report of institutional investment manager
pursuant to Section 13(f)
SEC Rule 240.14e-3: Transactions
in securities on the basis of material, nonpublic information in the context
of tender offers (Insider information)
SEC Rule 240.17f-1: Requirements for reporting and inquiry with respect
to missing, lost, counterfeit or stolen securities.
* codified at 17 CFR Part 240 --
General Rules and Regulations -- Securities Exchange Act of 1934.
Glass-Steagall Act
As Modified By Gramm-Leach-Bliley Act
Historical Perspective
The Banking Act of 1933 (Act), in particular Sections
16, 20, 21, and 32, are often called the Glass-Steagall Act, was enacted
to address questionable banking industry practices during the 1920's and
1930's.. The primary
purpose of the Act is to separate commercial banking from investment
banking. This separation was designed to promote the financial stability
of commercial banks, create public confidence in the banking system, and
prevent conflicts of interest which might develop from the performance of
both commercial and investment banking.
Sections 16, 20, 21, and 32 of the Act established
certain restrictions regarding commercial banks engaging in securities
related activities. In general, these Sections prohibited banks from
underwriting or making a market in stocks and municipal revenue debt
instruments. They also prohibited banks from maintaining financial or
personnel ties with investment banks. Specifically, Section 32 of the
Banking Act of 1933 prohibited any employee of a member bank from
concurrently being employed by any firm engaged in the issuance of
securities. In the case of a State nonmember bank, this would result in a
conflict of interest situation and would, if proper safeguards were not
taken, result in a deficiency in the bank's operation and action by the
Corporation to remedy the situation.
Gramm-Leach-Bliley Act (GLBA): enacted
November 12, 1999
The GLBA repealed Sections 20 and 32 of the Banking Act of 1933 [Section
101 of GLBA]. The GLBA also modified several other securities laws
which are applicable to banks and bank securities activities. Those issues
are discussed in the following sub-section.
Section 20 Repealed
Prior to GLBA, Section 20 had prohibited bank affiliations with organizations
dealing in the issuance of securities. It prohibited a bank from
affiliation with any corporation, association, business trust, or other
similar organization engaged principally in the issuance, flotation,
underwriting, public sale, or distribution, whether through wholesale or
retail channels or through participation in a syndicate, of stocks, bonds,
debentures, notes, or other securities.
With the repeal of Section 20, banks have more flexibility to engage in
securities underwriting and dealer activities. These activities will need
to be conducted through a Financial Holding Company or
financial subsidiary (at the bank level). This will be of particular
interest to banks with proprietary mutual funds, as they are now allowed
to underwrite and distribute both proprietary and third-party mutual
funds.
Section 32 Repealed
Prior to GLBA, Section 32 had prohibited interlocking management between entities
that issue securities and banks. The language describing these entities
was similar to that noted above.
With the repeal of Section 32, banks can have common
officers, directors, and employees with registered investment companies
(mutual funds). This allows interlocks and poses a new conflict of
interest situation. Though the interlock is limited to some degree by the
Investment Company Act of 1940, it still exists. Examiners should be
mindful of the potentially abusive situations this interlock may present.
Section 10(c) of the
Investment Company Act of 1940 prohibits a majority of the directors
of a mutual fund from being officers, directors, or employees of any one
bank. The GLBA expanded this prohibition to affiliates and subsidiaries
of the bank. Basically, a mutual fund may not have a majority of its
directorate comprised of individuals of a single bank and its associated
affiliates and subsidiaries.
In addition, the SEC strengthened its general rules for
director independence of investment companies by amending certain
exemptive rules under the
Investment Company Act of 1940. For investment companies that rely on
these rules: independent directors must constitute a majority of their
board of directors; independent directors must select and nominate other
independent directors; and any legal counsel for the independent directors
must be an independent legal counsel. [Section 10 of Investment Company
Act of 1940 and SEC Release Nos. 33-7932 & 34-43786 Final Rule: Role of
Independent Directors of Investment Companies; effective May 12, 2001.]
Applicability of Federal Securities Laws to Banks and Bank Sponsored
Securities Activities
The Gramm-Leach-Bliley Act (GLBA ) modified aspects of
certain Federal securities laws that are applicable to banks and bank
sponsored securities activities. The GLBA was enacted November 12, 1999.
GLBA provisions were phased-in during an eighteen month period after November
12, 1999. The following discussion of rules and exemptions are post-
GLBA .
-
Registration of Bank Securities
Securities Act of 1933 :
To provide full and fair disclosure of the character of securities sold in
interstate and foreign commerce and through the mails, and to prevent frauds
in the sale thereof, and for other purposes.
The Act exempts any security issued or guaranteed by a
bank from all Sections except
Section 17 fraud provisions. (§
3(a)(2)).
Securities Exchange Act of 1934
:
To provide for the regulation of securities exchanges and of
over-the-counter markets operating in interstate and foreign commerce and
through the mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Bank securities
must be registered with the appropriate bank regulatory agency which
administers and enforces §§ 12, 13, 14(a), (c), (d), (f), and 16 in a manner
substantially similar to the SEC (§ 12(i)).
-
Bank
as Broker
-
Securities Exchange Act of 1934 :
To provide for the regulation of securities exchanges and of
over-the-counter markets operating in interstate and foreign commerce and
through the mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
§3(a)(4) : The GLBA Section 201, Definition of Broker, amended
§3(a)(4) of the Securities Exchange Act of 1934.
There is an exemption for banks engaging
in traditional trust and fiduciary activity, provided a few key points
are followed.
These include how compensation is received, how the activity is marketed,
and how transactions are directed. A further explanation of these
concepts is found in subsections (B)(ii)
and (C). Fiduciary activity is defined in
subsection (D).
An exemption has also been afforded to certain
stock purchase plans (subsection B(iv)) and
safekeeping and custodial activity (subsection
B(viii). Again, these are subject to how transactions are directed.
There is also a "catch-all" de minimis exemption
for isolated transactions that fall outside of the items specifically
exempted (subsection B(xi)). It is expected that this will help with
incidental transactions.
There is no specific recordkeeping requirement
set-forth in this section; however, management will need sufficient
records to
demonstrate that the institution qualifies for the exemption. If
an activity does not meet any of the exemptions detailed below the bank
must
register with the SEC. Either the SEC or the NASD will provide regulatory
oversight. Management may decide to move the activity to a subsidiary or
affiliate. In that case, the subsidiary or affiliate must register with
the SEC.
On October 3, 2007, the Federal
Reserve and SEC published Regulation R, "Definitions of Terms
and Exemptions Relating to the 'Broker' Exceptions for Banks and Exemptions
for Banks
Under Section 3(a)(5) of The Securities Exchange Act and Related Rules;
Final Rule," which sets forth requirements for satisfying the
conditions for the Trust & Fiduciary exceptions, the Custody & Safekeeping
exemptions, as well as the Networking exception and other exemptions
for banks
from the definition of "Broker." See
SEC Release No. 34-56501: File No. S7-22-0 (353KB
PDF file - PDF Help). Also
refer to Section
10.F for a detailed discussion
of Regulation R.
The revised definition of a broker in Section §3(a)(4)
states, in part,
Broker:
- In General - The term `broker' means
any person engaged in the business of effecting transactions in securities
for the
account of others.
- Exception for certain bank activities
- A bank shall not be considered to be a broker because the bank
engages in any one or
more of the following activities under the conditions described:
- Third party brokerage arrangements - "text
not included"
- Trust Activities
- The bank effects transactions in a trustee capacity, or effects transactions
in a fiduciary capacity in its
trust department or other department that is regularly examined by bank
examiners for compliance with fiduciary principles and standards, and
- is chiefly compensated for such transactions,
consistent with fiduciary principles and standards, on the basis of
an administration or annual fee (payable on a monthly, quarterly,
or
other basis), a percentage of assets under management, or a flat or
capped per order processing fee equal to not more than the cost
incurred by the bank in connection with executing securities
transactions for trustee and fiduciary customers, or any combination
of such fees; and
- does not publicly solicit brokerage
business, other than by advertising that it effects transactions
in securities in
conjunction with advertising its other trust activities.
- Permissible Securities Transactions - "text
not included"
- Certain Stock
Purchase Plans
- Employee Benefit Plans - The bank effects
transactions, as part of its transfer agency activities, in the
securities of an issuer as part of any pension, retirement,
profit-sharing, bonus, thrift, savings, incentive, or other similar
benefit plan for the employees of that issuer or its affiliates (as
defined in Section 2 of the Bank Holding Company Act of 1956), if the
bank does not solicit transactions or provide investment advice with
respect to the purchase or sale of securities in connection with the
plan.
- Dividend Reinvestment Plans - The bank
effects transactions, as part of its transfer agency activities,
in the
securities of an issuer as part of that issuer's dividend reinvestment
plan, if
- the bank does not solicit transactions
or provide investment advice with respect to the purchase or
sale of securities
in connection with the plan; and
- the bank does not net shareholders'
buy and sell orders, other than for programs for odd-lot holders
or plans
registered with the Commission.
- Issuer Plans - The bank effects transactions,
as part of its transfer agency activities, in the securities of
an issuer
as part of a plan or program for the purchase or sale of that issuer's
shares, if
- the bank does not solicit transactions
or provide investment advice with respect to the purchase or
sale of securities
in connection with the plan or program; and
- the bank does not net shareholders'
buy and sell orders, other than for programs for odd-lot holders
or plans
registered with the Commission.
- Permissible Delivery of Materials -
The exception to being considered a broker for a bank engaged in
activities
described in sub clauses (I), (II), and (III) will not be affected
by delivery of written or electronic plan materials by a bank to
employees of the issuer, shareholders of the issuer, or members of
affinity groups of the issuer, so long as such materials are
- comparable in scope or nature to
that permitted by the Commission as of the date of the enactment
of the
Gramm-Leach-Bliley Act; or
- otherwise permitted by the Commission.
- Sweep Accounts
.--The bank effects transactions
as part of a program for the investment or reinvestment of deposit funds
into any no-load, open-end management investment company registered
under the Investment Company Act of 1940 that holds out as a money
market fund.
- Affiliate Transactions - "text not included"
- Private Securities Offerings - "text
not included"
- Safekeeping and
Custody Activities
- In General- The bank, as part of customary
banking activities
- provides safekeeping or custody services
with respect to securities, including the exercise of warrants
and other
rights on behalf of customers;
- facilitates the transfer of funds
or securities, as a custodian or a clearing agency, in connection
with the
clearance and settlement of its customers' transactions in
securities;
- effects securities lending or borrowing
transactions with or on behalf of customers as part of services
provided to customers pursuant to division (a) or (b) or invests
cash collateral pledged in connection with such transactions;
- holds securities pledged by a customer
to another person or securities subject to purchase or resale
agreements
involving a customer, or facilitates the pledging or transfer of
such securities by book entry or as otherwise provided under
applicable law, if the bank maintains records separately identifying
the securities and the customer; or
- serves as a custodian or provider
of other related administrative services to any individual retirement
account, pension, retirement, profit sharing, bonus, thrift savings,
incentive, or other similar benefit plan.
- Exception for Carrying Broker Activities
- "text
not included"
- Identified Banking Products
-- The bank effects transactions
in identified banking products as defined in Section 206 of the Gramm-Leach-Bliley
Act.
- Municipal Securities - The bank effects
transactions in municipal securities.
- De Minimis Exception
- The bank effects, other than in transactions referred to in clauses
(i) through (x), not more than
500 transactions in securities in any calendar year, and such
transactions are not effected by an employee of the bank who is also
an employee of a broker or dealer.
-
Execution by
Broker or Dealer- The exception to being considered a broker for a bank
engaged in activities described in clauses (ii), (iv), and (viii) of
subparagraph (B) shall not apply if the activities described in such
provisions result in the trade in the United States of any security that
is a publicly traded security in the United States, unless
-
the bank
directs such trade to a registered broker or dealer for execution;
- the trade is a cross trade or other substantially
similar trade of a security that
- is made by the bank or between the
bank and an affiliated fiduciary; and
- is not in contravention of fiduciary
principles established under applicable Federal or State law; or
- the trade is conducted in some other
manner permitted under rules, regulations, or orders as the Commission
may prescribe or
issue.
- Fiduciary Capacity - For purposes of
subparagraph (B)(ii), the term `fiduciary capacity' means
- in the capacity as trustee, executor,
administrator, registrar of stocks and bonds, transfer agent,
guardian, assignee, receiver, or custodian under a uniform gift to
minor act, or as an investment adviser if the bank receives a fee for
its investment advice;
- in any capacity in which the bank possesses
investment discretion on behalf of another; or
- in any other similar capacity.
- Exception for Entities Subject to Section
15(e) -
"text not included"
-
Investment Company Act of 1940:
To provide for the registration and regulation of
investment companies and investment advisers, and for other purposes.
The GLBA in Section 215, Definition
of Broker Under the Investment Company Act of 1940, amended
Section 2(a)(6) of the Investment Company Act of 1940.
The term `broker' has the same meaning as
given in Section 3 of the Securities Exchange Act of
1934, except that such term does not include any person solely by
reason of the fact that such person is an underwriter for one or more
investment companies.
-
Investment Advisers Act of 1940 :
To provide for the registration and regulation of
investment companies and investment advisers, and for other purposes.
The GLBA in Section 218, Definition
of Broker Under the Investment Advisers Act of 1940 amended
Section 202(a)(3).
The term `broker' has the same meaning as
given in Section 3 of the Securities Exchange Act of
1934.
- Bank as
Dealer
-
Securities Exchange Act of 1934
:
To provide for the regulation of securities
exchanges and of over-the-counter markets operating in interstate and
foreign commerce and through the mails, to prevent inequitable and unfair
practices on such exchanges and markets, and for other purposes.
§3(a)(5)
: The GLBA Section 202, Definition of Dealer, amended
Section 3(a)(5) of the Securities Exchange Act of 1934.
There is an exception for trustee
and fiduciary transactions and asset-backed
activity. However, the Securities Exchange Act of 1934 does not define
what is considered a trustee or fiduciary as it pertains to dealer
activity. It does define fiduciary activity in the revised
Section 3(a)(4)(D).
The revised definition of a dealer in
Section 3(a)(5) states, in part,
Dealer:
- In General - The term `dealer' means any person
engaged in the business of buying and selling securities for such
person's own account through a broker or otherwise.
- Exception for person not engaged in the business of
Dealing - "text not included"
- Exception for Certain Bank Activities - A bank shall
not be considered to be a dealer because the bank engages in any of the
following activities under the conditions described:
- Permissible Securities Transactions - "text not
included"
- Investment, Trustee, and Fiduciary Transactions -
The bank buys or sells securities for investment purposes
- for the bank; or
- for accounts for which the bank acts as a trustee
or fiduciary.
- Asset-Backed Transactions - The bank engages in the
issuance or sale to qualified investors, through a grantor trust or
other separate entity, of securities backed by or representing an
interest in notes, drafts, acceptances, loans, leases, receivables,
other obligations (other than securities of which the bank is not the
issuer), or pools of any such obligations predominantly originated by
- the bank;
- an affiliate of any such bank other than a broker
or dealer; or
- a syndicate of banks of which the bank is a
member, if the obligations or pool of obligations consists of
mortgage obligations or consumer-related receivables.
- Identified Banking Products -
The bank buys or sells
identified banking products, as defined in Section 206 of the Gramm-Leach-Bliley Act.
Furthermore, the SEC issued a
Final Rule (below) and separate
Staff Commentary in 2003 to clarify the requirements for bank
exemptions for broker and dealer rules. The new guidance finalizes dealer
rules, but separate broker rules are to be issued separately at a later
date. Broker rules definitions had not been issued as of this printing.
The revised sections of the Securities Exchange Act of 1934 are quoted
below. For preamble and endnotes to the SEC's final rule, refer to either
SEC Release No. 34-47364 or 68 Federal Register 8686.
SEC
Final Rule:
Definition of Terms in and Specific
Exemptions for Banks, Savings Associations, and Savings Banks Under
Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934
Securities and Exchange Commission 17
CFR Part 240 [Release No. 34-47364; File No. S7-41-02]
Excerpt:
Summary: The Securities and
Exchange Commission is adopting amendments to its rule granting an
exemption to banks from dealer registration for a de minimis number of
riskless principal transactions, and to its rule that defines terms used
in the bank exception to dealer registration for asset-backed
transactions. The Commission also is adopting a new exemption for banks
to the definition of broker and dealer under the Securities Exchange Act of
1934 for certain securities lending transactions. In addition, the
Commission is extending the exemption from rescission liability under
Exchange Act Section 29 to contracts entered into by banks acting in a
dealer capacity before March 31, 2005. These rules address certain of the
exceptions for banks from the definitions of "broker" and "dealer" that
were added to the Securities Exchange Act of 1934 by the Gramm-Leach-Bliley Act.
Compliance Date: September 30,
2003.
Section 240.3a5-1 is revised to
read as follows:
§ 240.3a5-1 Exemption from the definition of "dealer" for a bank engaged
in riskless principal transactions.
(a) A bank is exempt from the definition of the term "dealer" to the
extent that it engages in or effects riskless principal transactions if
the number of such riskless principal transactions during a calendar year
combined with transactions in which the bank is acting as an agent for a
customer pursuant to Section 3(a)(4)(B)(xi) of the Act (15 U.S.C.
78c(a)(4)(B)(xi)) during that same year does not exceed 500.
(b) For purposes of this section, the term riskless principal
transaction means a transaction in which, after having received an
order to buy from a customer, the bank purchased the security from another
person to offset a contemporaneous sale to such customer or, after having
received an order to sell from a customer, the bank sold the security to
another person to offset a contemporaneous purchase from such customer.
Section 240.3b-18 is revised to
read as follows:
§ 240.3b-18 Definitions of terms used in Section 3(a)(5) of the Act.
For the purposes of Section
3(a)(5)(C) of the Act (15 U.S.C. 78c(a)(5)(C):
(a) The term affiliate means
any company that controls, is controlled by, or is under common control
with another company.
(b) The term consumer-related
receivable means any obligation incurred by any natural person to
pay money arising out of a transaction in which the money, property,
insurance, or services (being purchased) are primarily for personal,
family, or household purposes.
(c) The term member as it
relates to the term "syndicate of banks" means a bank that is a
participant in a syndicate of banks and together with its affiliates,
other than its broker or dealer affiliates, originates no less than 10% of
the value of the obligations in a pool of obligations used to back the
securities issued through a grantor trust or other separate entity.
(d) The term obligation means
any note, draft, acceptance, loan, lease, receivable, or other evidence of
indebtedness that is not a security issued by a person other than the
bank.
(e) The term originated
means:
(1) Funding an obligation at
the time that the obligation is created; or
(2) Initially approving and
underwriting the obligation, or initially agreeing to purchase the
obligation, provided that:
(i) The obligation conforms to
the underwriting standards or is evidenced by the loan documents of the
bank or its affiliates, other than its broker or dealer affiliates; and
(ii) The bank or its
affiliates, other than its broker or dealer affiliates, fund the
obligation in a timely manner, not to exceed six months after the
obligation is created.
(f) The term pool means more
than one obligation or type of obligation grouped together to provide
collateral for a securities offering.
(g) The term predominantly
originated means that no less than 85% of the value of the
obligations in any pool were originated by:
(1) The bank or its affiliates,
other than its broker or dealer affiliates; or
(2) Banks that are members of a
syndicate of banks and affiliates of such banks, other than their broker
or dealer affiliates, if the obligations or pool of obligations consist of
mortgage obligations or consumer-related receivables.
(3) For this purpose, the bank
and its affiliates include any financial institution with which the bank
or its affiliates have merged but does not include the purchase of a pool
of obligations or the purchase of a line of business.
(h) The term syndicate of banks
means a group of banks that acts jointly, on a temporary basis, to issue
through a grantor trust or other separate entity, securities backed by
obligations originated by each of the individual banks or their
affiliates, other than their broker or dealer affiliates.
Section 240.15a-8 is revised to
read as follows:
§ 240.15a-8 Exemption for banks from Section 29 liability.
(a) No contract entered into before January 1, 2003 shall be void or
considered voidable by reason of Section 29 of the Act (15 U.S.C. 78cc)
because any bank that is a party to the contract violated the registration
requirements of Section 15(a) of the Act (15 U.S.C. 78o(a)) or any
applicable provision of the Act (15 U.S.C. 78a et seq.) and the
rules and regulations thereunder based solely on the bank's status as a
broker or dealer when the contract was created.
(b) No contract entered into before March 31, 2005, shall be void or
considered voidable by reason of Section 29 of the Act (15 U.S.C. 78cc)
because any bank that is a party to the contract violated the registration
requirements of Section 15(a) of the Act (15 U.S.C. 78o(a)) or any
applicable provision of the Act (15 U.S.C. 78a et seq.) and the
rules and regulations thereunder based solely on the bank's status as a
dealer when the contract was created.
Section 240.15a-11 is added to
read as follows:
§ 240.15a-11 Exemption from the definitions of "broker" and "dealer" for
banks engaging in securities lending transactions.
(a) A bank is exempt from the
definitions of the terms "broker" and "dealer" under
Sections 3(a)(4) and
3(a)(5) of the Act (15 U.S.C. 78c(a)(4) and (a)(5)), to the extent that,
as a conduit lender, or as an agent, it engages in or effects securities
lending transactions, and any securities lending services in connection
with such transactions, with or on behalf of a person the bank reasonably
believes to be:
(1) A qualified investor as
defined in Section 3(a)(54)(A) of the Act (15 U.S.C. 78c(a)(54)(A)); or
(2) Any employee benefit plan
that owns and invests on a discretionary basis, not less than $25,000,000
in investments.
(b) Securities lending
transaction means a transaction in which the owner of a security lends the
security temporarily to another party pursuant to a written securities
lending agreement under which the lender retains the economic interests of
an owner of such securities, and has the right to terminate the
transaction and to recall the loaned securities on terms agreed by the
parties.
(c) Securities lending services
means:
(1) Selecting and negotiating
with a borrower and executing, or directing the execution of the loan with
the borrower;
(2) Receiving, delivering, or
directing the receipt or delivery of loaned securities;
(3) Receiving, delivering, or
directing the receipt or delivery of collateral;
(4) Providing mark-to-market,
corporate action, recordkeeping or other
services incidental to the
administration of the securities lending transaction;
(5) Investing, or directing the
investment of, cash collateral; or
(6) Indemnifying the lender of
securities with respect to various matters.
(d) For the purposes of this
section, the term conduit lender means a bank that borrows or loans
securities, as principal, for its own account, and contemporaneously loans
or borrows the same securities, as principal, for its own account. A bank
that qualifies under this definition as a conduit lender at the
commencement of a transaction will continue to qualify, notwithstanding
whether:
(1) The lending or borrowing
transaction terminates and so long as the transaction is replaced within
one business day by another lending or borrowing transaction involving the
same securities; and
(2) Any substitutions of
collateral occur.
-
Investment Company Act of 1940
:
To provide for the registration and regulation of
investment companies and investment advisers, and for other purposes.
The GLBA in Section 216, Definition of Dealer Under
the Investment Company Act of 1940, amended
Section 2(a)(11) of the Investment Company Act of 1940 to read as
follows.
The term `dealer' has the same meaning as given in the
Securities Exchange Act of 1934, but
does not include an insurance company or investment company.
-
Investment Advisers Act of 1940
:
To provide for the registration and regulation of
investment companies and investment advisers, and for other purposes.
The GLBA in Section 219, Definition of Dealer Under
the Investment Advisers Act of 1940 amended
Section 202(a)(7) to read as follows.
The term `dealer' has the same meaning as given in
Section 3 of the Securities Exchange Act of
1934, but does not include an insurance company or investment company.
- Bank as Underwriter
-
Securities Act of 1933 :
To provide full and fair disclosure of the character of securities sold in
interstate and foreign commerce and through the mails, and to prevent
frauds in the sale thereof, and for other purposes.
No exemption from definition of "underwriter"
(§ 2(11)). The provisions of the Act are applicable to banks.
-
Securities Exchange Act of 1934
:
To provide for the regulation of securities exchanges and of
over-the-counter markets operating in interstate and foreign commerce and
through the mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Not exempt from
definition
(§ 3(a)(20)). The provisions of the act are applicable to banks.
-
Investment Company Act of 1940 :
To provide for the registration and regulation of investment companies and
investment advisers, and for other purposes.
Not exempt from definition of "underwriter"
(§ 2(a)(40)). The provisions of the act are applicable to banks.
-
Bank as Principal Underwriter
Investment Company Act of 1940 :
To provide for the registration and regulation of investment companies and
investment advisers, and for other purposes.
No exemption from definition
(§ 2(a)(29)).
- Bank as a Municipal Bond
Underwriter
The GLBA amends the corporate powers of National
banks. They now have the authority to underwrite municipal revenue bonds.
This activity may be performed within the bank. State banks may also
engage in this activity to the extent permitted by the respective State's
laws. This activity may be at the holding company, the bank, or the bank
subsidiary level.
Section 151 of the GLBA amends the paragraph
designating the Seventh of Section 5136 of the Revised Statutes of the
United States (12 U.S.C. 24(7)). It adds the following sentence.
In
addition to the provisions in this paragraph for dealing in,
underwriting, or purchasing securities, the limitations and
restrictions contained in this paragraph as to dealing in,
underwriting, and purchasing investment securities for the
national bank's own account shall not apply to obligations
(including limited obligation bonds, revenue bonds, and
obligations that satisfy the requirements of Section 142(b)(1) of
the Internal Revenue Code of 1986) issued by or on behalf of any
State or political subdivision of a State, including any municipal
corporate instrumentality of 1 or more States, or any public
agency or authority of any State or political subdivision of a
State, if the national bank is well capitalized (as defined in
Section 38 of the Federal Deposit Insurance
Act).
-
Bank as Clearing Agency
Securities Exchange Act of
1934 :
To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
No
exemption from definition (§ 3(a)(23)(A); however, a bank is not to
be deemed a clearing agency if it only performs customary bank
functions or acts as agent for a clearing agency or participant in
a clearing agency (§ 3(a)(23)(B)).
-
Bank as Municipal Securities
Dealer
Securities Exchange Act of 1934 :
To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
No
exemption from "municipal securities dealer" definition for banks
(§ 3(a)(30)); however, § 3(a)(30)(B) allows a separately
identifiable department or division and not the bank itself to
register as a municipal securities dealer
- Bank as Municipal Securities
Broker
Securities Exchange Act of
1934 :
To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Exempts
banks from definition of broker (§3(a)(4)(B)(ix))
-
Bank as Investment Adviser
- Securities Exchange Act of
1934 : To provide for the regulation of securities
exchanges and of over-the-counter markets operating in interstate
and foreign commerce and through the mails, to prevent inequitable
and unfair practices on such exchanges and markets, and for other
purposes.
Incorporates Investment Advisers, as defined
in the Investment Advisers Act of 1940. (§3(a)(20))
- Investment Advisers Act of 1940 : To provide for the registration and
regulation of investment companies and investment advisers, and
for other purposes.
Banks, bank holding companies, or their
SIDDs (separately identifiable department or division) are
required to register and comply with the Investment Advisers Act
of 1940 if the bank, bank holding company, or SIDD serves or acts
as an investment adviser to a registered investment company.
A registered investment company is defined in the Investment
Company Act of 1940 Section 3(a)(1) and includes mutual funds
and other similar issuers.
An "investment adviser" under the
Investment Advisers Act of 1940 is subject to SEC jurisdiction,
recordkeeping requirements, advertising and solicitation rules,
rules on receipt of performance fees, and limits on use of
nonpublic information.
If the bank or bank holding company does
not advise a registered investment company - the bank or bank
holding company is exempt from the Act. This is explained
below in an excerpt from Section 202(a)(11).
(§202(a)(11)) : "Investment adviser" means any person who,
for compensation, engages in the business of advising others,
either directly or through publications or writings, as to the
value of securities or as to the advisability of investing in,
purchasing, or selling securities, or who, for compensation and as
part of a regular business, issues or promulgates analyses or
reports concerning securities; but does not include (A) a bank, or
any bank holding company as defined in the Bank Holding Company
Act of 1956, which is not an investment company, except that the
term "investment adviser" includes any bank or bank holding
company to the extent that such bank or bank holding company
serves or acts as an investment adviser to a registered investment
company, but if, in the case of a bank, such services or actions
are performed through a separately identifiable department or
division, the department or division, and not the bank itself,
shall be deemed to be the investment adviser. "
If
management elects to provide investment advice to a registered
investment company, they will need to register the bank with the
SEC or establish a "separately identifiable department or
division" (SIDD) that will provide the advisory service. The SIDD
must meet the provisions of 202(a)(26) below and register with the
SEC.
(§202(a)(26)) : "The term "separately identifiable department
or division" of a bank means a unit-- (A) that
is under the direct supervision of an officer or officers
designated by the board of directors of the bank as responsible
for the day-to-day conduct of the bank's investment adviser
activities for one or more investment companies, including the
supervision of all bank employees engaged in the performance of
such activities; and (B) for
which all of the records relating to its investment adviser
activities are separately maintained in or extractable from such
unit's own facilities or the facilities of the bank, and such
records are so maintained or otherwise accessible as to permit
independent examination and enforcement by the Commission of this
Act or the Investment Company Act of 1940 and rules and
regulations promulgated under this Act or the Investment Company
Act of 1940. "
(§210(A) Consultation) : This
section of the Investment Advisors Act was added in 1999 through
the GLBA . It allows for the sharing of information, between
the SEC and the appropriate federal banking agency, regarding the
investment advisory activities of any bank, bank holding company,
or SIDD that is registered under Section 203 of the
Act.
- Banks as Investment Company
- Securities Exchange Act of
1934 :
To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Incorporates Investment Company Act
definition of "investment company". (§ 3(a)(19)).
- Investment Company Act of
1940 :
To provide for the
registration and regulation of investment companies and investment
advisers, and for other purposes.
Banks are
exempt from definition of investment company for the Act (§ 3(c)(3)).
-
Investment Advisers Act of 1940 :
To provide for the registration and
regulation of investment companies and investment advisers, and
for other purposes.
Incorporates Investment Company Act
definition of investment company (§ 202(a)(12)).
-
Collective Trust Fund
Treatment
- Securities Act of 1933 :
To provide full and fair
disclosure of the character of securities sold in interstate and
foreign commerce and through the mails, and to prevent frauds in
the sale thereof, and for other purposes.
Exempts
any interest or participation in any common trust fund or similar
fund that is excluded from the definition of the term 'investment
company' under Section 3(c)(3) of the Investment Company Act
of 1940 from all except fraud provisions under Section 17 of the Securities Act of
1933. (§ 3(a)(2)).
- Securities Exchange Act of
1934 : To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Exempts
any interest or participation in any common trust fund or similar
fund that is excluded from the definition of the term `investment
company' under Section 3(c)(3) of the Investment Company Act
of 1940. (§ 3(a)(12))
- Investment Company Act of 1940 :
To provide for the
registration and regulation of investment companies and investment
advisers, and for other purposes.
The
GLBA codified the SEC's position on common trust funds and
collective pooled investment funds. An exemption under Section 3(c)(3) of the Investment Company Act
of 1940 is available for common trust fund or similar fund
if:
- such
fund is employed by the bank solely as an aid to the
administration of trusts, estates, or other accounts created and
maintained for a fiduciary purpose;
- except in connection with the ordinary
advertising of the bank's fiduciary services, interests in such
fund are not-
- advertised; or
- offered for sale to the general public;
and
- fees
and expenses charged by such fund are not in contravention of
fiduciary principles established under applicable Federal or
State law. (§ 3(c)(3))
Collective Trust Funds
(for Qualified Plans)
- Single and Collective Trust Fund for IRC §
401 "Qualified" Retirement Plans Which Do Not Contain Voluntary
Employment Contributions
- Securities Act of 1933 : To provide full and fair
disclosure of the character of securities sold in interstate and
foreign commerce and through the mails, and to prevent frauds in
the sale thereof, and for other purposes.
Exempts
interests or participations in a single or collective trust fund
maintained by a bank . . . issued in connection with (a) a stock
bonus, pension, or profit-sharing plan which meets the
requirements for qualification under Section 401 of the Internal
Revenue Code of 1954" from all except fraud provisions (§ 3(a)(2)).
- Securities Exchange Act of
1934 : To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Includes
in definition of exempted security "interests or participations in
a collective trust fund maintained by a bank . . . issued in
connection with (A) a stock bonus, pension, or profit-sharing plan
which meets the requirements for qualification under Section 401
of the Internal Revenue Code of 1954" (§ 3(a)(12)). Exempts from
registration "interests or participations in any collective trust
fund maintained by a bank . . . issued in connection with (i) a
stock-bonus, pension, or profit-sharing plan which meets the
requirements for qualification under Section 401 of the Internal
Revenue Code of 1954" (§ 12(g)(2)(H)).
- Investment Company Act of
1940 :
To provide for the registration and
regulation of investment companies and investment advisers, and
for other purposes.
Exempts
from definition of investment company "employees, stock bonus,
pension, or profit-sharing trust which meets the requirements for
qualification under Section 401 of the Internal Revenue Code of
1954; or any collective trust fund maintained by a bank consisting
solely of assets of such trusts" (§ 3(c)(11)).
- Single and Collective Trust Fund for IRC §
401 "Qualified" Retirement Plans Which Contain Voluntary Employee
Contributions
- Securities Act of 1933 : To provide full and fair
disclosure of the character of securities sold in interstate and
foreign commerce and through the mails, and to prevent frauds in
the sale thereof, and for other purposes.
Contains
no exemption for interests or participants in a single or
collective trust fund maintained by a bank if "an amount in excess
of the employer's contribution is allocated to the purchase of
securities (other than interests or participants in the trust or
separate account itself) issued by the employer or by any company
indirectly or indirectly controlling, controlling by or under
common control with the employer" (§ 3(a)(2)).
- Securities Exchange Act of
1934 : To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Includes
in definition of exempted security "interests or participations in
a collective trust fund maintained by a bank . . . issued
connection with . . . a stock bonus, pension, or profit-sharing
plan which meets the requirements for qualification under Section
401 of the Internal Revenue Code of 1954" from all but fraud
provisions (§ 3(a)(12)). Exempts from registration
"interests or participations in any collective trust fund
maintained by a bank . . . (which) are issued connection with . .
. a stock-bonus, pension, or profit-sharing plan which meets the
requirements for qualification under Section 401 of the Internal
Revenue Code of 1954" (§ 12(g)(2)(H)).
Investment Company Act of
1940 :
To provide for the registration and
regulation of investment companies and investment advisers, and
for other purposes.
Exempts
from definition of investment company "employees' stock bonus,
pension, or profit-sharing trust which meet the requirements for
qualification under Section 401 of the Internal Revenue Code of
1954; or any collective trust fund consisting solely of assets of
such trusts": (§ 3(c)(11)).
- Single and
Collective Trust Fund for H.R. 10 or Keogh Plans
- Securities Act of 1933 : To provide full and fair
disclosure of the character of securities sold in interstate and
foreign commerce and through the mails, and to prevent frauds in
the sale thereof, and for other purposes.
Contains
no exemption since only interests or participations in single or
collective trust funds maintained by a bank which cover employees
some or all of whom are employees within the meaning of Section
401 of Internal Revenue Code of 1954 are exempted (§ 3(a)(2)).
- Securities Exchange Act of
1934 : To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
Contains
no exemption because the definition of exempted security expressly
excludes "interests or participations in collective trust funds
maintained by a bank . . . which cover employees some or all of
whom are employees within the meaning of Section 401(c)(1) of the
Internal Revenue Code of 1954" (§ 3(a)(12)).. However, interests in
Keogh Plans are exempt from registration under (§ 12(g)(2)(H)) which exempts "any
interest or participation in any collective trust funds maintained
by a bank . . . (which) is issued in connection with (i) a stock
bonus, pension, or profit-sharing plan which meets the
requirements for qualifications under Section 401 of the Internal
Revenue Code of 1954" (§ 12(g)(2)(H)).
- Investment Company Act of
1940 :
To provide for the registration and
regulation of investment companies and investment advisers, and
for other purposes.
Exempts
from definition of investment company "employees' stock bonus,
pension, or profit-sharing trusts which meet the requirements for
qualification under Section 401 of the Internal Revenue Code of
1954; or any collective trust fund consisting solely of assets of
such trusts": (§ 3(c)(11)).
-
Collective
Trust Funds, Including "Commingled Agency
Accounts"
- Securities Act of 1933: To provide full and fair
disclosure of the character of securities sold in interstate and
foreign commerce and through the mails, and to prevent frauds in
the sale thereof, and for other purposes.
No
exemption.
- Securities Exchange Act of
1934 : To provide for the
regulation of securities exchanges and of over-the-counter markets
operating in interstate and foreign commerce and through the
mails, to prevent inequitable and unfair practices on such
exchanges and markets, and for other purposes.
No
exemption.
- Investment Company Act of
1940 :
To provide for the registration and
regulation of investment companies and investment advisers, and
for other purposes.
No
general exemption; however, there is a limited exemption excepting
from the definition of investment company "any common trust fund,
or similar fund, established before the effective date of the
Revenue Act of 1936 (June 22, 1936) by a corporation which is
supervised or examined by State or Federal authority having
supervision over banks, if a majority of the units of beneficial
ownership in such fund, other than units owned by charitable or
educational institutions, are held under instruments providing for
payment of income to one or more persons and of principal to
another or others" (§ 3(c)(3)).
Securities and Exchange
Commission
Staff Compliance Guide to Banks on Dealer
Statutory Exceptions and Rules
September 16,
2003
Division of Market Regulation
This Staff Compliance Guide to Banks on
Dealer Statutory Exceptions and Rules was prepared by and represents
the views of the staff of the Division of Market Regulation and does
not constitute rules, regulations, or statements of the Securities
and Exchange Commission ("Commission"). The Commission has neither
approved nor disapproved its contents.
Beginning October 1, 2003,
banks that buy and sell securities need to consider whether they are
"dealers" under the federal securities laws.
Dealer activity is not interpreted the
same way under securities law and banking law.
Banks need to be aware that "dealer"
activity under the federal securities laws is not necessarily the
same thing as "dealer" activity under banking law. For example,
so-called "riskless principal" transactions are dealer activity for
securities law purposes, even though they are agency activity for
banking law purposes. Similarly, repurchase agreement transactions
are treated as purchases and sales of securities for securities law
purposes. Generally, these transactions would also be characterized
for securities law purposes as transactions in the underlying
security.
Although this Staff
Compliance Guide highlights some of the significant provisions of
the Securities Exchange Act of 1934 ("Exchange Act") and the
Commission's rules, it is not comprehensive. We urge banks that need
more information about particular exceptions and exemptions to
consult the applicable law, including Section 3(a)(5) of the
Exchange Act and the rules cited below. Banks can also obtain
additional information by reading Exchange Act Release No. 47364
(February 14, 2003) (which can be found at http://www.sec.gov/rules/final/34-47364.htm)
and Exchange Act Release No. 44291 (May 11, 2001) (which can be
found at http://www.sec.gov/rules/final/34-44291.htm).
Banks that have additional
questions may contact SEC staff for guidance at 202-942-0069 or at
marketreg@sec.gov. Banks may also wish to
consult with private counsel.
What is a "dealer" under the federal securities
laws?
Section 3(a)(5) of the Exchange Act
generally defines a "dealer" as "any person engaged in the business
of buying and selling securities for his own account, through a
broker or otherwise." All transactions that go through a bank's own
accounting books are potential dealer transactions.
The securities laws and rules, however,
distinguish "dealers" (which buy and sell securities as part of a
regular business) from "traders" (which buy and sell securities for
investment and not as part of a regular business). For additional
information on distinguishing "dealers" from "traders," see http://www.sec.gov/rules/proposed/34-46745.htm
and http://www.sec.gov/rules/final/34-47364.htm
at "Dealer Activities and the Dealer/Trader Distinction."
Typical dealer functions include:
- Providing two-sided quotations, or
otherwise indicating an ongoing willingness to buy and sell
particular securities; or
- Issuing or originating securities that
the person also buys and sells.
If you are trying to determine whether a
particular bank is acting as a dealer, you might want to consider
the following questions:
- Does the bank hold itself out as being in
the business of buying and selling securities?
- Does the bank engage in transactions with
the public?
- Does the bank make a market in, or quote
prices for both purchases and sales of, one or more securities?
- Does the bank participate in a "selling
group" or otherwise underwrite securities?
- Does the bank hold a dealer inventory or
does it trade with an affiliate that is a dealer?
A "yes" answer to any of these questions
indicates that the bank may be a dealer.
Special Rules for Banks and FDIC-Insured
Savings Associations
If a bank - or an FDIC-insured savings
association or savings bank (which we will refer to as "savings
banks") - is engaging in dealer activity, it does not necessarily
have to register as a dealer with the Commission. Rather, Section
3(a)(5) of the Exchange Act and certain Commission rules provide
transaction-specific exceptions and exemptions from the definition
of "dealer" for banks and savings banks. These exceptions and
exemptions are outlined below.
Exceptions From the Definition of "Dealer"
Under Exchange Act Section 3(a)(5)
The Exchange Act provides four exceptions
from the definition of "dealer." While the statute only makes these
exceptions available to "banks" as defined in Section 3(a)(6) of the
Exchange Act, the Commission has extended the scope of these
exceptions to include savings banks. The four exceptions cover
permissible securities transactions, investment transactions,
asset-backed transactions, and identified banking products.
1. Permissible securities
transactions. This exception permits banks to buy and
sell commercial paper, bankers acceptances or commercial bills,
certain Canadian government obligations, Brady bonds, and "exempted
securities." "Exempted securities" include government securities,
municipal securities, and interests or participations in common or
collective trust funds.
Note: Banks that deal in municipal
securities, government securities, and Canadian government
obligations have other registration requirements under the Exchange
Act. These requirements are discussed below in the question and
answer section of this guide.
2. Investment transactions. This
exception permits banks to buy and sell securities for investment
purposes. It applies to transactions both for the bank itself and
for its trustee and fiduciary accounts. It does not apply to
transactions between the bank and its customers. This exception is
analogous to the "trader" distinction discussed above.
3. Asset-backed transactions. This
exception permits banks - through a grantor trust or other separate
entity - to issue and sell certain asset-backed securities to
"qualified investors." These securities must represent obligations
predominantly (85% or more) originated by the bank, or an affiliate
of the bank other than a broker-dealer. If the underlying assets are
mortgage obligations or consumer-related receivables, a syndicate of
banks that includes the bank issuing and selling the securities must
have originated 85% or more of the obligations, and the bank issuing
and selling the securities must have originated at least 10% of the
value of the pool of obligations backing the securities. The term
"qualified investor" is defined in Exchange Act Section 3(a)(54) to
include other banks, broker-dealers, savings associations, and other
parties that meet specified criteria. The exception is limited to
the original placement of securities. It does not permit a bank to
repurchase and re-sell securities in the secondary market. For
additional information, see Exchange Act Rule 3b-18, which defines
terms used in the asset-backed transaction exception.
4. Identified banking products. This
exception permits banks to buy and sell certain "identified banking
products," which include deposit accounts, savings accounts,
certificates of deposit, other deposit instruments issued by a bank,
banker's acceptances, bank issued letters of credit, bank loans, and
debit accounts. "Identified banking products" also include loan
participations if they are sold to "qualified investors," or to
other persons who have the opportunity to review and assess any
material information. In addition, "identified banking products"
include (i) credit swaps and (ii) equity swaps that are sold
directly to "qualified investors." (As noted above, "qualified
investors" include other banks, broker-dealers, savings
associations, and other parties that meet specified criteria.)
Exemptions from the Definition of
"Dealer"
In addition to the four exceptions from the
definition of "dealer" outlined above, banks and savings banks
should also consider two exemptions adopted by the Commission by
rule. These exemptions pertain to riskless principal transactions
and securities lending transactions.
1. Riskless principal transactions.
[17 CFR 240.3a5-1.] This exemption, under Exchange Act Rule
3a5-1, permits banks to engage in a limited number (up to 500) of
"riskless principal" transactions per calendar year without
registering with the Commission as dealers. A "riskless principal"
transaction is one in which, after having received an order to buy
from a customer, a bank purchases the security from another person
to offset that contemporaneous sale. Alternatively, a riskless
principal transaction is one in which after having received an order
to sell from a customer, a bank sells the security to another person
to offset that contemporaneous purchase.
How to count
transactions for purposes of this exemption: Transactions
with two customers where the bank acts as a riskless principal
between them count as one transaction. However, if a bank acts as a
riskless principal between one counterparty and multiple
counterparties by arranging multiple transactions, each of the
transactions on the side that involves the largest number of
transactions would count as separate transactions against the annual
transaction-limit.
How counting will be
affected by banks' brokerage activities: The Exchange Act
also permits banks to engage in certain "broker" activities without
registering with the Commission. At the time the "dealer" provisions
become effective, however, the "broker" provisions still will be
subject to a Commission order delaying their effectiveness. See
Exchange Act Release No. 47649 (April 8, 2003) (which can be found
at http://www.sec.gov/rules/other/34-47649.htm).
One of the "broker" exceptions -
known as the de minimis exception - permits banks to engage in no
more than 500 brokerage transactions per year that are not otherwise
exempt without registering with the Commission. When banks utilize
this exception after the compliance date is set for the broker
rules, banks' riskless principal transactions and brokerage
transactions effected under the de minimis exception will count
toward the same 500-transaction limit. In other words, banks may be
able to engage in any combination of brokerage transactions under
the de minimis exception and riskless principal transactions under
Rule 3a5-1, so long as the total number of these transactions does
not exceed 500 per year. Until the broker rules are effective,
however, banks may use the entire 500-transaction limit for riskless
principal transactions.
A final note about this interim
period: Banks will have additional flexibility initially,
during the period when the dealer exceptions are effective but the
broker rules are not. Until the broker rules become effective, banks
may also choose to accommodate customers by executing securities
transactions as agent for a commission, rather than assuming the
role of a principal without risk.
2. Securities lending transactions.
[17 CFR 240.15a-11.] This exemption, under Rule 15a-11, permits
banks to engage in, or effect, securities lending transactions with
certain counterparties. A "securities lending transaction" is a
transaction in which the owner of a security lends the security
temporarily to another party under a written securities lending
agreement. Through this agreement, the lender retains the economic
interests of an owner of the securities. Subject to any terms agreed
upon by the parties, including an agreement to loan the securities
for a fixed term, the lender also has the right to terminate the
transaction and to recall the loaned securities.
Who can be a counterparty under
this exemption? The counterparty to these securities
lending transactions must be either a person the bank reasonably
believes is a "qualified investor," or any employee benefit plan
that owns and invests on a discretionary basis, at least $25,000,000
in investments. (As noted above, "qualified investors" include other
banks, broker-dealers, savings associations, and other parties that
that meet specified criteria.) See Exchange Act Section
3(a)(54).
In what capacities may a bank act
under this exemption? A bank may act as a conduit lender,
or as an agent. A bank is a "conduit lender" if, as principal for
its own account, it borrows or loans securities, and
contemporaneously loans or borrows the same securities. A bank that
qualifies as a conduit lender at the commencement of a transaction
will continue to qualify if the lending or borrowing transaction
terminates so long as it is replaced within one business day by
another lending or borrowing transaction involving the same
securities. It will also continue to qualify if substitutions of
collateral occur.
Securities lending services are
included within this exemption. Banks may also provide
securities lending services in connection with securities lending
transactions. "Securities lending services" encompass (1) selecting
and negotiating with a borrower, and executing, or directing the
execution of the loan with the borrower; (2) receiving, delivering,
or directing the receipt or delivery of loaned securities; (3)
receiving, delivering, or directing the receipt or delivery of
collateral; (4) providing mark-to-market, corporate action,
recordkeeping or other services incidental to the administration of
the securities lending transaction; (5) investing, or directing the
investment of, cash collateral; and (6) indemnifying the lender of
securities with respect to various matters.
A final note about safekeeping
and custody activities: Banks also have a conditional
exception under Section 3(a)(4)(B)(viii) from the Exchange Act
definition of "broker" for safekeeping and custody activities. Under
that exception, banks may engage in securities lending services for
custody customers without meeting the requirements of this
exemption. For example, the safekeeping and custody exception
permits a bank to engage in securities lending transactions for
custody customers that are not "qualified investors." Of course,
because the custody exception is only an exception from the
definition of "broker," it does not cover "dealer" transactions.
Reminder: If your bank is doing, or
may do, any of the activities of a dealer, you should find out if
the bank needs to register with the SEC or stop engaging in dealer
transactions. We want to underscore that similar topics may be
analyzed differently under the securities laws and interpretations
than under banking law and interpretations. If you are not certain,
you may want to review SEC laws, rules, interpretations, consult
with private counsel, or ask for Commission staff advice.
* * * *
*
Frequently Asked Questions
Question #1: May a bank holding company,
subsidiary of a bank, or affiliate of a bank use the bank exceptions
in the Exchange Act?
Answer #1: No. The exceptions in
the Exchange Act only exclude
banks' securities activities from
broker-dealer regulation, and then only in certain specified
circumstances. Only
the bank itself may claim an exception or exemption. The
exceptions and exemptions are not available to a subsidiary or
affiliate of a bank (unless the subsidiary or affiliate is itself a
bank).
Question #2: May a bank conduct securities
transactions with its subsidiaries or affiliates without registering
as a broker-dealer?
Answer #2: Each of a bank's
securities transactions with a subsidiary or affiliate of the bank
must qualify for an exception or exemption.
Question #3: May a bank use more than one
exception or exemption?
Answer #3: Yes, if the bank meets
all of the conditions of any exception or exemption on which it is
relying. For example, a bank may engage in securities lending
transactions in accordance with Exchange Act Rule 15a-1, or if the
security lent is an exempted security, in accordance with Exchange
Act Section 3(a)(5)(C)(i)(II).
Question #4: What can a bank do if it needs
additional time to bring its activities into conformity with the
bank dealer exceptions and exemptions?
Answer #4: As the Commission noted
in adopting the final dealer rules, individual banks may have
specific transactions in progress for which they may need an
extension of the implementation date of these rules. Banks in this
situation should contact SEC's staff to determine if specific relief
may be available to them. Each bank's situation will be considered
on a case-by-case basis for specified transactions for which a
demonstrated burden could be avoided or alleviated through a
reasonably short extension of the compliance date, or during any
period when additional specific exemption requests are being
considered.
Question #5: What kinds of issues will the
Commission staff address by telephone?
Answer #5: The Commission staff is
available to discuss any legal issue under the federal securities
laws. However, banks should understand that this guidance is highly
informal and, while intended to be helpful to the persons making the
inquiries, not binding on the Commission. A bank seeking more formal
assurance with respect to particular proposed activities should
submit a written request to the Office of Chief Counsel of the
Division of Market Regulation.
Question #6: If my bank has a program where it
sweeps deposit accounts into government securities subject to
repurchase agreements, will the bank have to change or end that
program when the bank "broker" and "dealer" rules go into
effect?
Answer #6: As explained above,
repurchase agreement transactions ("repos") are treated as purchases
and sales of securities for securities law purposes. Generally,
these transactions would also be characterized for securities law
purposes as transactions in the underlying security. Therefore, the
bank would need to consider whether it is acting as a broker (that
is, if the bank forwards the money to another entity which enters
into the repo as principal) or as a dealer (that is, if the bank
itself enters into the repo as principal). Under the bank exception
to the definition of broker, banks are permitted to effect
transactions in "exempted securities." Under the bank exception to
the definition of dealer, banks are permitted to buy and sell
exempted securities as defined in Section 3(a)(12) of the Exchange
Act. Exempted securities include government securities. Thus, a bank
has an exception from the definition of broker for transactions in
government securities and an exception from the definition of dealer
for buying and selling government securities. Banks must also,
however, comply with the requirements of the Government Securities
Act of 1986 and the related regulations. An analysis of those
requirements is beyond the scope of this guide.
Question #7: If my bank was doing riskless
principal transactions as a service to our customers when banks had
a complete exemption from broker-dealer registration under the
federal securities laws, how many riskless principal transactions
may the bank engage in from October 1, 2003 until December 31, 2003,
after the more limited exemption takes effect?
Answer #7: During the period
before the broker rules become effective, a bank is exempt from the
definition of "dealer" for 500 riskless principal transactions
during a calendar year. To make it easy for banks to comply during
this calendar year, a bank may utilize the entire 500 transactions
between October 1, 2003 and December 31, 2003. The Commission
extended the blanket bank broker exemption until November 12, 2004.
During calendar year 2004, the bank also may use the entire 500
transactions for riskless principal transactions. Once the revised
broker rules become effective, the bank will have to combine its
riskless principal transactions with the transactions in which the
bank is acting as an agent for a customer under the statutory
exception for de minimis transactions during each calendar year. The
combined number of transactions may not exceed 500 per calendar
year. [17 CFR 240.3a5-1.] The calculation for combining the de
minimis broker transactions with the riskless principal transactions
will be more fully addressed when the broker rules become
effective.
Question #8: If my bank wants to act as a
riskless principal to fill a securities order as a service to a
customer, how does the bank count the order when the bank transacts
with several broker-dealers to get best execution?
Answer #8: The bank would count
the order as one transaction, assuming the customer only placed one
order with the bank. In other words, multiple transactions with
broker-dealers to fill a single customer order would only count as
one transaction for the purpose of this exemption. Moreover, if the
bank routes an order to a single broker-dealer, and the
broker-dealer splits the order among several of its customers, the
bank would still count the transaction as one transaction. In
contrast, if the bank acts as an intermediary between one customer
and multiple customers by arranging multiple transactions, the bank
must count each of the transactions on the side of the
intermediation that involves the largest number of transactions
against the annual 500-transaction limit.
Question #9: What does it mean for a bank to
act as a fiduciary for purposes of Exchange Act Section
3(a)(5)(C)(ii)?
Answer #9: The exception for
trustee and fiduciary transactions applies when the bank buys or
sells securities for investment purposes for accounts for which the
bank acts as a trustee or fiduciary. In giving meaning to the term
"fiduciary" in Section 3(a)(5)(C)(ii), we look to the legislative
history, which states that Exchange Act Section 3(a)(5) "excepts a
bank from the definition of 'dealer' when it buys and sells
securities for investment purposes for the bank or for accounts for
which the bank acts as trustee or fiduciary. This mirrors existing
law distinguishing between investors and dealers, and is limited to
the portfolio trading of the bank and accounts for which it makes
investment decisions." H.R. Rep. No. 106-74, pt. 3, at
170-71(1999).
Question #11: What does it mean to underwrite
securities?
Answer #11: Confusion about what
it means to be a dealer sometimes is caused by the belief that
dealers only underwrite securities, although in general the
determination of broker or dealer status under the Exchange Act
primarily depends on the broader definitions of 'purchase' and
'sale.' See Exchange Act Section 3(a)(13) and 3(a)(14) [15 USC
78c(a)(13) and 78c(a)(14)]. As the Commission stated in footnote 21
of Exchange Act Release No 47364 (February 14, 2003): "The term
'underwriter' is defined in Section 2(a)(11) of the Securities Act
of 1933 [15 USC 77b(a)(11)]. In determining whether a bank is acting
as an underwriter when it undertakes particular securities
activities, the Commission is not expressing any views on whether
those activities would constitute 'underwriting' for purposes of
Section 16 of the Glass-Steagall Act. The Commission wishes to
emphasize that the determination of dealer status with respect to
securities transactions, including those that do not involve a
public offering, must be made by reference to the federal securities
laws. It is the Commission's view, however, that the fact that an
offering is exempt from registration under the Securities Act of
1933 ("Securities Act") [15 USC 77a, et seq.] does not necessarily
affect the status of a participant in that offering as an
'underwriter' as defined in Securities Act Section 2(a)(11)." [68 FR
8686 at 8688, note 21.]
Question #12: May a bank register itself as a
broker-dealer?
Answer #12: While this is possible
as a theoretical matter, it may not be practical for most banks
(except in the case of banks that do not make loans). As the
Commission noted in Exchange Act Release No. 44291 (May 11, 2001) http://www.sec.gov/rules/final/34-44291.htm
at note 266 and the sources cited therein, banks have traditionally
had varying reasons for choosing to conduct securities activities
through a separate entity.
Question #13: Why is the definition of "dealer"
for purposes of broker-dealer registration different from the
analysis under the Commission's net capital rule of when a
registered broker-dealer must maintain the required minimum capital
as a "dealer"?
Answer #13: The analysis is
different because the purpose of the analysis is different. All
registered broker-dealers, including any bank that registered with
the Commission, are subject to the net capital rule. The net capital
rule sets forth appropriate capital levels to comply with the
financial responsibility requirements for a registered broker-dealer
based on its business model. Exchange Act Rule 15c3-1(a)(2)(iii)(B)
establishes minimum net capital requirements for broker-dealers that
are designated as "dealers" because they engage in a certain level
of proprietary trading. Under that rule, a "dealer" includes "any
broker or dealer that effects more than ten transactions in any one
calendar year for its own investment account." In contrast,
determining when a person meets the initial threshold that requires
registration as a broker-dealer is subject to the analysis of the
factors set forth at the beginning of this special notice as well as
the broker factors set forth in the Compliance Guide to the
Registration and Regulation of Brokers and Dealers.
Question #14: If a bank acts only as a
municipal securities dealer, must it register as a
broker-dealer?
Answer #14: No, it has an
exception from broker-dealer registration. It, or its separately
identified department or division, must, however, register as a
municipal securities dealer under Exchange Act Section 15B. A bank
should use Form MSD to register with the Commission. The bank, or
its separately identified department or division, must follow the
rules governing municipal securities dealers, including the rules of
the Municipal Securities Rulemaking Board ("MSRB").
Question #15: If a bank is registered as a
municipal securities dealer, must it also register as a municipal
securities broker?
Answer #15: No, there is no
separate registration for municipal securities brokers. However, if
a bank has a separately identified department or division registered
as a municipal securities dealer, the bank must conduct its
municipal brokerage business in that separately identifiable
department or division. For additional information on this subject,
see MSRB Rule G-1, which defines the separately identifiable
department or division of a bank.
Question #16: Do a bank's transactions in
municipal fund securities have to comply with Commission and MSRB
rules?
Answer #16: Banks must register as
municipal securities dealers to deal in municipal securities that
States issue to provide tax-favored vehicles for educational
savings, such as 529 plans. All those banks' municipal securities
activities - including municipal fund securities transactions in
which the bank acts solely as an agent - must conform with MSRB
rules and all Commission rules that apply to municipal securities
dealers. On the other hand, if a bank does not act as a dealer in
municipal securities, then the bank may engage in agency
transactions involving municipal fund securities without registering
with the Commission and registering with the MSRB.
Question #17: If a bank acts as a dealer of
U.S. government or Canadian government securities, must it register
as a broker-dealer?
Answer #17: No, because banks are
exempted from broker-dealer registration for "permissible securities
transactions." Permissible securities transactions include "exempt
securities," which include government securities and Canadian
securities and are defined in Exchange Act Section 3(a)(12). Banks,
however, must also comply with the requirements of the Government
Securities Act of 1986 [15 USC § 78o-5] as well as the legal
requirements of the implementing regulations promulgated by
Treasury, 17 C.F.R. Parts 400 to 450 when they effect transactions
in or buy or sell government securities and Canadian securities. For
hold-in-custody repurchase transactions, 17 C.F.R. § 450 also is
applicable. Banks that are dealing in government securities also
should review the Federal Financial Institutions Examination Council
("FFIEC") Modification of Policy Statement, 63 F.R. 6935 (February
11, 1998).
Question # 18: If a bank may deal only with
"qualified investors" to meet the terms of an exemption or
exception, who can be its customers or
counterparties?
Answer #18: The term "qualified
investor" is defined in Exchange Act Section 3(a)(54). [15 USC
78c(a)(54).] Qualified investors include investment companies,
banks, small business investment companies, any State sponsored
employee benefit plan, institutional trusts, market intermediaries,
and individuals, corporations or partnerships that own and invest on
a discretionary basis more than $25,000,000.
How to Contact Us
For general questions regarding
broker-dealer registration and regulation:
Office of Interpretation and
Guidance Division of Market Regulation U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549 (202) 942-0069 E-mail
address: marketreg@sec.gov
Where to Get Further Information
For copies of SEC forms and recent SEC
releases:
Publications Section U.S. Securities and Exchange Commission 450 Fifth Street, N.W. Washington, D.C. 20549-0011 (202) 942-4046
Other useful telephone numbers, and Web sites:
References:
Definition of Terms in and Specific
Exemptions for Banks, Savings Associations, and Savings Banks Under
Sections 3(a)(4) and 3(a)(5) of Exchange Act Release No. 34-47364, 68 FR
8686 (February 24, 2003).
Definition of Terms in and Specific
Exemptions for Banks, Savings Associations, and Savings Banks Under
Sections 3(a)(4) and 3(a)(5) of Exchange Act Release No. 34-46745, 67 FR
67495 (November 5, 2002).
Definition of Terms in and Specific
Exemptions for Banks, Savings Associations, and Savings Banks Under
Sections 3(a)(4) and 3(a)(5) of Exchange Act Release No. 34-44291, 66 FR
27760 (May 18, 2001).
Division of Market Regulation: Compliance
Guide to the Registration and Regulation of Brokers and Dealers, http://www.sec.gov/divisions/marketreg/bdguide.htm
http://www.sec.gov/divisions/marketreg/bankdealerguide.htm
Securities
Exchange Act of 1934 Release No. 34-23170 Section 28(e) and Soft
Dollars
17 CFR Part 241 April 23, 1986
Agency: Securities and Exchange
Commission.
Action: Interpretive
Release Concerning the Scope of Section 28(e) of the Securities
Exchange Act of 1934 and Related Matters.
Summary:
The Commission today announced the issuance of an interpretive
release under Section 28(e) of the Securities Exchange Act of 1934
("Act") which provides a safe harbor for persons who exercise
investment discretion over beneficiaries' or clients' accounts to
pay for research and brokerage services with commission dollars
generated by account transactions. In the release, the Commission
has clarified its interpretation of the phrase "brokerage and
research services" in Section 28(e)(3) and has reiterated the
disclosure obligations of money managers under the federal
securities laws concerning brokerage allocation practices and the
use of commission dollars. The Commission has also expressed its
views regarding best execution obligations of fiduciaries for their
clients' transactions and its views and those of the United States
Department of Labor regarding directed brokerage practices by
sponsors of employee benefit plans. The Commission believes that the
release will provide useful guidance to money managers and other
persons in the securities industry.
For
Further Information Contact: Mary Chamberlin, Chief Counsel, or
Kerry F. Hemond, Esq. ((202) 272-2848), Office of Chief
Counsel, Division of Market Regulation, Securities and Exchange
Commission, 450 5th Street, NW, Washington, DC 20549. For further
information regarding the obligations imposed under the Investment
Advisers Act of 1940 and the Investment Company Act of 1940, contact
Thomas P. Lemke, Chief Counsel, Stephanie M. Monaco, Esq., or Gerald
T. Lins, Esq. ((202) 272-2030), Office Chief Counsel, Division
of Investment Management, Securities and Exchange
Commission.
Supplementary
Information:
I. Background
Section 28(e) provides a safe harbor to money managers who use the
commission dollars of the advised accounts to obtain investment
research and brokerage services, provided that all of the conditions
in the section are met. The section states that a person
who exercises investment discretion with respect to an account shall not
be deemed to have acted unlawfully or to have breached a fiduciary
duty under state or federal law solely by reason of his having
caused an account to pay more than the lowest available commission
if that person determines in good faith that the amount of the
commission is reasonable in relation to the value of the brokerage
and research services provided. Conduct outside of the safe harbor
of Section 28(e) may constitute a breach of fiduciary duty as
well as a violation of specific provisions of the federal securities
laws, particularly under the Investment Advisers Act of 1940
("Advisers Act") and the Investment Company Act of 1940 ("Company
Act") and of the Employee Retirement Income Security Act of 1974
("ERISA"). In addition, the section only excuses paying more than
the lowest available commission and does not shield a person who
exercises investment discretion from charges of violations of the
antifraud provisions of the federal securities laws or from
allegations, for example, that he churned an account, failed to seek
the best price, or failed to make required disclosures.
In connection with the abolition of fixed commission rates on
May 1, 1975, money managers and broker-dealers expressed
concern that, if money managers were to pay more than the lowest
commission rate available to a broker-dealer in return for services
other than execution, such as research, they would be exposed to charges
that they had breached a fiduciary duty. This concern was based on
the traditional fiduciary principle that a fiduciary cannot use
trust assets to benefit himself. The purchase of research with the
commission dollars of a beneficiary or a client, even if used for
the benefit of the beneficiary or the client, could be viewed as
also benefiting the money manager in that he was being relieved of
the obligation to produce the research himself or to purchase it
with his own money. This concern stemmed in part from litigation
during the 1960's and 1970's over whether advisers of investment
companies had a duty to recapture commission dollars for the benefit
of the investment company. The Congress added
Section 28(e) of the Act to make clear that money managers
could consider the provision of research, as well as execution
services, in evaluating the cost of brokerage services without
violating their fiduciary responsibility. In adopting
Section 28(e), the Congress acknowledged the important service
broker-dealers provide by producing and distributing investment
research to money managers and created a safe harbor to permit money
managers, in certain circumstances, to continue to use commission
dollars paid by managed accounts to acquire research as well as
execution services. These arrangements have come to be referred to
as "soft dollar" arrangements.
In 1976, the Commission issued an interpretive release concerning
the scope of Section 28(e). The Commission stated in the
release that the safe harbor did not protect "products and services
which are readily and customarily available and offered to the
general public on a commercial basis." The Commission issued the
release as a result of a number of practices which it did not
believe were within the safe harbor. Since that time, the commission
has issued a report pursuant to Section 21(a) of the Act
reiterating this standard. The staff has generally declined,
as a matter of policy, to express definitive views as to whether a
money manager's receipt of any particular product or service would
by protected by Section 28(e), although it has provided general
comments on research services through the no-action letter
process.
Prompted by an increased industry focus on soft dollar practices,
over the past eighteen months the staff of the Commission's
Divisions of Market Regulation and Investment Management, and the
staff of the Commission's regional offices, have been engaged in an
examination of such practices generally and in particular in a
re-evaluation of the 1976 standard as to-the meaning of the phrase
"brokerage and research services" in the context of
Section 28(e). Based on the staff's analyses and
recommendations, the Commission has concluded that the 1976 standard
is difficult to apply and unduly restrictive in some circumstances,
and that uncertainty about the standard may have impeded money
managers from obtaining, for commission dollars, goods and services
they believe are important to the making of investment decisions.
Accordingly, the Commission is withdrawing the 1976 standard and
adopting revised standard, as discussed below. At the same time,
however, the Commission emphasizes that money managers, particularly
investment advisers registered under the Advisers Act, have
important fiduciary and disclosure obligations concerning soft
dollar practices, as well as a duty to obtain best execution of
their clients' transactions. Finally, the Commission expresses its
views on the practice of many employee benefit plan sponsors of
directing their money managers to execute transactions through
specified broker-dealers who have agreed to rebate to the plan a
portion of the commissions paid in the form of cash, goods or
services.
II. Definition of Brokerage and Research
Services
A. In
General
Subparagraph (3) of Section 28(e) defines the brokerage
and research services that are protected. The statute states that a
person provides brokerage and research services insofar as he
--
(A) furnishes advice, either direct or
through publications or writings, as to the value of securities, the
advisability of investing in, purchasing, or selling securities, and
the availability of securities or purchasers or sellers of
securities;
(B) furnishes analyses and reports
concerning issuers, industries, securities, economic factors and
trends, portfolio strategy, and the performance of accounts;
or
(C) effects securities transactions and
performs functions incidental thereto (such as clearance,
settlement, and custody) or required in connection therewith by
rules of the Commission or a self-regulatory organization of which
such person is a member or person associated with a member or in
which such person is a participant.
The legislative history of Section 28(e) indicates that: the
definition of brokerage and research services is intended to
comprehend the subject matter in the broadest terms, subject always
to the good faith standard in subsection (e)(1). Thus, for
example, the reference to economic factors and trends would subsume
political factors which may have economic implications which may in
turn have implications in terms of the securities markets as a whole
or in terms of the past, present, or future values of individual
securities or groups of securities. Similarly, computer analyses of
securities portfolios would also be covered. Thus, the touchstone
for determining when a service is within or without the definition
in Section 28(e)(3) is whether it provides lawful and
appropriate assistance to the money manager in the carrying out of
his responsibilities.
The Commission relied on this legislative history in adopting the
1976 guidelines, but expressed its view that in order to rely on the
Section 28(e) safe harbor, the product or service must not be
readily and customarily available and offered to the general public
on a commercial basis. While application of this standard has in
some cases been clear, in other cases it has caused substantial
uncertainty and confusion on the part of money managers and others,
particularly as the types of research products and their methods of
delivery have proliferated and become more complex. For example,
participants in the securities industry have repeatedly requested
clarification as to whether the application of this standard would
disqualify a product that is available for hard dollars, what is
meant by "the general public," the extent to which economic,
financial and statistical information conveyed through computer
facilities to a money manager may be considered to be research, and
whether the computer facilities themselves can constitute research.
The Commission is concerned that this lack of clarity has impeded
the use by fiduciaries of appropriate research material and has
acted as a disincentive to competition among
broker-dealers.
B. Revised
Standard
The Commission believes that, subject to the process discussed below
of allocating payment for products or services that serve both a
research and a non-research function, the controlling principle to
be used to determine whether something is research is whether it
provides lawful and appropriate assistance to the money manager in
the performance of his investment decision-making responsibilities.
In making this determination, the fact that a product or service is
readily and customarily available and offered to the general public
on a commercial basis does not dictate the conclusion that the
product or service is not research, as was the case under the 1976
standard. Rather, the focus should be on
whether the product or service provides lawful and appropriate
assistance to the money manager's investment decision-making
process. What constitutes lawful and appropriate assistance in any
particular case will depend on the nature of the relationships
between the various parties involved and is not susceptible to hard
and fast rules. Of course, Section 28(e) continues to require
the money manager to make a good faith determination that the value
of research and brokerage services is reasonable in relation to the
amount of commissions paid. The legislative history of
Section 28(e) makes clear that the burden of proof in
demonstrating this determination rests on the money
manager.
In many cases, a product or service termed "research" may serve
other functions that are not related to the making of investment
decisions. For example, management information systems may integrate
such diverse functions as trading, execution, accounting,
recordkeeping and other administrative matters, such as measuring
the performance of accounts. Where a product obtained with soft
dollars has a mixed use, a money manager faces a conflict of
interest in obtaining that product by causing his clients to pay
more than competitive brokerage commission rates. Therefore, the
Commission believes that where a product has a mixed use, a money
manager should make a reasonable allocation of the cost of the
product according to its use. The percentage of the service or
specific component that provides assistance to a money manager in
the investment decision-making process may be paid for in commission
dollars, while those services that provide administrative or other
non-research assistance to the money manager are outside the
Section 28(e) safe harbor and must be paid for by the money
manager using his own funds. The money manager must keep
adequate books and records concerning allocations so as to be able
to make the required good faith showing. [Emphasis added]
Computer hardware is another example of a product which may have a
mixed use. If the hardware is dedicated exclusively to software that
is used for research for a client's benefit, it may be paid for in
commission dollars. On the other hand, if the computer will be used
in assisting the money manager in a non-research capacity
(e.g., bookkeeping or other administrative functions), that
portion of the cost of the computer would not be within the safe
harbor. The acquisition of quotation equipment should be analyzed
similarly. Such equipment generally serves a legitimate research
function of pricing securities for investment and keeping a manager
informed of market developments. The equipment may also be used for
a non-research purpose (e.g., client reporting). Finally, where
a money manager is invited to attend a research seminar or similar
program, the cost of that seminar may be paid for with commission
dollars. Non-research aspects of the trip, however, such as travel
costs, hotel, meal and entertainment expenses, are not within the
safe harbor.
The Commission recognizes that the task of properly allocating the
research and non-research properties of certain goods and services
provided to fiduciaries may be complex. The Commission believes the
standard will be satisfied where a fiduciary can demonstrate a good
faith attempt, under all the circumstances, to allocate the
anticipated uses of a product.
III. Third Party Research
Another issue raised under Section 28(e) is whether research
may be produced or provided by someone other than the executing
broker-dealer, or so-called "third party" research. Prior to the
elimination of fixed commission rates, a variety of techniques were
employed that permitted money managers to purchase third party
research with brokerage commissions. Although the legislative
history of Section 28(e) includes a strong statement that
commission dollars may be paid only to the broker-dealer that
"provides" both the execution and research services and that the
section does not authorize the resumption of "give-ups, "it seems
unlikely that Congress intended to forbid certain common practices
that were then considered permissible and whose elimination would be
anti-competitive.
In the 1976 release, the Commission indicated that
Section 28(e) might, under appropriate circumstances, apply to
situations in which research produced by third parties is provided
to a money manager by a broker. The Commission suggested that
payment of a part of the commission to another broker who is a
"normal and legitimate correspondent" of the executing or clearing
broker would not necessarily be a give-up outside the protection of
Section 28(e).
In Release 16679, a report pursuant to Section 21(a) of
the Act, the Commission found that the
brokers involved in the arrangement did not provide the money
managers with any significant research services. They merely
executed the transactions and paid 50% of the commissions to
Investors Information, Inc. ("III"), who represented various
research originators. All arrangements for acquiring the services
were made by the money managers and the vendors of the services. III
simply held the money for the money managers and paid the bills as
requested. The money managers were obligated to pay the vendors for
the services and the brokers generally were not aware of the
specific services which the managers acquired.
The Commission acknowledged that it is not necessary that a broker
produce the research services "in-house" in order for the money
manager to obtain the protection of Section 28(e). The
Commission emphasized, however, that the research services must be
"provided by" the broker. The Commission stated that while a broker
may under appropriate circumstances arrange to have research
materials or services produced by a third party, it is not
"providing" such research services when it pays obligations incurred
by the money manager to the third party.
In approving the "Papilsky" rules, the Commission clarified that
research provided in third-party arrangements falls within
Section 28(e) even if the money manager participates in
selecting the research services or products to be provided to it by
the broker-dealer. The Commission also stated that third-party
research does not have to be shipped through the broker, but may
instead be delivered directly by the third party to the manager in
circumstances that otherwise qualified for the safe harbor. The
Commission stated:
a broker-dealer may be deemed to have provided third party research
when it has incurred a direct legal obligation to a third party
producer to pay for the research (regardless of whether the research
is then sent directly to the broker's fiduciary customer by the
third party or instead is sent to the broker who then sends it to
his customer). The Commission does not believe, however, that
Section 28(e) would apply where the broker was merely used as
an alternative means of paying obligations incurred by the fiduciary
in its direct dealings with the third party . . . [citation
omitted]. In that regard, a broker-dealer may be deemed to have
provided third party research that it is legally obligated to pay
for even if its fiduciary customer participates in the selection of
the research services or products to be provided to it by the
broker-dealer.
The staff also has expressed the opinion that Section 28(e) was
not intended to exclude from its coverage the payment of commissions
made in good faith to an introducing broker for execution and
clearing services performed in whole or in part by the introducing
broker's normal and legitimate correspondent. The staff added that
the protection of Section 28(e) would not be lost merely
because the fiduciary by-passed the order desk of the introducing
broker and called its orders directly into the clearing broker. More
recently, the staff has stated that its views concerning
correspondent relationships contemplate that the "introducing broker
would be engaged in securities activities of a more extensive nature
than merely the receipt of commissions paid to it by other
broker-dealers for 'research services' provided to money
managers."
IV. Disclosure and Order Obligations Under the
Investment Advisers Act of 1940 and the Investment Company Act of
1940 Applicable to Money Managers Engaging in Soft Dollar
Arrangements
Money
managers engaging in soft dollar arrangements must comply with all
applicable disclosure requirements under the federal securities
laws, and registered investment advisers and others should pay
particular attention to the disclosure and books and records
requirements under the Advisers Act and the Company Act. Disclosure
is required even if an arrangement is within the safe harbor
provided by Section 28(e). In addition, money managers must
comply with any other laws imposing fiduciary or other obligations
with respect to their participation in such arrangements. Set forth
below is a discussion of the principal provisions of the Advisers
Act and Company Act and rules and forms thereunder which, depending
on the facts and circumstances involved, impose disclosure and other
obligations on money managers and related persons.
A. Advisers Act
1. Form ADV
Fundamental to the Advisers Act is the concept that an investment
adviser has a fiduciary obligation to act in the best interests of
clients. As a fiduciary, an adviser has a duty to disclose to
clients all material information which is intended "to eliminate, or
at least expose," all potential or actual conflicts of interest
"which might incline an investment adviser consciously or
unconsciously -- to render advice which was not disinterested. "Due to
the potential conflict of interest when an adviser receives research
as a result of allocating brokerage on behalf of clients' accounts,
the Commission has long maintained that an adviser must disclose
soft dollar arrangements to clients. The Commission had adopted
mandatory disclosure standards for advisers involved in such
arrangements, as discussed below.
Pursuant to its authority in Section 28(e)(2) to adopt rules
governing a money manager's disclosure of brokerage policies and
practices, the Commission proposed disclosure rules in 1976, but
later determined to "incorporate more comprehensive brokerage
placement practice disclosure requirements" within the registration
process for investment advisers under the Advisers Act. One of
these provisions is the so-called "brochure rule," which was adopted
in 1979 and is set forth in Rule 204-3 under the Advisers Act.
This rule requires generally that an adviser furnish each advisory
client and each prospective advisory client with a written
disclosure statement containing certain information regarding the
adviser's business background and practices. The
disclosure statement may be either a copy of Part II of the
adviser's Form ADV, the registration form for
investment advisers, or a written document containing at least the
information required by Part II of the Form ADV.
Item 12 of Part II of Form ADV requires disclosure to
clients regarding investment or brokerage discretion. The purpose of
this disclosure is to provide clients with material information
about the adviser's brokerage allocation policies and practices
which may be important to them in deciding to hire an adviser or
continue a contract with an adviser and which will permit them to
evaluate any conflicts of interest inherent in the adviser's
arrangements for allocating brokerage. Because brokerage policies and
practices vary greatly, the disclosure made in response to
Item 12 should provide sufficient information to enable a
client or potential client to understand such policies and
practices. This item requires disclosure regarding
(1) whether the adviser or a related person has authority to
determine, without specific client consent, the broker-dealer to be
used in any securities transaction or the commission rate to be
paid, or (2) whether the adviser or a related person suggests
broker-dealers to clients. If the adviser engages in either of these
practices, whether or not pursuant to a written agreement, it must
describe the factors considered in selecting broker-dealers and in
determining the reasonableness of commissions charged. If the value
of products, research, and services given to the adviser or a
related person is a factor in those decisions, the adviser must
describe the following:
- The
products, research, and services;
- Whether clients may pay commissions higher
than those obtainable from other brokers in return for those
products and services;
- Whether research is used to service all of
the adviser's accounts or just those accounts paying for it;
and
- Any
procedures the adviser used during the last fiscal year to
direct client transactions to a particular broker in return for
products and research services received.
In its release discussing the concurrent adoption of Form ADV
disclosure requirements and the brochure rule, the
Commission pointed out that:
the
amended rule and forms represent mandatory disclosure standards.
More detailed or additional information and explanatory material
could and should be provided where necessary, because of
circumstances in particular cases, to ensure that all material
information regarding brokerage placement practices and policies
will be disclosed to investors.
An
investment adviser should be particularly aware of the fact that the
Advisers Act disclosure requirements apply to all soft dollar
arrangements, whether or not they are within the safe harbor of
Section 28(e). Moreover, compliance with Advisers
Act disclosure requirements does not relieve an adviser from other
disclosure obligations under federal or state law.
2. Section 204
Section 204 of the Advisers Act authorizes the Commission to
adopt rules prescribing the book and records a registered adviser
must maintain. Pursuant to this authority, the Commission has
adopted Rule 204-2, which requires an adviser to keep true,
accurate, and current books and records relating to its advisory
business. In the case of securities
transactions, particularly those which may involve soft dollars, the
adviser's books and records should contain sufficient details
relating to each participant in a particular transaction.
3. Best Execution
The Commission's staff has stated that an adviser, as a fiduciary,
owes its clients a duty of obtaining the best execution on
securities transactions. For further discussion of best
execution, see Section V of this release.
B. Company Act
The Company Act and rules and forms thereunder impose various
disclosure and other obligations on registered investment companies,
investment advisers of registered investment companies, and related
persons in connection with soft dollar arrangements.
1. Form N-1A
Form N-1A is the integrated registration form used by most
open-end management investment companies to register under the
Company Act and to register their securities under the Securities
Act of 1933. Its disclosure requirements form the basis of the
two-part prospectus used by these investment companies. Part B
of the form, termed the "Statement of Additional Information,"
requires disclosure about the company's brokerage allocation
practices. Specifically, Item 17
requires a description of how transactions in portfolio securities
are effected, including a general statement about brokerage
commissions. Investment companies also must describe how
broker-dealers will be selected to effect securities transactions
and how the overall reasonableness of commissions paid will be
evaluated, including the factors considered
in connection with these determinations. The instructions to this
item further require that:
- If
the receipt of products or services other than brokerage or
research is a factor in selecting brokers, the products and
services should be described;
- if
the receipt of research services is a factor in selecting
brokers, the nature of such research services should be
described;
- The
registrant must state if persons acting on its behalf are
authorized to pay a commission in excess of that which another
broker might have charged for the same transaction in
recognition of brokerage or research services provided by the
broker;
- If
applicable, the registrant should explain that research services
provided by brokers may be used by the adviser in servicing all
of its accounts or described other practices applicable to the
registrant regarding allocation of research services provided by
brokers; and
- The
registrant must state the amount of transactions and related
commissions paid as a result of directing the registrant's
brokerage transactions to a broker because of research services
provided pursuant to an agreement or understanding with a broker
or otherwise through an internal allocation procedure.
2. Section 20(a)
Section 20(a) of the Company Act makes it unlawful for any
person to solicit proxies regarding the securities of any registered
investment company in contravention of Commission rules. Pursuant to
this provision, the commission has adopted two rules that may be
relevant to soft dollar arrangements. First, where a proxy
solicitation is made on behalf of the management of the investment
company, Rule 20a-1(b) requires the adviser of the investment
company to furnish promptly to management, upon request, all
information necessary for management to comply with the proxy rules,
including information about soft dollar arrangements.
In
addition to this general obligation, Rule 20a-2 requires
disclosure of specific information about the adviser and its
investment advisory contract in certain proxy solicitations,
including information about brokerage placement practices.
specifically, paragraph (b)(7) of the rule requires disclosure
of, among other things, the following:
- A
description of how brokers are selected to effect securities
transactions for the company and how the reasonableness of
overall brokerage commissions paid will be evaluated, including
the factors considered in these determinations;
- If
the receipt of products or services other than research or
brokerage is a factor in selecting brokers, a description of
these products or services;
- If
the receipt of research services is a factor in selecting
brokers, the nature of such services;
- Whether persons acting on behalf of the
company are authorized to pay a broker a commission in excess of
that which another broker might have charged for the same
transaction in recognition of brokerage or research services
provided by the broker;
- If
applicable, an explanation that research services furnished by
the company's brokers may be used by the adviser in servicing
all of its accounts and that not all such services may be used
by the adviser in connection with the company, or an explanation
of other policies or practices applicable to the company
regarding the allocation of research services provided by
brokers; and
- The
amount of transactions and related commissions directed to a
broker or brokers pursuant to an agreement or understanding or
otherwise through an internal allocation procedure.
3. Section 15(c)
Section 15(c) makes it unlawful for any investment company to
enter into or renew any investment advisory contract unless it is
approved by a majority of the company's disinterested directors. In
approving such a contract, this provision imposes on directors a
duty to request and evaluate such information as may reasonably be
necessary for the directors to evaluate the terms of the contract.
This provision also imposes on the company's adviser a duty to
furnish such information to the directors.
The Supreme Court has defined the Congressional purpose in enacting
Section 15(c) and related provisions of the Company Act as
placing "the unaffiliated directors in the role of 'independent
watchdogs' "entrusted with" the primary
responsibility for looking after the interest of the funds'
shareholders. "Disinterested directors are
required to "exercise informed discretion, and the responsibility
for keeping the independent directors informed lies with management,
i.e., the investment adviser and interested directors. "Depending on the facts involved, the responsibility of the
disinterested directors may include monitoring of the adviser's soft
dollar arrangements.
4. Section 31
Section 31 of the Company Act authorizes the Commission to
adopt rules prescribing the books and records to be maintained by a
registered investment company or by others, on its behalf, including
investment advisers. Pursuant to this authority, the
Commission adopted Rule 31a-1. Paragraph (b)(9) of that
rule requires an investment company to maintain a record for each
fiscal quarter describing in detail the basis or bases upon which it
allocated orders for the purchase or sale of portfolio securities
and divided brokerage commissions or other compensation on such
orders. The record also must indicate the
consideration given to services or benefits supplied by
broker-dealers to the investment company or adviser and show the
nature of such services or benefits made available.
5. Section 36(b)
Under Section 36(b) of the Company Act, an investment adviser
to a registered investment company has a fiduciary duty with respect
to the receipt of compensation for services, or of
payments of a material nature, from the investment company or its
shareholders. However, with respect to any such amount received by
an adviser, no violation of Section 36(b) could occur for a
soft dollar arrangement falling within the safe harbor of
Section 28(e). Where an adviser received amounts
outside of the safe harbor of Section 28(e) such amounts would
have to be analyzed under Section 36(b) to determine if they
were consistent with that provision.
6. Section 17(e)(1)
As relevant here, Section 17(e)(1) of the Company Act makes it
unlawful for an affiliated person of a registered investment
company to receive any compensation for the
purchase or sale of any property to or for the investment company
when that person is acting as an agent for the company other than in the
course of that person's business as a broker-dealer. The
Court of Appeals for the Second Circuit has held that the objective
of Section 17(e)(1) is to prevent affiliated persons [of
investment companies] from having their judgment and fidelity
impaired by conflicts of interest "in situations where the benefit of
a reciprocal relationship between the affiliated person and another
person is diverted to the affiliated person while the burden of that
relationship is borne by the investment company.
It is important to emphasize that receipt by an investment adviser
of any compensation pursuant to a soft dollar
arrangement in connection with the purchase or sale of any property,
including securities, to or for the investment company arguably
would violate Section 17(e)(1). To the extent that compensation
is received by an affiliated person of a fund pursuant to a soft
dollar arrangement within the safe harbor of Section 28(e),
however, the prohibition of Section 17(e)(1) would not
apply.
Finally, it is not necessary to show that the person receiving
compensation prohibited by Section 17(e)(1) influenced the
action of the investment company, nor must economic injury to the
investment company be shown. Rather, the essence of a violation
of Section 17(e)(1) is the mere receipt of compensation in
connection with the purchase or sale of property to or from the
investment company.
V. Best Execution Obligations
As a fiduciary, a money manager has an obligation to obtain "best
execution" of clients' transactions under the circumstances of the
particular transaction. The money manager must:
execute
securities transactions for clients in such a manner that the
client's total cost or proceeds in each transaction is the most
favorable under the circumstances.
A money manager should consider the full range and quality of a
broker's services in placing brokerage including, among other
things, the value of research provided as well as execution
capability, commission rate, financial responsibility, and
responsiveness to the money manager. The Commission wishes to remind
money managers that the determinative factor is not the lowest
possible commission cost but whether the transaction represents the
best qualitative execution for the managed account. In this
connection, money managers should periodically and systematically
evaluate the execution performance of broker-dealers executing their
transactions.
VI. Employee Benefit Plans and Plan Sponsor
Directed Brokerage
During the past year the practice of plan sponsor directed brokerage
has drawn considerable attention. This phrase refers to an
arrangement whereby an employee benefit plan sponsor requests its
money manager, subject to the manager's satisfaction that it is
receiving best execution, to direct commission business to a
particular broker-dealer who has agreed to provide services, pay
obligations or make cash rebates to the plan.
At the outset, the Commission wishes to emphasize that directed
brokerage transactions clearly do not fall within the safe harbor of
Section 28(e). The safe harbor is available only to persons who
are exercising investment discretion, as that term is defined in
Section 3(a)(35) of the Act. A pension plan sponsor that has
retained a money manager to make investment decisions, as is the
case in directed brokerage arrangements, is not exercising
investment discretion. Accordingly, neither the plan
sponsor, the money manager, nor the broker-dealer participating in
the transactions can rely on Section 28(e).
Section 28(e), however, cannot by its terms be violated. Thus,
the fact that sponsor directed brokerage transactions are outside
its protections does not necessarily mean that such transactions are
illegal. Nevertheless, each participant in the transaction may be
exposed to liability unless certain aspects of the transaction are
carefully handled. The Commission does not administer ERISA, but
sponsor directed brokerage in connection with plans covered by ERISA
may involve violations of that Act and may violate the antifraud
provisions of the federal securities laws.
The Department of Labor has indicated that if the cash rebate, goods
or services provided by the broker to the plan is not for a purpose
that exclusively benefits the plan, the transaction would constitute
a per se violation of ERISA. The Commission understands that many
money managers and brokers who are engaging in directed brokerage
transactions have required the pension plan to represent in writing
at the initiation of such transactions that the rebate will be used
for the exclusive benefit of the plan and its
beneficiaries.
A second concern arises regarding the broker's obligation to
accurately confirm transactions with customers pursuant to
Rule 10b-10 under the Securities Exchange Act and to maintain
books and records pursuant to Rule 17a-3.
Rule 10b-10(a)(7)(ii) requires a broker to disclose the amount
of remuneration received or to be received by him from a customer in
connection with an agency transaction. In sponsor directed brokerage
arrangements the broker-dealer has agreed to charge specified
commissions but at the same time has agreed to rebate a portion of
the commissions. At least in the case of a cash rebate, the
confirmation is false if it does not at a minimum provide disclosure
that a portion of the commission was returned to the plan. The
Commission has emphasized in the past improper nature of this
rebating practice without disclosure. Rule 17a-3(a)(8) requires the
broker to keep copies of confirmation of all purchases and sales of
securities and copies of notices of all other debits and credits for
securities, cash and other items for the account of customers. This
provision would require that the broker document any rebating
arrangements that it had entered into with plan sponsors.
Third, Section 28(e) allows a money manager in making his good
faith determination as to the reasonableness of commissions paid to
consider not only the benefit to be derived by the account paying
the commissions, but also the benefits derived by other accounts.
Since sponsor directed brokerage transactions are outside of the
safe harbor, this additional element of protection is unavailable.
Stated differently, the Commission believes this it is illegal, from
a securities law fraud perspective, for a money manager or a
broker-dealer to use one client's commissions to fund an undisclosed
rebate to another client. This problem is particularly acute where a
money manager aggregates orders for managed accounts. In this
connection, the Commission believes that serious concerns are raised
under the antifraud provisions of the securities laws where a money
manager or broker-dealer aggregates directed and non-directed orders
unless the money manager or broker-dealer can demonstrate that it
has not disadvantaged one client's account in order to fund a rebate
to another client. This means that the money manager and the
broker-dealer must have a system of controls and a system of records
to assure that this commingling does not occur.
VII. Conclusion
The Commission believes that this release will provide useful
guidance to money managers and other persons in the securities
industry. It believes that the new standard comports fully with
congressional intent in the enactment of the section, while at the
same time is responsive to concerns raised in response to a changing
array of research products and the impact of new technology on
brokerage practices. The Commission believes that the issue is
ultimately one of good faith on the part of the money manager and
that the disclosure obligations will allow clients to satisfy
themselves that their money manager is in fact acting in their best
interest.
List of Subjects in 17 CFR Part 241
Reporting and recordkeeping requirements, Securities.
Part 241 -- (Amended)
Part 241 of Title 17 of the Code of Federal Regulations is
amended by adding this Interpretive Release Concerning the Scope of
Section 28(e) of the Securities Exchange Act of 1934
(Release No. 34-23170) to the list of Interpretive
Releases.
By the Commission.
- Section 28(e) of the Act states in
pertinent part:
No person using the mails,
or any means or instrumentality of interstate commerce, in the
exercise of investment discretion with respect to an account shall
be deemed to have acted unlawfully or to have breached a fiduciary
duty under State or Federal law unless expressly provided to the
contrary by a law enacted by the Congress or any State subsequent
to June 4, 1975, solely by reason of his having caused the
account to pay a member of an exchange, broker, or dealer an
amount of commission for effecting a securities transaction in
excess of the amount of commission another member of an exchange,
broker, or dealer would have charged for effecting that
transaction, if such person determined in good faith that such
amount of commission was reasonable in relation to the value of
the brokerage and research services provided by such member,
broker, or dealer, viewed in terms of either that particular
transaction or his overall responsibilities with respect to the
accounts as to which he exercises investment discretion. . .
.
- The
term "investment discretion" is defined in Section 3(a)(35)
of the Act.
- This
practice is commonly known as "paying up" for research.
- See
Tannenbaum v. Zeller, 552 F.2d 402 (2d Cir. 1977); Arthur Lipper
Corp. v. Securities & Exchange Commission, 547 F.2d 171 (2d
Cir 1976); Fogel v. Chestnutt, 533 F.2d 731 (2d Cir 1975), cert.
denied, 429 U.S. 824 (1976); Moses v. Burgin, 445 F.2d 369 (1st
Cir), cert. denied, 404 U.S. 994 (1971).
- Securities Acts Amendments of 1975, Pub. L.
No. 94-29, 89 Stat. 97 (1975).
- Securities Exchange Act
Rel. No. 12251 (Mar. 24, 1976).
- Report
of Investigation in the Matter of Investors Information, Inc.,
Securities Exchange Act Rel. No. 16679 (Mar. 19,
1980) [hereinafter cited as Release 16679].
- See,
e.g., The Bank of New Jersey (1976-77 Transfer Binder)
Fed. Sec. L. Rep. (CCH) p 80,662 (June 15, 1976); Hugh
Johnson & Co., (1976-77 Transfer Binder) Fed. Sec. L.
Rep. (CCH) p 80,520 (Mar. 24, 1976).
- Securities Acts Amendments of 1975, Report of
the Comm. on Banking, Housing and Urban Affairs, S. Rep.
No. 75, 94th Cong., 1st Sess. 71 (1975).
- Nevertheless, obvious overhead expenses such
as office space, typewriters, furniture and clerical assistance
would not constitute research.
- The
fact that a product is available for hard dollars or is otherwise
available and used by the general public is relevant to the
determination of the value of the research.
- See
House Comm. on Interstate and Foreign Commerce, H.R. Rep.
No. 123, 94th Cong., 1st Sess. 95 (1975). The Report states
that:
"It is, of course, expected that
money managers paying brokers an amount (of commissions) which is
based upon the quality and reliability of the broker's services
including the availability and value of research, would stand
ready and be required to demonstrate that such expenditures were
bona fide."
- The
allocation determination itself poses a conflict of interest for
the money manager that should be disclosed to the client.
- Securities Acts Amendments of 1975,
Conference Report to Accompany S. 249, Joint Explanatory Statement
of the Comm. of Conference, H.R. Rep. No. 220, 99th
Cong., 1st Sess. 108 (1975).
- See
supra note 7.
- Securities Exchange Act
Rel. No. 17371 (Dec. 12, 1980).
- Id. at
24, note 54.
- Becker
Securities Corp. [1976 Transfer Binder) Fed. Sec. L. Rep.
(CCH) p 80,641 (May 28, 1976).
- Data
Exchange Securities, [1981-82 Transfer Binder) Fed. Sec. L.
Rep. (CCH) p 77,016 (Apr. 20, 1981). See also SEI
Financial Services (pub. avail. Dec. 14, 1983), in which the
staff reviewed a specific broker correspondent relationship
focusing on the services provided and concluded the nature of the
relationship did not preclude reliance on
Section 28(e).
- As the
Commission stated in a 1979 release adopting rule and form
amendments designed to require registered investment companies to
provide investors with disclosure about brokerage placement
practices and policies, "[t]hese disclosure requirements reflect a
longstanding policy of the Commission that brokerage placement
practices of investment managers may take into consideration
research and brokerage services, provided, however, that such
practices are disclosed to investors." Securities Act
Rel. No. 6019 (Jan. 30, 1979) (emphasis added)
(hereinafter cited as Release 6019). See "Applicability of
the Commission's Policy Statement on the Future Structure of the
Securities Markets To Selections of Brokers and Payments of
Commissions By Institutional Managers," Securities Act
Rel. No. 5250 (May 9, 1972) [hereinafter cited as
Release 5250].
- Securities and Exchange Commission v. Capital
Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963); See also
Section 206 of the Advisers Act; Rule 264-8 under the
Advisers Act.
- E.g., Release 6019, supra note
20.
- Securities Act Rel. No. 5772
(Nov. 30, 1976).
- Investment Advisers Act
Rel. No. 664 (Jan. 30, 1979).
- The
specific delivery requirements applicable to the brochure are set
forth in paragraphs (b) and (c) of Rule 204-3.
- Recently the Commission adopted a new,
uniform Form ADV, the uniform Application form for advisers
registered with the Commission and the forty states that require
advisers to register. Investment Advisers Act
Rel. No. 981 (Oct. 15, 1965). The form was
developed jointly by the Commission and the North American
Securities Administrators Association.
New Form ADV retains the two part format
for the earlier form. Part I requires disclosure primarily
for use by regulatory agencies. Part II of the form, which
serves as the basis for the brochure rule, requires disclosure
primarily for use by clients.
- See
Rule 204-3(a).
- A
general discussion of the background, purpose, and effect of the
disclosure required in what is now Item 12 of Form ADV
may be found in Release 6019, supra note 20.
- An
adviser need not list individually each product, item of
research, or service received, but rather can state the types of
products, research, or services obtained with enough specificity
so that clients can understand what is being obtained. Disclosure
to the effect that various research reports and products are
obtained would not provide the specificity required.
- The
adviser should disclose any practices, including informal ones and
whether or not they involve "paying up," to allocate brokerage to
particular brokers in recognition of research products and
services received. In this connection, the Commission notes that a
money manager that obligated itself formally to generate a
specified amount of commissions would be faced with a heavy burden
of demonstrating that he was consistently obtaining best
execution.
- Item 12 of the new uniform Form ADV
mirrors Item 11 of the superseded form and has remained
substantively the same since its adoption in 1979.
- Release 6019, supra note 20, 14 SEC
Docket 839. In addition to the disclosure required by Item 12
of Part II of Form ADV, Item 13 of Part II
requires disclosure that may be relevant to soft dollar
arrangements. That item requires an adviser to describe any
oral or written arrangements where it or any related person
receives some economic benefit from a non-client, including a
benefit in the form of non-research services, in connection with
giving advice to clients.
- See,
e.g., Release 18679, supra note 7;
Release 6019, supra note 20.
- E.g., Rule 204-2(a)(1),
(a)(2), and (a)(3).
- E.g., Interfinancial Corp. (pub.
avail, 1985). See also Release 5250, supra note 20 (in
selecting a broker-dealer, a money manager "is not required to
seek the service which carries the lowest cost so long as the
difference in cost is reasonably justified by the quality of the
service offered"); Securities Exchange Act
Rel. No. 12251 (Mar. 24, 1976).
- Registered investment companies must make the
Statement of Additional Information available free of charge to
shareholders and potential investors upon request.
- Where
an investment manager, in return for research services, pays an
affiliated broker-dealer more than normal charges for execution of
brokerage transactions, the manager "would be under a heavy burden
to show that such payments were appropriate." Release 6019,
supra note 20, 16 SEC Docket 844.
- Disclosure about brokerage allocation
practices also is required by other registration and reporting
forms used by investment companies. E.g., Form N-2 (Item 9);
Form N-3 (Item 22); and Form N-SAR
(Item 26).
- The
requirements of Rule 20a-2 are applicable to any solicitation
made by or on behalf of management or the adviser involving action
with respect to the election of directors of the investment
company. See Rule 20a-2(a).
- In
addition to paragraph (c) of Section 15,
paragraph (a)(1) of that provision may be applicable to a
soft dollar arrangement. This provision makes it unlawful for any
person to serve as an investment adviser of a registered
investment company except pursuant to a written contract which has
been approved by a majority vote of shareholders and which
"precisely describes all compensation" to be paid under that
contract. As to what constitutes "compensation," see infra note
46.
- Burks
v. Lasker, 441 U.S. 471, 484 (1979), citing Tannenbaum v. Zeller,
supra note 4.
- Burks,
supra note 41, at 485.
- Tannenbaum, supra note 4, at 417-18.
- See
Rule 31a-3.
- Rule 31a-1(b)(g) requires this record to
be completed within ten days after the end of the
quarter.
- The
term "compensation" under Section 36(b) and other provisions
of the Company Act has been broadly construed to include any
economic benefit paid directly or indirectly to an adviser. E.g., Steadman Securities
Corporation. Securities Exchange Act Rel. No. 13695 at
12 SEC Docket 1042, 1052 (June 29, 1977) revld on other
grounds sub. nom. Steadman v. Securities and Exchange Commission,
603 F.2d 1126 (5th Cir. 1979), affld, 450 U.S. 91 (1981). In re
Investor Research Corporation, et al., 12 SEC Docket 102 (1978),
affld in part and vacated in part, Investors Research Corporation
and Stoners v. Securities and Exchange Commission, 628 F.2d 168
(D.C. Cir. 1980), cert. denied, 449 U.S. 919 (1981) (hereinafter
cited as Investors Research). Investors Research Corporation.
Investment Advisers Act Rel. No. 627 (May 1, 1978),
affld in part and vacated in part 628 F.2d 168 (D.C. Cir. 1980),
cert. denied 449 U.S. 919 (1981); Imperial Financial Services, 42
SEC 717 (1965); Release 5250, supra note 20; Accord
Investment Advisers Act Rel. No. 770 (Aug. 13,
1981) (the element of "compensation" in the definition of an
investment adviser in Section 202(a)(11) of the Advisers Act
"is satisfied by the receipt of any economic benefit."
- Securities Acts Amendments of 1975,
Conference Report to Accompany S. 249, Joint Explanatory Statement
of the Comm. of Conference, H.R. Rep. No. 229, 94th
Cong., 1st Sess. 108 (1975). Although both the Senate and House
versions of the Section 28(e) legislation contained
provisions protecting money managers against breach of fiduciary
duty claims, the Conference Report makes clear that the Senate
version was selected for the final legislation because it "more
clearly preempted both statutory and common law." Id.
- The
phrase "affiliated person" of an investment company to defined in
Section 2(a)(3)(E) of the Company Act and includes, among
others, an investment adviser to an investment company. The
proscription of Section 17(e)(1) also applies to any
affiliated person of an affiliated person of the investment
company.
- See
supra note 46.
- As the
Second Circuit stated in United States v. Deutsch, 451 F.2d 98,
111 (2d Cir. 1971), cert. denied, 404 U.S. 1019 (1972), an
affiliated person of an investment company is acting as an "agent"
in connection with the purchase or sale of property for purposes
of Section 17(e)(1) "in all cases when he is not acting as
broker for the investment company." See Provident Management
Corp., 44 SEC 442, 448 (1970) [hereinafter cited as
Provident].
- Where
an adviser is acting as "broker" in connection with the purchase
or sale of securities to or for an investment company, its
activities would be governed by Section 17(e)(2) of the
Company Act.
- Deutsch, supra note 50, at 109.
- See
Investors Research, supra note 45, at 173.
- See
supra note 46, and accompanying text.
- The
fact that a soft dollar arrangement outside of Section 28(e)
is disclosed would not cure a violation of Section 17(e)(1)
because that provision reflects the Congressional determination
that disclosure alone is not adequate protection in the investment
company field. Investors Research, supra note 46.
- Deutsch, supra note 53, at 100.
- Id. "No
showing of actual impairment need be made. This is a prophylactic
statute. Its aim is not to redress harm but to prevent it."
Investors Research, supra note 46, at 1023. See also Provident,
supra note 50.
- Securities Exchange Act Rel. Act
No. 9598 (1971-72 Transfer Binder) Fed. Sec. L. Rep.
(CCH) p 78,776 (1972); Kidder, Peabody & Co., Inc.,
Investment Advisers Act Rel. No. 232 (Oct. 16,
1968).
- Section 3(a)(35) provides that a person
exercises "investment discretion" with respect to an account if,
directly or indirectly, such person -
- is
authorized to determine what securities or other property shall
be purchased or sold to or for the account,
- makes
decisions as to what securities or other property shall be
purchased or sold by or for the account even though some other
person may have responsibility for such investment decisions,
or
- otherwise exercises such influence with
respect to the purchase and sale of securities or other property
by or for the account as the Commission, by rule, determines, in
the public interest or for the protection of investors, should
be subject to the operation of the provisions of this title and
the rules and regulations thereunder.
- See
Foley & Lardner (1976-77 Transfer Binder) Fed. Sec. L.
Rep. (CCH) p 80,925 (Dec. 3, 1976); Capital
Institutional Services, Inc. [Current) Fed. Sec. L. Rep.
(CCH) p 78,107 (May 1, 1985).
- See
Securities Exchange Act Rel. No. 16679, supra note 7;
Securities Exchange Act Rel. No. 11629 (Sept. 3,
1975).
Office of Chief Counsel Division of Investment Management Securities and Exchange Commission WASHINGTON, D.C. 20549
SEC No-Action Letter Regarding Waiver of
12b-1 Fees for ERISA Plans
Southeastern Growth Fund, Inc. Ref. No. 86-37-CC File No. 811-4228
Response of the Office of Chief Counsel April 22, 1986
In your letter of January 29, 1986, you request our assurance
that we would not recommend any enforcement action to the Commission
under the Investment Company Act of 1940 ("Act") if, as described in
your letter, Southeastern Growth Fund, Inc. (the "Fund") amends its
Distribution Plan, adopted pursuant to rule 12b-1 under the
Act, to exempt an employee benefit plan from payment of its pro rata
portion of the Fund's expenses incurred under that plan.
Given that rule 12b-1(e) permits a 12b-1 plan to be adopted or
continued only if the directors conclude, in the exercise of
reasonable business judgment and in light of their fiduciary duties,
that there is a reasonable likelihood that the plan will benefit the
company and its shareholders, the staff will not provide
interpretive responses to requests regarding the merits of a
particular 12b-1 plan. See American Pension Investors Trust (pub.
avail. Nov. 27, 1985). As a general matter, however, we believe
that any waiver or rebate of an investor's pro rata portion of the
expenses incurred under a 12b-1 plan would raise serious concerns
under both Section 36 of the Act and general fiduciary
principles. We also question strongly whether a board of directors
could conclude, as required by paragraph (e) of
rule 12b-1, that there is a reasonable likelihood that a 12b-1
plan which provides for such disparate treatment of shareholders
will benefit the company and its shareholders.
See, e.g., Section 1(b)(3) of the Act, which declares, in
part, that the public interest and the interest of investors are
adversely affected "when investment companies issue securities
containing inequitable or discriminatory provisions ...
."
Gerald T.
Lins Attorney
Mcguire, Woods & Battle One James Center Richmond, VA 23219 Telephone (804) 644-4131 January 29, 1986
Division
of Investment Management Securities and
Exchange Commission 450 Fifth Street, NW Washington, D.C. 20549
Attn:
Chief Counsel
Re: Southeastern
Growth Fund, Inc.
Investment Company Act of 1940, Regulation @ 270.12b-1
Employee Retirement Income Security Act of 1974, Section 406
Prohibited Transaction Exemption
77-3
Dear
Sirs:
We are writing to request the advice of the Division that it would
not recommend to the Commission that it take action if Southeastern
Growth Fund, Inc. (the "Fund") amends its 12b-1 distribution plan to
provide that a distribution fee will not be paid with regard to that
portion of the Fund's assets attributable to an investment in the
Fund by any employee benefit plan whose investment in the Fund would
otherwise violate Section 406 of the Employee Retirement
Income Security Act of 1974 (ERISA).
The Fund is a diversified, open-end investment company which was
incorporated under the laws of Virginia on January 7, 1985. It
is registered under the Investment Company Act of 1940, as amended
(the "1940 Act"). The Fund seeks long-term capital growth by
investing in a diversified portfolio of securities, primarily common
stocks of companies that are domiciled or whose principal business
is located in the Southeastern United States.
Wheat First Securities, Inc. ("Wheat") acts as distributor of the
Fund's shares. Wheat Investment Advisors, Inc. ("WIA") serves as
investment adviser and administrator of the Fund. Both Wheat and WIA
are wholly-owned subsidiaries of WFS Financial Corporation
("WFS").
The Fund does not charge sales commissions (i.e., the Fund is a
"no-load" fund). However, Wheat receives a fee for its services
under the Fund's "Plan of Distribution Pursuant to Rule 12b-1"
(the "Distribution Plan"). Wheat receives a distribution fee which
is accrued daily and paid monthly at a rate of 1% per year of the
Fund's average daily net assets.
WFS maintains for its employees an Employee Benefit Plan (the
"Plan") under ERISA and would like to have the flexibility to invest
a portion of the Plan's assets in the Fund. However, an investment
by the Plan in the Fund may violate Section 406 of ERISA unless Wheat
complies with Prohibited Transaction Exemption 77-3, 42 F.R. 18734
(PTE 77-3) by waiving the distribution
fee for the portion of the Fund's assets attributable to the
Plan.
Section 406 of ERISA provides in
pertinent part:
(a)(1) A fiduciary with respect to a plan shall not cause the plan
to engage in a transaction, if he knows or should know that such
transaction constitutes a direct or indirect ... (D) transfer to, or
use by or for the benefit of, a party in interest, of any assets of
the plan ...
Wheat is a "party in interest", as defined by ERISA Section 3(14), with respect to
the Plan. Since the Plan's investment in the Fund arguably would
benefit Wheat through the Distribution Plan, ERISA counsel to the
Plan advised that the transaction may be found to violate the
prohibited transaction rule of ERISA Section 406(a)(1) unless Wheat
complies with PTE 77-3.
PTE 77-3 allows a mutual fund "in-house" plan to invest the
assets of its employee benefit plan in its own mutual fund provided
it complies with the following four conditions:
(a) The plan does not pay any investment management, investment
advisory or similar fee to such investment adviser, principal
underwriter or affiliated person. This condition does not preclude
the payment of investment advisory fees by the investment company
under the terms of its investment advisory agreement adopted in
accordance with Section 15 of the Investment Company Act of
1940.
(b) The plan does not pay a redemption fee in connection with the
sale by the plan to the investment company of such shares unless
(1) such redemption fee is paid only to the investment company,
and (2) the existence of such redemption fee is disclosed in
the investment company prospectus in effect both at the time of the
acquisition of such shares and at the time of such sale.
(c) In the case of transactions occurring more than 60 days after
the granting of this exemption, the plan does not pay a sales
commission in connection with such acquisition or sale.
(d) All other dealings between the plan and the investment company,
the investment adviser or principal underwriter, are on a basis no
less favorable to the plan than such dealings are with other
shareholders of the investment company.
While the other conditions are met, condition (c) that the Plan
does not pay a sales commission in connection with its investment in
the Fund may not be met since the distribution fee paid to Wheat is
utilized in part to compensate sales brokers for their efforts in
selling shares of the Fund. Indeed, Rule 12b-1 of the 1940 Act
explicitly contemplates use of the distribution fee to pay brokers'
sales commissions. Rule 12b-1 provides that a company is a
distributor "if it engages directly or indirectly in financing any
activity which is primarily intended to result in the sale of shares
issued by such company including ... compensation of underwriters,
dealers and sales personnel." Thus, this sales aspect of the
distribution fee seems to preclude the Fund's compliance with PTE 77-3, even though payment of the
fee to Wheat is not directly related to sales and the fee would not
be a sales commission or sales load within the meaning of the 1940
Act.
If there is no available exemption from ERISA Section 406, the Plan cannot
invest in the Fund, even though the Distribution Plan complies in
all respects with Rule 12b-1 of the 1940 Act. Counsel to the
Plan has advised that the relief provided by PTE 77-3 would be available with
respect to an investment by the Plan in the Fund if the distribution
fee is waived with respect to the Plan's interest in the Fund. The
Fund will eliminate any suggestion under PTE 77-3 that there
may be a sales aspect inherent in the distribution fee by
negotiating an agreement with Wheat to waive the fee as to that
portion of the assets of the Fund attributable to an investment by
the Plan. This is a simple calculation and will create no
administrative burden. The Fund proposes the following procedure.
Wheat will pay to the Plan the portion of the distribution fee that
Wheat receives on account of the Plan's investment. The Fund will
then credit that amount to the Plan's account. Alternatively, the
distribution fee will be reduced ex ante by an amount
representing the Plan's investment in the Fund.
The Fund's proposal is consistent with other rules under the 1940
Act which allow scheduled variation in the sales terms among classes
of investors when certain conditions are met. The Fund represents
that the following will be undertaken:
(a) The Fund will apply the variation in payment of the Distribution
Fee uniformly to all purchases which are employee benefit plans for
which a payment under the Distribution Plan would otherwise violate
ERISA Section 406;
(b) The Fund will furnish to existing shareholders and prospective
investors adequate information concerning the variation in payment
of the Distribution Fee where its payment would violate ERISA
Section 406; and
(c) Before making the variation in payment of the Distribution Fee
available to purchasers of the Plan's shares, the Plan will revise
its prospectus and statement of additional information to describe
that new variation.
The Fund will comply with the requirements of Section 12b-1 of
the 1940 Act to amend the Distribution Plan. The amendment will be
submitted for approval by a vote of the board of directors of the
Fund, as well as a vote of the directors who are not interested
persons of the fund and who have no direct or indirect financial
interest in the operation of the Distribution Plan or in any
agreements related to the Distribution Plan. The votes on the
amendment will be cast in person at a meeting of the board of
directors called for the purpose of voting on the amendment to the
Distribution Plan. Reg. @ 270 12b-1(b)(4).
In addition to amending its prospectus and registration statement as
discussed above and submitting the proposed change to the board of
directors as required by Rule 12b-1, the Fund will submit the
amended Distribution Plan to the shareholders for approval even
though this is not required under the regulations. From the
shareholders viewpoint, the Fund would receive the same net
investment from an investment by the Plan as from any other
investor, with the portion of the distribution fee attributable to
the Plan being refunded to the Plan rather than being paid to Wheat.
Thus, Wheat would receive a lesser Distribution Fee than it would if
the investment were made by someone else, but the same fee it would
receive if the Plan were not to invest. Shareholder approval is
anticipated because an investment by the Plan will allow the Fund to
make more investments and achieve greater diversity of investment
with no adverse effect on the shareholders.
The Fund requests that the staff confirm that it will not recommend
enforcement action to the Commission if, under these circumstances,
the Fund amends its Distribution Plan to provide that a distribution
fee will not be paid with regard to that portion of the Fund's
assets attributable to an investment in the Fund by any employee
benefit plan whose investment in the Fund would otherwise violate
Section 406 of ERISA.
If you require any further information, please contact the
undersigned at (804) 644-4131.
Please date-stamp the enclosed copy of this letter to indicate
receipt of this filing and return the stamped copy to the messenger
making the filing.
Thank
you.
Very truly
yours,
William L.
Taylor
The Investment Company Act of 1940 Release No.
IC-22579; IA-1623; S7-24-95
Status of
Investment Advisory Programs
17 CFR Parts 270 and 274
March 31, 1997
Agency:
Securities and Exchange Commission.
Action:
Final rule.
Summary: The
Commission is adopting rule 3a-4 under the Investment Company
Act of 1940 to provide a nonexclusive safe harbor from the
definition of investment company for certain programs under which
investment advisory services are provided on a discretionary basis
to a large number of advisory clients having relatively small
amounts to invest. An investment advisory program that is organized
and operated in accordance with the rule's provisions is not
required to register as an investment company under the Investment
Company Act of 1940, or to comply with the Act's requirements. In
addition, such a program is not subject to the registration
requirement under Section 5 of the Securities Act of
1933.
Effective Date: March 31,
1997.
For Further Information Contact:
Rochelle Kauffman Plesset, Senior Counsel,
(202) 942-0660, Office of Chief Counsel, Division of Investment
Management, 450 Fifth Street, N.W., Washington, D.C.
20549.
Supplementary Information:
The Securities and Exchange Commission ("Commission") is adopting
rule 3a-4 under the Investment Company Act of 1940
[15 USC 80a-1, et seq.] ("Investment Company Act").
Rule 3a-4 provides a nonexclusive safe harbor from the
definition of investment company for certain programs under which
investment advisory services are provided to advisory clients
("investment advisory programs").
Executive
Summary
The
Commission is adopting rule 3a-4 under the Investment Company
Act to provide a nonexclusive safe harbor from the definition of
investment company for certain investment advisory programs. These
programs typically are designed by investment advisers or other
money managers seeking to provide the same or similar professional
portfolio management services on a discretionary basis to a large
number of advisory clients having relatively small amounts to
invest. Under rule 3a-4, any investment advisory program
organized and operated in accordance with the rule's provisions is
deemed not to be an investment company within the meaning of the
Investment Company Act. In addition, a preliminary note to
rule 3a-4 states that there is no registration requirement
under Section 5 of the Securities Act of 1933 ("Securities
Act") with
respect to investment advisory programs that are organized and
operated in compliance with the provisions of the rule.
The rule provides that: (i) each client's account must be
managed on the basis of the client's financial situation and
investment objectives, and in accordance with any reasonable
restrictions imposed by the client on the management of the account;
(ii) the sponsor of the program must obtain sufficient
information from each client to be able to provide individualized
investment advice to the client; (iii) the sponsor and
portfolio manager must be reasonably available to consult with each
client; (iv) each client must have the ability to impose
reasonable restrictions on the management of the client's account;
(v) each client must be provided with a quarterly account
statement containing a description of all activity in the client's
account; and (vi) each client must retain certain indicia of
ownership of all securities and funds in the account. The rule is
intended to be a nonexclusive safe harbor; a program that is not
organized and operated in a manner consistent with the rule does not
necessarily meet the Investment Company Act's definition of
investment company. The rule, as adopted, does not include
provisions regarding written policies and procedures, the
maintenance of records, or the filing of a form with the Commission
that were proposed for comment in 1995. [Emphasis added]
I. Background
In recent years, the number of investment advisory programs that are
designed to provide professional portfolio management services on a
discretionary basis to a large number of clients has increased
greatly. These programs historically have been offered typically to
clients who are investing amounts of money less than the minimum
investments for individual accounts otherwise required by
participating investment advisers, but significantly more than the
minimum account sizes of most mutual funds.
These
investment advisory programs typically are organized and
administered by a sponsor, which provides, or arranges for the
provision of, asset allocation advice and administrative
services. In
some programs, the sponsor or its employees also provide portfolio
management services, including the selection of particular
securities, to the program's clients. In other programs, the sponsor
selects, or provides advice to clients regarding the selection of,
another investment adviser (which may or may not be affiliated with
the sponsor) to act as the client's portfolio manager. In
these programs, the sponsor generally is responsible for the ongoing
monitoring of the management of the account by the manager or
managers selected. The sponsor, rather than the portfolio manager,
often serves as the primary contact for the client in connection
with the program. Sponsors and portfolio managers
usually meet the definition of "investment adviser" under the
Investment Advisers Act of 1940 ("Advisers Act"), and may
be required to register under that Act. Included among investment advisory
programs developed in the recent past are those commonly referred to
as "wrap fee programs." In a wrap fee program, the client typically
is provided with portfolio management, execution of transactions,
asset allocation, and administrative services for a single fee based
on the size of the account. At year-end 1995, assets in wrap
fee programs totaled approximately $101.6 billion, an increase of
over 30 percent in one year.
Under
wrap fee and other investment advisory programs, a client's account
typically is managed on a discretionary basis in accordance with
pre-selected investment objectives. Clients with similar investment
objectives often receive the same investment advice and may hold the
same or substantially the same securities in their accounts. In
light of this similarity of management, some of these investment
advisory programs may meet the definition of investment company
under the Investment Company Act, and may be issuing securities for
purposes of the Securities Act.
In
1980, the Commission sought to address certain issues presented by
investment advisory programs by proposing rule 3a-4
under the Investment Company Act, which would have provided a safe
harbor from the definition of investment company for investment
advisory programs operating in the manner described in the rule. Commenters generally opposed the proposed rule, and it was never
adopted. After this proposal, however, the Commission's Division of Investment
Management ("Division") received numerous requests for assurance
that it would not recommend enforcement action with respect to
investment advisory programs if they operated without registering
under the Investment Company Act. In response to these requests, the
staff issued a series of no-action letters describing investment
advisory programs that would not be deemed investment companies for
purposes of the Investment Company Act. Many, if not most, of the programs
described in the no-action letters met the terms specified in the
proposed rule.
On
July 27, 1995, the Commission proposed for comment a revised version
of rule 3a-4 ("revised proposed
rule 3a-4" or "revised proposed rule," proposed for comment in
the "July Release"). The objective of the revised
proposed rule was to clarify the Commission's views regarding the
status of investment advisory programs under the federal securities
laws by describing certain basic attributes of an investment
advisory program that differ from those of an investment company
that is required to register under the Investment Company Act. The
revised proposed rule was based largely on the provisions of the
rule as originally proposed, as modified and explained in the
subsequent no-action letters, but also required the creation and
maintenance of certain documents and records. Like the original
proposal, revised proposed rule 3a-4 would have provided a
nonexclusive safe harbor from the definition of investment company
for investment advisory programs that are organized and operated in
the manner described in the rule.
The
Commission received comments on the revised proposed rule from 28
commenters, including three law firms, eight professional and trade
associations, and 17 financial firms (i.e., brokers, banks,
investment advisers and others). Commenters generally expressed
support for the Commission's goal of providing a nonexclusive safe
harbor from the definition of investment company for certain
investment advisory programs. A number of commenters, however,
raised concerns about particular aspects of the rule. Many of these
comments are discussed in more detail below. [comments have been
excluded}
II. Discussion
The
Commission is adopting rule 3a-4 under the Investment Company
Act. Like the proposed and revised proposed rules, rule 3a-4
provides a nonexclusive safe harbor from the definition of
investment company for investment advisory programs that are
organized and operated in the manner described in the rule. The
rule's provisions have the effect of ensuring that clients in a
program relying on the rule receive individualized treatment,
including the opportunity to place investment restrictions on the
management of their accounts and the right to receive disclosure
documents in connection with securities held in their accounts.
Moreover, if an advisory program were operated by an investment
adviser registered under the Advisers Act, clients of the program
would receive the protections of that Act. The safe harbor thus is
designed to provide an exemption for certain investment advisory
programs without undermining the protection of investors who
participate in those programs.
A. Preliminary Matters
The
Commission noted in the July Release that the adoption of rule 3a-4 would not affect the status
of no-action letters previously issued by the Division with respect
to investment advisory programs. Therefore, investment advisory
programs operated in a manner consistent with those letters would
continue not to be required to register under the Investment Company
Act, and interests in the programs would not be required to be
registered as securities under the Securities Act. The Commission
also stated in the July Release that the Division, as a general
matter, would not consider requests for no-action or exemptive
relief with respect to programs that do not rely on the rule. In
making this statement, the Commission sought to indicate that in the
future, the staff ordinarily will not respond to no-action requests
or support applications for exemptive relief regarding investment
advisory programs that are similar to those programs that have been
the subject of the no-action letters issued by the Division, but
that are not operated in accordance with all the provisions of
rule 3a-4. The staff, however, will in the future consider
requests raising interpretive issues under rule 3a-4, and will
continue to entertain no-action requests with respect to programs
that raise unique or novel issues.
B. Definitions
1. The
Sponsor
A
number of the terms of the revised proposed rule provided that the
"sponsor" of a program or another person designated by the sponsor
must perform the duties and responsibilities set forth in the rule.
Under paragraph (b) of revised proposed rule 3a-4,
"sponsor" would have been defined as any person who receives
compensation for sponsoring, organizing or administering the
program, or for selecting, or providing advice to clients regarding
the selection of, persons responsible for managing the client's
account in the program. Revised proposed rule 3a-4 would have
provided that, if a program had more than one sponsor, one person
would need to be designated as the principal sponsor, and that
person would be responsible for carrying out the sponsor's duties
and responsibilities under the rule. The July Release noted that this
definition and approach was the same as that used in
paragraph (f) of rule 204-3 under the Advisers Act, which
sets forth a separate brochure requirement for sponsors of wrap fee
programs.
The
Commission notes that the structure of programs may vary widely, and
that the broad definition of the term sponsor is intended to
anticipate such variations and to provide persons involved in a
program with the flexibility to designate the person in the best
position to fulfill the rule's provisions. The Commission thus has
determined to adopt the definition as proposed in order to preserve
this flexibility.
2. Investment Advisory Program
The
safe harbor described in revised proposed rule 3a-4
would have been available to a "program under which investment
advisory services are provided to clients." The revised proposed
rule, however, did not specifically define the term "program." The
Commission notes that the use of the term "program" in the rule is
intended to describe the types of advisory services that potentially
could be subject to the Investment Company Act and the Securities
Act. The Commission does not believe that it is necessary or
advisable to include a definition of program in the rule, because
such a definition could result inadvertently in the exclusion from
the scope of the rule of an entity that otherwise would be entitled
to rely on it.
C. Provisions Designed To Ensure That Each
Client Receives Individualized Treatment
Revised
proposed rule 3a-4 contained four provisions
relating to the individualized treatment received by clients in
investment advisory programs covered by the rule. The July Release
stated that these provisions were based on the terms of
rule 3a-4 as originally proposed, as those provisions were
applied in the no-action letters. The rule as adopted includes these
four provisions, with certain modifications discussed
below.
1. Individualized Management of Client
Accounts
Paragraph (a)(1) of the revised
proposed rule provided that a client's account must be managed on
the basis of the client's financial situation, investment objectives
and instructions. The July Release noted that this provision was
designed to delineate a key difference between clients of investment
advisers and investors in investment companies. A client of an
investment adviser typically is provided with individualized advice
that is based on the client's financial situation and investment
objectives. In contrast, the investment adviser of an investment
company need not consider the individual needs of the company's
shareholders when making investment decisions, and thus has no
obligation to ensure that each security purchased for the company's
portfolio is an appropriate investment for each shareholder. The
Commission is adopting paragraph (a)(1) without substantive
modification.
In
the July Release, the Commission noted that clients of an investment
advisory program with similar investment objectives may hold
substantially the same securities in their accounts in accordance
with a portfolio manager's model, and that this does not necessarily
indicate that clients in the program have not received
individualized treatment for purposes of the rule. The
Commission is reaffirming this position in connection with the
adopted rule.
The Commission also stated in the July Release that it would not be
necessary under the rule for a portfolio manager to make separate
determinations regarding the appropriateness of each transaction for
each client prior to effecting the transaction.
Investment
advisers under the Advisers Act owe their clients the duty to
provide only suitable investment advice, whether or not the advice
is provided to clients through an investment advisory program. To
fulfill this suitability obligation, an investment adviser must make
a reasonable determination that the investment advice provided is
suitable for the client based on the client's financial situation
and investment objectives. The adviser's use of a model to manage
client accounts would not alter this obligation in any
way.
2. Initial and Ongoing Client Contact
Paragraph (a)(2) of revised proposed
rule 3a-4 reflects the view that providing individualized
investment advice contemplates an adviser having sufficient contact
with a client to elicit the information necessary to provide the
advice. In particular, under paragraph (a)(2), a program
relying on the rule must provide that the sponsor or a person
designated by the sponsor ("designated person") contact and solicit
information from the client. Such a program also must provide for
the sponsor and the portfolio manager to be reasonably available to
consult with the client concerning the management of the client's
account.
Under
paragraph (a)(2) of the revised
proposed rule, an advisory program intended to qualify for the safe
harbor set out in the rule would have needed to require that the
sponsor or a designated person: (1) obtain information from the
client concerning the client's financial situation and investment
objectives (including any restrictions that the client may wish to
impose regarding the management of the account) at the time the
client opens the account; (2) contact the client at
least annually to determine whether there have been any changes in
the client's financial situation or investment objectives, or
whether the client wishes to impose any reasonable restrictions on
the management of the account or modify an existing restriction in a
reasonable manner; and (3) notify the client in writing at
least quarterly that the sponsor or designated person should be
contacted if there have been any changes in the client's financial
situation or investment objectives, or if the client wishes to
impose or modify any restrictions on the management of the account.
The Commission is adopting these three provisions as proposed, with
minor modifications to clarify their meaning.
In
the July Release, the Commission noted that the provision regarding
annual client contact was designed to ensure that sponsors have
current information about clients in the program, which, in the
Commission's view, is critical to the provision of individually
tailored advice. Like the revised proposed rule,
the rule as adopted does not dictate the manner in which a sponsor
contacts its clients annually. Contact can be made, for example,
in person, by telephone, or by letter or electronic mail that
includes a questionnaire requesting the client to provide or update
relevant information.
The
rule, as adopted, provides that the sponsor or a designated person
seeking to rely on the rule must notify the client in writing at
least quarterly that the sponsor or designated person should be
contacted if there have been any changes in the client's financial
situation or investment objectives, or if the client wishes to
impose or modify restrictions concerning the management of the
account. This provision contemplates only that notice will be given to an
investor, while the annual contact provision described above
contemplates that the sponsor (or the designated person) will
actively attempt to contact the client to obtain information in
order to be covered by the rule.
In
the July Release, the Commission noted that, if the sponsor did not
provide the portfolio manager with information obtained from the
client, the manager might be unable to manage the client's account
on the basis of the client's financial situation and investment
objectives and in accordance with any reasonable restrictions
imposed by the client. The Commission requested comment whether the
rule should state explicitly that the sponsor or designated person
must convey to the portfolio manager the information obtained from
the client. Some commenters stated that the rule should contain an explicit provision
to that effect, while others suggested that such a provision was
unnecessary. It would appear unlikely that the provision of paragraph (a)(1) providing that the
account be managed based on the client's financial situation and
investment objectives and in accordance with reasonable restrictions
imposed by the client could be satisfied if the sponsor failed to
transmit the client's financial information to the portfolio
manager. The Commission therefore has determined not to include in
rule 3a-4 an explicit requirement that
the information must be provided to the portfolio
manager.
Paragraph (a)(2) of the revised
proposed rule would have provided that the sponsor and persons
authorized to make investment decisions for the client's account be
reasonably available to consult with the client concerning the
management of the account. In the July Release, the Commission
indicated that this provision contemplated a client's having
reasonable access to the sponsor and the portfolio manager to ask
questions or to seek additional information about the investment
advisory program or the client's account. The Commission recognizes that a
program's sponsor may serve as the primary contact for clients in
the program, and that direct client contact with the portfolio
manager may not occur until after the sponsor and others have
attempted to address the client's questions or concerns.
Nonetheless, in the Commission's view, a program seeking to rely on
the rule must provide a procedure by which each client has
reasonable access to personnel of the manager who are knowledgeable
about the management of the client's account, as necessary to
respond to the client's inquiry. Therefore, the Commission is
adopting this provision of the revised proposed rule with the
modification discussed below.
Several
commenters suggested that the rule should permit delegation of the
client consultation responsibilities to an employee of the advisory
firm managing the client's account who is knowledgeable about
investment and other matters relevant to the account. The rule has
been revised to state that "the sponsor and personnel of the manager
of the client's account who are knowledgeable about the account and
its management" must be reasonably available to the client for
consultation. In accordance with this provision, the contact person need not be the
individual primarily responsible for managing the account, but must
be sufficiently knowledgeable to discuss and explain investment
decisions that were made.
3. Reasonable Management Restrictions
The
Commission stated in the July Release that the ability of a client
in an investment advisory program to place reasonable restrictions
on the management of his or her account is a critical factor in
determining whether individualized treatment is provided under the
program. Paragraph (a)(3) of the revised
proposed rule, therefore, would have provided that a program relying
on the rule must include a requirement that each client have the
ability to impose reasonable restrictions on the management of his
or her account. Such restrictions were described to include, for
example, prohibitions with respect to the purchase of particular
securities or types of securities. This provision of the rule is
being adopted as reproposed, except that language has been added to
the provision to clarify that a program relying on rule 3a-4 need not provide clients
with the right to direct the manager to purchase specific securities
or types of securities.
Some
of the commenters addressing this aspect of the proposal asked the
Commission to provide additional guidance as to what constitutes a
reasonable management restriction. As noted in the July Release,
whether a particular restriction would be reasonable depends on an
analysis of the relevant facts and circumstances. In
general, a restriction would be unreasonable if it is clearly
inconsistent with the portfolio manager's stated investment strategy
or philosophy or the client's stated investment objective, or is
fundamentally inconsistent with the nature or operation of the
program. Other factors that bear on whether
a particular restriction is reasonable are the difficulty in
complying with the restriction, the specificity of the restriction
and the number of other restrictions imposed by the client. A
restriction would not be unreasonable, however, simply because it
placed administrative burdens on the manager, or could affect the
performance of the account.
The
Commission stated in the July Release that if the sponsor or
portfolio manager of a program concluded that a particular
restriction sought to be imposed by a client was unreasonable, the
client should be notified and given an opportunity to restate the
restriction more reasonably. The Commission also noted that if a
client was unable or unwilling to modify an unreasonable
restriction, then the client could be removed from the program
without jeopardizing reliance on the safe harbor. The
Commission is also of the view that if a sponsor or portfolio
manager is informed in advance that a client wants to impose a
restriction the sponsor or portfolio manager deems unreasonable, and
the client refuses to modify the restriction, then the sponsor or
portfolio manager may refuse to accept the client. The Commission,
however, does not agree with the suggestion of some commenters that
a sponsor or portfolio manager should be permitted to refuse to
accept a client without giving the client an opportunity to modify
or withdraw the restriction.
4. Quarterly Account Statements
Paragraph (a)(4) of the revised
proposed rule stated that each client in a program covered by the
rule must be provided quarterly with a statement describing all
activity in the client's account during the preceding quarter,
including all transactions made on behalf of the account, all
contributions and withdrawals made by the client, and all fees and
expenses charged to the account. The statement also would have
included the value of the account at both the beginning and end of
the quarter. Some commenters asserted that the rule should not
specify the contents of quarterly statements. The Commission is not
persuaded by this argument. This provision, which is consistent with
several no-action letters that had specified the contents of the
quarterly reports, reflects the view that a key
element of individualized advisory services is an individualized
report about a client's account. The Commission therefore is
adopting this provision substantially as proposed, with one
modification clarifying that statements may be sent more often than
quarterly.
5. Minimum Account Size
The
revised proposed rule would not have specified a minimum size for
client accounts in a program. While the Commission acknowledged
in the July Release that providing individualized advice to a large
number of relatively small accounts may be so costly and
time-consuming as to render individualized treatment impracticable,
it noted that the provisions of the revised proposed rule should be
sufficient to ensure individualized treatment, and that innovations
in computer technology may allow portfolio managers to render
individualized treatment to relatively small accounts on a cost-
effective basis. Nonetheless, the Commission
requested comment whether the rule should include a provision
specifying a minimum account size.
All
but one of the commenters responding to the request for comment
opposed the inclusion of a minimum account size provision in rule 3a-4. These commenters asserted
that the sponsor and the portfolio manager are in the best position
to determine the appropriate minimum account size for a program
based upon the nature of the program. The Commission has concluded
that a particular account size is not a necessary element to ensure
that clients are provided with individualized investment management
services. The Commission recognizes, however, that the smaller the
minimum account size of an investment advisory program, the more
likely that clients would not have the ability to demand and receive
individualized treatment in the program. In assessing the status
under the Investment Company Act of a program that does not qualify
for the safe harbor under rule 3a-4, therefore, the Commission
will consider a relatively large minimum account size as evidence
that individualized treatment is being provided to clients of the
program.
D. Client Retention of Ownership of
Securities
Under
paragraph (a)(5) of the revised
proposed rule, a program covered by the rule would have been
characterized by each client retaining certain specified indicia of
ownership of all securities and funds in that client's account. The
Commission stated in the July Release that the indicia of ownership
specified in revised proposed rule 3a-4 are those that provide
clients with the ability to act as owners of the securities in their
accounts.
Paragraph (a)(5) of rule 3a-4
contemplates only that the program does not impose additional
restrictions or limitations on client ownership of securities held
in program accounts, and that a client's participation in the
program will not alter his or her ability to exercise the ownership
rights enumerated in the rule. The language of the rule has been
modified to clarify this standard.
1. Ability to Withdraw and Pledge
Securities
The
revised proposed rule would have provided that clients be able to
withdraw securities or cash from their accounts. In addition,
revised proposed rule 3a-4 also would have specified
that clients be able to pledge the securities in their accounts. The
July Release stated that investment advisory programs relying on the
safe harbor could require a client to withdraw securities from his
or her account before using them as collateral.
A
number of commenters maintained that the retention by clients of the
right to pledge securities should be eliminated from the final rule.
One of these commenters asserted that, because clients may be forced
to withdraw their securities before pledging them, the provision of
the revised proposed rule regarding the right to pledge securities
is unnecessary if the client has the right to withdraw them. The
Commission agrees, and has modified the rule text to remove this
provision.
2. Right
to Vote Securities and Receive Certain Documents as
Securityholders
The
revised proposed rule would have provided that the client have the
right to vote the securities in his or her account. This provision
would have permitted clients to delegate the authority to vote
securities to another person, such as the portfolio manager or other
fiduciary, so long as the client retained the right to revoke the
delegation at any time. The Commission indicated that the right to
vote proxies implied that the client would receive proxy materials
in sufficient time to permit the client to consider how to vote and
to submit the proxies. The Commission is clarifying that,
if a client delegates voting rights to another person, the proxies,
proxy materials, and, if applicable, annual reports, need be
furnished only to the party exercising the delegated voting
authority.
Revised
proposed rule 3a-4 contemplated that the client
(or the client's agent) would be provided with documents that the
client (or agent) would have received had the same securities been
owned by the client outside the program. These documents may include
prospectuses, periodic shareholder reports, proxy materials, and any
other information and disclosure required by applicable laws or
regulations.
Some
commenters suggested that clients be permitted to waive receipt of
the documents generally required to be provided to securityholders,
as they could have waived receipt of immediate confirmations under
the revised proposed rule. Rule 3a-4
does not limit a client's right to waive receipt of these documents.
Nor does rule 3a-4 prohibit a client from making an informed
designation of another person, including a financial planner or
registered broker-dealer, to receive such documents on the client's
behalf. Whether a client in an investment advisory program may waive receipt of
documents or designate another person to receive documents depends
upon whether the client would have been able to do so under
applicable federal or state law if the securities were owned
directly.
3. Right
to Receive Trade Confirmations
The
revised proposed rule contained a provision under which a client
would have the right to receive in a timely manner confirmations of
securities transactions of the type required by rule 10b-10
under the Securities Exchange Act of 1934. Two commenters objected to the
provision of the rule that the confirmations be "of the type
required by rule 10b-10." These commenters asserted that this
provision was burdensome, particularly with respect to banks and
trust companies that are not subject to rule 10b-10. The
Commission has decided that the confirmation provision, like the
other indicia of ownership specified in the rule, should apply only
to the extent that the client would have a right to receive
confirmations from the person executing the transaction if he or she
traded the securities through that person outside the program.
Therefore, the Commission has revised the provision of the rule
addressing confirmations to delete the reference to
rule 10b-10. As revised, this provision would state that a
client in an investment advisory program must receive confirmations
that the person executing the transaction is required to send under
the laws regulating that person's activities. This provision of the
rule also provides that the confirmations must include the
information specified by the applicable law governing such
content.
As
discussed in the July Release, rule 10b-10 permits customers of
registered broker-dealers to waive receipt of individual
confirmations in certain circumstances. A client in an investment advisory
program whose transactions are executed by a registered
broker-dealer effectively has the option to receive either
individual confirmations for each transaction or periodic
statements, delivered no less frequently than quarterly, that
include the information required by rule 10b-10 with respect to
all transactions that occurred within the period covered by the
statement. As discussed above, the confirmation provision in rule 3a-4
applies only to the extent that the client would have a right to
receive confirmations if he or she traded the securities outside the
program. A client's ability to waive receipt of confirmations will
not be altered because securities are held in a program account.
Whether a client whose transactions are not executed by a registered
broker-dealer may waive receipt of confirmations or other
transaction notifications must be determined by reference to the
laws that govern the relationship.
4. Legal
Rights as Securityholders
Revised
proposed rule 3a-4 would have provided that the
client retain the right to proceed directly against an issuer of
securities in a client's account without joining any other person
involved in the program. The July Release indicated that underlying
this provision (which was based on representations made in several
no-action letters) was the view that a key element of
providing individualized advisory services is that a client have the
same rights as a person holding the securities outside an investment
advisory program.
Certain
commenters suggested that this provision of the revised proposed
rule may be problematic with respect to client securities that are
held in nominee or street name, or by a trustee. These commenters
stated that the nominee or trustee might be considered an
indispensable party in any action against the issuer, and that
nominal joinder of the nominee or trustee might be required. These
comments have been addressed by the revision discussed above
regarding restrictions on the exercise of ownership rights that are
external to the program. Otherwise, the Commission is
adopting this provision as proposed.
E. Policies and Procedures and Form
N-3a4
Paragraph (a)(6) of revised proposed rule 3a-4
contemplated the establishment by a program's sponsor of written
procedures and agreements governing the operation of the program,
and the maintenance of records relating to the program.
Paragraph (a)(6) would have provided that the sponsor must:
(1) Establish and effect written policies and procedures that
are reasonably designed to ensure that each of the provisions of the
rule are implemented; (2) maintain and preserve all written
policies, procedures and certain other documents relating to the
program for specified periods of time; (3) enter into written
agreements with other persons that the sponsor designates to retain
records pertaining to the program; and (4) furnish to the
Commission upon demand copies of the policies, procedures and other
documents created pursuant to these policies and procedures.
Paragraph (a)(7) of the revised proposed rule would have
provided that the sponsor of an investment advisory program
intending to rely on the safe harbor file Form N-3a4 with the
Commission.
In
the July Release, the Commission specifically requested comment
whether any of the provisions under paragraph (a)(6) of the
rule could be "eliminated, consolidated, or otherwise made less
burdensome without compromising investor protection. "The
Commission has reevaluated these provisions and determined not to
adopt them for a number of reasons. First, the Commission agrees
that compliance with these types of formal procedural provisions
generally should not be determinative of an entity's status under
the Investment Company Act. As one commenter noted, none of the
other rules under the Investment Company Act exempting certain
entities from investment company regulation contain similar
procedural provisions.
Second, with respect to programs sponsored by registered investment
advisers, the recordkeeping requirements under the Advisers Act and
the Commission's authority to examine registered investment advisers
should be sufficient to enable the Commission to detect violations
of the Investment Company Act. Most, if not all, of the records that
would have been covered by the revised proposed rule currently are
required to be maintained under rule 204-2 under the Advisers
Act.
With respect to those investment advisory programs sponsored by
banks that are not subject to the Advisers Act, the Commission staff
intends to consult and work closely with the relevant banking
agencies so that these programs will be subject to oversight
designed to determine whether the programs are being operated as
unregistered investment companies. Further, to the extent these
programs include registered investment companies as investment
vehicles for their clients, or that registered investment advisers
serve as subadvisers in a program sponsored by a bank, the
Commission will have access to certain records relating to the
programs through its authority to examine such registered
entities.
Despite
its determination not to include in rule 3a-4 a
provision pertaining to written policies and procedures, the
Commission continues to believe that it is important for the sponsor
of an investment advisory program to monitor the program's
compliance with the rule. Each person relying on rule 3a-4 is
responsible for demonstrating its compliance with the rule's
provisions. A sponsor that establishes and implements written
policies and procedures designed to ensure adherence to the
provisions of rule 3a-4 would greatly reduce the chance that
the program will fail to operate in the manner specified in the
rule. Moreover, the implementation of such procedures by an
investment adviser may serve to protect the adviser in certain
instances from liability for violating, or aiding and abetting
violations of, the Investment Company Act and/or the Securities Act,
or failing to supervise a person under the adviser's supervision who
violates those Acts. The Commission, therefore,
strongly recommends that a sponsor of an advisory program seeking to
rely on rule 3a-4 establish and implement
written policies and procedures, and a system for applying such
procedures, that are reasonably designed to ensure that the program
operates in the manner contemplated by the rule.
The
Commission also believes that it would be advisable for a person
seeking to rely on rule 3a-4 to maintain the records
necessary to evidence compliance with the rule, even if the person
is not subject to rule 204-2 under the Advisers Act or certain
of the records are not required by that rule. As noted above, a
person seeking to rely on rule 3a-4 must be able to establish
compliance with each of the rule's provisions. Compliance with many
of these provisions, including those relating to client contact, the
delivery of documents to clients, and the opportunity of clients to
place reasonable restrictions on the management of their accounts,
would be difficult, if not impossible, to demonstrate without
contemporaneous recordkeeping.
F. Investment Advisers Act Issues Raised by
Investment Advisory Programs
The
Commission noted in the July Release that wrap fee and other
investment advisory programs raise, in addition to the Investment
Company Act issues addressed in the release, a number of issues
under the Advisers Act. The Commission requested comment on certain
of these issues and indicated the possible publication of an
interpretive release that would address them. The
Commission received few comments in response to this request, and
the comments that were received suggested that investment advisory
programs did not raise unique issues under the Advisers Act, but
simply presented issues under the Act in a specific factual context.
The Commission, therefore, has decided not to publish an
interpretive release at this time. The staff of the Division will
entertain requests for no-action or interpretive guidance with
respect to the application of the Advisers Act in the context of
investment advisory programs.
III. Cost/Benefit Analysis
Rule 3a-4 under the Investment Company
Act provides a nonexclusive safe harbor from the definition of
investment company for investment advisory programs. Programs that
are organized and operated in the manner described in the rule are
not required to register under the Investment Company Act or to
comply with the Act's substantive provisions. The rule is intended
to provide guidance to persons operating investment advisory
programs regarding the status of these programs under the Investment
Company Act, and help to ensure that such programs do not operate as
investment companies without clients of the programs benefiting from
the Act's protections.
The
Commission anticipates that the cost of compliance with rule 3a-4 will be small. In addition,
the Commission does not believe that compliance with any of the
provisions will be unduly burdensome. Furthermore, because the rule
is based principally on long-standing staff positions, the
Commission believes that it will not substantially alter current
industry practice or the costs associated therewith.
Section 2(c)
of the Investment Company Act provides that whenever the Commission
is engaged in rulemaking under the Investment Company Act and is
required to consider or determine whether an action is consistent
with the public interest, the Commission also must consider, in
addition to the protection of investors, whether the action will
promote efficiency, competition, and capital formation. The
Commission has considered rule 3a-4 in
light of these standards and believes that, by removing uncertainty
with respect to the status of certain investment advisory programs
under the Investment Company Act, the rule is consistent with the
public interest, and will promote efficiency and the competition
among sponsors of such programs. In addition, the rule will have no
adverse effect on capital formation, nor be unduly burdensome to
those sponsors wishing to comply with the rule.
IV. Paperwork Reduction Act
Information omitted.
V. Final
Regulatory Flexibility Analysis
Information omitted.
VI. Effective Date
Rule 3a-4 is effective upon
publication in the Federal Register. Pursuant to
5 USC 553(d)(1), immediate effectiveness is appropriate
because rule 3a-4 is purely exemptive in nature. It provides a
nonexclusive safe harbor from the definition of investment company
for certain programs under which investment advisory services are
provided to advisory clients. Under the rule, programs that are
organized and operated in the manner described in the rule are not
required to register under the Investment Company Act or to comply
with the Act's requirements. The benefits of the rule should be
available at the earliest possible time.
VII. Statutory Authority
The Commission is adopting rule 3a-4 pursuant to the authority
set forth in Sections 6(c) and 38(a) of the Investment
Company Act [15 USC 80a-6(c), - 37(a)].
Text of
Rule
List of Subjects in 17 CFR Parts 270 and 274
Investment companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set out in the preamble, title 17, chapter II of the
Code of Federal Regulations is 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 USC 80a-1 et seq., 80a-37, 80a-39 unless
otherwise noted;
* * * * * 2. By adding Section 270.3a-4 to read as
follows:
270.3a-4 Status of investment advisory
programs.
Note: This section is a nonexclusive safe harbor from the definition
of investment company for programs that provide discretionary
investment advisory services to clients. There is no registration
requirement under Section 5 of the Securities Act of 1933
[15 USC 77e] with respect to programs that are organized
and operated in the manner described in Section 270.3a-4. The
section is not intended, however, to create any presumption about a
program that is not organized and operated in the manner
contemplated by the section.
(a)
Any program under which discretionary investment advisory services
are provided to clients that has the following characteristics will
not be deemed to be an investment company within the meaning of the
Act [15 USC 80a, et seq.]:
- Each
client's account in the program is managed on the basis of the
client's financial situation and investment objectives and in
accordance with any reasonable restrictions imposed by the client
on the management of the account.
-
- At
the opening of the account, the sponsor or another person
designated by the sponsor obtains information from the client
regarding the client's financial situation and investment
objectives, and gives the client the opportunity to impose
reasonable restrictions on the management of the account;
- At
least annually, the sponsor or another person designated by the
sponsor contacts the client to determine whether there have been
any changes in the client's financial situation or investment
objectives, and whether the client wishes to impose any
reasonable restrictions on the management of the account or
reasonably modify existing restrictions;
- At
least quarterly, the sponsor or another person designated by the
sponsor notifies the client in writing to contact the sponsor or
such other person if there have been any changes in the client's
financial situation or investment objectives, or if the client
wishes to impose any reasonable restrictions on the management
of the client's account or reasonably modify existing
restrictions, and provides the client with a means through which
such contact may be made; and
- The
sponsor and personnel of the manager of the client's account who
are knowledgeable about the account and its management are
reasonably available to the client for consultation.
- Each
client has the ability to impose reasonable restrictions on the
management of the client's account, including the designation of
particular securities or types of securities that should not be
purchased for the account, or that should be sold if held in the
account; Provided, however, that nothing in this section requires
that a client have the ability to require that particular
securities or types of securities be purchased for the
account.
- The sponsor or person designated by the
sponsor provides each client with a statement, at least quarterly,
containing a description of all activity in the client's account
during the preceding period, including all transactions made on
behalf of the account, all contributions and withdrawals made by
the client, all fees and expenses charged to the account, and the
value of the account at the beginning and end of the
period.
- Each client retains, with respect to all
securities and funds in the account, to the same extent as if the
client held the securities and funds outside the program, the
right to:
- Withdraw
securities or cash;
- Vote
securities, or
delegate the authority to vote securities to another
person;
- Be
provided in a timely manner with a written confirmation or other
notification of each securities transaction, and all other
documents required by law to be provided to security holders;
and
- Proceed
directly as a security holder against the issuer of any security in the
client's account and not be obligated to join any person
involved in the operation of the program, or any other client of
the program, as a condition precedent to initiating such
proceeding.
(b)
As used in this section, the term sponsor refers to any person who
receives compensation for sponsoring, organizing or administering
the program, or for selecting, or providing advice to clients
regarding the selection of, persons responsible for managing the
client's account in the program. If a program has more than one
sponsor, one person shall be designated the principal sponsor, and
such person shall be considered the sponsor of the program under
this section.
By
the Commission.
Dated:
March 24, 1997.
Margaret
H. McFarland, Deputy Secretary.
Footnotes
- 15 USC 77a, et seq.
-
The sponsor often is a money management firm, a broker-dealer, a
mutual fund adviser or, in some instances, a bank. See,
e.g., Wall Street Preferred Money Managers, Inc. (pub. avail.
Apr. 10, 1992) (broker-dealer); United Missouri Bank of Kansas
City, n.a. (pub. avail. May 11, 1990, as modified Jan. 23, 1995)
(bank); Strategic Advisers Inc. (pub. avail. Dec. 13, 1988)
(mutual fund adviser). The sponsor or one of its affiliates also
may execute some or all of the transactions for client
accounts.
- More
than one portfolio manager may manage the client's assets,
depending on the program, the client's investment objectives, and
the size of the client's account. See, e.g., Rauscher Pierce
Refsnes, Inc. (pub. avail. Apr. 10, 1992); Wall Street Preferred
Money Managers, Inc., supra note 2; Westfield Consultants
Group (pub. avail. Dec. 13, 1991).
- Some
investment advisory programs, however, are marketed by the sponsor
through unaffiliated investment advisers, such as financial
planners. In some of these programs, the unaffiliated investment
adviser, rather than the sponsor, may serve as the primary contact
for its clients that participate in the program. See,
e.g., Westfield Consultants Group, supra note 3.
- 15 USC 80b-1, et seq.
Section 202(a)(11) of the Advisers Act
(15 USC 80b-2(a)(11)) defines "investment adviser" as
"any person who, for compensation, engages in the business of
advising others, either directly or through publications or
writings, as to the value of securities or as to the advisability
of investing in, purchasing, or selling securities, or who, for
compensation and as part of a regular business, issues or
promulgates analyses or reports concerning securities * * *." A
bank generally is excepted from the definition of investment
adviser under Section 202(a)(11)(A) of the Advisers Act. A
broker-dealer that sponsors an investment advisory program
generally cannot rely on the broker-dealer exception from the
definition of investment adviser in Section 202(a)(11)(C) of
the Advisers Act. See, e.g., Status of Investment Advisory
Programs under the Investment Company Act, Investment Company Act
Release No. 21260 (July 27, 1995), 60 FR 39574
(Aug. 2, 1995) ("July Release"); National Regulatory
Services, Inc. (pub. avail. Dec. 2, 1992).
- The
National Securities Markets Improvement Act of 1996 (Pub. L. No.
104- 290) amended the Advisers Act to provide that certain
investment advisers will be subject primarily to the supervision
of the Commission, while other advisers will be subject primarily
to state regulation. Effective April 9, 1997, if an investment
adviser is regulated or required to be regulated as an investment
adviser in the state in which it maintains its principal office
and place of business, it may not register with the Commission
unless (1) it has assets under management of $25 million
or more, or (2) it advises a registered investment company.
Proposed rules published for comment by the Commission would
reallocate regulatory responsibilities for investment advisers
between the Commission and the states. Rules Implementing
Amendments to the Investment Advisers Act of 1940, Investment
Advisers Act Release No. 1601 (Dec. 18, 1996),
61 FR 68480 (Dec. 27, 1996).
- See
paragraph (g)(4) of rule 204-3 under the Advisers Act
(17 CFR 275.204-3(g)(4)) (defining wrap fee program for
purposes of wrap fee brochure requirement).
- Cerulli
Associates, Inc. and Lipper Analytical Services, Inc., The
Cerulli-Lipper Analytical Report: State of the Wrap Account
Industry 5 (1996). These figures include assets in mutual fund
wrap programs, also called mutual fund asset allocation programs.
Unlike traditional wrap fee programs, mutual fund wrap programs
contemplate that a client's assets are allocated only among
specified mutual funds. Assets in mutual fund wrap programs
represented 19% of total assets in wrap fee programs at year-end
1995. Id. at 7.
- For a
detailed discussion of why an investment advisory program may meet
the definition of investment company and may be deemed to be
issuing securities, see July Release, supra note 5, at
Section I. See also In the Matter of Clarke Lanzen Skalla
Investment Firm, Inc., Investment Company Act Release
No. 21140 (June 16, 1995); SEC v. First National City
Bank, Litigation Release No. 4534 [1969-1970 Transfer Binder]
Fed. Sec. L. Rep. (CCH) 92,592 (Feb. 6, 1970).
- Individualized Investment Management
Services, Investment Company Act Release No. 11391
(Oct. 10, 1980), 45 FR 69479 (Oct. 21, 1980)
("1980 Release"). The 1980 Release also stated that the
Commission's Division of Corporation Finance had indicated that if
rule 3a-4 were adopted, that Division would not recommend
that the Commission take enforcement action if interests in an
investment advisory program operated in accordance with the
proposed rule's requirements were not registered under the
Securities Act. Id. at n.15.
- See
July Release, supra note 5, at n.20 and accompanying
text.
- See,
e.g., Benson White & Company (pub. avail. June 14, 1995);
Wall Street Preferred Money Managers, Inc., supra note 2;
Rauscher Pierce Refsnes, Inc., supra note 3; Westfield
Consultants Group, supra note 3; WestAmerican Investment
Company (pub. avail. Nov. 26, 1991); Rushmore Investment Advisers,
Ltd. (pub. avail. Feb. 1, 1991); Qualivest Capital Management,
Inc. (pub. avail. July 30, 1990); United Missouri Bank of Kansas
City, n.a., supra note 2; Manning & Napier Advisors, Inc.
(pub. avail. Apr. 24, 1990); Jeffries & Company (pub. avail.
June 16, 1989); Strategic Advisers, Inc., supra note 2;
Scudder Fund Management Service (pub. avail. Aug. 17, 1988);
Shearson/American Express, Inc. (pub. avail. July 13, 1983); Paley
& Ganz, Inc. (pub. avail. Dec. 6, 1982).
- July
Release, supra note 5.
- July
Release, supra note 5, at Section I.
- The
Note to the revised proposed rule stated that interests in
investment advisory programs organized and operated in compliance
with the rule would not be required to be registered under the
Securities Act. See July Release, supra note 5, at n.26 and
accompanying text; Note to revised proposed rule 3a-4.
- The
comment letters and a summary of the comments prepared by the
Commission staff are included in File No. S7-24-95.
- See
infra Section II.E.
- Whether
a program is nondiscretionary is inherently a factual
determination. A program designated as "nondiscretionary" in which
the client follows each and every recommendation of the adviser
may raise a question whether the program in fact is
nondiscretionary.
- In the
July Release, the Commission noted that an investment advisory
program could be considered to be an issuer because the client
accounts in the program, taken together, could be considered to be
an organized group of persons. See July Release, supra
note 5, at nn.11-15 and accompanying text; see also Advisory
Committee on Investment Management Services for Individual
Investors: Small Account Investment Management Services at 23
(Jan. 1973). ("An investment service which is operated on a
discretionary basis and does not afford investors individual
attention would appear to be offering an investment contract or
security, if substantially the same investment advice is given to
all clients or to discernible groups of clients. * * *")
- In
letters issued by the Division of Investment Management granting
no- action assurances to investment advisory programs, the
Division of Corporation Finance also gave assurances that it would
not recommend enforcement action to the Commission if the
requestor relied on an opinion of counsel stating that interests
in the investment advisory program were not "securities" within
the meaning of the Securities Act. See, e.g., Morgan Keegan
& Company, Inc., supra note 12; Westfield Consultants
Group, supra note 3; Rauscher Pierce Refsnes, Inc., supra
note 3.
- The
Note to rule 3a-4 states, in part, that there is no
registration requirement under Section 5 of the Securities
Act with respect to programs that are organized and operated in
the manner described in the rule.
- July
Release, supra note 5, at n.27.
- The
staff previously has indicated that it will no longer entertain
requests for no-action relief regarding investment advisory
programs unless they present novel or unusual issues. See,
e.g., Wall Street Preferred Money Managers, Inc., supra
note 2.
- July
Release, supra note 5, at Section II.A.1.
- The
sponsor of an investment advisory program usually is an investment
adviser under Section 202(a)(11) of the Advisers Act, and may
be required to register under the Act. See July Release, supra
note 5, at nn.5-8 and accompanying text and note 6 of
this Release. Nonetheless, the rule is available to any investment
advisory program, regardless of whether the sponsor is excepted
from the definition of investment adviser (e.g., a bank), or
is required to be registered under the Act.
- Paragraph (b) of rule 3a-4, as
adopted.
- July
Release, supra note 5, at Section II.A.2.
- July
Release, supra note 5, at Section II.A.2.i.
- As
noted above, paragraph (a)(1) of the revised proposed rule
provided that a client's account must be managed on the basis of
the client's financial situation, investment objectives and
instructions (emphasis added). The Commission has determined that
individualized treatment does not require that the client be
entitled to give instructions to the adviser with respect to the
management of the account other than those reasonable restrictions
referenced in paragraph (a)(3). Therefore, the Commission has
clarified the rule text by replacing the word "instructions" with
the word "restrictions." Nonetheless, the rule contemplates that a
client's investment objective will be formulated with appropriate
input from the client regarding the client's financial goals and
risk tolerance.
- July
Release, supra note 5, at n.34 and accompanying text.
- As
indicated in the July Release, this position is consistent with
no- action letters issued concerning programs that allocate client
assets in accordance with computerized investment models. July
Release, supra note 5, at n.34 and accompanying text; see,
e.g., Qualivest Capital Management Inc., supra note 12
(sponsor proposed to use computerized investment allocation model
to allocate client assets among money managers).
- See
Suitability of Investment Advice Provided by Investment Advisers:
Custodial Account Statements for Certain Advisory Clients,
Investment Advisers Act Release No. 1406 (Mar. 16,
1994), 59 FR 13464 (Mar. 22, 1994) at nn.2-5 and
accompanying text ("Investment advisers are fiduciaries who owe
their clients a series of duties, one of which is the duty to
provide only suitable investment advice. This duty is enforceable
under the antifraud provisions of the Advisers Act,
Section 206, and the Commission has sanctioned advisers for
violating this duty.").
- A
sponsor or designated person seeking to rely on the rule as
adopted could obtain this information through interviews (either
in person or by telephone) and/or through questionnaires that
clients must complete and return prior to the opening of the
account. This position is consistent with no-action letters
previously issued by the staff. See, e.g., Rauscher Pierce
Refsnes, Inc., supra note 3 (prospective client will be
interviewed over the telephone); Manning & Napier Advisors,
Inc., supra note 12 (prospective client initially submits
written questionnaire and later is interviewed by
telephone).
- Paragraphs (a)(2)(i), (a)(2)(ii)
and (a)(2)(iii) of rule 3a-4, as adopted.
- July
Release, supra note 5, at Section II.A.2.ii.
- Paragraph (a)(2)(ii) of rule 3a-4,
as adopted. One commenter asked whether the rule permits a sponsor
or designated person to contact a client by electronic mail. Under
appropriate circumstances, an electronic mail message requesting
information from clients in the program would constitute annual
client contact within the meaning of rule 3a-4. See Use of
Electronic Media by Broker-Dealers, Transfer Agents, and
Investment Advisers for Delivery of Information; Additional
Examples under the Securities Act of 1933, Securities Exchange Act
of 1934, and Investment Company Act of 1940, Securities Exchange
Act Release No. 37182 (May 9, 1996),
61 FR 24644 (May 15, 1996) (interpretive release in
which the Commission, among other things, provided general
guidance to investment advisers that contemplate using electronic
media to fulfill their disclosure obligations under the Advisers
Act).
- This
provision of the rule contemplates a reasonable attempt by the
sponsor or designated person to reach and obtain information from
the client. A sponsor or designated person that is unable to
obtain information from a client after pursuing all reasonable
means to contact the client would not be precluded from relying on
the safe harbor.
- Paragraph (a)(2)(iii) of rule 3a-4,
as adopted. This notice could be included as part of or with
another mailing sent to the client. For example, the notification
could be included as part of the quarterly account statement
described in paragraph (a)(4) of the rule. For a discussion
of the provisions of rule 3a-4 stating that quarterly account
statements must be sent to investment advisory clients, see infra
Section II.C.4.
- For
this reason, the Commission disagrees with those commenters who
asserted that the annual contact and quarterly notification
provisions are duplicative.
- July
Release, supra note 5, at Section II.A.2.ii.
- Id.
- This
view is reflected in staff no-action letters. See,
e.g., Rauscher Pierce Refsnes, Inc., supra note 3 (the
portfolio manager, when necessary, will be available to discuss
more complex questions regarding the client's account); Westfield
Consultants Group, supra note 3 (client will be furnished the
name and direct telephone number of manager, who will be
reasonably available during business hours). In one no-action
request, a representation was made that the client would be able
to contact his or her financial planner or the portfolio manager
to obtain information or assistance during normal business hours,
but the client might be charged hourly fees whenever the client
requested that certain investment officers of the portfolio
manager answer specific questions regarding investment strategies
with respect to the client's account. Manning & Napier
Advisors, Inc., supra note 12. Rule 3a-4 does not
preclude a sponsor from charging reasonable fees for this or other
services. However, such fees must be adequately disclosed to the
client. See Item 7(f) of Schedule H of Form ADV (requiring
disclosure of any fees in addition to the wrap fee that a client
in a wrap fee program may pay).
- Paragraph (a)(2)(iv) of rule 3a-4,
as adopted.
- July
Release, supra note 5, at Section II.A.2.iii.
- Paragraph (a)(3) of rule 3a-4, as
adopted.
- July
Release, supra note 5, at Section II.A.2.iii.
- July
Release, supra note 5, at Section II.A.2.iii. The
exclusion of individual stocks or stocks from a particular
country, for example, would appear to be a reasonable restriction
under ordinary facts and circumstances. A general restriction on
the purchase of the securities of foreign issuers may be
unreasonable, however, if the manager's investment strategy is to
invest exclusively or primarily in foreign securities. Under those
circumstances, it may be necessary for the client and the sponsor
to reassess the choice of manager or the client's investment
objective or strategy.
- July
Release, supra note 5, at Section II.A.2.iii. While
rule 3a-4 generally contemplates that clients in mutual fund
asset allocation programs should have the ability to exclude
specific funds from their accounts, under some circumstances a
restriction on the purchase of a fund included in the program may
be inconsistent with the operation of the program. This could be
the case, for example, when there is only a single fund with a
specified investment objective available in the program, and that
fund plays a necessary role in the overall investment strategy
determined to be appropriate for the client. See Benson White
& Company, supra note 12 (program under which client
assets are allocated among four mutual funds based upon the
client's age need not give clients the opportunity to place
restrictions on the purchase of any of the funds).
- In the
context of a mutual fund asset allocation program, for example,
compliance with restrictions based on the securities held by a
fund in which program assets are invested (i.e., a
restriction that would require a manager to monitor the fund's
portfolio securities) may be so burdensome as to be
unreasonable.
- The
restrictions that a client seeks to impose on his or her account
could be unreasonable when considered in the aggregate, even
though each restriction may be reasonable when considered
separately, or if the client alters them or imposes new
restrictions with excessive frequency. Paragraph (a)(2)(iii)
of the rule, which contemplates that a sponsor notify each client
at least quarterly to contact the sponsor if the client wishes to
modify restrictions concerning the management of the account, is
not intended to imply that it necessarily would be reasonable for
a client to change his or her investment restrictions on a
quarterly basis.
- July
Release, supra note 5, at Section II.A.2.iii.
- See
Westfield Consultants Group, supra note 3 (quarterly
statements will contain a review and analysis of client account);
Strategic Advisers, Inc., supra note 2 (quarterly statements
will contain a description of investments).
- Paragraph (a)(4) of rule 3a-4, as
adopted.
- The
Division has granted no-action relief to investment advisory
programs with varying minimum account sizes. See,
e.g., Qualivest Capital Management, Inc., supra note 12
($5 million); Wall Street Preferred Money Managers, Inc.,
supra note 2 ($100,000); Strategic Advisers, Inc., supra
note 2 ($50,000).
- July
Release, supra note 5, at Section II.A.2.v.
- Rule 3a-4, as originally proposed, would
have provided that clients maintain to the extent reasonably
practicable all indicia of ownership of the funds in their
accounts, and specified certain requisite attributes of ownership.
1980 Release, supra note 10; paragraph (c) of
rule 3a-4 as originally proposed.
- Like
the revised proposed rule, rule 3a-4 as adopted does not
provide that the client be the record owner of the securities held
in its account. The Division has taken the position that an
investment advisory program would not be deemed to be an
investment company solely because securities of clients
participating in the program are held in nominee or street name.
United Missouri Bank of Kansas City, n.a., supra note 2
(investment company securities held in nominee name). See,
e.g., Manning & Napier Advisors, Inc., supra note 12
(non-investment company securities held in nominee name).
- This
commenter suggested that providing the right to pledge securities
in the account of a retirement plan could cause the plan to lose
its status as a qualified plan under the Internal Revenue Code. In
general, a qualified plan must provide that benefits under the
plan may not be anticipated, assigned, alienated, or subject to
attachment, garnishment, levy, execution, or other legal process.
See Internal Revenue Code ("IRC") Section 401(a)(13)
[26 USC 401(a)(13)]; Treas. Reg.
Section 1.401(a)-13 (as amended by T.D. 8219,
53 FR 31837 (Aug. 22, 1988)). In addition, the IRC
imposes an additional tax of 10% on early distributions from a
qualified retirement plan. See IRC Section 72(t)(1)
[26 USC 72(t)(1)].
- Similarly, paragraph (a)(5) would not
prohibit a client from being charged reasonable fees for services
in connection with the ownership of securities held in the
program, provided such fees could be charged if the client held
the securities outside the program. Of course, all fees must be
permissible under applicable state and federal law and must be
adequately disclosed. See Item 7 of Schedule H of Form ADV.
- Paragraph (a)(5) of rule 3a-4, as
adopted. The rule's text also has been changed to clarify that the
rule provides for the retention of only the rights of ownership
specified in the rule. Of course, nothing in the rule is intended
to prevent clients from retaining other rights of ownership, if
permitted by the program.
- July
Release, supra note 5, at Section II.A.3.i.
- The
Commission regards a client's ability to pledge securities in his
or her account directly without first withdrawing them as an
additional attribute of the client's ownership of the securities.
While the absence of a right to pledge would not cause a program
to fall outside of rule 3a-4, a client's right to pledge
securities may be relevant to determining whether a program that
is not relying on the safe harbor would be considered to be an
investment company.
- July
Release, supra note 5, at Section II.A.3.ii.
- See
infra Section II.D.3. Rule 3a-4, as adopted, is in no
way intended to indicate the instances under which a client's
right to vote proxies may be delegated to another person. Whether
the right can be delegated depends on applicable state and federal
law. An employee benefit plan subject to the Employee Retirement
Income Security Act of 1974 ("ERISA"), for example, may provide
that the plan's named fiduciary may delegate asset management,
including the authority to vote proxies, to an "investment
manager" for the plan, as that term is defined in
Section 3(38) of ERISA. See, e.g., Sections 402-405
of ERISA [29 USC 1102-1105]; Letter from Alan D.
Lebowitz, Deputy Assistant Secretary for Program Operations, U.S.
Department of Labor, to Robert A.G. Monks, Institutional
Shareholder Services, Inc. (Jan. 23, 1990), 1990 ERISA
LEXIS 66. Certain provisions of the federal securities laws
also contemplate that clients can delegate their right to vote
proxies. Under the Commission's proxy rules, the term "beneficial
owner," the person who must receive proxy materials, includes an
investment adviser that has the power to vote, or to direct the
voting of, a security pursuant to an agreement with the client.
See Securities Exchange Act Rule 14b-2(a)(2)
[17 CFR 240.14b-2]. Rules adopted by the New York Stock
Exchange ("NYSE"), the National Association of Securities Dealers,
Inc. ("NASD") and the American Stock Exchange, Inc. ("AMEX")
permit a securityholder to designate a registered [investment
adviser who has discretion over the management of the client's
account to receive and vote proxies on his or her behalf. See NYSE
Guide, Rules of Board, Rules 450, 451, 452 and 465; NASD Conduct
Rules, Rule 2260; AMEX Rules 575, 576, 577 and 585.
-
See infra Section II.D.3.
- In the
revised proposed rule, the paragraph regarding receipt of
documents specifically referred to receipt by the client's agent.
Paragraph (a)(5)(iv) of revised
proposed rule 3a-4; July Release, supra note 5, at
Section II.A.3.iii. In connection with modifying the rule
text to effect the changes discussed above, supra
Section II.D, the reference to the client's agent has been
deleted as a conforming change. These changes in the rule text are
not intended to indicate that a client in an investment advisory
program may not designate another person to receive documents that
must be provided to securityholders by law.
- 17 CFR 240.10b-10.
- Paragraph (a)(6) of rule 3a-4, as
adopted. Banks that execute securities transactions for customers
generally are subject to confirmation requirements under the
banking laws. See, e.g., 12 CFR 12.4-12.5 (Office
of the Comptroller of the Currency ("OCC") confirmation
requirements for national banks). The OCC recently proposed
amendments to these rules that would make their confirmation
requirements more closely reflect the requirements of
rule 10b-10. OCC, Recordkeeping and Confirmation Requirements
for Securities Transactions (Dec. 7, 1995), 60 FR 66517
(Dec. 22, 1995). In addition, the Federal Deposit Insurance
Corporation ("FDIC") recently considered when and how to amend its
regulations governing recordkeeping and confirmation requirements
for securities transactions by state nonmember banks
(12 CFR part 344). FDIC, Recordkeeping and Confirmation
Requirements for Securities Transactions (May 14, 1996),
61 FR 26135 (May 24, 1996).
- July
Release, supra note 5, at n.60 and accompanying text, citing
Securities Exchange Act Release No. 34962 (Nov. 10,
1994), 59 FR 59612 (Nov. 17, 1994) ("Exchange Act
Release 34962").
- Although a client may waive his or her right
to receive the immediate confirmation, the client may not waive
his or her right to receive the periodic statement. Exchange Act
Release 34962, supra note 68, at nn.34-36 and
accompanying text.
- One
commenter observed that a person executing transactions on behalf
of a client whose shares are held in nominee name may not know the
identity of the client, and asked the Commission to clarify how a
program relying on the safe harbor could comply with the
confirmation provision with respect to such a client. In the case
of transactions effected by a registered broker- dealer, the
Division of Market Regulation has expressed the view that a good
faith effort should be made in these circumstances to obtain the
information necessary to send the confirmation required by
rule 10b-10 directly to the client. If these efforts are not
successful, then the confirmation should be sent, in accordance
with certain procedures, to the client's custodian or a fiduciary
authorized to manage the account. See Letter from Catherine
McGuire, Chief Counsel, Division of Market Regulation, U.S.
Securities and Exchange Commission, to George P. Miller, Vice
President and Associate General Counsel, Public Securities
Association (Sept. 29, 1995).
- See,
e.g., Westfield Consultants Group, supra note 3; Manning
& Napier Advisors, Inc., supra note 12; Jeffries &
Company, supra note 12; Rauscher Pierce Refsnes, Inc., supra
note 3.
- See
supra Section II.D.
- Paragraph (a)(5)(iv) of rule 3a-4,
as adopted.
- July
Release, supra note 5, at Section II.A.4.
- See
rule 3a-1 (certain prima facie investment companies);
rule 3a-2 (transient investment companies); rule 3a-3
(certain investment companies owned by companies that are not
investment companies); rule 3a-5 (exemption for subsidiaries
organized to finance the operations of domestic or foreign
companies); rule 3a-6 (foreign banks and foreign insurance
companies); and rule 3a-7 (issuers of asset-backed
securities).
- For
instance, paragraph (a)(7) of rule 204-2
[17 CFR 275.204-2(a)(7)] generally requires a registered
adviser to maintain originals of all written communications
received and copies of all written communication sent by the
adviser relating to the adviser's advice or recommendations. Under
Section 204 of the Advisers Act, records maintained under
rule 204-2 must be made available to Commission
examiners.
- Section 203(e)(5) of the Advisers Act
[15 USC 80b-3(e)(5)] provides that no person will be
deemed to have failed to supervise another person subject to his
or her supervision if: (1) the person has established
procedures that would reasonably be expected to prevent or detect
the other person's violation, and a system for applying such
procedures; and (2) the supervisor reasonably discharged his
or her duties under the procedures and system and did not have
reasonable cause to believe that such procedures were not being
complied with.
- July
Release, supra note 5, at Section II.C.
- See
supra Section II.C.4.
- See
supra Section II.E.
FDIC Informal Guidance
SEC Rule
3a-4, Safe Harbor for Wrap Accounts Informal Message to Trust
Specialists and Examiners
Effective: March
31, 1997
Citations: Rule
is SEC Reg 270.3a-4 (17 CFR 270.3a-4)
Published in Federal Register on March 31, 1997 (62 FR
15098)
Problem Being
Addressed:
This
rule provides a "non-exclusive" safe harbor against
inadvertently operating a nonregistered investment company
(mutual fund). If the provisions in the
safe harbor rule are complied with, "wrap" accounts offered by
banks will not be deemed to be either a "security" under the
1933 Act or an "investment company" under the 1940
Act.
In
such accounts, a customer's funds are invested according to
pre-established general investment guidelines, often based (at
least in part) on the customer's age and current
financial/investment situation. This often takes the form of an
asset-allocation product. The "wrap" means that the customer
pays only one fee for everything.
The
bank (or the third-party provider) has discretion to change the
individual investments in the pool, and maybe also the
percentages of stock-income-MM allocations. Since each account
in such a program may be invested identically, the bank is, in
effect, operating a mutual fund.
The safe harbor is "non-exclusive", meaning
it is not absolute. Compliance with Rule 3a-4 means
that the SEC would not consider the program to be an
unregistered investment company.
It is
possible for other types of wrap programs (or wrap programs
which meet some, but not all, of the safe harbor provisions, to
not be considered investment
companies. Sponsors of nonconforming wrap programs would have to
write the SEC for "no action" relief in order to be assured that
their particular program is not an "unregistered investment
company" under the Investment Company Act of
1940.
Accounts/Services
Covered:
Most likely, asset-allocation programs
(including those offered by a third-party provider) and
similar investment "models".
Bank Areas
Affected: Trust departments and/or retail investment
areas.
Definitions:
Sponsor
- Any person who receives compensation for
If a
program has more than one sponsor, one person shall be
designated the principal sponsor, and such person shall be
considered the sponsor of the program (for purposes of
Rule 3a-4).
SEC
notes that this is a broad definition, intended to cover
programs whose structure varies widely, and will provide both
the industry and the SEC with flexibility.
Investment
Advisory Program - This is the term used in the Rule to
describe covered wrap programs. The term is not defined in the
Rule, giving the SEC flexibility in applying it.
A wrap
program is generally one in which individual clients' assets are
invested on a pooled basis according to an asset allocation
model. The customer pays a single fee, which includes both a
management fee and transactions costs (commissions and loads).
The sponsor has discretion over how the funds are invested,
which may be in mutual funds and/or individual
securities.
General Requirements:
- Applicable only to discretionary accounts (as
explained above). Non-discretionary accounts are not at risk of
being considered unregistered investment companies.
- Account
Requirements
- You
should expect to see a written account agreement, although that
is not specifically required. A standardized agreement is
acceptable; it does not need to be custom-drawn.
- Account acceptance/management must reflect
that it is based on the each individual client's financial
situation, investment objectives, and risk tolerance. This must
be documented. [270.3a-4(a)(2)(i)]
- Each
client must be able to impose
reasonable restrictions on what his/her account can be invested
in. This is a "negative" investment privilege (no tobacco,
nuclear, defense, or chemical investments, or no International
Paper stock). Therefore, reasonable investment prohibitions must
be permitted. [270.3a-4(a)(3)]
The client may not impose any positive investment
requirements requiring the purchase of certain specific
investments.
- Bank
Administration Requirements
- Account Opening: The bank must obtain
information about each individual client's financial situation,
investment objectives, and risk tolerance. This must be
documented. [270.3a-4(a)(2)(i)]
- Quarterly Statements: Customers must be
provided a statement at least quarterly. The statement must show
all transactions, contributions, withdrawals, fees and expenses,
and the value of the account at the beginning and end of the
period. A statement is required even if the account is inactive.
The bank should keep a copy of such statements. [270.3a-4(a)(4)]
-
Quarterly
Status Change Requests: Not less than quarterly, the bank must
request that the client notify the bank of any substantive
changes in the customer's status that would affect how his/her
account is invested (or the model selected). The type of changes
envisioned are marriage, birth of children, retirement, health
problems, etc. [270.3a-4(a)(2)(iii)] This quarterly request may be an insert to
the quarterly statement, or a message printed on the quarterly
statement. Recurring standardized/boilerplate language is
permissible.
-
Annual
Contacts: The
bank must contact each customer not less than annually in order
to determine whether there has been any change in the customer's
status. Refer to the Quarterly Status Change Requests for the
types of changes envisioned. [270.3a-4(a)(2)(ii)] Per the commentary by the "SEC commission",
any number of methods may be used to make contact. Examples
include in person, by telephone, or by letter or electronic
mail. The contact should include a questionnaire requesting the
client to provide or update relevant information. The provision
contemplates that a reasonable attempt will be made. If current
information is not available after pursuing all reasonable means
the safe harbor exclusion remains intact.
-
Client Rights The client must have
the [270.3a-4(a)(5)]:
-
power to
vote securities (or to delegate such power) in which his account
is invested.
-
ability
to withdraw funds from his/her account either in the form of
securities or in cash. Investments may, however, be held in
nominee name. Problems might arise if, for instance, pooled
clients' funds were large enough to invest in a mutual fund with
a minimum investment of $100,000 -- but no client's individual
investment was larger than $25,000. How could the individual
client withdraw the actual shares of the mutual fund?
-
right to
require a confirmation (that complies with FDIC Part 344 requirements) for every (or any
individual) transaction affecting the customer's account.
-
right to
consult with the "sponsor" and/or the portfolio manager.
-
ability
to sue the issuer of any securities in which his/her account is
invested.
NOTE:
-
There is no
registration requirement imposed by this Rule.
-
No annual
reports are required under this Rule.
-
No general or specific written policies
are required by the Rule. The "SEC commission" does believe that
it is important for the sponsor of these programs to monitor
compliance with the safe harbor provisions and feels that each
person relying on the rule is responsible for demonstrating
compliance with the rule. The existence of formal policies and
procedures would reduce the probability of failing to comply with
the provisions of the safe harbor. Therefore, the "SEC commission"
strongly recommends that written policies and procedures be
developed to guide and monitor this type of activity.
Optional Examination
Guidance
- Work
with management to achieve compliance. Examiners should bring this
safe harbor to management's attention and ascertain the bank's
intentions as to compliance.
If corrections are promised and the examiner
has no reason to doubt management's intentions, merely a mention
in the pink (for the next exam) may be sufficient.
This is a safe
harbor. The attorneys make a point that safe harbors cannot be
violated. It would be considered noncompliance with the safe
harbor provisions, but not a violation of law. Use the correct
terminology in any criticisms, but you can show them on the
Violations exam report page.
If there is a large degree of noncompliance,
or blatant noncompliance, or an unwillingness to effect
correction, it would seem reasonable to cite the noncompliance in
the examination report, with a recommendation that the bank either
correct them or seek qualified legal advice. The FDIC should be
kept advised as to the bank's actions.
- The SEC
has indicated that it evaluates compliance on an individual
facts-and-circumstances basis. In some cases, failure to comply
with a specific requirement may be outweighed by compliance with
another factor.
- Contact
Tony DiMilo at FDIC with questions. DO NOT
call the SEC directly.
- Your
questions and/or citations of apparent violations may be referred
to the SEC for answer or for further resolution.
Securities and Exchange Commission
SEC Rule 206(4)-6, Sec Rule
204-2
(Release No. IA-2106; File No. S7-38-02)
Final Rule: Disclosure of Proxy Voting Policies and Proxy
Voting Records by Registered Management Investment
Companies
Securities and Exchange Commission 17 CFR Parts 239, 249, 270, and 274 Release Nos. 33-8188, 34-47304, IC-25922; File
No. S7-36-02 RIN
3235-AI64
Agency:
Securities and Exchange Commission
Action: Final
rule; request for comments on Paperwork Reduction Act burden
estimate
Summary: The
Securities and Exchange Commission is adopting rule and form
amendments under the Securities Act of 1933, the Securities Exchange
Act of 1934, and the Investment Company Act of 1940 to require
registered management investment companies to provide disclosure
about how they vote proxies relating to portfolio securities they
hold. These amendments require registered management investment
companies to disclose the policies and procedures that they use to
determine how to vote proxies relating to portfolio securities. The
amendments also require registered management investment companies
to file with the Commission and to make available to shareholders
the specific proxy votes that they cast in shareholder meetings of
issuers of portfolio securities.
Dates: Effective Date: April 14, 2003.
Compliance
Dates: See Section III of this release for information on
compliance dates.
Comment Date:
Comments regarding the "collection of information" requirements,
within the meaning of the Paperwork Reduction Act of 1995, of Form
N-PX should be received by March 14, 2003.
Addresses: To
help us process and review your comments more efficiently, comments
should be sent by hard copy or electronic mail, but not by both
methods.
Comments sent by hard copy should be
submitted in triplicate to Jonathan G. Katz, Secretary, Securities
and Exchange Commission, 450 5th Street, N.W., Washington, D.C.
20549-0609. Comments also may be submitted electronically at the
following E-mail address: rule-comments@sec.gov. All comment letters
should refer to File No. S7-36-02; this file number should be
included on the subject line if E-mail is used. All comments
received will be available for public inspection and copying in the
Commission's Public Reference Room, 450 5th Street, N.W.,
Washington, D.C. 20549-0102. Electronically submitted comment
letters will also be posted on the Commission's Internet site
(http://www.sec.gov).
For Further
Information Contact: Christian L. Broadbent, Attorney,
Christopher P. Kaiser, Senior Counsel, or Paul G. Cellupica,
Assistant Director, Office of Disclosure Regulation, Division of
Investment Management, (202) 942-0721, at the Securities and
Exchange Commission, 450 Fifth Street NW, Washington, DC
20549-0506.
Supplementary
Information: The Securities and Exchange Commission
("Commission") is adopting new rule 30b1-4 [17 CFR 270.30b1-4] and
new Form N-PX [17 CFR 274.130] under the Investment Company Act of
1940 [15 U.S.C. 80a-1 et seq.]
("Investment Company Act"); amendments to Forms N-1A [17 CFR
239.15A; 274.11A], N-2 [17 CFR 239.14; 274.11a-1], and N-3 [17 CFR
239.17a; 17 CFR 274.11b], the registration forms used by management
investment companies to register under the Investment Company Act
and to offer their securities under the Securities Act of 1933 [15
U.S.C. 77a et seq.] ("Securities Act");
and amendments to Form N-CSR [17 CFR 249.331; 17 CFR 274.128], the form
to be used by registered management investment companies to file
certified shareholder reports with the Commission under the
Sarbanes-Oxley Act of 2002.
Executive Summary
We are adopting rule and form amendments
that:
- Require a management investment company
registered under the Investment Company Act of 1940 ("fund") to
disclose in its registration statement (and, in the case of a
closed-end fund, Form N-CSR) the policies and procedures that it
uses to determine how to vote proxies relating to portfolio
securities; and
- Require a fund to file with the
Commission and to make available to its shareholders, either on
its website or upon request, its record of how it voted proxies
relating to portfolio securities. A fund will be required to
disclose in its annual and semi-annual reports to shareholders and
in its registration statement the methods by which shareholders
may obtain information about proxy voting.
In a companion release, we are also adopting
a new rule and rule amendments under the Investment Advisers Act of
1940 that will require a registered investment adviser that
exercises voting authority over client proxies to adopt policies and
procedures reasonably designed to ensure that the adviser votes
proxies in the best interests of clients, to disclose to clients
information about those policies and procedures, to disclose to
clients how they may obtain information on how the adviser voted
their proxies, and to maintain certain records relating to proxy
voting.
I. Introduction and Background
As of September 2002, mutual funds held $2.0
trillion in publicly traded U.S. corporate equity, representing
approximately 18% of all publicly traded U.S. corporate equity. This
represents a dramatic increase from only 7.4% at the end of
1992. Millions of individual American investors, in turn, hold shares of equity
mutual funds, relying on these funds -- and the value of the
corporate securities in which they invest -- to fund their
retirements, their childrens' educations, and their other basic
financial needs. Yet, despite the enormous influence
of mutual funds in the capital markets and their huge impact on the
financial fortunes of American investors, funds have been reluctant
to disclose how they exercise their proxy voting power with respect
to portfolio securities. We believe that the time has come
to increase the transparency of proxy voting by mutual funds. This
increased transparency will enable fund shareholders to monitor
their funds' involvement in the governance activities of portfolio
companies, which may have a dramatic impact on shareholder
value.
Mutual funds are formed as corporations or
business trusts under state law and, as in the case of other
corporations and trusts, must be operated for the benefit of their
shareholders. Because a mutual fund is the
beneficial owner of its portfolio securities, the fund's board of
directors, acting on the fund's behalf, has the right and the
obligation to vote proxies relating to the fund's portfolio
securities. As a practical matter, however, the board typically
delegates this function to the fund's investment adviser as part of
the adviser's general management of fund assets, subject to the
board's continuing oversight. The investment adviser to a mutual
fund is a fiduciary that owes the fund a duty of "utmost good faith,
and full and fair disclosure. "This fiduciary duty extends to all
functions undertaken on the fund's behalf, including the voting of
proxies relating to the fund's portfolio securities. An investment
adviser voting proxies on behalf of a fund, therefore, must do so in
a manner consistent with the best interests of the fund and its
shareholders.
Traditionally, mutual funds have been viewed
as largely passive investors, reluctant to challenge corporate
management on issues such as corporate governance. Funds
have often followed the so-called "Wall Street rule," according to
which an investor should either vote as management recommends or, if
dissatisfied with management, sell the stock. In
recent years, however, some funds, along with other institutional
investors, have become more assertive in exercising their proxy
voting responsibilities. The increased assertiveness by
mutual funds in the voting of proxies may have a number of causes.
In some instances, funds have come to hold such large positions in a
particular portfolio company that they cannot easily sell the
company's stock if the company's management is performing
poorly. The investment policies of index funds typically do not permit them to
sell poorly performing investments, and thus these funds may become
active in corporate governance in order to maximize value for their
shareholders.
Recent corporate scandals have created
renewed investor interest in issues of corporate governance and have
underscored the need for mutual funds and other institutional
investors to focus on corporate governance. The
increased equity holdings and accompanying voting power of mutual
funds place them in a position to have enormous influence on
corporate accountability. As major shareholders, mutual funds may
play a vital role in monitoring the stewardship of the companies in
which they invest.
Moreover, in some situations the interests
of a mutual fund's shareholders may conflict with those of its
investment adviser with respect to proxy voting. This
may occur, for example, when a fund's adviser also manages or seeks
to manage the retirement plan assets of a company whose securities
are held by the fund. In these situations, a fund's
adviser may have an incentive to support management recommendations
to further its business interests.
Yet, in spite of the substantial
institutional voting power held by mutual funds, the increasing
importance of the exercise of that power to fund shareholders, and
the potential for conflicts of interest with respect to the exercise
of fund proxy voting power, limited information is available
regarding how funds vote their proxies. At present, the Commission's
rules do not require mutual funds to disclose either their proxy
voting policies and procedures or their proxy voting records. Several
mutual fund complexes voluntarily provide information to investors,
often on their websites, about the policies and procedures that they
use to determine how to vote proxies and, in some cases, their
actual proxy voting decisions. The Internet provides a medium for
these funds to make information about their proxy voting available
to shareholders quickly and in a cost-effective manner. We applaud
these voluntary efforts of mutual funds to disclose proxy voting
information to shareholders.
We believe, however, that the time has now
arrived for the Commission to require mutual funds to disclose their
proxy voting policies and procedures, and their actual voting
records. Investors in mutual funds have a fundamental right to know
how the fund casts proxy votes on shareholders' behalf. Last
September, we proposed amendments that would require mutual funds
and other registered management investment companies to provide
disclosure about how they vote proxies relating to portfolio
securities that they hold ("Proposing Release"). Our
proposals resulted in an extraordinary level of public interest and
vigorous debate and over 8,000 comment letters. Today
we adopt these proposals, with modifications to address commenters'
concerns.
Proxy voting decisions by funds can play an
important role in maximizing the value of the funds' investments,
thereby having an enormous impact on the financial livelihood of
millions of Americans. Further, shedding light on mutual fund proxy
voting could illuminate potential conflicts of interest and
discourage voting that is inconsistent with fund shareholders' best
interests. Finally, requiring greater transparency of proxy voting
by funds may encourage funds to become more engaged in corporate
governance of issuers held in their portfolios, which may benefit
all investors and not just fund shareholders.
II. Discussion
The Proposing Release generated significant
comment and public interest. Of the approximately 8,000 comment
letters, the overwhelming majority supported the proposals and urged
us to adopt the proposed amendments. Many commenters, including
individual investors, fund groups that currently provide proxy
voting information to their shareholders, labor unions, and pension
and retirement plan trustees, supported the proposals, and in some
cases commented that the proposals did not go far enough in
requiring funds to provide proxy voting disclosure. Many fund
industry members supported the proposed amendments regarding the
disclosure of policies and procedures. However, most fund industry
members opposed the proposed amendments that would require
disclosure of a fund's complete proxy voting record and disclosure
of votes that are inconsistent with fund policies and procedures.
The Commission is adopting the proposed
amendments with the modifications described below that address some
of the concerns expressed by commenters.
A. Disclosure of Policies and Procedures With
Respect To Voting Proxies Relating to Portfolio
Securities
The Commission is adopting, with one
modification to address commenters' concerns, the requirement that
mutual funds that invest in voting securities disclose in their
statements of additional information ("SAIs") the policies and
procedures that they use to determine how to vote proxies relating
to securities held in their portfolios. We are also adopting the
requirement that closed-end funds disclose their proxy voting
policies and procedures annually on Form N-CSR. This
disclosure would include the procedures that a fund uses when a vote
presents a conflict between the interests of fund shareholders, on
the one hand, and those of the fund's investment adviser, principal
underwriter, or an affiliated person of the fund, its investment
adviser, or principal underwriter, on the other. It also
includes any policies and procedures of a fund's investment adviser,
or any other third party, that the fund uses, or that are used on
the fund's behalf, to determine how to vote proxies relating to
portfolio securities. For example, if a fund delegates proxy voting
decisions to its investment adviser and the adviser uses its own
policies and procedures to vote the fund's proxies, disclosure of
the adviser's policies and procedures is required. Or a fund's board
may wish to adopt its adviser's policies and procedures, rather than
designing its own.
We also are adopting, as proposed, the
requirement that a fund disclose in its shareholder reports that a
description of the fund's proxy voting policies and procedures is
available (i) without charge, upon request, by calling a specified
toll-free (or collect) telephone number; (ii) on the fund's website,
if applicable; and (iii) on the Commission's website at http://www.sec.gov. A fund
will be required to send this description of the fund's proxy voting
policies and procedures within three business days of receipt of the
request, by first-class mail or other means designed to ensure
equally prompt delivery.
Commenters generally supported the proposed
disclosure requirements regarding proxy voting policies and
procedures. A number of commenters, however, objected to certain
aspects of the disclosure requirements. Some commenters recommended
that we provide additional, more specific guidelines regarding the
categories of disclosure that should be included in proxy voting
policies and procedures. These commenters, which included many
"socially responsible" fund groups, argued that the absence of
specific guidelines could create an incentive for funds to adopt as
few policies and procedures as possible, thereby minimizing
reporting and disclosure obligations.
We have determined not to prescribe more
specific guidelines or requirements for the proxy voting policies
and procedures that a fund must disclose in its SAI or Form N-CSR
for closed-end funds. The intent of our proposal is to promote
transparency with respect to proxy voting information, and not to
mandate the content of a fund's policies or procedures. Therefore,
we believe that funds should be allowed the flexibility to determine
the content that would be appropriate for this disclosure.
We do expect, however, that funds'
disclosure of their policies and procedures will include general
policies and procedures, as well as policies with respect to voting
on specific types of issues. The following are examples of general
policies and procedures that some funds include in their proxy
voting policies and procedures and with respect to which disclosure
would be appropriate:
- The extent to which the fund delegates
its proxy voting decisions to its investment adviser or another
third party, or relies on the recommendations of a third party;
- Policies and procedures relating to
matters that may affect substantially the rights or privileges of
the holders of securities to be voted; and
- Policies regarding the extent to which
the fund will support or give weight to the views of management of
a portfolio company.
The following are examples of specific types
of issues that are covered by some funds' proxy voting policies and
procedures and with respect to which disclosure would be
appropriate:
- Corporate governance matters, including
changes in the state of incorporation, mergers and other corporate
restructurings, and anti-takeover provisions such as staggered
boards, poison pills, and supermajority provisions;
- Changes to capital structure, including
increases and decreases of capital and preferred stock
issuance;
- Stock option plans and other management
compensation issues; and
- Social and corporate responsibility
issues.
We are modifying our proposal in one
respect, however, to clarify that a fund may satisfy the
requirements for a description of its policies and procedures by
including a copy of the policies and procedures themselves. A
number of commenters recommended that we streamline the disclosure
of policies and procedures that would be required in the SAI.
Several of these commenters were fund groups that noted that they
have funds with multiple sub-advisers, each of which uses its own
proxy voting policies and procedures to vote the fund's proxies.
Because the proposed rules would require the fund to include a
description of each such sub-adviser's policies and procedures in
the fund's SAI, commenters argued, the requirements would add
lengthy disclosure to the SAI. Further, because different
sub-advisers for a single fund could have policies that vary with
respect to a particular issue, this disclosure could confuse
investors. These commenters argued that disclosure of policies and
procedures was not necessary or appropriate given the lack of
genuine shareholder interest in the information.
We have determined that it would not be
appropriate to modify the proposal to allow a fund to reduce or
eliminate the disclosure regarding its proxy voting policies and
procedures. Shareholders have a right to know the policies and
procedures that are being used by a fund to vote proxies on their
behalf. To the extent that multiple policies are being used by a
single fund, shareholders should have access to information about
all the policies that are in effect. In order to mitigate the burden
of preparing descriptions of policies and procedures, however, we
have modified our disclosure requirements to permit a fund to
include the actual policies and procedures used to vote proxies in
the SAI or N-CSR, rather than a description of the policies.
Some commenters argued that the SAI was not
the appropriate location for disclosure of proxy voting policies and
procedures because the SAI is not likely to reach a wide base of
investors. These commenters argued that the policies and procedures
should be required to be distributed to all investors, as part of
the fund's prospectus, annual report, or in a separate mailing. We
continue to believe, however, that the SAI is the most appropriate
and cost-effective location for this disclosure. The disclosure will
be readily accessible to shareholders because funds are required to
provide an SAI promptly to any investor who requests one. On the
other hand, funds and their shareholders will not be forced to bear
the costs for printing and mailing this information to every
shareholder, without regard to their level of interest in this
information.
B. Disclosure of Proxy Voting
Record
The Commission is adopting, with
modifications, amendments that will require each fund to file with
the Commission its proxy voting record and make this record
available to its shareholders. The Commission is not, however,
adopting its proposal to require a fund to disclose in its annual
and semi-annual reports to shareholders information regarding any
proxy votes that are inconsistent with its proxy voting policies and
procedures.
The proposal to require funds to disclose
their proxy voting records generated strong and divergent views
among commenters. A number of commenters, including an overwhelming
number of individual investors, strongly supported the Commission's
proposal to require a fund to disclose its complete proxy voting
record. Many of these commenters stated that this disclosure would
improve shareholders' ability to monitor funds' voting decisions on
their behalf and that it would allow investors to make more informed
decisions when choosing among funds.
On the other hand, many commenters,
including a large number of fund industry participants, strongly
opposed any requirement for a fund to provide disclosure of its
actual proxy votes cast. First, they argued that shareholders are
not interested in this disclosure, with many fund groups claiming
that they have received virtually no requests from their
shareholders for proxy voting information. Second, they argued that
the proposals would deny funds the ability to vote confidentially
and subject funds to pressure from corporate management to influence
proxy voting decisions, as well as to retaliatory actions by
management, such as restricting access by portfolio managers to
corporate personnel. Third, on a related point, commenters argued
that mandatory disclosure of proxy votes would undermine their
ability to change corporate governance practices of portfolio
companies through "behind the scenes" private communications.
Fourth, they argued that requiring funds to disclose their proxy
votes publicly will subject them to orchestrated campaigns in the
media and elsewhere by special interest groups with social or
political agendas different from those of fund shareholders, which
will detract from a fund's ability to concentrate on the management
of its portfolio. Fifth, fund industry commenters argued that the
required disclosure of proxy votes would undermine the role of fund
boards of directors, including independent directors, in overseeing
proxy voting and protecting fund shareholders against conflicts of
interest. Some of these commenters suggested that rather than
requiring disclosure of proxy votes, the Commission should mandate
that fund directors approve proxy voting policies and procedures,
including policies and procedures for addressing potential conflicts
of interest, and should require reports to be provided to fund
directors concerning actual proxy votes cast. Sixth, the commenters
argued that the costs of collecting and disclosing the information
in semi-annual reports on Form N-CSR would be substantial and would
exceed any benefit to shareholders from the disclosure.
After careful consideration of these
comments, we continue to believe that requiring funds to disclose
their complete proxy voting records will benefit investors by
improving transparency and enabling fund shareholders to monitor
their funds' involvement in the governance activities of portfolio
companies. With respect to the specific arguments raised by
commenters who opposed disclosure of proxy votes, we note first that
the argument that investors are not interested in proxy voting
disclosure is to some extent belied by the large number of favorable
comments from individual investors that the proposal attracted. In
addition, we note that a recent shareholder proposal seeking to
require a major fund to disclose its proxy votes on social and
environmental issues generated significant support from fund
shareholders. Further, regardless of whether
all, or a majority of, investors are interested in proxy vote
disclosure, we believe that fund shareholders who are interested in
this information have a fundamental right to know how the fund has
exercised its proxy votes on their behalf.
Second, while we are cognizant of concerns
that disclosure will undermine funds' ability to vote confidentially
and thereby lead to pressure on or retaliation against funds, we
believe that this risk is not sufficient to outweigh shareholders'
interests in knowing how their funds have voted their portfolio
securities. In addition, as some proponents of the disclosure
requirements argued, the principle of confidential voting is
intended to protect shareholders from having their votes disclosed
prior to a shareholder meeting, while
the amendments that we are adopting would only require disclosure of
votes two months or more after a
shareholder meeting. We are also persuaded by other commenters who
noted that a large majority of portfolio companies currently do not
have confidential voting policies and that companies are often able
to identify when and how a particularly large shareholder, such as a
fund, has cast its votes.
Third, with respect to the argument that the
disclosure of a fund's proxy voting record will undermine the use of
"behind the scenes" communications to change corporate governance
practices, we note that disclosure by funds of their proxy votes is
not inconsistent with these communications and will not force funds
to disclose these communications. Further, we believe that requiring
a fund to disclose its proxy voting record may actually encourage it
to become more engaged in corporate governance matters involving
issuers held in its portfolio, through "behind the scenes"
communications as well as other means.
Fourth, with respect to the argument that
proxy vote disclosure will "politicize" the process of proxy voting
by funds to the detriment of fund shareholders, we believe that to
the extent that greater disclosure may encourage and enable
shareholders to express their views on their funds' proxy decisions,
that is an appropriate development. We agree, however, that fund
shareholders could be adversely affected if, in fact, disclosure of
fund proxy votes results in significant politicization of the proxy
voting process by non-shareholder interest groups and interference
with funds' ability to change corporate governance practices through
"behind the scenes" communications. Therefore, the Commission has
asked the staff to monitor the effects of the disclosure and report
back to the Commission on the operation of the rules, and whether
there have been any unintended consequences as a result of the
disclosure, no later than December 31, 2005.
Fifth, we disagree with the argument that
proxy voting disclosure will undermine the authority of funds'
boards of directors, and that we instead should adopt amendments to
require that boards be more involved in the proxy voting process.
Disclosure of proxy votes is not inconsistent with, and, in fact,
will promote recognition by fund boards of their obligation to
exercise their proxy voting responsibilities in a manner that is
consistent with shareholders' interests. Further, we believe that
the additional requirements with respect to fund boards that some
commenters suggested that we adopt in lieu of proxy voting
disclosure are unnecessary. A fund's board of directors, acting on
the fund's behalf, already has the obligation to vote proxies
relating to the fund's portfolio securities. Although the board
typically delegates this function to the fund's investment adviser,
the adviser remains subject to the board's continuing oversight. By
increasing transparency of proxy voting, the amendments will work in
tandem with the existing obligation of fund boards.
Finally, with respect to arguments that the
disclosure may impose excessive costs, we note that several fund
groups that currently provide disclosure of their complete proxy
voting records to their shareholders commented that although there
are start-up costs for compliance systems, this cost decreases over
time, and that the overall costs of the disclosure are minimal. We
find these arguments made by funds that are providing this
disclosure to be particularly persuasive and continue to believe
that the costs of disclosure are reasonable. We also note that by
requiring disclosure of the proxy voting record in filings with the
Commission, with additional disclosure in the fund's SAI and annual
and semi-annual reports to shareholders about how investors may
obtain this voting record, we have tailored the disclosure
requirement to allow those investors who are interested in this
disclosure to access the information without imposing undue cost
burdens. In addition, as discussed below, we have modified our
proposals in order to further reduce the costs associated with this
disclosure.
Disclosure of Complete Proxy Voting
Record
The Commission is adopting new rule 30b1-4
under the Investment Company Act to require that a fund file its
complete proxy voting record on an annual basis. This
rule will require a fund to file new Form N-PX, containing its
complete proxy voting record for the twelve-month period ended June
30, by no later than August 31 of each year. Form N-PX will be a
reporting form required under the Investment Company Act, and will
be required to be signed by the fund, and on behalf of the fund by
its principal executive officer or officers.
We had proposed to require a fund to file
its complete proxy voting record as part of its semi-annual reports
on Form N-CSR, which will be used by registered management
investment companies to file certified shareholder reports with the
Commission under the Sarbanes-Oxley Act of 2002. One
commenter argued that this means of disclosure would impose
unnecessary costs and substantial administrative complexity. The
commenter noted that, under our proposed rules, fund complexes that
have funds with staggered fiscal year ends would be required to file
reports on Form N-CSR containing their proxy voting records as many
as twelve times per year. We are persuaded that annual disclosure of
a fund's proxy voting record is sufficient and that the filing does
not need to be based on a fund's fiscal year end. Therefore, to
reduce the burden of proxy vote disclosure, we are modifying our
proposal to require that all funds file their voting records
annually not later than August 31, for the twelve-month period ended
June 30. This approach will have the advantages of making each
fund's proxy voting record available within a relatively short
period of time after the proxy voting season, and of
providing disclosure of all funds' proxy voting records over a
uniform period of time.
Funds will be required to disclose the
following information on Form N-PX for each matter relating to a
portfolio security considered at any shareholder meeting held during
the period covered by the report and with respect to which the fund
was entitled to vote:
- The name of the issuer of the portfolio
security;
- The exchange ticker symbol of the
portfolio security;
- The Council on Uniform Securities
Identification Procedures ("CUSIP") number for the portfolio
security;
- The shareholder meeting date;
- A brief identification of the matter
voted on;
- Whether the matter was proposed by the
issuer or by a security holder;
- Whether the fund cast its vote on the
matter;
- How the fund cast its vote (e.g., for or against proposal, or
abstain; for or withhold regarding election of directors); and
- Whether the fund cast its vote for or
against management.
In response to commenters who noted that the
exchange ticker symbol and CUSIP number may be difficult to obtain
for certain portfolio securities, particularly foreign securities,
we have added an instruction permitting a fund to omit this
information if it is not available through reasonably practicable
means.
A fund also will be required to make its
proxy voting record available to shareholders. However, we are
modifying our proposal, in response to a comment, to allow a fund
the flexibility to choose to make its proxy voting record available
to shareholders either upon request or by making available an
electronic version on or through the fund's website. The
proposed amendments would have required a fund to send the proxy
voting record upon request. This modification addresses
concerns that the proposals would require funds with large numbers
of holdings to produce lengthy proxy voting spreadsheets and to send
them to investors who request them.
As adopted, our amendments will require a
fund to include in its annual and semi-annual reports to
shareholders as well as its SAI a statement that information
regarding how the fund voted proxies relating to portfolio
securities during the most recent twelve-month period ended June 30
is available (1) without charge, upon request, by calling a
specified toll-free (or collect) telephone number; or on or through
the fund's website at a specified Internet address; or both; and (2)
on the Commission's website. If a fund discloses that its proxy
voting record is available by calling a toll-free (or collect)
telephone number, it must send the information disclosed in the
fund's most recently filed report on Form N-PX within three business
days of receipt of a request for this information, by first-class
mail or other means designed to ensure equally prompt delivery.
If a fund discloses that its proxy voting
record is available on or through its website, it must make
available free of charge the information disclosed in the fund's
most recently filed report on Form N-PX on or through its website as
soon as reasonably practicable after filing the report with the
Commission. We interpret the "as soon as
reasonably practicable" standard to mean that the information would
be available, barring unforeseen circumstances, on the same day as
filing. We could revisit this requirement if posting on the same day
does not generally occur. A fund would not be required to
continue to make available on or through its website any information
from reports on Form N-PX that precede the most recently filed
report on Form N-PX.
These rules require that a fund's proxy
voting record be publicly available through filings with us. They
also require that this information be readily available to fund
shareholders from the fund itself and that shareholders be apprised
of how this information may be obtained. We believe that these rules
strike an appropriate balance - ensuring that a fund's proxy voting
record is readily available to interested fund shareholders, while
allowing funds the flexibility to choose how to make this
information available in the most effective and cost-efficient
manner.
Some commenters recommended other specific
modifications to our proposed disclosure requirements, which we are
not adopting. Several of these commenters suggested that we require
funds to provide additional disclosure with respect to situations
where the fund's investment adviser has a conflict of interest,
including, for example, disclosure of any business and financial
relationship with the issuer and all fees received by the adviser or
its affiliates from the issuer during a designated period of time.
We have determined not to require additional
disclosure regarding conflict of interest situations at the present
time. We believe that disclosure of a fund's complete voting record
will enable shareholders to monitor how the fund voted in specific
instances and whether the vote is in the shareholders' best
interests. Further, requiring additional public disclosure with
respect to conflicts of interest would significantly increase the
complexity and cost of the proxy vote disclosure.
Several commenters argued that we should
require a fund to provide its proxy vote disclosure in a uniform,
web-accessible, downloadable format. Other commenters indicated that
we should require a fund to disclose its proxy voting record on its
website, if it has one. Commenters also suggested that we require
funds to provide an executive summary of their votes, that might
include, for example, the percentage of votes cast for and against
management, sorted by the type of issue.
We have determined not to modify our
proposals in order to add these requirements, in order to minimize
the cost to funds and their shareholders of providing disclosure of
fund proxy voting records. As adopted, our requirements will allow
funds the flexibility to determine the best manner in which to make
their proxy voting records available to shareholders. We continue to
believe that our disclosure requirements strike an appropriate
balance by ensuring that a fund's proxy voting record, as well as
its policies and procedures, is readily available to interested fund
shareholders without imposing undue costs. We would, however,
encourage funds to use their websites and other available means to
make their proxy voting records readily accessible to shareholders
in a user-friendly format.
Other commenters, by contrast, requested
that we limit the proposed disclosure regarding a fund's proxy
voting record. For example, some commenters recommended that we
require a fund to disclose information regarding only those proxy
votes cast against management of the portfolio companies in which it
invests, or where a conflict of interest exists. In
addition, one commenter suggested that we require only a summary of
all proxy votes in the aggregate arranged according to issue. We
believe, however, that limiting disclosure of the proxy voting
record to specific votes, or to a general summary of all votes,
would significantly undercut the intent of our proposals, which is
to enable fund shareholders to determine how a fund voted with
respect to any particular proxy vote.
Disclosure of Proxy Votes that are Inconsistent
with Fund's Policies and Procedures
The Commission has determined not to adopt
the proposed requirement that a fund disclose in its annual and
semi-annual reports to shareholders proxy votes (or failures to
vote) that are inconsistent with the fund's proxy voting policies
and procedures. Many commenters, including both
those who generally supported the disclosure of funds' proxy voting
records and those who generally opposed this disclosure, expressed
concerns regarding the proposed requirements for disclosure of
inconsistent votes. Proponents of proxy voting record disclosure
argued that a requirement to disclose inconsistent votes might lead
funds to draft overly broad policies and procedures to avoid
triggering the required disclosure. Opponents of proxy voting record
disclosure argued that the disclosure of inconsistent votes would be
burdensome because it would require funds to analyze a large volume
of proxy votes to determine whether any vote triggered the
disclosure and then to provide a lengthy explanation to shareholders
regarding each inconsistent vote, which would be expensive to
prepare and not meaningful to investors. We find these arguments
persuasive and have therefore determined not to adopt the
requirement that funds disclose information regarding votes that are
inconsistent with the fund's policies and procedures.
III. Effective Date and Compliance
Date
The effective date of these amendments is
April 14, 2003. Registered management investment companies must file
their first report on Form N-PX not later than August 31, 2004, for
the twelve-month period beginning July 1, 2003, and ending June 30,
2004. Based on the comments, we believe that this will provide funds
with sufficient time to make any necessary changes to existing
software and internal systems in order to compile proxy voting
information in the manner that will be required by new Form N-PX.
All initial registration statements on Form
N-1A, N-2, or N-3, and all post-effective amendments that are annual
updates to effective registration statements on these forms, filed
on or after July 1, 2003, must include the disclosure required by
Item 13(f) of Form N-1A, Item 18.16 of Form N-2, or Item 20(o) of
Form N-3, as applicable, regarding the fund's proxy voting policies
and procedures. Every annual report by a
closed-end fund on Form N-CSR filed on or after July 1, 2003, must
include the disclosure required by Item 7 of Form N-CSR regarding
the fund's proxy voting policies and procedures.
All initial registration statements on Form
N-1A, N-2, or N-3, and all post-effective amendments that are annual
updates to effective registration statements on these forms, filed
on or after August 31, 2004, must include the disclosure required by
Item 13(f) of Form N-1A, Item 18.16 of Form N-2, or Item 20(o) of
Form N-3, as applicable, regarding the availability of the fund's
proxy voting record. Every report to shareholders of a fund
registered on Form N-1A, N-2, or N-3 that is transmitted to
shareholders on or after August 31, 2004, must include the
disclosure required by Item 22(b)(8) and 22(c)(6) of Form N-1A,
Instructions 4.h. and 5.f. to Item 23 of Form N-2, or Instructions
4(viii) and 5(vi) to Item 27(a) of Form N-3, as applicable,
regarding the availability of a fund's proxy voting record. Every
report to shareholders of a fund registered on Form N-1A, N-2, or
N-3 that is transmitted to shareholders on or after the effective
date of an initial registration statement or post-effective
amendment that is required to include a description of the fund's
proxy voting policies and procedures (or, in the case of a
closed-end fund, the filing date of its first annual report on Form
N-CSR filed on or after July 1, 2003) must include the disclosure
required by Item 22(b)(7) and 22(c)(5) of Form N-1A, Instructions
4.g. and 5.e. to Item 23 of Form N-2, or Instructions 4(vii) and
5(v) to Item 27(a) of Form N-3 regarding the availability of the
fund's proxy voting policies and procedures.
IV. Paperwork Reduction Act
As explained in the Proposing Release,
certain provisions of the amendments contain "collection of
information" requirements within the meaning of the Paperwork
Reduction Act of 1995 ("PRA") [44 U.S.C. 3501 et seq.], and the Commission has submitted
the proposed collections of information to the Office of Management
and Budget ("OMB") for review in accordance with 44 U.S.C. 3507(d)
and 5 CFR 1320.11. The titles for the collections of information
that we have submitted are: (1) "Form N-1A under the Investment
Company Act of 1940 and Securities Act of 1933, Registration
Statement of Open-End Management Investment Companies"; (2) "Form
N-2 - Registration Statement of Closed-End Management Investment
Companies"; (3) "Form N-3 - Registration Statement of Separate
Accounts Organized as Management Investment Companies"; (4) "Form
N-CSR - Certified Shareholder Report of Registered Management
Investment Companies"; and (5) "Rule 30e-1 under the Investment
Company Act of 1940, Reports to Stockholders of Management
Companies." OMB approved the collections of information for the
amendments to Forms N-1A, N-2, and N-3, and rule 30e-1. Because we
have modified our proposals as described above, we are revising the
burden estimate for Form N-CSR and rule 30e-1. We have submitted a
revised collection of information for Form N-CSR to OMB, and have
submitted the following additional collection of information to OMB:
"Form N-PX - Annual Report of Proxy Voting Record of Registered
Management Investment Companies." An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless it displays a currently valid OMB control number.
Form N-1A (OMB Control No. 3235-0307), Form
N-2 (OMB Control No. 3235-0026), and Form N-3 (OMB Control No.
3235-0316) were adopted pursuant to Section 8(a) of the Investment
Company Act [15 U.S.C. 80a-8] and Section 5 of the Securities Act
[15 U.S.C. 77e]. Form N-CSR (OMB Control No. 3235-0570) was adopted
pursuant to Section 30 of the Investment Company Act [15 U.S.C.
80a-29] and Sections 13(a) and 15(d) of the Securities Exchange Act
of 1934 ("Exchange Act") [15 U.S.C. 78m and 78o(d)]. Form N-PX is
being adopted pursuant to Section 30 of the Investment Company Act
[15 U.S.C. 80a-29]. Rule 30e-1 under the Investment Company Act (OMB
Control No. 3235-0025) was adopted pursuant to Section 30(e) of the
Investment Company Act [15 U.S.C. 80a-29(e)].
As discussed above, the amendments will
require that funds holding equity securities disclose the policies
and procedures that they use to determine how to vote the proxies of
their portfolio securities. The amendments also require funds to
file with the Commission and to make available to their shareholders
the specific proxy votes that they cast in shareholder meetings of
issuers of portfolio securities. These changes are intended to
enhance the transparency of fund proxy voting and will allow
shareholders to monitor whether funds are voting portfolio
securities in the best interests of shareholders.
Summary of Comment Letters and Revisions to
Proposals
We requested comment on the PRA analysis
contained in the Proposing Release, and we received numerous comment
letters concerning the proposed collection of information
requirements, particularly with respect to the proposed requirement
to disclose funds' actual proxy voting records. Many commenters,
including in particular funds that currently provide disclosure of
their proxy votes, indicated that the Commission's estimates of the
burden of the proposed disclosure were reasonable, and that
available technology and other resources would render record-keeping
and reporting requirements relatively routine. Other commenters,
including many other members of the fund industry, argued that the
Commission's estimates substantially underestimated the burden of
providing the proposed disclosure. Some of these commenters argued
that the Commission's estimates omitted start-up and one-time
transition costs for collecting proxy voting information and
preparing it in the format that would be required by Form N-CSR.
Several commenters provided specific
estimates of the costs of providing the disclosure of their proxy
vote records. However, these commenters generally did not provide
any breakdown of the components of these estimates (e.g., number of tasks required, persons
required to perform each task, wage rates for each person). One fund
group which opposed the requirement to disclose its proxy voting
record prepared a sample disclosure in the format prescribed by the
proposed amendment to Form N-CSR for one of its funds which cast
proxy votes on 1,607 agenda items at 500 shareholder meetings during
a six-month period. The fund group estimated that the
collection of votes from its information systems would take four
hours, reformatting the data to the format of Form N-CSR would take
eight hours, and reconfirming that each vote was cast in accordance
with the fund's proxy voting policies would take at least another
two hours. Another fund group which recently began to post its proxy
voting guidelines and proxy voting records for two of its funds on
its website estimated that this task took approximately two
days. These estimates are generally consistent with the estimate in the
Proposing Release that the disclosure on Form N-CSR of a fund's
proxy voting record would take 10 hours per semi-annual filing on
Form N-CSR, at an annual cost of $1,379 per fund. By contrast, a
fund industry trade group estimated, based on a survey of fund
complexes conducted on its behalf by a third-party, that proxy
voting record disclosure would cost approximately $3,380 per fund in
start-up costs, and $5,530 per year in ongoing costs.
We note that we have modified our proposal
in two significant ways, in part in response to concerns expressed
about costs by commenters. First, the amendments will require
disclosure of proxy votes cast in annual reports on new Form N-PX,
rather than semi-annually on Form N-CSR. Second, we are not adopting
the proposed requirement that funds disclose in their annual and
semi-annual reports to shareholders votes that were inconsistent
with their proxy voting policies and procedures. Because of these
modifications, we have revised our burden estimates for Form N-CSR
and rule 30e-1. The burden estimate for disclosure of a fund's proxy
voting record will be the burden estimated for new Form N-PX. These
revisions to the burden estimates are described below.
Form N-1A
Form N-1A, including the amendments,
contains collection of information requirements. The likely
respondents to this information collection are open-end funds
registering with the Commission on Form N-1A. Compliance with the
disclosure requirements of Form N-1A is mandatory. Responses to the
disclosure requirements are not confidential.
Prior to the proposed amendments, the
estimated hour burden for preparing an initial registration
statement on Form N-1A was 801 hours per portfolio, and the
estimated hour burden for preparing post-effective amendments on
Form N-1A was 99 hours per portfolio. The Commission estimates that,
on an annual basis, 193 portfolios file initial registration
statements on Form N-1A and 7,525 portfolios file post-effective
amendments on Form N-1A. Thus, the total hour burden for the
preparation and filing of Form N-1A, prior to the proposed
amendments, was 899,568 hours.
We estimated in the Proposing Release that
the amendments would increase the hour burden per portfolio per
filing of an initial registration statement by 8 hours, to 809 hours
per portfolio, and would increase the hour burden per portfolio per
filing of a post-effective amendment to a registration statement by
2 hours, to 101 hours per portfolio. Thus, the current total annual
hour burden for all funds for preparation and filing of initial
registration statements and post-effective amendments to Form N-1A
is 916,162 hours.
Form N-2
Form N-2, including the amendments, contains
collection of information requirements. The likely respondents to
this information collection are closed-end funds registering with
the Commission on Form N-2. Compliance with the disclosure
requirements of Form N-2 is mandatory. Responses to the disclosure
requirements are not confidential.
Prior to the proposed amendments, the
estimated hour burden for preparing an initial registration
statement on Form N-2 was 536.7 burden hours per filing, and the
estimated annual hour burden for preparing post-effective amendments
on Form N-2 was 101.7 hours per filing. The Commission estimates
that, on an annual basis, 140 respondents file an initial
registration statement on Form N-2 and 38 respondents file
post-effective amendments on Form N-2. Thus, the total annual hour
burden for the preparation and filing of Form N-2, prior to the
proposed amendments, was 79,003 hours.
We estimated in the Proposing Release that
the amendments would increase the hour burden per filing of an
initial registration statement on Form N-2 by 8 hours, to 544.7
hours per filing, and would increase the hour burden per filing of a
post-effective amendment to a registration statement on Form N-2 by
2 hours, to 103.7 hours per filing. Thus, the current total annual
hour burden for all funds for preparation and filing of initial
registration statements and post-effective amendments on Form N-2 is
80,198 hours.
Form N-3
Form N-3, including the amendments, contains
collection of information requirements. The likely respondents to
this information collection are separate accounts, organized as
management investment companies and offering variable annuities,
registering with the Commission on Form N-3. Compliance with the
disclosure requirements of Form N-3 is mandatory. Responses to the
disclosure requirements are not confidential.
Prior to the proposed amendments, the
estimated hour burden for preparing an initial registration
statement on Form N-3 was 907.2 hours per portfolio, and the
estimated hour burden for preparing post-effective amendments on
Form N-1A was 148.4 hours per portfolio. The Commission estimates
that, on an annual basis, no initial registration statements will be
filed on Form N-3 and 60 post-effective amendments will be filed on
Form N-3. The estimated average number of portfolios per filing is
4, bringing the estimated total number of portfolios in
post-effective amendments to filings on Form N-3 annually to 240.
Thus, the total hour burden for the preparation and filing of Form
N-3, prior to the proposed amendments, was 35,616 hours.
We estimated in the Proposing Release that
the amendments to Form N-3 would increase the hour burden per
portfolio of an initial registration statement by 8 hours, to 915.2
hours per portfolio, and would increase the hour burden per
portfolio of a post-effective amendment to a registration statement
by 2 hours, to 150.4 hours per portfolio. Thus, the current total
annual hour burden for all funds for preparation and filing of
initial registration statements and post-effective amendments on
Form N-3 will be 36,096 hours.
Form N-CSR
Form N-CSR, including the amendments,
contains collection of information requirements. The respondents to
this information collection will be closed-end management investment
companies subject to rule 30e-1 under the Investment Company Act of
1940 registering with the Commission on Form N-2. Compliance with
the disclosure requirements of Form N-CSR is mandatory. Responses to
the disclosure requirements are not confidential.
The current estimated total hour burden for
preparation of Form N-CSR is 35,139 hours. In the
Proposing Release, we estimated that 3,700 registered investment
companies would file Form N-CSR on a semi-annual basis for a total
of 7,400 filings. We estimated in the Proposing
Release that the amendments to Form N-CSR would increase the hour
burden per filing of each semi-annual report on Form N-CSR by 10
hours, or 74,000 hours total. However, we have modified our proposal
to require funds to disclose their proxy voting record in reports on
new Form N-PX on an annual basis, rather than in reports on Form
N-CSR on a semi-annual basis. As proposed, however, we are requiring
registered closed-end management investment companies to include in
their annual reports on Form N-CSR a description of the policies and
procedures that they use to determine how to vote proxies relating
to portfolio securities. We estimate that 663 closed-end management
investment companies will file reports on Form N-CSR, and are
revising our estimate of the increase in the hour burden resulting
from the amendments to 2 hours per filing. We estimate that the
total annual burden attributable to the disclosure of proxy voting
policies and procedures for closed-end funds will be 1,326 hours.
Thus, the new total annual hour burden for preparation and filing of
Form N-CSR will be 36,465 hours.
Shareholder Reports
Rule 30e-1, including the amendments to
Forms N-1A, N-2, and N-3, contains collection of information
requirements. Compliance with the disclosure
requirements of rule 30e-1 is mandatory. Responses to the disclosure
requirements are not confidential.
There are approximately 3,700 funds subject
to rule 30e-1. We estimated in the Proposing Release that the hour
burden for preparing and filing semi-annual and annual shareholder
reports in compliance with rule 30e-1, prior to the proposed
amendments, was 202.5 hours per year, and that the amendments would
increase the hour burden of complying with rule 30e-1 by 10 hours
per fund per year for a total increase in burden hours of 37,000
hours. However, we have revised our proposed amendments to eliminate
the proposed requirement that annual and semi-annual shareholder
reports include disclosure of proxy votes that are inconsistent with
the fund's proxy voting policies. Thus, we are revising our estimate
of the increase in the hour burden of complying with rule 30e-1
attributable to the proposed amendments to 3,700 hours, rather than
37,000 hours, to reflect the elimination of this proposed disclosure
requirement. The total hour burden of complying with rule 30e-1 will
be 203.5 hours per year, for a total annual burden to the industry
of 752,950 hours.
Rule 30b1-4
The purpose of rule 30b1-4 is to improve the
transparency of information about funds' proxy voting records. Rule
30b1-4 will require a fund to file Form N-PX, containing its
complete proxy voting record for the twelve-month period ended June
30, by no later than August 31 of each year. The respondents to rule
30b1-4 will be registered management investment companies, other
than small business investment companies registered with the
Commission on Form N-5.
We estimate that there are approximately
3,700 funds that will be affected by the rule. Each of these 3,700
funds will be required by rule 30b1-4 to file complete proxy voting
records with the Commission on Form N-PX. For purposes of this PRA
analysis, the burden associated with the requirement of Rule 30b1-4
has been included in the collection of information required by Form
N-PX, rather than the rule. Compliance with rule 30b1-4 is mandatory
for every registered management investment company, other than a
small business investment company registered with the Commission on
Form N-5. Responses to the disclosure requirements are not
confidential.
Form N-PX
Form N-PX contains collection of information
requirements. The respondents to this information collection will be
registered management investment companies, other than small
business investment companies registered with the Commission on Form
N-5. Compliance with the disclosure requirements of Form N-PX is
mandatory. Responses to the disclosure requirements are not
confidential.
Every registered management investment
company, other than a small business investment company registered
with the Commission on Form N-5, will be required to file Form N-PX,
containing its complete proxy voting record for the twelve-month
period ended June 30, by no later than August 31 of each year. We
estimate that there are approximately 3,700 funds registered with
the Commission, with 5,200 fund portfolios that hold equity
securities that will be required to file Form N-PX. We
further estimate that for each of these funds the disclosure of its
proxy voting record in filings on Form N-PX as of the end of each
twelve-month period ended June 30 will require, on average, 14.4
hours per filing per equity portfolio, for a total annual burden of
74,880 hours (14.4 hours per filing x 5,200 equity portfolios).
In the Proposing Release, we estimated that
the hour burden imposed by the proposed amendments to Form N-CSR,
including the requirement for a fund to disclose its proxy voting
record on Form N-CSR, would increase the hour burden per filing of a
Form N-CSR by 10 hours, or 74,000 hours total. This
total burden hour estimate is comparable to our estimate of 74,880
total burden hours for filing Form N-PX. However, our estimate of
the hour burden per filing of Form N-PX differs from the estimated
hour burden per filing of Form N-CSR, in part because Form N-PX will
be filed annually rather than semi-annually, and in part because we
are calculating the hour burden for Form N-PX by portfolio, rather
than by fund.
Request for Comments
We request comments on the accuracy of our
estimates with respect to Form N-PX.
Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits
comments to: (i) evaluate whether the proposed collection of
information is 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
burden of the proposed collection 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 collection of information on
those who are to respond, including through the use of automated
collection techniques or other forms of information technology.
Persons submitting comments on the
collection of information requirements should direct the comments to
the Office of Management and Budget, Attention: Desk Officer for the
Securities and Exchange Commission, Office of Information and
Regulatory Affairs, Room 3208, New Executive Office Building,
Washington, DC 20503, and should send a copy to Jonathan G. Katz,
Secretary, Securities and Exchange Commission, 450 5th Street, NW,
Washington, DC 20549-0609, with reference to File No. S7-36-02. OMB
is required to make a decision concerning the collection of
information between 30 and 60 days after publication of this
Release. Consequently, a comment to OMB is best assured of having
its full effect if OMB receives it within 30 days after publication
of this Release.
V. Cost/Benefit Analysis
The Commission is sensitive to the costs and
benefits imposed by its rules. The amendments we are adopting will
require funds to provide disclosure about how they vote proxies of
the portfolio securities they hold. A fund will be required to
disclose in its registration statement the policies and procedures
that it uses to determine how to vote proxies relating to portfolio
securities, and to include disclosure about the availability of the
fund's proxy voting record. This disclosure will be included in the
fund's Statement of Additional Information ("SAI") (and on Form
N-CSR also, in the case of a closed-end fund's policies and
procedures), which is not part of the fund's prospectus but is
delivered to investors free of charge upon request. We are also
requiring a fund to file with the Commission an annual report on
Form N-PX, containing the fund's complete proxy voting record for
the twelve-month period ended June 30, by no later than August 31 of
each year. Our amendments will also require a fund to include in its
annual and semi-annual reports to shareholders disclosure that the
fund's proxy voting policies and procedures are available (i)
without charge, upon request from the fund, (ii) on the fund's
website, if applicable, and (iii) on the SEC website. In addition, a
fund will be required to state in its registration statement and
reports to shareholders that its proxy voting record is available
(i) without charge, upon request, by calling a specified toll-free
(or collect) telephone number; or on or through the fund's website
at a specified Internet address; or both; and (ii) on the SEC
website.
In the Proposing Release, we analyzed the
costs and benefits of our proposals and requested comments and data
regarding the costs and benefits of the proposed form amendments.
These comments are summarized below.
A. Benefits
The amendments to the registration statement
and reporting forms that we are adopting will benefit fund
investors, by providing them with access to information about how
funds vote their proxies.
First, the amendments will provide better
information to investors who wish to determine:
- to which fund managers they should
allocate their capital, and
- whether their existing fund managers are
adequately maximizing the value of their shares.
The investment adviser to a mutual fund is a
fiduciary that owes the fund a duty of "utmost good faith, and full
and fair disclosure. "This fiduciary duty extends to all
functions undertaken on the fund's behalf, including the voting of
proxies relating to the fund's portfolio securities. An investment
adviser voting proxies on behalf of a fund, therefore, must do so in
a manner consistent with the best interests of the fund and its
shareholders. The increased transparency
resulting from proxy voting disclosure may increase investors'
confidence that their fund managers are voting proxies in accordance
with their fiduciary duties. Without disclosure about how the fund
votes proxies, fund shareholders cannot evaluate this aspect of
their managers' performance. To the extent that investors choose
among funds based on their proxy voting policies and records, in
addition to other factors such as expenses, performance, and
investment policies, investors will be better able to select funds
that suit their preferences. Further, insofar as investors may
over-emphasize certain of these factors, e.g., past performance, in selecting funds,
it may be beneficial to provide additional information to use in
selecting funds. On a related point, we anticipate that over time,
commercial third-party information providers will offer services
that will enable investors to better analyze proxy voting by funds.
These developments will further facilitate the benefits to fund
investors from proxy vote disclosure.
Second, in some situations the interests of
a fund's shareholders may conflict with those of its investment
adviser with respect to proxy voting. This may occur, for example,
when a fund's adviser also manages or seeks to manage the retirement
plan assets of a company whose securities are held by the fund. In
these situations, a fund's adviser may have an incentive to support
management recommendations to further its business interests. The
amendments require funds to disclose how they address such conflicts
of interest in determining how to vote their proxies. This
disclosure requirement may benefit fund shareholders by deterring
voting decisions that are motivated by considerations of the
interests of the fund's adviser rather than the interests of fund
shareholders. Further, the increased transparency resulting from
proxy voting disclosure may increase investors' confidence that
their fund managers are voting proxies in accordance with their
fiduciary duties.
A third significant benefit of the
amendments comes from providing stronger incentives to fund managers
to vote their proxies conscientiously. The amendments could increase
the incentives for fund managers to vote their proxies carefully,
and thereby improve corporate performance and enhance shareholder
value. The improved corporate performance that could result from
better decision making in corporate governance matters may benefit
fund investors. In addition, other equity holders may benefit from
the improvement to corporate governance that results from more
conscientious proxy voting by fund managers. We note that assets
held in equity funds account for approximately 18% of the $11
trillion market capitalization of all publicly traded U.S.
corporations, and therefore funds exercise a considerable amount of
influence in proxy votes affecting the value of these
corporations.
The benefits to the economy that will result
from improved corporate governance are difficult to measure. While
measuring the effects of such a rule involves a high degree of
uncertainty, the scale of the aggregate portfolio holdings involved
suggests that they may be substantial.
A number of commenters addressed the
benefits of the proposals identified in the Proposing Release. Most
commenters who addressed the costs and benefits of our proposals
concurred with our assessment of the benefits of the proposed
requirements to disclose the policies and procedures that funds use
to determine how to vote proxies relating to securities held in
their portfolios.
Our proposals to require disclosure of the
actual votes cast by funds generated divergent views as to the
possible benefits of this disclosure. Many commenters, including
individual investors, labor unions, trustees of pension and
retirement plans, and funds that currently make their proxy voting
records available to their shareholders agreed with our assessment
of the benefits of this disclosure, and argued that these benefits
would be substantial. These commenters stated that investors would
benefit from the increased transparency resulting from disclosure of
proxy voting records, by allowing investors to consider a fund's
proxy voting record when making an investment decision. In
addition, commenters argued that disclosure of proxy votes cast
would have beneficial effects across the entire U.S. economy, by
encouraging better decision making in corporate governance matters,
which would enhance shareholder value of the issuers of portfolio
securities and, in turn, benefit both investors in the fund and
other investors in these issuers.
Many other commenters, however, argued that
the disclosure of proxy votes cast would not benefit fund investors.
These commenters, who consisted primarily of funds, investment
advisers, and members of boards of directors of funds, argued that
the funds with which they are associated have received virtually no
requests from their shareholders for proxy voting information. They
also argued that investors who care about proxy vote disclosure can
decide to invest in those funds that choose to disclose their votes.
The arguments of these commenters do not
address two important considerations, however. First, investors
consider many factors besides proxy voting histories when choosing
their investment managers. If other factors-for example, fund
performance-are more important to them than proxy voting,
competitive pressures alone may cause few funds to reveal their
proxy votes. The fact that market pressure has not forced many funds
to reveal their votes merely suggests that investors do not value
transparency of proxy votes as much as they value other factors.
That does not mean that investors do not value transparency of proxy
votes. In addition, the availability of proxy voting information may
increase shareholder interest in the future. Second, these arguments
do not consider the external benefits that all fund investors may
obtain if, as discussed above, disclosure increases the incentives
for fund managers to vote their proxies more carefully, and thereby
improve corporate performance and enhance shareholder value.
Commenters who objected to the proposed
disclosure requirement also questioned whether disclosure of proxy
voting records would benefit investors by discouraging voting
motivated by conflicts of interest, and noted that the Proposing
Release did not provide any evidence of any fund failing to vote its
proxies in its shareholders' best interests due to a conflict of
interest. However, as noted above, funds may have strong incentives
to vote in a certain way when, for example, a fund's adviser also
manages or seeks to manage the retirement plan assets of a company
whose securities are held by the fund. It may be difficult to prove
that a particular vote in such a situation was motivated by a
conflict of interest, and therefore disclosure may be the most
effective means of deterring these conflicts.
In addition, commenters objected to the
argument that proxy voting disclosure would result in benefits to
all investors by encouraging funds to be more engaged in corporate
governance of issuers held in their portfolios. The commenters
asserted that funds were already sufficiently engaged in corporate
governance issues, and that requiring disclosure of proxy votes by
funds, but not other institutional investors, would unfairly single
out one class of investors and force them to bear the burdens of the
Commission's broader objectives with respect to the improvement of
corporate governance.
We recognize that while the costs of the
disclosure requirements will be borne by funds, the benefits of
improved corporate governance resulting from the disclosure will
accrue to all investors. We note, however, that investors in a fund
may benefit from any improved oversight of its portfolio companies
resulting from more careful proxy voting by other funds. In
addition, we note that some of the other positive effects resulting
from the disclosure, such as allowing investors to better evaluate
whether their fund managers are voting proxies in accordance with
their fiduciary duties, are benefits to fund investors.
We also note that, as adopted, the
disclosure required by the amendments will provide the same benefits
to investors as the proposal. However, the modifications to the
proposal will mitigate the costs of disclosure, for funds and fund
investors, by requiring a fund to file its proxy voting record on
Form N-PX annually, by allowing a fund flexibility in determining
how to disclose its proxy voting record to shareholders, and by not
requiring a fund to disclose votes that are inconsistent with its
policies and procedures.
B. Costs
The amendments will lead to some additional
costs for funds, which may be passed on to fund shareholders. As
discussed below, the amendments require new disclosure by a fund
regarding how it votes proxies relating to portfolio securities it
holds, in its SAI (and in Form N-CSR for closed-end funds), in
annual reports on new Form N-PX, and in the fund's annual and
semi-annual reports to shareholders. The direct costs of this
disclosure will include both internal costs (for attorneys and other
non-legal staff of a fund, such as computer programmers, to prepare
and review the required disclosure) and external costs (for
typesetting, printing, and mailing of the disclosure).
First, the amendments require disclosure of
the fund's proxy voting policies and procedures, and disclosure
about the availability of its proxy voting record, in the fund's SAI
(and in the case of a closed-end fund, disclosure of its policies
and procedures on Form N-CSR also). Because the SAI is typically not
typeset and is only provided to shareholders upon request, we
estimate that the external costs per fund of this additional
disclosure in the SAI will be minimal. Similarly, because the
disclosure in Form N-CSR will only be required to be provided to
shareholders upon request, we estimate that the external costs of
this disclosure on Form N-CSR will be minimal as well. For purposes
of the Paperwork Reduction Act, we have estimated that the
disclosure requirements will add 19,596 hours to the burden of
completing Forms N-1A, N-2, N-3, and N-CSR. We
estimate that this additional burden will equal total internal costs
of $1,350,948 annually, or $365 per fund.
Second, the amendments will require a fund
to file with the Commission an annual report on new Form N-PX,
containing the fund's complete proxy voting record for the twelve
month period ended June 30, by no later than August 31 of each year,
and to make available to its shareholders the information contained
in Form N-PX. We estimate that because this information will be
available on the Commission's website, and because we anticipate
that many funds will choose to make this information available to
their shareholders on or through their websites, the external costs
to funds (for typesetting, printing, and mailing) of providing this
disclosure to shareholders will be minimal. For purposes of the
Paperwork Reduction Act, we estimate that funds will spend 74,880
hours to comply with Form N-PX, or 14.4 hours per equity fund
portfolio filing on Form N-PX annually. Further, we estimate that funds
will file reports on Form N-PX for 5,200 portfolios holding equity
securities. Thus, we estimate that the burden
of filing Form N-PX will equal $5,162,227 in total internal costs
annually, or $992 per equity fund portfolio. We
had originally proposed to require a fund to file its complete proxy
voting record as part of its semi-annual reports on Form N-CSR.
However, we modified our proposal in response to one commenter who
suggested that requiring disclosure on Form N-CSR would impose
unnecessary costs and substantial administrative complexity for fund
complexes that have funds with staggered fiscal year ends.
Third, with respect to reports to
shareholders, funds will be required to include in their annual and
semi-annual reports to shareholders disclosure about the
availability of information regarding the fund's proxy voting
policies and procedures, and the fund's proxy voting record. We
estimate that to comply with these disclosure requirements, a
typical fund will need to include at most one additional page in its
annual and semi-annual reports to shareholders, at a typesetting
cost of $55 per page and a printing cost of $0.025 per page. We
estimate that a typical fund may have, on average, 30,000
shareholder accounts; therefore, the additional
disclosure in shareholder reports will cost approximately $1,610
(($0.025 x 30,000 shareholder accounts, plus $55) x 2 reports per
year) in external costs per fund. Based on the Commission's estimate
of 3,700 funds that are required to transmit annual and semi-annual
reports to shareholders, we estimate these external costs will be
$5,957,000 for the industry as a whole. In addition, we estimate for
purposes of the Paperwork Reduction Act that these disclosure
requirements will add 3,700 burden hours for funds required to
transmit shareholder reports, or one hour per fund, equal to
internal costs of $255,078 for the industry annually, or $69 per
investment company.
Therefore, based on this analysis, we
estimate that the total external and internal direct costs of the
additional disclosure required by the amendments will be
$12,725,253. Because the amendments may have
the effect of inducing fund advisers and fund boards to devote more
resources to articulating their proxy voting policies and procedures
in more detail, and to monitoring proxy voting decisions, they may
result in higher expenses and advisory fees for funds. Some or all
of these expenses may be passed on to shareholders.
Numerous commenters responded to the
Commission's request for comment on the potential costs of the
proposed disclosure requirements, particularly with respect to the
required disclosure of their complete proxy voting records in
reports on Form N-CSR, and the proposed disclosure of inconsistent
votes in annual and semi-annual reports to shareholders. A number of
commenters, principally members of the fund industry, argued that
the Commission's estimates substantially underestimated the direct
costs of the proposed disclosure requirements. First, commenters
argued that the estimates omitted any start-up or one-time
transition costs, noting that fund groups would need to establish
systems or make arrangements with outside vendors to capture the
information on proxy votes cast. Second, a commenter argued that
while some fund groups rely on outside service providers to vote
their proxies, and these service providers may provide proxy voting
records in electronic form, many fund groups do not use such outside
service providers, and hence may have higher costs to compile their
proxy voting records in electronic form. Third, commenters argued that the
costs of preparing the voting record disclosure may be higher for
funds with significant holdings in foreign securities, because
foreign proxies typically contain more proposals than those of U.S.
issuers, and certain required data, such as ticker symbols and
sponsorship of proposals, is not readily available for meetings of
foreign portfolio companies. Fourth, some fund groups also
stated that they would incur costs by having to hire and train
shareholder servicing personnel in order to respond to requests from
shareholders for the proxy voting records disclosed in Form N-CSR.
We continue to believe that our estimates of
the direct costs imposed by the disclosure are reasonable. First, we
note that our cost estimates, which were based in part on the costs
of funds that currently disclose their proxy votes, incorporate
start-up costs and one-time transition costs amortized over time. In
addition, we believe that start-up costs should be limited in most
cases, because most funds currently keep track of information
regarding their proxy votes. Second, our cost estimates are derived
both from funds that outsource the collection and disclosure of
proxy voting information, and from funds that perform these tasks
internally. We anticipate that funds will choose to provide the
required proxy voting information in the most cost-efficient manner.
Third, with respect to the argument that the costs incurred by funds
with significant foreign holdings may be higher than estimated, we
note that we have modified our proposal to include an instruction
permitting a fund to omit exchange ticker symbols and CUSIP numbers
if they are not available through reasonably practicable means.
Finally, with respect to the argument that funds would incur costs
by having to hire and train personnel to respond to requests for
their proxy voting records, we note that we have modified our
proposals to allow funds to choose to provide their proxy voting
records to shareholders through website disclosure or upon request,
which should reduce the number of shareholder requests received by
phone.
Other commenters argued that the estimates
of direct costs in the Proposing Release were reasonable. Several
fund groups which currently disclose proxy voting records on their
websites as well as through hard copy stated that based on their
experience the costs of the proposed disclosure requirements would
be minimal. These commenters argued that funds
should already be keeping track of their proxy votes internally, so
that providing the required disclosure should be a matter of
converting existing data to new fields for web interface. One
commenter noted that the expense ratios of funds that disclose their
proxy votes are not higher than those of funds in general.
A few commenters, including supporters and
opponents of the proposed requirement to disclose proxy voting
records, provided specific estimates of the direct costs of
providing this disclosure. One fund group which opposed the
requirement to disclose its proxy voting record prepared a sample
disclosure in the format prescribed by the proposed amendment to
Form N-CSR, and estimated that the collection of votes from its
information systems would take four hours, reformatting the data to
the format of Form N-CSR would take eight hours, and that
reconfirming that each vote was cast in accordance with the fund's
proxy voting policies would take at least another two hours.
Another fund group which recently began to post its proxy voting
guidelines and proxy voting records for two of its funds on its
website estimated that this task took approximately two days. These
estimates are generally consistent with our estimate that proxy vote
disclosure on Form N-PX will take 14.4 hours per equity portfolio
per filing, at an annual cost of $992 per equity portfolio. By
contrast, a fund industry trade group estimated, based on a survey
of eight fund complexes conducted on its behalf by a third-party,
that proxy voting record disclosure would cost approximately $3,380
per fund in start-up costs, and $5,530 per year in ongoing
costs.
We also note, as discussed above, that we
have modified our proposals in three significant ways, in part in
response to concerns expressed about costs by commenters. First, the
amendments will require disclosure of proxy votes cast in annual
reports on Form N-PX, rather than semi-annually on Form N-CSR.
Second, we are not adopting the proposed requirement that funds
disclose in their annual and semi-annual reports to shareholders
votes that were inconsistent with their proxy voting policies and
procedures. Third, rather than requiring funds to send their proxy
voting records without charge and upon request, we are permitting
them to choose to make their records available either upon request
or by making available an electronic version on or through their
websites.
The rules may also impose potential indirect
costs on fund managers. Several commenters identified certain
indirect costs that they argued were not addressed by the
cost-benefit analysis in the Proposing Release. First, commenters
argued that depriving funds of confidential voting would subject
them to possible retaliatory actions by corporate management of the
issuers of portfolio securities, such as restricting access by
portfolio managers to corporate personnel. These
costs are difficult to quantify. Further, these commenters did not
provide any evidence that this retaliatory action has occurred or
might occur as a result of proxy vote disclosure. We also note that
while it is possible that corporations could retaliate against fund
managers if they knew that those fund managers had voted against
them in the past, it is also possible that corporations could react
by trying to work harder to develop cooperative relationships with
fund managers. One additional advantage of the amendments is that
they will permit fund managers to demonstrate credibly to management
of a portfolio company that they have been willing to vote against
the recommendations of corporate management in other cases.
Second, several commenters, including funds,
claimed that required disclosure of proxy voting records would
politicize the process of proxy voting and thereby impose costs on
funds in order to address orchestrated campaigns in the media and
elsewhere by special interest groups, which would detract from a
fund's ability to concentrate on the management of its
portfolio. These commenters did not provide
any estimates of the magnitude of these costs, however. Some
commenters argued that proxy vote disclosure might lead to certain
groups threatening to encourage their members and others to withdraw
their investments from a fund complex unless the funds' adviser
voted in a certain way. To the extent that this
possibility is real, and that fund managers may be pressured by
large or influential shareholders to vote as directed, making voting
policies and procedures available to investors will mitigate this
influence to a large degree. Because of the disclosure requirements
we are adopting, shareholders will be able to evaluate how closely
fund managers follow their stated proxy voting policies, and to
react adversely to fund managers who vote inconsistently with these
policies.
VI. Consideration of Burden on Competition;
Promotion of Efficiency, Competition, and Capital
Formation
Section 23(a)(2) of the Exchange Act
requires us, when adopting rules under the Exchange Act, to consider
the impact that any new rule would have on competition. Section
23(a)(2) also prohibits us from adopting any rule that would impose
a burden on competition not necessary or appropriate in furtherance
of the purposes of the Exchange Act. In addition, Section 2(c) of the
Investment Company Act, Section 2(b) of the Securities Act, and
Section 3(f) of the Exchange Act require the Commission, when
engaging in rulemaking that requires it to consider or determine
whether an action is necessary or appropriate in the public
interest, to consider, in addition to the protection of investors,
whether the action will promote efficiency, competition, and capital
formation. The Commission has considered
these factors.
The amendments requiring disclosure of
funds' proxy voting policies and procedures and actual proxy voting
records are intended to provide greater transparency for fund
shareholders regarding the management of their investments in funds.
The amendments may improve efficiency. The enhanced disclosure
requirements will provide shareholders with greater access to
information regarding the proxy voting policies and decisions of the
funds in which they invest, which should promote more efficient
allocation of investments by investors and more efficient allocation
of assets among competing funds. The amendments may also improve
competition, as enhanced disclosure may prompt funds to seek to
differentiate themselves based on their proxy voting policies and
practices. Finally, the effects of the amendments on capital
formation are unclear. Although, as noted above, we believe that the
amendments will benefit investors, the magnitude of the effect of
the amendments on efficiency, competition, and capital formation is
difficult to quantify.
In the Proposing Release, we requested
comment on whether the proposed amendments would promote efficiency,
competition, and capital formation, or, conversely, would impose a
burden on competition. The Commission received several letters
addressing the effect of the proposed amendments on efficiency,
competition, and capital formation. A number of commenters expressed
concern that the required disclosure, particularly the requirements
that funds disclose their proxy votes cast and any votes that are
inconsistent with their proxy voting policies, may have adverse
effects on competition and capital formation among funds. Commenters
argued that the amendments would disadvantage funds relative to
other institutional investors such as banks and pension funds,
because funds would be the only class of investors not allowed to
vote confidentially. Further, the commenters argued, depriving funds
of confidential voting would subject them to possible retaliatory
actions by corporate management of the issuers of portfolio
securities, such as restricting access by portfolio managers to
corporate personnel. Commenters also argued that requiring funds to
disclose their proxy votes would subject them to orchestrated
campaigns in the media and elsewhere by special interest groups with
social or political agendas different from those of fund
shareholders, which would detract from a fund's ability to
concentrate on the management of its portfolio and ultimately harm
fund shareholders. Finally, commenters asserted that the proposed
disclosure requirements would impose substantial costs on funds,
which would be passed on to their shareholders.
Other commenters, however, argued that proxy
voting disclosure would improve competition by allowing investors
who wish to consider proxy voting policies and records when deciding
between two funds to do so. According to one such commenter,
mandating proxy voting disclosure would thereby allow proxy voting
policies and records to be fully "valued" by the marketplace. Many
commenters also asserted that because funds hold a significant
percentage of equity securities, requiring proxy vote disclosure by
funds would improve corporate governance and accountability among
issuers of portfolio securities, which would benefit investors
broadly. With respect to the argument that disclosure would harm
funds by "politicizing" the proxy voting process, one commenter
argued that to the extent that this meant funds would come under
market pressure for behavior that their investors disapprove of,
this would be a positive, not a negative, result.
As discussed in more detail in the
Cost-Benefit Analysis above, we continue to believe that the proxy
vote disclosure required by the amendments will provide several
benefits to fund investors. The amendments will provide better
information to investors to use in selecting funds, and in
determining whether fund managers are adequately maximizing the
value of their shares. The amendments may also deter votes motivated
by conflicts of interest. In addition, the amendments may provide
stronger incentives to fund managers to vote their proxies
carefully, which could thereby improve corporate performance and
enhance shareholder value. With respect to the commenters' argument
that the amendments may disadvantage funds by depriving them of
confidential voting, we note that there is no evidence that
retaliatory action by portfolio company management has occurred or
might occur as a result of proxy vote disclosure, and that it is
possible that this disclosure will encourage corporations to work
harder to develop cooperative relationships with fund managers. With
respect to the argument that disclosure of a fund's proxy voting
record may subject it to pressure from special interest groups to
vote in a certain manner, we note that to the extent that this
possibility is real, making voting policies and procedures available
to investors will mitigate this influence to a large degree. With
respect to the argument that the proposed disclosure requirements
would impose substantial costs on funds, we have modified certain of
our proposals to mitigate costs by requiring a fund to file its
proxy voting record annually on new Form N-PX rather than
semi-annually on Form N-CSR, by eliminating the requirement that a
fund disclose its proxy votes (or failures to vote) that are
inconsistent with its proxy voting policies and procedures, and by
permitting a fund to choose to make available to its shareholders
its record of how it voted proxies relating to portfolio securities
on or through its website or upon request.
VII. Final Regulatory Flexibility
Analysis
This Final Regulatory Flexibility Analysis
("FRFA") has been prepared in accordance with 5 U.S.C. 604, and
relates to the Commission's rule and form amendments under the
Securities Act, the Exchange Act, and the Investment Company Act to
require funds to provide disclosure about how they vote proxies of
portfolio securities they hold. Under the amendments, a fund will be
required to disclose in its registration statement the policies and
procedures that it uses to determine how to vote the proxies of
portfolio securities. The amendments also require a fund to file
with the Commission on new Form N-PX, and to make available to its
shareholders, on or through its website or upon request, its record
of how it voted proxies relating to portfolio securities.
Specifically, a fund will be required to
disclose in its statement of additional information ("SAI") its
policies and procedures used to determine how to vote proxies of the
securities held in its portfolio, and to provide disclosure
regarding the availability of its proxy voting record to
shareholders. The amendments also require a
fund to file with the Commission, in an annual report on Form N-PX,
its complete proxy voting record for the most recent twelve-month
period ended June 30. The amendments require a fund to include in
its annual and semi-annual reports to shareholders disclosure that
the fund's proxy voting policies and procedures, are available (i)
without charge, upon request from the fund, (ii) on the fund's
website, if applicable, and (iii) on the SEC website. The amendments
also require a fund to state in its registration statement and
reports to shareholders that its proxy voting record is available
(i) without charge, upon request, by calling a specified toll-free
(or collect) telephone number; or on or through the fund's website
at a specified Internet address; or both; and (ii) on the SEC
website. The Commission prepared an Initial Regulatory Flexibility
Analysis ("IRFA") in accordance with 5 U.S.C. 603 in conjunction
with the Proposing Release, which was made available to the public.
The Proposing Release included the IRFA and solicited comments on
it.
A. Reasons for, and Objectives of,
Amendments
Proxy voting decisions may play an important
role in maximizing the value of a fund's investments for its
shareholders. Requiring funds to disclose specific proxy voting
information could enable shareholders to make an informed assessment
as to whether funds are utilizing proxy voting for the benefit of
fund shareholders. We are adopting these amendments because we
believe that requiring management investment companies to disclose
their proxy policies and procedures as well as voting records will
result in greater transparency for fund shareholders regarding the
overall management of their investments. We also believe it is
possible to achieve this improved disclosure efficiently at minimal
cost because of recent advances in technology, such as the
Internet.
B. Significant Issues Raised by Public
Comment
No comments specifically addressed the IRFA.
However, a few commenters asserted that the proposed amendments that
would require disclosure of a fund's proxy voting record would have
a negative impact on small entities. These commenters noted that the
loss of confidential voting that would result from the disclosure of
proxy votes would raise the risk that portfolio company management
might retaliate against a fund, and that this risk of retaliation
would be disproportionately greater for small funds. One commenter
argued that small funds should not be required to bear the burden
and costs of providing proxy voting disclosure, when many much
larger institutional investors, such as pension plans, insurance
companies, common and collective trust funds, and hedge funds would
not be required to do so. On the other hand, an association
of "socially responsible" funds commented that some smaller fund
companies have been providing proxy voting disclosure for some time,
with little cost to their investors.
C. Small Entities Subject to the
Rule
For purposes of the Regulatory Flexibility
Act, an investment company is a small entity if it, together with
other investment companies in the same group of related investment
companies, has net assets of $50 million or less as of the end of
its most recent fiscal year. Approximately 205 out of 3700
investment companies that will be affected by this rule meet this
definition.
D. Reporting, Recordkeeping, and Other
Compliance Requirements
The amendments require a fund to disclose in
its SAI (and in Form N-CSR, in the case of a closed-end fund) the
policies and procedures it uses to determine how to vote proxies for
the securities held in its portfolio, and to provide disclosure in
its SAI regarding the availability of its proxy voting record to
shareholders. The amendments also require a fund to file with the
Commission, on Form N-PX, its complete proxy voting record for its
most recent twelve-month period ended June 30. Finally, the
amendments require a fund to include in its annual and semi-annual
reports to shareholders disclosure that a description of the
policies and procedures that the fund uses to determine how to vote
proxies relating to portfolio securities is available
(i) without charge, upon request, by calling
a specified toll-free (or collect) telephone number; (ii) on the
fund's website, if applicable; and (iii) on the SEC website. The
amendments also require a fund to state in its registration
statement and reports to shareholders that its proxy voting record
is available (i) without charge, upon request, by calling a
specified toll-free (or collect) telephone number; or on or through
the fund's website at a specified Internet address; or both; and
(ii) on the SEC website.
The Commission estimates some one-time
formatting and ongoing costs and burdens that will be imposed on all
funds, but which may have a relatively greater impact on smaller
firms. These include the costs related to disclosing proxy voting
policies and procedures to fund shareholders; filing proxy voting
records with the Commission on Form N-PX; and disclosing voting
records through website disclosure or upon request. These costs
could include expenses for computer time, legal and accounting fees,
information technology staff, and additional computer and telephone
equipment. However, we believe, based on consultations with a number
of fund complexes, including smaller fund complexes, that many
investment companies presently collect in-house or outsource the
collection of proxy voting information on a basis at least as
current as annually and, therefore, that the marginal cost increases
for most funds will be minimal.
E. Agency Action to Minimize Effect on Small
Entities
The Commission believes at the present time
that special compliance or reporting requirements for small
entities, or an exemption from coverage for small entities, would
not be appropriate or consistent with investor protection. The
disclosure amendments will provide shareholders with greater
transparency regarding a fund's proxy voting polices and procedures,
as well as records of votes cast. Different disclosure requirements
for small entities, such as reducing the level of proxy voting
disclosure that small entities would have to provide shareholders,
may create the risk that those shareholders would not receive
sufficient information to make an informed evaluation as to whether
the fund's board and its investment adviser are complying with their
fiduciary duties to vote proxies of portfolio securities in the best
interest of fund shareholders. We believe it is important for the
proxy disclosure required by the amendments to be provided to
shareholders by all funds, not just funds that are not considered
small entities.
We have endeavored through the amendments to
minimize the regulatory burden on all funds, including small
entities, while meeting our regulatory objectives. Small entities
should benefit from the Commission's reasoned approach to the
amendments to the same degree as other investment companies. Further
clarification, consolidation, or simplification of the amendments
for funds that are small entities would be inconsistent with the
Commission's concern for investor protection. Finally, we do not
consider using performance rather than design standards to be
consistent with our statutory mandate of investor protection in the
present context.
We note, however, that we have modified our
proposals in response to comments, in part to reduce the regulatory
burden on funds, including small funds. As adopted, our amendments
will require a fund to provide disclosure of its proxy voting record
annually on Form N-PX, rather than semi-annually. In addition, we
are not adopting the proposed requirement that a fund's annual and
semi-annual reports to shareholders include all votes that are
inconsistent with the fund's proxy voting policies and procedures.
Further, we are modifying our proposed requirement that a fund must
send its proxy voting record without charge and upon request, by
permitting a fund to make its proxy voting record available on or
through its website instead.
VIII. Statutory Authority<
The Commission is adopting amendments to
Forms N-1A, N-2, N-3, and N-CSR pursuant to authority set forth in
Sections 5, 6, 7, 10, 19(a), and 28 of the Securities Act [15 U.S.C.
77e, 77f, 77g, 77j, 77s(a), and 77z-3], Sections 10(b), 13, 15(d),
23(a), and 36 of the Exchange Act [15 U.S.C. 78j(b), 78m, 78o(d),
78w(a), and 78mm], and Sections 6(c), 8, 24(a), 30, and 38 of the
Investment Company Act [15 U.S.C. 80a-6(c), 80a-8, 80a-24(a),
80a-29, and 80a-37]. The Commission is adopting new rule 30b1-4 and
new Form N-PX pursuant to authority set forth in Sections 8, 30, 31,
and 38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-29,
80a-30, and 80a-37].
List of
Subjects
17 CFR Parts 239 and
249
Reporting and recordkeeping requirements,
Securities.
17 CFR Parts 270 and
274
Investment companies, Reporting and
recordkeeping requirements, Securities.
Text of Rule and
Form Amendments
For the reasons set out in the preamble, the
Commission amends Title 17, Chapter II of the Code of Federal
Regulations as follows:
Part 239 - Forms
Prescribed Under The Securities Act of 1933
1. 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-26, 80a-29, 80a-30, and 80a-37, unless otherwise noted.
* * * * *
Part 249 - Forms,
Securities Exchange Act of 1934
2. The authority citation for Part 249
continues to read in part as follows:
Authority: 15
U.S.C. 78a, et seq., unless otherwise
noted.
* * * * *
Section 249.331 is also issued under secs.
3(a), 202, 208, 302, 406, and 407, Pub. L. No. 107-204, 116 Stat.
745.
Part 270 - Rules and
Regulations, Investment Company Act of 1940
3. The general authority citation for part
270 continues to read as follows:
Authority: 15
U.S.C. 80a-1 et seq., 80a-34(d), 80a-37,
and 80a-39, unless otherwise noted.
* * * * *
4. Section 270.30b1-4 is added to read as
follows:
§ 270.30b1-4 Report of proxy voting record.
Every registered management investment
company, other than a small business investment company registered
on Form N-5 (§§ 239.24 and 274.5 of this chapter), shall file an
annual report on Form N-PX (§ 274.129 of this chapter) not later
than August 31 of each year, containing the registrant's proxy
voting record for the most recent twelve-month period ended June 30.
Part 239 - Forms
Prescribed Under the Securities Act of 1933
Part 274 - Forms
Prescribed Under the Investment Company Act of 1940
5. The authority citation for Part 274 is
amended by revising the sectional authority for § 274.128 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, 80a-26,
and 80a-29, unless otherwise noted.
* * * * *
Section 274.128 is also issued under secs.
3(a), 202, 208, 302, 406, and 407, Pub. L. No. 107-204, 116 Stat.
745.
6. Form N-1A (referenced in §§ 239.15A and
274.11A) is amended by:
a. In Item 13, adding paragraph (f); and
b. In Item 22, adding paragraphs (b)(7) and
(8) and (c)(5) and (6).
These additions read as follows:
Note: The text
of Form N-1A does not, and these amendments will not, appear in the
Code of Federal Regulations.
Form N-1A
* * * * *
Item 13. Management
of the Fund
* * * * *
(f) Proxy Voting Policies. Unless the Fund
invests exclusively in non-voting securities, describe the policies
and procedures that the Fund uses to determine how to vote proxies
relating to portfolio securities, including the procedures that the
Fund uses when a vote presents a conflict between the interests of
Fund shareholders, on the one hand, and those of the Fund's
investment adviser; principal underwriter; or any affiliated person
of the Fund, its investment adviser, or its principal underwriter,
on the other. Include any policies and procedures of the Fund's
investment adviser, or any other third party, that the Fund uses, or
that are used on the Fund's behalf, to determine how to vote proxies
relating to portfolio securities. Also, state that information
regarding how the Fund voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is
available (1) without charge, upon request, by calling a specified
toll-free (or collect) telephone number; or on or through the Fund's
website at a specified Internet address; or both; and (2) on the
Commission's website at http://www.sec.gov.
Instructions.
1. A Fund may satisfy the requirement to
provide a description of the policies and procedures that it uses to
determine how to vote proxies relating to portfolio securities by
including a copy of the policies and procedures themselves.
2. If a Fund discloses that the Fund's proxy
voting record is available by calling a toll-free (or collect)
telephone number, and the Fund (or financial intermediary through
which shares of the Fund may be purchased or sold) receives a
request for this information, the Fund (or financial intermediary)
must send the information disclosed in the Fund's most recently
filed report on Form N-PX, within three business days of receipt of
the request, by first-class mail or other means designed to ensure
equally prompt delivery.
3. If a Fund discloses that the Fund's proxy
voting record is available on or through its website, the Fund must
make available free of charge the information disclosed in the
Fund's most recently filed report on Form N-PX on or through its
website as soon as reasonably practicable after filing the report
with the Commission. The information disclosed in the Fund's most
recently filed report on Form N-PX must remain available on or
through the Fund's website for as long as the Fund remains subject
to the requirements of Rule 30b1-4 (17 CFR 270.30b1-4) and discloses
that the Fund's proxy voting record is available on or through its
website.
* * * * *
Item 22. Financial
Statements
* * * * *
(b) * * *
(7) A statement that a description of the
policies and procedures that the Fund uses to determine how to vote
proxies relating to portfolio securities is available (i) without
charge, upon request, by calling a specified toll-free (or collect)
telephone number; (ii) on the Fund's website, if applicable; and
(iii) on the Commission's website at http://www.sec.gov.
Instruction.
When a Fund (or financial intermediary through which shares of the
Fund may be purchased or sold) receives a request for a description
of the policies and procedures that the Fund uses to determine how
to vote proxies, the Fund (or financial intermediary) must send the
information disclosed in response to Item 13(f) of this Form, within
three business days of receipt of the request, by first-class mail
or other means designed to ensure equally prompt delivery.
(8) A statement that information regarding
how the Fund voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30 is available (i)
without charge, upon request, by calling a specified toll-free (or
collect) telephone number; or on or through the Fund's website at a
specified Internet address; or both; and (ii) on the Commission's
website at http://www.sec.gov.
Instructions.
1. If a Fund discloses that the Fund's proxy
voting record is available by calling a toll-free (or collect)
telephone number, and the Fund (or financial intermediary through
which shares of the Fund may be purchased or sold) receives a
request for this information, the Fund (or financial intermediary)
must send the information disclosed in the Fund's most recently
filed report on Form N-PX, within three business days of receipt of
the request, by first-class mail or other means designed to ensure
equally prompt delivery.
2. If a Fund discloses that the Fund's proxy
voting record is available on or through its website, the Fund must
make available free of charge the information disclosed in the
Fund's most recently filed report on Form N-PX on or through its
website as soon as reasonably practicable after filing the report
with the Commission. The information disclosed in the Fund's most
recently filed report on Form N-PX must remain available on or
through the Fund's website for as long as the Fund remains subject
to the requirements of Rule 30b1-4 (17 CFR 270.30b1-4) and discloses
that the Fund's proxy voting record is available on or through its
website.
(c) * * *
(5) A statement that a description of the
policies and procedures that the Fund uses to determine how to vote
proxies relating to portfolio securities is available (i) without
charge, upon request, by calling a specified toll-free (or collect)
telephone number; (ii) on the Fund's website, if applicable; and
(iii) on the Commission's website at http://www.sec.gov.
Instruction.
When a Fund (or financial intermediary through which shares of the
Fund may be purchased or sold) receives a request for a description
of the policies and procedures that the Fund uses to determine how
to vote proxies, the Fund (or financial intermediary) must send the
information disclosed in response to Item 13(f) of this Form, within
three business days of receipt of the request, by first-class mail
or other means designed to ensure equally prompt delivery.
(6) A statement that information regarding
how the Fund voted proxies relating to portfolio securities during
the most recent 12-month period ended June 30 is available (i)
without charge, upon request, by calling a specified toll-free (or
collect) telephone number; or on or through the Fund's website at a
specified Internet address; or both; and (ii) on the Commission's
website at http://www.sec.gov.
Instruction. Instructions 1 and 2 to Item
22(b)(8) also apply to this Item 22(c)(6).
* * * * *
7. Form N-2 (referenced in §§ 239.14 and
274.11a-1) is amended by:
a. In Item 18, adding paragraph 16;
b. In Item 23, removing "and" from the end
of Instruction 4.e.;
c. In Item 23, removing the period from the
end of Instruction 4.f. and in its place adding a semi-colon;
d. In Item 23, adding Instructions 4.g. and
4.h.;
e. In Item 23, removing "and" from the end
of Instruction 5.c.;
f. In Item 23, removing the period from the
end of Instruction 5.d. and in its place adding a semi-colon;
g. In Item 23, adding Instructions 5.e. and
5.f.;
h. In Item 23, redesignating Instruction 6
as Instruction 7; and
i. In Item 23, adding new Instruction 6.
These additions read as follows:
Note: The text
of Form N-2 does not, and these amendments will not, appear in the
Code of Federal Regulations.
Form N-2
* * * * *
Item 18.
Management
* * * * *
16. Unless the Registrant invests
exclusively in non-voting securities, describe the policies and
procedures that the Registrant uses to determine how to vote proxies
relating to portfolio securities, including the procedures that the
Registrant uses when a vote presents a conflict between the
interests of the Registrant's shareholders, on the one hand, and
those of the Registrant's investment adviser; principal underwriter;
or any affiliated person (as defined in Section 2(a)(3) of the 1940
Act (15 U.S.C. 80a-2(a)(3)) and the rules thereunder) of the
Registrant, its investment adviser, or its principal underwriter, on
the other. Include any policies and procedures of the Registrant's
investment adviser, or any other third party, that the Registrant
uses, or that are used on the Registrant's behalf, to determine how
to vote proxies relating to portfolio securities. Also, state that
information regarding how the Registrant voted proxies relating to
portfolio securities during the most recent 12-month period ended
June 30 is available
(i) without charge, upon request, by calling
a specified toll-free (or collect) telephone number; or on or
through the Registrant's website at a specified Internet address; or
both; and (ii) on the Commission's website at http://www.sec.gov.
Instructions.
1. A Registrant may satisfy the requirement
to provide a description of the policies and procedures that it uses
to determine how to vote proxies relating to portfolio securities by
including a copy of the policies and procedures themselves.
2. If a Registrant discloses that the
Registrant's proxy voting record is available by calling a toll-free
(or collect) telephone number, and the Registrant (or financial
intermediary through which shares of the Registrant may be purchased
or sold) receives a request for this information, the Registrant (or
financial intermediary) must send the information disclosed in the
Registrant's most recently filed report on Form N-PX, within three
business days of receipt of the request, by first-class mail or
other means designed to ensure equally prompt delivery.
3. If a Registrant discloses that the
Registrant's proxy voting record is available on or through its
website, the Registrant must make available free of charge the
information disclosed in the Registrant's most recently filed report
on Form N-PX on or through its website as soon as reasonably
practicable after filing the report with the Commission. The
information disclosed in the Registrant's most recently filed report
on Form N-PX must remain available on or through the Registrant's
website for as long as the Registrant remains subject to the
requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-4)
and discloses that the Registrant's proxy voting record is available
on or through its website.
* * * * *
Item 23. Financial
Statements
* * * *
*
Instructions:
* * * * *
4. * * *
g. a statement that a description of the
policies and procedures that the Registrant uses to determine how to
vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling a specified toll-free (or
collect) telephone number; (2) on the Registrant's website, if
applicable; and (3) on the Commission's website at
http://www.sec.gov; and
h. a statement that information regarding
how the Registrant voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available
(1) without charge, upon request, by calling a specified toll-free
(or collect) telephone number; or on or through the Registrant's
website at a specified Internet address; or both; and (2) on the
Commission's website at http://www.sec.gov.
5. * * *
e. a statement that a description of the
policies and procedures that the Registrant uses to determine how to
vote proxies relating to portfolio securities is available (1)
without charge, upon request, by calling a specified toll-free (or
collect) telephone number; (2) on the Registrant's website, if
applicable; and (3) on the Commission's website at
http://www.sec.gov; and
f. a statement that information regarding
how the Registrant voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available
(1) without charge, upon request, by calling a specified toll-free
(or collect) telephone number; or on or through the Registrant's
website at a specified Internet address; or both; and (2) on the
Commission's website at http://www.sec.gov.
6. a. When a Registrant (or financial
intermediary through which shares of the Registrant may be purchased
or sold) receives a request for a description of the policies and
procedures that the Registrant uses to determine how to vote
proxies, the Registrant (or financial intermediary) must send the
information most recently disclosed in response to Item 18.16 of
this Form or Item 7 of Form N-CSR within three business days of
receipt of the request, by first-class mail or other means designed
to ensure equally prompt delivery.
b. If a Registrant discloses that the
Registrant's proxy voting record is available by calling a toll-free
(or collect) telephone number, and the Registrant (or financial
intermediary through which shares of the Registrant may be purchased
or sold) receives a request for this information, the Registrant (or
financial intermediary) must send the information disclosed in the
Registrant's most recently filed report on Form N-PX, within three
business days of receipt of the request, by first-class mail or
other means designed to ensure equally prompt delivery.
c. If a Registrant discloses that the
Registrant's proxy voting record is available on or through its
website, the Registrant must make available free of charge the
information disclosed in the Registrant's most recently filed report
on Form N-PX on or through its website as soon as reasonably
practicable after filing the report with the Commission. The
information disclosed in the Registrant's most recently filed report
on Form N-PX must remain available on or through the Registrant's
website for as long as the Registrant remains subject to the
requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-4)
and discloses that the Registrant's proxy voting record is available
on or through its website.
* * * * *
8. Form N-3 (referenced in §§ 239.17a and
274.11b) is amended by:
a. In Item 20, adding paragraph (o);
b. In Item 27(a), removing "and" from the
end of Instruction 4(v);
c. In Item 27(a), removing the period from
the end of Instruction 4(vi) and in its place adding a semi-colon;
d. In Item 27(a), adding Instructions 4(vii)
and 4(viii);
e. In Item 27(a), removing "and" from the
end of Instruction 5(iii);
f. In Item 27(a), removing the period from
the end of Instruction 5(iv) and in its place adding a semi-colon;
g. In Item 27(a), adding Instructions 5(v)
and 5(vi);
h. In Item 27(a), redesignating Instruction
6 as Instruction 7; and
i. In Item 27(a), adding new Instruction
6.
These additions read as follows:
Note: The text
of Form N-3 does not, and these amendments will not, appear in the
Code of Federal Regulations.
Form N-3
* * * * *
Item 20.
Management
* * * * *
(o) Unless the Registrant invests
exclusively in non-voting securities, describe the policies and
procedures that the Registrant uses to determine how to vote proxies
relating to portfolio securities, including the procedures that the
Registrant uses when a vote presents a conflict between the
interests of the Registrant's contractowners, on the one hand, and
those of the Registrant's investment adviser; principal underwriter;
or any affiliated person (as defined in Section 2(a)(3) of the 1940
Act (15 U.S.C. 80a-2(a)(3)) and the rules thereunder) of the
Registrant, its investment adviser, or its principal underwriter, on
the other. Include any policies and procedures of the Registrant's
investment adviser, or any other third party, that the Registrant
uses, or that are used on the Registrant's behalf, to determine how
to vote proxies relating to portfolio securities. Also, state that
information regarding how the Registrant voted proxies relating to
portfolio securities during the most recent 12-month period ended
June 30 is available (1) without charge, upon request, by calling a
specified toll-free (or collect) telephone number; or on or through
the Registrant's website at a specified Internet address; or both;
and (2) on the Commission's website at http://www.sec.gov.
Instructions.
1. A Registrant may satisfy the requirement
to provide a description of the policies and procedures that it uses
to determine how to vote proxies relating to portfolio securities by
including a copy of the policies and procedures
themselves.
2. If a Registrant discloses that the
Registrant's proxy voting record is available by calling a toll-free
(or collect) telephone number, and the Registrant (or financial
intermediary through which shares of the Registrant may be purchased
or sold) receives a request for this information, the Registrant (or
financial intermediary) must send the information disclosed in the
Registrant's most recently filed report on Form N-PX, within three
business days of receipt of the request, by first-class mail or
other means designed to ensure equally prompt delivery.
3. If a Registrant discloses that the
Registrant's proxy voting record is available on or through its
website, the Registrant must make available free of charge the
information disclosed in the Registrant's most recently filed report
on Form N-PX on or through its website as soon as reasonably
practicable after filing the report with the Commission. The
information disclosed in the Registrant's most recently filed report
on Form N-PX must remain available on or through the Registrant's
website for as long as the Registrant remains subject to the
requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-4)
and discloses that the Registrant's proxy voting record is available
on or through its website.
* * * * *
Item 27. Financial
Statements
(a) * * *
Instructions:
* * * * *
4. * * *
(vii) a statement that a description of the
policies and procedures that the Registrant uses to determine how to
vote proxies relating to portfolio securities is available (A)
without charge, upon request, by calling a specified toll-free (or
collect) telephone number; (B) on the Registrant's website, if
applicable; and (C) on the Commission's website at
http://www.sec.gov; and
(viii) a statement that information
regarding how the Registrant voted proxies relating to portfolio
securities during the most recent 12-month period ended June 30 is
available (A) without charge, upon request, by calling a specified
toll-free (or collect) telephone number; or on or through the
Registrant's website at a specified Internet address; or both; and
(B) on the Commission's website at http://www.sec.gov.
5. * * *
(v) a statement that a description of the
policies and procedures that the Registrant uses to determine how to
vote proxies relating to portfolio securities is available (A)
without charge, upon request, by calling a specified toll-free (or
collect) telephone number; (B) on the Registrant's website, if
applicable; and (C) on the Commission's website at
http://www.sec.gov; and
(vi) a statement that information regarding
how the Registrant voted proxies relating to portfolio securities
during the most recent 12-month period ended June 30 is available
(A) without charge, upon request, by calling a specified toll-free
(or collect) telephone number; or on or through the Registrant's
website at a specified Internet address; or both; and (B) on the
Commission's website at http://www.sec.gov.
6. (i) When a Registrant (or financial
intermediary through which shares of the Registrant may be purchased
or sold) receives a request for a description of the policies and
procedures that the Registrant uses to determine how to vote
proxies, the Registrant (or financial intermediary) must send the
information disclosed in response to Item 20(o) of this Form, within
three business days of receipt of the request, by first-class mail
or other means designed to ensure equally prompt delivery.
(ii) If a Registrant discloses that the
Registrant's proxy voting record is available by calling a toll-free
(or collect) telephone number, and the Registrant (or financial
intermediary through which shares of the Registrant may be purchased
or sold) receives a request for this information, the Registrant (or
financial intermediary) must send the information disclosed in the
Registrant's most recently filed report on Form N-PX, within three
business days of receipt of the request, by first-class mail or
other means designed to ensure equally prompt delivery.
(iii) If a Registrant discloses that the
Registrant's proxy voting record is available on or through its
website, the Registrant must make available free of charge the
information disclosed in the Registrant's most recently filed report
on Form N-PX on or through its website as soon as reasonably
practicable after filing the report with the Commission. The
information disclosed in the Registrant's most recently filed report
on Form N-PX must remain available on or through the Registrant's
website for as long as the Registrant remains subject to the
requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-4)
and discloses that the Registrant's proxy voting record is available
on or through its website.
* * * * *
Part 249 - Forms,
Securities Exchange Act of 1934
Part 274 - Forms
Prescribed Under the Investment Company Act of 1940
9. Form N-CSR (referenced in §§ 249.331 and
274.128) is amended by adding new Item 7 to read as follows:
Note: The text
of Form N-CSR does not, and these amendments will not, appear in the
Code of Federal Regulations.
Form N-CSR
* * * * *
Item 7. Disclosure
of Proxy Voting Policies and Procedures for Closed-End Management
Investment Companies.
A closed-end management investment company
that is filing an annual report on this Form N-CSR must, unless it
invests exclusively in non-voting securities, describe the policies
and procedures that it uses to determine how to vote proxies
relating to portfolio securities, including the procedures that the
company uses when a vote presents a conflict between the interests
of its shareholders, on the one hand, and those of the company's
investment adviser; principal underwriter; or any affiliated person
(as defined in Section 2(a)(3) of the Investment Company Act of 1940
(15 U.S.C. 80a-2(a)(3)) and the rules thereunder) of the company,
its investment adviser, or its principal underwriter, on the other.
Include any policies and procedures of the company's investment
adviser, or any other third party, that the company uses, or that
are used on the company's behalf, to determine how to vote proxies
relating to portfolio securities.
Instruction. A company may satisfy the
requirement to provide a description of the policies and procedures
that it uses to determine how to vote proxies relating to portfolio
securities by including a copy of the policies and procedures
themselves.
* * * * *
10. Section 274.129 is added to read as
follows:
§ 274.129 Form N-PX,
annual report of proxy voting record of registered management
investment company.
This form shall be used by registered
management investment companies, other than small business
investment companies registered on Form N-5 (§§ 239.24 and 274.5 of
this chapter), for annual reports to be filed not later than August
31 of each year, containing the company's proxy voting record for
the most recent twelve-month period ended June 30, pursuant to
Section 30 of the Investment Company Act of 1940 and
§ 270.30b1-4 of this chapter.
11. Add Form N-PX (referenced in § 274.129)
to read as follows:
Note: The text
of Form N-PX will not appear in the Code of Federal Regulations.
United States Securities and Exchange Commission Washington, DC 20549
Form N-PX
Annual Report of Proxy Voting Record of
Registered Management Investment Company
Investment Company Act file
number____________________
________________________________________________________________ (Exact name of registrant as specified in
charter)
________________________________________________________________ (Address of principal executive offices)
(Zip code)
________________________________________________________________ (Name and address of agent for service)
Registrant's telephone number, including
area code:_____________
Date of fiscal year end:________________
Date of reporting period:_______________
Form N-PX is to be used by a registered
management investment company, other than a small business
investment company registered on Form N-5 (§§ 239.24 and 274.5 of
this chapter), to file reports with the Commission, not later than
August 31 of each year, containing the registrant's proxy voting
record for the most recent twelve-month period ended June 30,
pursuant to Section 30 of the Investment Company Act of 1940 and
rule 30b1-4 thereunder (17 CFR 270.30b1-4). The Commission may use
the information provided on Form N-PX in its regulatory, disclosure
review, inspection, and policymaking roles.
A registrant is required to disclose the
information specified by Form N-PX, and the Commission will make
this information public. A registrant is not required to respond to
the collection of information contained in Form N-PX unless the Form
displays a currently valid Office of Management and Budget ("OMB")
control number. Please direct comments concerning the accuracy of
the information collection burden estimate and any suggestions for
reducing the burden to the Secretary, Securities and Exchange
Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB
has reviewed this collection of information under the clearance
requirements of 44 U.S.C. § 3507.
General
Instructions
A. Rule as to Use of
Form N-PX.
Form N-PX is to be used for reports pursuant
to Section 30 of the Investment Company Act of 1940 (the "Act") and
Rule 30b1-4 under the Act (17 CFR 270.30b1-4) by all registered
management investment companies, other than small business
investment companies registered on Form N-5 (§§ 239.24 and 274.5 of
this chapter), to file their complete proxy voting record not later
than August 31 of each year for the most recent twelve-month period
ended June 30.
B. Application of
General Rules and Regulations.
The General Rules and Regulations under the
Act contain certain general requirements that are applicable to
reporting on any form under the Act. These general requirements
should be carefully read and observed in the preparation and filing
of reports on this form, except that any provision in the form or in
these instructions shall be controlling.
C. Preparation of
Report.
1. This Form is not to be used as a blank
form to be filled in, but only as a guide in preparing the report in
accordance with Rules 8b-11 (17 CFR 270.8b-11) and 8b-12 (17 CFR
270.8b-12) under the Act. The Commission does not furnish blank
copies of this form to be filled in for filing.
2. These general instructions are not to be
filed with the report.
D. Incorporation by
Reference
No items of this Form shall be answered by
incorporating any information by reference.
E.
Definitions
Unless the context clearly indicates the
contrary, terms used in this Form N-PX have meanings as defined in
the Act and the rules and regulations thereunder. Unless otherwise
indicated, all references in the form to statutory sections or to
rules are sections of the Act and the rules and regulations
thereunder.
F. Signature and
Filing of Report.
1. If the report is filed in paper pursuant
to a hardship exemption from electronic filing (see Item 201 et seq.
of Regulation S-T (17 CFR 232.201 et seq.)), eight complete copies
of the report shall be filed with the Commission. At least one
complete copy of the report filed with the Commission must be
manually signed. Copies not manually signed must bear typed or
printed signatures.
2.(a) The report must be signed by the
registrant, and on behalf of the registrant by its principal
executive officer or officers.
(b) The name and title of each person who
signs the report shall be typed or printed beneath his or her
signature. Attention is directed to Rule 8b-11 under the Act (17 CFR
270.8b-11) concerning manual signatures and signatures pursuant to
powers of attorney.
Item 1. Proxy Voting
Record.
Disclose the following information for each
matter relating to a portfolio security considered at any
shareholder meeting held during the period covered by the report and
with respect to which the registrant was entitled to vote:
(a) The name of the issuer of the portfolio
security;
(b) The exchange ticker symbol of the
portfolio security;
(c) The Council on Uniform Securities
Identification Procedures ("CUSIP") number for the portfolio
security;
(d) The shareholder meeting date;
(e) A brief identification of the matter
voted on;
(f) Whether the matter was proposed by the
issuer or by a security holder;
(g) Whether the registrant cast its vote on
the matter;
(h) How the registrant cast its vote (e.g.,
for or against proposal, or abstain; for or withhold regarding
election of directors); and
(i) Whether the registrant cast its vote for
or against management.
Instructions.
1. In the case of a registrant that offers
multiple series of shares, provide the information required by this
Item separately for each series. The term "series" means shares
offered by a registrant that represent undivided interests in a
portfolio of investments and that are preferred over all other
series of shares for assets specifically allocated to that series in
accordance with Rule 18f-2(a) under the Act (17 CFR
270.18f-2(a)).
2. The exchange ticker symbol or CUSIP
number required by paragraph (b) or (c) of this Item may be omitted
if it is not available through reasonably practicable means,
e.g., in the case of certain securities of
foreign issuers.
Signatures
[See General Instruction F]
Pursuant to the requirements of the
Investment Company Act of 1940, the registrant has duly caused this
report to be signed on its behalf by the undersigned, thereunto duly
authorized.
(Registrant)____________________________________________________
By (Signature and Title)*
_________________________________________
Date___________________________________________________________
* Print the name and title of each signing
officer under his or her signature.
By the Commission.
Margaret H. McFarland Deputy Secretary
Dated: January 31, 2003
Endnotes
We do not edit personal identifying
information, such as names or e-mail addresses, from electronic
submissions. Submit only information that you wish to make publicly
available.
See
Investment Company Act Release No. 25914 (Jan. 27, 2003) (adopting
Form N-CSR).
Pub. L. 107-204, § 302, 116 Stat.
745 (2002).
See
Disclosure of Proxy Voting Policies and Proxy Voting Records by
Registered Management Investment Companies, Investment Company Act
Release No. 25739 (Sept. 20, 2002) [67 FR 60828 (Sept. 26, 2002)]
("Proposing Release").
See
Investment Advisers Act Release No. 2106 (Jan. 31, 2003).
For simplicity, this release
focuses on mutual funds (i.e., open-end
management investment companies). An open-end management investment
company is an investment company, other than a unit investment trust
or face-amount certificate company, that offers for sale or has
outstanding any redeemable security of which it is the issuer. See Sections 4
and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and
80a-5(a)(1)]. The amendments, however, would also apply to
registered closed-end management investment companies and insurance
company separate accounts organized as management investment
companies that offer variable annuity contracts.
See
Board of Governors of the Federal Reserve System, Flow of Funds
Accounts of the United States: Flows and Outstandings, Third Quarter
2002, at 90 (2002) [hereinafter Flow of Funds Accounts] (estimating
$2.005 trillion market value of mutual fund corporate equity
holdings and $10.960 trillion market value of all corporate equity
issues).
Securities Industry Association,
Securities Industry Fact Book 71 (2002).
Investment Company Institute,
Mutual Fund Fact Book 37 (42nd ed. 2002). Approximately 93 million
individual investors hold shares of mutual funds. Id. Shares of equity mutual funds are held
through 164.8 million shareholder accounts. Id. at 63. A single individual may hold
mutual fund shares through multiple accounts.
See
John Wasik, Speak Loudly - Or Lose Your Big
Stick, The Financial Times, July 24, 2002, at 26 (only eight
retail mutual fund groups openly disclose how they vote on proxies).
We have previously prepared reports commenting on the role of
institutional investors in the corporate accountability process and
their impact on portfolio companies. See
Division of Corporation Finance, SEC, Staff Report on Corporate
Accountability (Sept. 4, 1980) (printed for the use of Senate Comm.
on Banking, Housing and Urban Affairs, 96th Cong., 2d Sess.)
[hereinafter SEC, Staff Report on Corporate Accountability]; SEC,
Institutional Investor Study Report (Mar. 10, 1971) (printed for the
use of House Comm. on Interstate and Foreign Commerce, 92nd Cong.,
1st Sess.) [hereinafter SEC, Institutional Investor Study
Report].
See
generally James M. Storey & Thomas M. Clyde, Mutual Fund Law
Handbook § 7.2 (1998); Allan S. Mostoff & Olivia P. Adler, Organizing an Investment Company - Structural
Considerations § 2.4 in The
Investment Company Regulation Deskbook (Amy L. Goodman ed.,
1997).
SEC v.
Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963)
(interpreting Section 206 of the Investment Advisers Act of 1940).
Cf. Section 36(b) of the Investment
Company Act [15 U.S.C. 80a-35] (investment adviser of a fund has a
fiduciary duty with respect to the receipt of compensation paid by
the fund).
See
Investment Advisers Act Release No. 2106, supra note 5. See
also SEC, Staff Report on Corporate Accountability, supra note 10, at 391 (fiduciary principle
applies to all aspects of investment management, including voting).
Cf. Dep't of Labor, Interpretive
Bulletins Relating to the Employee Retirement Income Security Act of
1974, 29 CFR 2509.94-2 (2002) (fiduciary act of managing employee
benefit plan assets consisting of equity securities includes voting
of proxies appurtenant to those securities).
See,
e.g., SEC, Staff Report on Corporate Accountability, supra note 10, at 404 (investment managers
have routinely supported management slates of director nominees);
Alan R. Palmiter, Mutual Fund Voting of
Portfolio Shares: Why Not Disclose?, 23 Cardozo L. Rev. 1419,
1430-31 (2002) (discussing mutual fund passivity in corporate
governance). See generally John C.
Coffee, Jr., The SEC and The Institutional
Investor: A Half-Time Report, 15 Cardozo L. Rev. 837 (1994)
(institutional investors have historically been passive investors);
Bernard S. Black, Shareholder Passivity
Reexamined, 89 Mich. L. Rev. 520 (1990) (shareholder voting has
historically been passive).
See
SEC, Staff Report on Corporate Accountability, supra note 10, at 392 (describing "Wall
Street Rule").
See,
e.g., Aaron Lucchetti, A Mutual-Fund
Giant Is Stalking Excessive Pay, Wall Street Journal, June 12,
2002, at C1 (Fidelity has voted against management recommendations
involving stock-option plans); Kathleen Day, Prodding For Disclosure of Funds' Proxy
Votes, Washington Post, Apr. 8, 2001, at H1 (Domini Social
Equity Fund voted against management proposal to issue additional
stock options for directors).
See
Palmiter, supra note 14, at 1435-36 (as
holdings have increased, mutual funds have realized that they cannot
easily sell blocks of poorly performing stock).
See
Kathleen Pender, The Influence of Indexing
on the Markets, San Francisco Chronicle, June 23, 2002, at G1
(some index funds are more likely to vote proxies because they
generally cannot sell portfolio securities consistent with their
investment policies).
See,
e.g., Josh Friedman, Vanguard to Turn
More Activist in Proxy Voting, Los Angeles Times, Aug. 22, 2002,
at B3 (Vanguard imposing stricter corporate governance guidelines in
light of recent events); Tom Hamburger, Union Targets Corporate Change, Wall Street
Journal, July 30, 2002, at A2 (workers should use pension funds and
votes to compel changes in corporate behavior); Beth Healy, Big Investors Assuming a More Activist
Stance, Boston Globe, July 11, 2002, at C1 (big investors say
they are taking a more activist stance after financial scandals at
Enron, Global Crossing, and WorldCom); Russ Wiles, Funds May Have More to Say on Governance,
Chicago Sun-Times, June 3, 2002, at F53 (investors taking a closer
look at corporate governance issues as a result of Enron).
See,
e.g., Aaron Bernstein & Geoffrey Smith, Can You Trust Your Fund Company?,
BusinessWeek Online, Aug. 8, 2002 (AFL-CIO argues that conflicts of
interest lead mutual funds to vote with management).
For additional examples of
potential conflicts of interest involving investment advisers, see Investment Advisers Act Release No.
2106, supra note 5, at Section I.,
"Background."
In general, investment companies
are organized either as business trusts in Delaware or
Massachusetts, or as corporations in Maryland. The applicable state
statutes do not specifically permit shareholders to inspect books
and records relating to proxy voting by funds with respect to
portfolio securities. See Del. Code Ann.
tit. 12, § 3801-3824 (2001); Mass. Gen. Laws. Ann. ch. 182, § 1-14
(2002); Md. Code Ann., Corporations § 2-512 (2001).
See
Calvert Group, Ltd. <www.calvertgroup.com> (visited January
14, 2003) (proxy voting policies and votes cast); Domini Social
Investments LLC <www.domini.com> (visited January 14, 2003)
(proxy voting policies and votes cast); Fidelity Management &
Research Company <www.fidelity.com > (visited January 14,
2003) (proxy voting policies); PAX World Management Corporation
<www.paxfund.com> (visited January 14, 2003) (proxy voting
policies and votes cast); Teachers Insurance and Annuity Association
of America-College Retirement and Equities Fund
<www.tiaa-cref.org> (visited January 14, 2003) (proxy voting
policies); The Vanguard Group <www.vanguard.com> (visited
January 14, 2003) (proxy voting policies).
See
Proposing Release, supra note 4. Prior
to our rule proposal, we received three rulemaking petitions urging
that we adopt rules requiring funds to disclose both the policies
and guidelines followed by the funds in determining how to vote on
proxy proposals and the record of actual proxy votes cast. See Rulemaking Petition by Domini Social
Investments, LLC (Nov. 27, 2001); Rulemaking Petition by the
International Brotherhood of Teamsters (Jan. 18, 2001); Rulemaking
Petitions by the American Federation of Labor and Congress of
Industrial Organizations (July 30, 2002 and Dec. 20, 2000). The
rulemaking petitions are available for inspection and copying in
File No. 4-439 in the Commission's Public Reference Room.
See,
e.g., John J. Brennan and Edward C. Johnson 3d, No Disclosure: The Feeling is Mutual, Wall
Street Journal, Jan. 14, 2003, at A14 (arguing that proxy voting
disclosure would harm shareholders); Aaron Lucchetti, SEC Proposal on Proxy Votes Finds Supporters in
the House, Wall Street Journal, Dec. 17, 2002, at C14 (reporting
that House Financial Services Committee Chairman Michael G. Oxley
and Capital Markets Subcommittee Chairman Richard H. Baker support
the proxy voting disclosure proposal); John C. Bogle, Mutual Fund Secrecy, New York Times, Dec.
14, 2002, at A35 (arguing that fund agents should disclose proxy
voting information); Gretchen Morgenson, Wider Support Is Sought For Disclosing Mutual
Fund Votes, New York Times, Oct. 23, 2002, at C11 (explaining
joint efforts of Pax World Funds, AFL-CIO, and Fund Democracy to
urge investors to support the proposal, and discussing comments by
industry participants); Kathleen Day, SEC
Wants Funds To Disclose Votes, Washington Post, Sept. 20, 2002,
at E3 (reporting comments on the proposal by disclosure advocates
and opponents).
The comment letters are available for public
inspection and copying in the Commission's Public Reference Room,
450 Fifth Street, N.W., Washington, D.C. 20549 (File No. S7-36-02).
Public comments submitted by electronic mail are also available on
our website, www.sec.gov. Many of the
comment letters that the Commission received commented on both the
Proposing Release and a companion release proposing a new rule and
rule amendments under the Investment Advisers Act of 1940 that we
are also adopting today. See Investment
Advisers Act Release No. 2106, supra
note 5.
Item 13(f) of Form N-1A; Item
18.16 of Form N-2; Item 20(o) of Form N-3. The SAI is part of a
fund's registration statement and contains information about a fund
in addition to that contained in the prospectus. The SAI is required
to be delivered to investors upon request and is available on the
Commission's Electronic Data Gathering, Analysis, and Retrieval
System ("EDGAR").
Item 7 of Form N-CSR.
See
Investment Advisers Act Release No. 2106, supra note 5, at Section II.A.2.b.
"Resolving Conflicts of Interest" (discussing need for investment
adviser's policies and procedures to address how adviser resolves
material conflicts of interest with its clients).
See
Item 22(b)(7) and 22(c)(5) of Form N-1A; Instructions 4.g. &
5.e. to Item 23 of Form N-2; Instructions 4(vii) & 5(v) to Item
27(a) of Form N-3.
Instructions to Items 22(b)(7) and
22(c)(5) of Form N-1A; Instruction 6.a. to Item 23 of Form N-2;
Instruction 6(i) to Item 27(a) of Form N-3.
"Socially responsible" funds use
social and moral criteria as well as traditional investment criteria
to select investments.
Instruction 1 to Item 13(f) of
Form N-1A; Instruction 1 to Item 18.16 of Form N-2; Instruction 1 to
Item 20(o) of Form N-3; Instruction to Item 7 of Form N-CSR.
Instruction 3 to Item 1(b)(1) of
Form N-1A (requiring fund or financial intermediary through which
shares of the fund may be purchased or sold to send the SAI, within
three business days of receipt of the request, by first-class mail
or other means designed to ensure equally prompt delivery).
See CREF Participants Reject All Four Resolutions
at 2002 Annual Meeting, TIAA-CREF Press Release, Nov. 7, 2002
<www.tiaa-cref.org> (visited Jan. 14, 2002) (18.7% of shares
voted in favor of shareholder proposal that College Retirement
Equities Fund (CREF) disclose how it votes proxies that involve
social and environmental issues).
See
Timothy M. Hunt, IRRC Corporate Governance
Service 2002 Background Report F, Background Reports (IRRC) at
7, 10 (Jan. 2002) (noting that 26.9% of the S&P 500 companies
have confidential voting procedures, with smaller percentages at
smaller companies, and that use of street names often does not
protect the identity of shareholders).
See
discussion infra, "Disclosure of
Complete Proxy Voting Record."
17 CFR 270.30b1-4; General
Instruction A and Item 1 to Form N-PX [17 CFR 274.129].
General Instruction F.2.(a) to
Form N-PX.
Investment Company Act Release No.
25914 (Jan. 27, 2003) (adopting Form N-CSR).
Memorandum from Paul G. Cellupica,
Assistant Director, Office of Disclosure Regulation, Division of
Investment Management, Securities and Exchange Commission re:
Comments of Investment Company Institute (Jan. 15, 2003) ("ICI
Memorandum") (available in the comment file for File Nos. S7-36-02
and S7-38-02 and on the Commission's website, www.sec.gov).
Based on information provided to
the Commission staff by a third party that provides proxy voting
services, the staff estimates that over 54% of shareholder meetings
are held in the period from April through June of each year.
Item 1 of Form N-PX.
Instruction 2 to Item 1 of Form
N-PX. See ICI Memorandum, supra note 40; Letter of Eric D. Roiter,
Senior Vice President and General Counsel, Fidelity Management &
Research Company (Dec. 6, 2002).
In addition, the fund's proxy
voting record will be publicly available on the EDGAR section of the
Commission's website.
Proposed Instructions to Items
13(f), 22(b)(7), and 22(c)(5) of Form N-1A; Proposed Instruction to
Item 18.16 and proposed Instruction 6 to Item 23 of Form N-2;
Proposed Instruction to Item 20(o) and proposed Instruction 6 to
Item 27(a) of Form N-3.
Letter of Matthew P. Fink,
President, Investment Company Institute (Jan. 21, 2003).
Items 13(f), 22(b)(8), and
22(c)(6) of Form N-1A; Item 18.16 and Instructions 4.h and 5.f to
Item 23 of Form N-2; Item 20(o) and Instructions 4(viii) and 5(vi)
to Item 27(a) of Form N-3.
If a fund is complying with this disclosure
requirement, the inclusion of the fund's website address will not,
by itself, include or incorporate by reference the information on
the site into the fund's reports to shareholders or SAI, unless the
fund otherwise acts to incorporate the information by reference. Cf. Securities Act Release No. 8128 (Sept.
5, 2002) [67 FR 58480, 58494 (Sept. 16, 2002)] (noting that if a
company is complying with the requirement to disclose its website
address in its annual report on Form 10-K, inclusion of its website
address would not, by itself, include or incorporate by reference
the information on the website into the filing).
Instruction 2 to Item 13(f),
Instruction 1 to Item 22(b)(8), and Instruction to Item 22(c)(6) of
Form N-1A; Instruction 2 to Item 18.16 and Instruction 6.b. to Item
23 of Form N-2; Instruction 2 to Item 20(o) and Instruction 6(ii) to
Item 27(a) of Form N-3.
Instruction 3 to Item 13(f),
Instruction 2 to Item 22(b)(8), and Instruction to Item 22(c)(6) of
Form N-1A; Instruction 3 to Item 18.16 and Instruction 6.c. to Item
23 of Form N-2; Instruction 3 to Item 20(o) and Instruction 6(iii)
to Item 27(a) of Form N-3.
A fund could satisfy this requirement
through hyperlinking to a third-party service or our EDGAR website.
Cf. Securities Act Release No. 8128
(Sept. 5, 2002) [67 FR 58480, 58493 (Sept. 16, 2002)]. We direct
funds to this release for guidance concerning satisfaction of this
requirement through hyperlinking.
Cf.
Securities Act Release No. 8128 (Sept. 5, 2002) [67 FR 58480, 58493
(Sept. 16, 2002)] (construing the "as soon as reasonably
practicable" standard to mean the same day as filing, barring
unforeseen circumstances, with respect to the requirement that
issuers disclose whether they make reports on Forms 10-K, 10-Q, and
8-K available on their websites as soon as reasonably practicable
after filing of these reports with the Commission).
See
Letter of Peter C. Clapman, Senior Vice President and Chief Counsel,
Teachers Insurance and Annuity Association of America/College
Retirement and Equities Fund (Dec. 6, 2002) (recommending proxy vote
disclosure in instances of potential conflict of interest); Letter
of Leslie L. Ogg, President, Board Services Corporation (Nov. 22,
2002) (recommending disclosure when a fund votes against the
recommendation of management and where a conflict of interest
exists).
Letter of Peter C. Clapman,
Teachers Insurance and Annuity Association of America/College
Retirement Equities Fund (Dec. 6, 2002).
Proposed Items 22(b)(8) &
(c)(6) of Form N-1A; Proposed Instructions 4.h. & 5.f. to Item
23 of Form N-2; Proposed Instructions 4(viii) & 5(vi) to Item
27(a) of Form N-3.
We would not object if existing
funds file their first annual update complying with the amendments
pursuant to rule 485(b) under the Securities Act [17 CFR
230.485(b)], provided that the post-effective amendment otherwise
meets the conditions for immediate effectiveness under the rule.
See,
e.g., Letter of Craig Tyle, General Counsel, Investment Company
Institute (Dec. 6, 2002) ("ICI Letter").
Letter of Eric D. Roiter, Senior
Vice President and General Counsel, Fidelity Management &
Research Co. (Dec. 6, 2002).
Letter of Timothy Smith, Senior
Vice-President, Walden Asset Management (Nov. 20, 2002).
ICI Letter, supra note 55, at 14-15.
See
Investment Company Act Release No. 25914 (Jan. 27, 2003) (release
adopting Form N-CSR).
Investment Company Act Release No.
25739 (Sept. 20, 2002) [67 FR 60828 (Sept. 26, 2002)].
The Commission has submitted
additional collections of information to OMB for Form N-CSR in
connection with Investment Company Act Release No. 25775 (Oct. 22,
2002) [67 FR 66208 (Oct. 30, 2002)] (code of ethics and financial
expert disclosure); Investment Company Act Release No. 25838 (Dec.
2, 2002) [67 FR 76780 (Dec. 13, 2002)] (auditor independence
provisions of the Sarbanes-Oxley Act); Investment Company Act
Release No. 25845 (Dec. 10, 2002) [67 FR 77593 (Dec. 18, 2002)]
(revisions to rule 10b-18 under the Exchange Act); Investment
Company Act Release No. 25870 (Dec. 18, 2002) [68 FR 160 (Jan. 2,
2003)] (shareholder reports and quarterly portfolio disclosure); and
Investment Company Act Release No. 25885 (Jan. 8, 2003) [68 FR 2637
(Jan. 17, 2003)] (standards relating to listed company audit
committees). These submissions are currently pending before OMB. If
these submissions are approved, the approved total burden hours for
Form N-CSR will be 195,472 hours. With the adjustment to reflect the
modifications we are making here to our proposed amendments to Form
N-CSR, the approved total burden hours for Form N-CSR would be
122,798 hours (195,472 - (74,000 - 1,326)).
Rule 30e-1(a) under the Investment
Company Act of 1940 [17 CFR 270.30e-1(a)] requires funds to include
in their shareholder reports the information that is required by the
fund's registration statement form.
We have submitted an additional
collection of information to OMB in connection with Investment
Company Act Release No. 25870 (Dec. 18, 2002) [68 FR 160 (Jan. 2,
2003)] (proposing amendments regarding shareholder reports and
quarterly portfolio disclosure). This submission is currently
pending before OMB. If the submission is approved, the approved
total burden hours for complying with rule 30e-1 will be 926,350
hours. With the adjustment to reflect the modifications we are
making here to our proposed amendments to Forms N-1A, N-2, and N-3,
the approved total burden hours for complying with rule 30e-1 would
be 893,050 hours (926,350-(37,000-3,700)).
The estimate of 3,700 funds is
based on the number of management investment companies currently
registered with the Commission. We estimate, based on data from the
Investment Company Institute and other sources, that there are
approximately 4,700 fund portfolios that invest primarily in equity
securities and 500 "hybrid" or bond portfolios that may hold some
equity securities, for a total of 5,200 portfolios holding equity
securities.
The estimate of 14.4 hours per
equity portfolio is based on the staff's consultations with funds
that currently provide disclosure of their proxy voting records, and
estimates that the average equity fund will cast votes at 144
shareholder meetings during a twelve-month reporting period, and
will vote on three matters at each shareholder meeting, for a total
of 432 matters voted on per year. The estimate of the number of
shareholder meetings per equity fund is based on the staff's
analysis of data on the average number of equities held per fund
from the December 2002 edition of the Morningstar Principia Pro database. The
estimate of the number of matters voted on at each shareholder
meeting is based on information provided to the staff by a
third-party provider of proxy voting services for funds and other
institutional investors.
Proposing Release, supra note 4, 67 FR at 60834.
We believe it is more appropriate
to estimate the burden of complying with Form N-PX by portfolio,
rather than by fund, as we estimated the burden of complying with
Form N-CSR in the Proposing Release. We note that many funds do not
have portfolios that hold equity securities, while many funds have
multiple equity portfolios. Funds with multiple equity portfolios
would be required to report their proxy voting records for each
portfolio holding equity securities.
SEC v.
Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963)
(interpreting Section 206 of the Investment Advisers Act of 1940).
Cf. Section 36(b) of the Investment
Company Act [15 U.S.C. 80a-35] (investment adviser of a fund has a
fiduciary duty with respect to the receipt of compensation paid by
the fund).
See
Investment Advisers Act Release No. 2106, supra note 5. See
also SEC, Staff Report on Corporate Accountability, supra note 10, at 391 (fiduciary principle
applies to all aspects of investment management, including voting).
Cf. Dep't of Labor, Interpretive
Bulletins Relating to the Employee Retirement Income Security Act of
1974, 29 CFR 2509.94-2 (2002) (fiduciary act of managing employee
benefit plan assets consisting of equity securities includes voting
of proxies appurtenant to those securities).
See
Flow of Funds Accounts, supra note
7.
Id.
See,
e.g., Letter of Mercer Bullard, Fund Democracy, LLC (Oct. 21,
2002).
See,
e.g., ICI Letter, supra note 55, at
9; Letter of Robert D. Neary, Chairman of the Board, Armada Funds,
at 2 (Dec. 4, 2002); Letter of Domenick Pugliese, Senior Vice
President, Alliance Capital Management L.P. (Dec. 5, 2002).
See,
e.g., ICI Letter, supra note 55, at
12.
Because closed-end funds do not
offer their shares continuously, and are therefore generally not
required to maintain an updated SAI to meet their obligations under
the Securities Act of 1933, they will be required to disclose their
proxy voting policies and procedures in their annual reports on Form
N-CSR. We are not requiring closed-end funds to provide disclosure
about the availability of their proxy voting policies and records on
Form N-CSR.
This represents 16,594 additional
hours for Form N-1A, 1,196 additional hours for Form N-2, 480
additional hours for Form N-3, and 1,326 additional hours for Form
N-CSR. The estimated total hour burden for disclosure of proxy
voting policies and procedures differs from the figure of 18,270
hours used in the Proposing Release, because here we are including
the estimated hour burden for disclosure of policies and procedures
by closed-end funds on Form N-CSR as well.
These figures are based on a
Commission estimate that approximately 3,700 management investment
companies are subject to the amendments and an estimated hourly wage
rate of $68.94. The estimate of the number of funds is based on data
derived from the Commission's EDGAR filing system. The estimated
wage rate figure is based on published hourly wage rates for
compliance attorneys in New York City ($74.22) and programmers
($27.91), and the estimate, based on the Commission staff's
discussions with certain fund complexes, that attorneys and
programmers will divide time equally on compliance with the proxy
voting disclosure requirements, yielding a weighted wage rate of
$51.065 (($74.22 x .50) + (27.91 x .50)) = $51.065). See Securities Industry Association, Report on Management & Professional
Earnings in the Securities Industry 2001 (Oct. 2001). This
weighted wage rate was then adjusted upward by 35% for overhead,
reflecting the costs of supervision, space, and administrative
support, to obtain the total per hour internal cost of $68.94
(51.065 x 1.35) = $68.94.
The estimate of 14.4 hours per
equity portfolio is based on the staff's consultations with funds
that currently provide disclosure of their proxy voting records, and
estimates that the average equity fund will cast votes at 144
shareholder meetings during a twelve-month reporting period, and
will vote on three matters at each shareholder meeting, for a total
of 432 matters voted on per year. The estimate of the number of
shareholder meetings per equity fund is based on the staff's
analysis of data on the average number of equities held per fund
from the December 2002 edition of the Morningstar Principia Pro database. The
estimate of the number of matters voted on at each shareholder
meeting is based on information provided to the staff by a
third-party provider of proxy voting services for funds and other
institutional investors.
This estimate is based on the
staff's analysis of data from the Investment Company Institute and
other sources indicating that there are approximately 4,700 fund
portfolios that invest primarily in equity securities and 500
"hybrid" or bond portfolios that may hold some equity securities.
These figures are based on the
Commission's estimate that approximately 3,700 funds, with 5,200
portfolios holding equity securities, will report their proxy voting
records on Form N-PX, an estimate of 14.4 hours per equity fund
portfolio filing on Form N-PX, and an estimated hourly wage rate of
$68.94. See supra note 77.
This estimate is based on
information provided to the Division of Investment Management by
registered investment companies regarding printing and typesetting
costs for prospectuses and SAIs.
This estimate regarding the
average number of shareholder accounts per typical fund is derived
from data provided in the Mutual Fund Fact Book, supra note 9, at 63, 64.
These figures are based on a
Commission estimate that approximately 3,700 investment companies
will be subject to the amendments and an estimated hourly wage rate
of $68.94. See supra note 77.
The Commission has modified its
estimate of the total external and internal costs of the additional
disclosure required by the amendments from the estimate in the
Proposing Release, to reflect that it is not adopting the proposal
to require a fund to disclose in its annual and semi-annual reports
to shareholders information regarding any proxy votes that are
inconsistent with its proxy voting policies and procedures, and that
it is requiring funds to disclose their proxy voting records
annually on Form N-PX rather than semi-annually on Form N-CSR.
See,
e.g., ICI Letter, supra note 55, at
14.
ICI Letter, supra note 55, at 14-15.
See,
e.g., Letter of Eric D. Roiter, Senior Vice President and
General Counsel, Fidelity Management & Research Co., at 4 (Dec.
6, 2002).
Instruction 2 to Item 1 of Form
N-PX.
See,
e.g., Letter of Amy Domini, CEO, Domini Social Investments LLC
(Nov. 1, 2002); Letter of Thomas W. Grant, President, and Laurence
A. Shadek, Chairman, Pax World Funds (Nov. 26, 2002); Letter of
Timothy Smith, Senior Vice President, Walden Asset Management (Nov.
20, 2002).
See,
e.g., Letter of Timothy H. Smith, President and Chair, Social
Investment Forum (Nov. 11, 2002).
See,
e.g., Letter of Mercer Bullard, Fund Democracy, LLC (Oct. 21,
2002).
Letter of Eric D. Roiter, Senior
Vice President and General Counsel, Fidelity Management &
Research Co., at 3 (Dec. 6, 2002).
Letter of Timothy Smith, Senior
Vice President, Walden Asset Management (Nov. 20, 2002).
By comparison, a third-party
service provider of proxy voting services to funds and other
institutional investors indicated to the staff that for a basic vote
disclosure website it charges a $3,000 setup fee, a $12,000 base fee
for disclosure for the first fund in the complex, and $1,000 for
additional funds after the first fund. Thus, a fund complex with 20
funds would pay $34,000 ($3,000 + $12,000 + (19 x $1,000)), or
$1,700 per fund.
ICI Letter, supra note 55, at 14-15.
See,
e.g., Letter of Richard Mason, General Counsel, Mosaic Funds
(Nov. 27, 2002).
See,
e.g., Letter of Eric D. Roiter, Senior Vice President and
General Counsel, Fidelity Management & Research Co., at 6-7
(Dec. 6, 2002); Letter of Philip L. Kirstein, General Counsel,
Merrill Lynch Investment Managers, L.P., at 7 (Dec. 6, 2002).
See,
e.g., Jonathan S. Bowater, Paul S. Lowengrub, and James C.
Miller III, The SEC's Proposal to Require
Mutual Funds to Publish Proxy Votes, at 23, attachment to Letter of Craig Tyle, General
Counsel, Investment Company Institute (Jan. 16, 2003).
15 U.S.C. 78w(a)(2).
15 U.S.C. 77(b), 78c(f), and
80a-2(c).
Letter of Mercer Bullard, Fund
Democracy, LLC (Oct. 21, 2002).
Letter of Richard L. Trumka,
Secretary-Treasurer, AFL-CIO, at 4 (Dec. 6, 2002).
Because closed-end funds do not
offer their shares continuously, and are therefore generally not
required to maintain an updated SAI to meet their obligations under
the Securities Act of 1933, they will be required to disclose their
proxy voting policies and procedures in their annual reports on Form
N-CSR.
See,
e.g., Letter of Richard Mason, General Counsel, Mosaic Funds
(Nov. 27, 2002); ICI Letter, supra note
55, at 16.
Letter of Richard Mason, General
Counsel, Mosaic Funds (Nov. 27, 2002).
Letter of Timothy H. Smith,
President and Chair, Social Investment Forum, at 3 (Nov. 11,
2002).
17 CFR 270.0-10.
This estimate is based on figures
compiled by the Commission's staff regarding investment companies
registered on Form N-1A, Form N-2, and Form N-3.
http://www.sec.gov/rules/final/33-8188.htm
Shareholder Communications Facilitation 17 CFR Parts 200 and
240 (Release No. 34-23847;
1C-15435; File No. 87-12-86)
Agency: Securities and
Exchange Commission.
Action: Final rules.
Summary: The Securities
and Exchange Commission ("Commission") today is adopting new
Rule 14b-2 under the Securities Exchange Act of 1934
("Exchange Act") and related amendments to Rules 14a-1, 14a-13, 14c-1 and 14c-7,
which implement provisions of the Shareholder Communications Act
of 1985. New Rule 14b-2 and the related rule amendments
will govern: (1) The process by which registrants communicate with
the beneficial owners of securities registered in the name of a
bank, association or other entity that exercises fiduciary powers
(hereinafter collectively referred to as "banks"); and (2) the proxy
processing activities of banks.
In
addition, the Commission is adopting certain other amendments to
Rule 14a-3 regarding the circumstances under which registrants
are no longer obligated to deliver annual reports or proxy
statements to security holders. This amendment will also apply to
registrant's delivery obligations in connection with information
statements under Rule 14c-2.
Securities and Exchange Commission SEC Rule 14a-1 SEC
Regulation 240.14a-1 17 CFR 240.14a-1
Solicitation of Proxies - Definitions
Originally issued December 18, 1952
(17 FR 11431) As revised through
October 22, 1992 (57 FR 48290)
Unless the
context otherwise requires, all terms used in this regulation have
the same meanings as in the Act or elsewhere in the general rules
and regulations thereunder. In addition, the following definitions
apply unless the context otherwise requires:
- Associate. The term "associate," used to
indicate a relationship with any person, means:
- Any
corporation or organization (other than the registrant or a
majority owned subsidiary of the registrant) of which such
person is an officer or partner or is, directly or indirectly,
the beneficial owner of 10 percent or more of any class of
equity securities;
- Any
trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee
or in a similar fiduciary capacity; and
- Any
relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a
director or officer of the registrant or any of its parents or
subsidiaries.
- Employee benefit plan. For purposes of §§ 240.14a-13, 240.14b-1 and 240.14b-2, the term "employee benefit
plan" means any purchase, savings, option, bonus, appreciation,
profit sharing, thrift, incentive, pension or similar plan solely
for employees, directors, trustees or officers.
- Entity
that exercises fiduciary powers. The term "entity that exercises
fiduciary powers" means any entity that holds securities in
nominee name or otherwise on behalf of a beneficial owner but does
not include a clearing agency registered pursuant to
Section 17A of the Act or a broker or a dealer.
- Exempt
employee benefit plan securities. For purposes of
§§ 240.14a-13, 240.14b-1 and 240.14b-2, the term "exempt
employee benefit plan securities" means:
- Securities of the registrant held by an
employee benefit plan, as defined in paragraph (b) of this
section, where such plan is established by the registrant;
or
- If
notice regarding the current solicitation has been given
pursuant to § 240.14a-13(a)(1)(ii)(C) or if
notice regarding the current request for a list of names,
addresses and securities positions of beneficial owners has been
given pursuant to § 240.14a-13(b)(3), securities of
the registrant held by an employee benefit plan, as defined in
paragraph (b) of this section, where such plan is
established by an affiliate of the registrant.
- Last
fiscal year. The term "last fiscal year" of the registrant means
the last fiscal year of the registrant ending prior to the date of
the meeting for which proxies are to be solicited or if the
solicitation involves written authorizations or consents in lieu
of a meeting, the earliest date on which that they may be used to
effect corporate action.
- Proxy.
The term "proxy" includes every proxy, consent or authorization
within the meaning of Section 14(a) of the Act. The consent
or authorization may take the form of failure to object or to
dissent.
- Proxy
statement. The term "proxy statement" means the statement required
by § 240.14a-3(a) whether or not contained in a single
document.
- Record
date. The term "record date" means the date as of which the record
holders of securities entitled to vote at a meeting or by written
consent or authorization shall be determined.
- Record
holder. For purposes of
§§ 240.14a-13, 240.14b-1
and 240.14b-2, the term "record holder" means
any broker, dealer, voting trustee, bank, association or other
entity that exercises fiduciary powers which holds securities of
record in nominee name or otherwise or as a participant in a
clearing agency registered pursuant to Section 17A of the
Act.
- Registrant. The term "registrant" means the
issuer of the securities in respect of which proxies are to be
solicited.
- Respondent bank. For purposes of §§ 240.14a-13, 240.14b-1 and 240.14b-2, the term "respondent bank"
means any bank, association or other entity that exercises
fiduciary powers which holds securities on behalf of beneficial
owners and deposits such securities for safekeeping with another
bank, association or other entity that exercises fiduciary
powers.
- Solicitation.
- The
terms "solicit" and "solicitation" include:
- Any
request for a proxy whether or not accompanied by or included
in a form of proxy;
- Any
request to execute or not to execute, or to revoke, a proxy;
or
- The
furnishing of a form of proxy or other communication to
security holders under circumstances reasonably calculated to
result in the procurement, withholding or revocation of a
proxy.
- The
terms do not apply, however, to:
- The
furnishing of a form of proxy to a security holder upon the
unsolicited request of such security holder;
- The
performance by the registrant of acts required by
§ 240.14a-7;
- The
performance by any person of ministerial acts on behalf of a
person soliciting a proxy; or
- A
communication by a security holder who does not otherwise
engage in a proxy solicitation (other than a solicitation
exempt under § 240.14a-2) stating how the security holder
intends to vote and the reasons therefore, provided that the
communication:
- Is made by means of speeches in public
forums, press releases, published or broadcast opinions,
statements, or advertisements appearing in a broadcast
media, or newspaper, magazine or other bona fide publication
disseminated on a regular basis,
- Is directed to persons to whom the
security holder owes a fiduciary duty in connection with the
voting of securities of a registrant held by the security
holder, or
- Is made in response to unsolicited
requests for additional information with respect to a prior
communication by the security holder made pursuant to this
paragraph (l)(2)(iv).
Securities and Exchange Commission SEC Rule 14a-13 SEC Regulation 240.14a-13
17 CFR 240.14a-13
Obligations of registrant in communicating with
beneficial owners
Originally issued December 6, 1986
(51 FR 44276) As revised through
January 10, 1992 (57 FR 1099)
- If the
registrant knows that securities of any class entitled to vote at
a meeting (or by written consents or authorizations if no meeting
is held) with respect to which the registrant intends to solicit
proxies, consents or authorizations are held of record by a
broker, dealer, voting trustee, bank, association, or other entity
that exercises fiduciary powers in nominee name or otherwise, the
registrant shall:
- By
first class mail or other equally prompt means:
- Inquire of each such record holder:
- Whether other persons are the
beneficial owners of such securities and if so, the number
of copies of the proxy and other soliciting material
necessary to supply such material to such beneficial
owners;
- In the case of an annual (or special
meeting in lieu of the annual) meeting, or written consents
in lieu of such meeting, at which directors are to be
elected, the number of copies of the annual report to
security holders necessary to supply such report to
beneficial owners to whom such reports are to be distributed
by such record holder or its nominee and not by the
registrant;
- If the record holder has an obligation
under § 240.14b-1(b)(3) or § 240.14b-2(b)(4)(ii)
and (iii), whether an agent has been designated to
act on its behalf in fulfilling such obligation and, if so,
the name and address of such agent; and
- Whether it holds the registrant's
securities on behalf of any respondent bank and, if so, the
name and address of each such respondent bank; and
- Indicate to each such record holder:
- Whether the registrant, pursuant to
paragraph (c) of this section, intends to distribute
the annual report to security holders to beneficial owners
of its securities whose names, addresses and securities
positions are disclosed pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii)
and (iii);
- The record date; and
- At the option of the registrant, any
employee benefit plan established by an affiliate of the
registrant that holds securities of the registrant that the
registrant elects to treat as exempt employee benefit plan
securities;
- Upon
receipt of a record holder's or respondent bank's response
indicating, pursuant to § 240.14b-2(b)(1)(i), the names
and addresses of its respondent banks, within one business day
after the date such response is received, make an inquiry of and
give notification to each such respondent bank in the same
manner required by paragraph (a)(1) of this section;
Provided, however, the inquiry required by
paragraphs (a)(1) and (a)(2) of this section shall not
cover beneficial owners of exempt employee benefit plan
securities;
- Make
the inquiry required by paragraph (a)(1) of this section at
least 20 business days prior to the record date of the meeting
of security holders, or
- If
such inquiry is impracticable 20 business days prior to the
record date of a special meeting, as many days before the
record date of such meeting as is practicable or,
- If
consents or authorizations are solicited, and such inquiry is
impracticable 20 business days before the earliest date on
which they may be used to effect corporate action, as many
days before that date as is practicable, or
- At
such later time as the rules of a national securities exchange
on which the class of securities in question is listed may
permit for good cause shown; Provided, however, That if a
record holder or respondent bank has informed the registrant
that a designated office(s) or department(s) is to receive
such inquiries, the inquiry shall be made to such designated
office(s) or department(s); and
- Supply, in a timely manner, each record
holder and respondent bank of whom the inquiries required by
paragraphs (a)(1) and (a)(2) of this section are made
with copies of the proxy, other proxy soliciting material,
and/or the annual report to security holders, in such
quantities, assembled in such form and at such place(s), as the
record holder or respondent bank may reasonably request in order
to send such material to each beneficial owner of securities who
is to be furnished with such material by the record holder or
respondent bank; and
- Upon
the request of any record holder or respondent bank that is
supplied with proxy soliciting material and/or annual reports to
security holders pursuant to paragraph (a)(4) of this
section, pay its reasonable expenses for completing the mailing
of such material to beneficial owners.
Note 1: If the
registrant's list of security holders indicates that some of its
securities are registered in the name of a clearing agency
registered pursuant to Section 17A of the Act (e.g., "Cede & Co.," nominee for the
Depository Trust Company), the registrant shall make
appropriate inquiry of the clearing agency and thereafter of the
participants in
such
clearing agency who may hold on behalf of a beneficial owner or
respondent bank, and shall comply with the above paragraph
with respect to any such participant (see § 240.14a-1).
Note 2: The
attention of registrants is called to the fact that each broker,
dealer, bank, association, and other entity that exercises
fiduciary powers has an obligation pursuant to § 240.14b-1 and § 240.14b-2 (except as provided
therein with respect to exempt employee benefit plan securities
held in nominee name) and, with respect to brokers
and dealers, applicable self-regulatory organization
requirements to obtain and forward, within the time periods
prescribed therein, (a) proxies (or in lieu thereof
requests for voting instructions) and proxy soliciting materials
to beneficial owners on whose behalf it holds securities,
and (b) annual reports to security holders to beneficial owners
on whose behalf it holds securities, unless the registrant
has notified the record holder or respondent bank that it has
assumed responsibility to mail such material to
beneficial owners whose names, addresses, and securities
positions are disclosed pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii)
and (iii).
Note 3: The attention of registrants is
called to the fact that registrants have an obligation, pursuant
to paragraph (d) of this section, to cause proxies (or in
lieu thereof requests for voting instructions), proxy soliciting
material and annual reports to security holders to be furnished,
in a timely manner, to beneficial owners of exempt employee
benefit plan securities.
- Any
registrant requesting pursuant to § 240.14b-1(b)(3) or § 240.14b- 2(b)(4)(ii)
and (iii) a list of names, addresses and securities
positions of beneficial owners of its securities who either have
consented or have not objected to disclosure of such information
shall:
- By
first class mail or other equally prompt means, inquire of each
record holder and each respondent bank identified to the
registrant pursuant to § 240.14b-2(b)(4)(i) whether such
record holder or respondent bank holds the registrant's
securities on behalf of any respondent banks and, if so, the
name and address of each such respondent bank;
- Request such list to be compiled as of a
date no earlier than five business days after the date the
registrant's request is received by the record holder or
respondent bank; Provided, however, That if the record holder or
respondent bank has informed the registrant that a designated
office(s) or department(s) is to receive such requests, the
request shall be made to such designated office(s) or
department(s);
- Make
such request to the following persons that hold the registrant's
securities on behalf of beneficial owners: all brokers, dealers,
banks, associations and other entities that exercises fiduciary
powers; Provided however, such request shall not cover
beneficial owners of exempt employee benefit plan securities as
defined in § 240.14a-1(d)(1); and, at the
option of the registrant, such request may give notice of any
employee benefit plan established by an affiliate of the
registrant that holds securities of the registrant that the
registrant elects to treat as exempt employee benefit plan
securities;
- Use
the information furnished in response to such request
exclusively for purposes of corporate communications; and
- Upon
the request of any record holder or respondent bank to whom such
request is made, pay the reasonable expenses, both direct and
indirect, of providing beneficial owner information. Note: A
registrant will be deemed to have satisfied its obligations
under paragraph (b) of this section by requesting
consenting and non-objecting beneficial owner lists from a
designated agent acting on behalf of the record holder or
respondent
bank and
paying to that designated agent the reasonable expenses of
providing the beneficial owner information.
- A
registrant, at its option, may mail its annual report to security
holders to the beneficial owners whose identifying information is
provided by record holders and respondent banks, pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii)
and (iii), provided that such registrant notifies the
record holders and respondent banks, at the time it makes the
inquiry required by paragraph (a) of this section, that the
registrant will mail the annual report to security holders to the
beneficial owners so identified.
- If a
registrant solicits proxies, consents or authorizations from
record holders and respondent banks who hold securities on behalf
of beneficial owners, the registrant shall cause proxies (or in
lieu thereof requests or voting instructions), proxy soliciting
material and annual reports to security holders to be furnished,
in a timely manner, to beneficial owners of exempt employee
benefit plan securities.
Securities and Exchange Commission SEC Rule 14b-1 SEC Regulation 240.14b-1
17 CFR 240.14b-1
Obligation of
registered brokers and dealers in connection with the prompt
forwarding of certain communications to beneficial owners
Originally issued July 13, 1977
(42 FR 35955) As revised through
January 10, 1992 (57 FR 1099)
- Definitions. Unless the context otherwise
requires, all terms used in this section shall have the same
meanings as in the Act and, with respect to proxy soliciting
material, as in § 240.14a-1 thereunder and, with
respect to information statements, as in § 240.14c-1 thereunder. In addition,
as used in this section, the term "registrant" means:
- The
issuer of a class of securities registered pursuant to
Section 12 of the Act; or
- An
investment company registered under the Investment Company Act
of 1940.
- Dissemination and beneficial owner
information requirements. A broker or dealer registered under
Section 15 of the Act shall comply with the following
requirements for disseminating certain communications to
beneficial owners and providing beneficial owner information to
registrants.
- The
broker or dealer shall respond, by first class mail or other
equally prompt means, directly to the registrant no later than
seven business days after the date it receives an inquiry made
in accordance with § 240.14a-13(a) or § 240.14c-7(a) by indicting, by
means of a search card or otherwise:
- The
approximate number of customers of the broker or dealer who
are beneficial owners of the registrant's securities that are
held of record by the broker, dealer, or its nominee;
- The
number of customers of the broker or dealer who are beneficial
owners of the registrant's securities who have objected to
disclosure of their names, addresses, and securities positions
if the registrant has indicated, pursuant to § 240.14a-13(a)(1)(ii)(A) or § 240.14c-7(a)(1)(ii)(A), that
it will distribute the annual report to security holders to
beneficial owners of its securities whose names, addresses and
securities positions are disclosed pursuant to
paragraph (b)(3) of this section; and
- The
identity of the designated agent of the broker or dealer, if
any, acting on its behalf in fulfilling its obligations under
paragraph (b)(3) of this section; Provided, however, that
if the broker or dealer has informed the registrant that a
designated office(s) or department(s) is to receive such
inquiries, receipt for purposes of paragraph (b)(1) of
this section shall mean receipt by such designated office(s)
or department(s).
- The
broker or dealer shall, upon receipt of the proxy, other proxy
soliciting material, information statement, and/or annual
reports to security holders, forward such materials to its
customers who are beneficial owners of the registrant's
securities no later than five business days after receipt of the
proxy material, information statement or annual reports.
- The
broker or dealer shall, through its agent or directly:
- Provide the registrant, upon the
registrant's request, with the names, addresses, and
securities positions, compiled as of a date specified in the
registrant's request which is no earlier than five business
days after the date the registrant's request is received, of
its customers who are beneficial owners of the registrant's
securities and who have not objected to disclosure of such
information; Provided , however, that if the broker or dealer
has informed the registrant that a designated office(s) or
department(s) is to receive such requests, receipt shall mean
receipt by such designated office(s) or department(s);
and
- Transmit the data specified in
paragraph (b)(3)(i) of this section to the registrant no
later than five business days after the record date or other
date specified by the registrant.
Note 1: Where a broker or dealer employs
a designated agent to act on its behalf in performing the
obligations imposed on the broker or dealer by
paragraph (b)(3) of this section, the five business day
time period for determining the date as of which the
beneficial owner information is to be compiled is calculated
from the date the designated agent receives the registrant's
request. In complying with the registrant's request for
beneficial owner information under paragraph (b)(3) of
this section, a broker or dealer need only supply the
registrant with the names, addresses, and securities positions
of non-objecting beneficial owners. Note 2: If a broker or dealer receives a
registrant's request less than five business days before the
requested compilation date, it must provide a list compiled as
of a date that is no more than five business days after
receipt and transmit the list within five business days after
the compilation date.
- Exceptions to dissemination and beneficial
owner information requirements. A broker or dealer registered
under Section 15 of the Act shall be subject to the following
with respect to its dissemination and beneficial owner information
requirements.
- With
regard to beneficial owners of exempt employee benefit plan
securities, the broker or dealer shall:
- Not
include information in its response pursuant to paragraph (b)(1) of this section
or forward proxies (or in lieu thereof requests for voting
instructions), proxy soliciting material, information
statements, or annual reports to security holders pursuant to
paragraph (b)(2) of this section
to such beneficial owners; and
- Not
include in its response, pursuant to paragraph (b)(3) of this
section, data concerning such beneficial owners.
- A
broker or dealer need not satisfy:
- Its
obligations under paragraphs (b)(2) and (b)(3) of this section if a
registrant does not provide assurance of reimbursement of the
broker's or dealer's reasonable expenses, both direct and
indirect, incurred in connection with performing the
obligations imposed by paragraphs (b)(2) and (b)(3) of this section; or
- Its
obligation under paragraph (b)(2) of this section
to forward annual reports to non-objecting beneficial owners
identified by the broker or dealer, through its agent or
directly, pursuant to paragraph (b)(3) of this section
if the registrant notifies the broker or dealer pursuant to § 240.14a-13(c) or § 240.14c-7(c) that the
registrant will mail the annual report to such non- objecting
beneficial owners identified by the broker or dealer and
delivered in a list to the registrant pursuant to paragraph (b)(3) of this
section.
Securities and Exchange
Commission
SEC Rule
14b-2 SEC Regulation 240.14b-2 17 CFR 240.14b-2
Obligation of banks,
associations and other entities that exercise fiduciary powers in
connection with the prompt forwarding of certain communications to
beneficial owners.
Originally issued December 9, 1986
(51 FR 44278) As revised through
January 10, 1992 (57 FR 1100)
- Definitions. Unless the context otherwise
requires, all terms used in this section shall have the same
meanings as in the Act and, with respect to proxy soliciting
material, as in § 240.14a-1 thereunder and, with
respect to information statements, as in § 240.14c-1 thereunder. In addition,
as used in this section, the following terms shall apply:
- The
term "bank" means a bank, association, or other entity that
exercises fiduciary powers.
- The
term "beneficial owner" includes any person who has or shares,
pursuant to an instrument, agreement, or otherwise, the power to
vote, or to direct the voting of a security.
Note 1: If more
than one person shares voting power, the provisions of the
instrument creating that voting power shall govern with respect
to whether consent to disclosure of beneficial owner information
has been given.
Note 2: If more than one person shares
voting power or if the instrument creating that voting power
provides that such power shall be exercised by different persons
depending on the nature of the corporate action involved, all
persons entitled to exercise such power shall be deemed
beneficial owners; Provided, however, that only one such
beneficial owner need be designated among the beneficial owners
to receive proxies or requests for voting instructions, other
proxy soliciting material, information statements, and/or annual
reports to security holders, if the person so designated assumes
the obligation to disseminate, in a timely manner, such
materials to the other beneficial owners.
- The
term "registrant" means:
- The
issuer of a class of securities registered pursuant to
Section 12 of the Act; or
- An
investment company registered under the Investment Company Act
of 1940.
- Dissemination and beneficial owner
information requirements. A bank shall comply with the following
requirements for disseminating certain communications to
beneficial owners and providing beneficial owner information to
registrants.
- The
bank shall:
- Respond, by first class mail or other
equally prompt means, directly to the registrant, no later
than one business day after the date it receives an inquiry
made in accordance with § 240.14a-13(a) or § 240.14c-7(a) by indicating the
name and address of each of its respondent banks that holds
the registrant's securities on behalf of beneficial owners, if
any; and
- Respond, by first class mail or other
equally prompt means, directly to the registrant no later than
seven business days after the date it receives an inquiry made
in accordance with § 240.14a-13(a) or § 240.14c-7(a) by indicating,
by means of a search card or otherwise:
- The approximate number of customers of
the bank who are beneficial owners of the registrant's
securities that are held of record by the bank or its
nominee;
- If the registrant has indicated,
pursuant to § 240.14a-13(a)(1)(ii)(A) or
§ 240.14c-7(a)(1)(ii)(A), that
it will distribute the annual report to security holders to
beneficial owners of its securities whose names, addresses,
and securities positions are disclosed pursuant to
paragraphs (b)(4)(ii) and (iii) of this section:
- With respect to customer accounts
opened on or before December 28, 1986, the number of
beneficial owners of the registrant's securities who have
affirmatively consented to disclosure of their names,
addresses, and securities positions; and
- With respect to customer accounts
opened after December 28, 1986, the number of beneficial
owners of the registrant's securities who have not
objected to disclosure of their names, addresses, and
securities positions; and
- The identity of its designated agent,
if any, acting on its behalf in fulfilling its obligations
under paragraphs (b)(4)(ii) and (iii) of this
section;
Provided, however, that, if the bank or
respondent bank has informed the registrant that a designated
office(s) or department(s) is to receive such inquiries, receipt
for purposes of paragraphs (b)(1)(i) and (ii) of this
section shall mean receipt by such designated office(s) or
department(s).
- Where
proxies are solicited, the bank shall, within five business days
after the record date:
- Execute an omnibus proxy, including a
power of substitution, in favor of its respondent banks and
forward such proxy to the registrant; and
- Furnish a notice to each respondent bank
in whose favor an omnibus proxy has been executed that it has
executed such a proxy, including a power of substitution, in
its favor pursuant to paragraph (b)(2)(i) of this
section.
- Upon
receipt of the proxy, other proxy soliciting material,
information statement, and/or annual reports to security
holders, the bank shall forward such materials to each
beneficial owner on whose behalf it holds securities, no later
than five business days after the date it receives such material
and, where a proxy is solicited, the bank shall forward, with
the other proxy soliciting material and/or the annual report,
either:
- A
properly executed proxy:
- Indicating the number of securities
held for such beneficial owner;
- Bearing the beneficial owner's account
number or other form of identification, together with
instructions as to the procedures to vote the
securities;
- Briefly stating which other proxies, if
any, are required to permit securities to be voted under the
terms of the instrument creating that voting power or
applicable state law; and
- Being accompanied by an envelope
addressed to the registrant or its agent, if not provided by
the registrant; or
- A
request for voting instructions (for which registrant's form
of proxy may be used and which shall be voted by the record
holder bank or respondent bank in accordance with the
instructions received), together with an envelope addressed to
the record holder bank or respondent bank.
- The
bank shall:
- Respond, by first class mail or other
equally prompt means, directly to the registrant no later than
one business day after the date it receives an inquiry made in
accordance with § 240.14a-13(b)(1) or § 240.14c-7(b)(1) by indicating
the name and address of each of its respondent banks that
holds the registrant's securities on behalf of beneficial
owners, if any;
- Through its agent or directly, provide
the registrant, upon the registrant's request, and within the
time specified in paragraph (b)(4)(iii) of this section,
with the names, addresses, and securities position, compiled
as of a date specified in the registrant's request which is no
earlier than five business days after the date the
registrant's request is received, of:
- With respect to customer accounts
opened on or before December 28, 1986, beneficial owners of
the registrant's securities on whose behalf it holds
securities who have consented affirmatively to disclosure of
such information, subject to paragraph (b)(5) of this
section; and
- With respect to customer accounts
opened after December 28, 1986, beneficial owners of the
registrant's securities on whose behalf it holds securities
who have not objected to disclosure of such
information;
Provided, however, that if the record
holder bank or respondent bank has informed the registrant
that a designated office(s) or department(s) is to receive
such requests, receipt for purposes of
paragraphs (b)(4)(i) and (ii) of this section shall
mean receipt by such designated office(s) or department(s);
and
- Through its agent or directly, transmit
the data specified in paragraph (b)(4)(ii) of this
section to the registrant no later than five business days
after the date specified by the registrant.
Note 1: Where a
record holder bank or respondent bank employs a designated
agent to act on its behalf in performing the obligations
imposed on it by paragraphs (b)(4)(ii) and (iii) of
this section, the five business day time period for
determining the date as of which the beneficial owner
information is to be compiled is calculated from the date the
designated agent receives the registrant's request. In
complying with the registrant's request for beneficial owner
information under paragraphs (b)(4)(ii) and (iii) of
this section, a record holder bank or respondent bank need
only supply the registrant with the names, addresses and
securities positions of affirmatively consenting and
non-objecting beneficial owners.
Note 2: If a record holder bank or
respondent bank receives a registrant's request less than five
business days before the requested compilation date, it must
provide a list compiled as of a date that is no more than five
business days after receipt and transmit the list within five
business days after the compilation date.
- For
customer accounts opened on or before December 28, 1986, unless
the bank has made a good faith effort to obtain affirmative
consent to disclosure of beneficial owner information pursuant
to paragraph (b)(4)(ii) of this
section, the bank shall provide such information as to
beneficial owners who do not object to disclosure of such
information. A good faith effort to obtain affirmative consent
to disclosure of beneficial owner information shall include, but
shall not be limited to, making an inquiry:
- Phrased in neutral language, explaining
the purpose of the disclosure and the limitations on the
registrant's use thereof;
- Either in at least one mailing separate
from other account mailings or in repeated mailings;
and
- In
a mailing that includes a return card, postage paid enclosure.
- Exceptions to dissemination and beneficial
owner information requirements. The bank shall be subject to the
following respect to its dissemination and beneficial owner
requirements.
- With
regard to beneficial owners of exempt employee benefit plan
securities, the bank shall not:
- Include information in its response
pursuant to paragraph (b)(1) of this
section; or forward proxies (or in lieu thereof requests for
voting instructions), proxy soliciting material, information
statements, or annual reports to security holders pursuant
to
paragraph (b)(3) of this section to such beneficial
owners; or
- Include in its response pursuant to
paragraphs (b)(4) and (b)(5) of this section data
concerning such beneficial owners.
- The
bank need not satisfy:
- Its
obligations under paragraphs (b)(2), (b)(3), and (b)(4) of this section if a
registrant does not provide assurance of reimbursement of its
reasonable expenses, both direct and indirect, incurred in
connection with performing the obligations imposed by
paragraphs (b)(2), (b)(3), and (b)(4) of this
section; or
- Its
obligation under paragraph (b)(3) of this section
to forward annual reports to consenting and non-objecting
beneficial owners identified pursuant to paragraphs (b)(4)(ii)
and (iii) of this section if the registrant notifies
the record holder bank or respondent bank, pursuant to § 240.14a-13(c) or § 240.14c-7(c), that the
registrant will mail the annual report to beneficial owners
whose names addresses and securities positions are disclosed
pursuant to paragraphs (b)(4)(ii) and (iii) of this
section.
- For
the purposes of determining the fees which may be charged to
registrants pursuant to § 240.14a-13(b)(5), § 240.14c-7(a)(5), and
paragraph (c)(2) of this section for performing obligations
under paragraphs (b)(2), (b)(3), and (b)(4) of this section, an amount no
greater than that permitted to be charged by brokers or dealers
for reimbursement of their reasonable expenses, both direct and
indirect, incurred in connection with performing the obligations
imposed by paragraphs (b)(2) and (b)(3) of § 240.14b-1, shall be
deemed to be reasonable.
Securities and Exchange Commission SEC Rule 14c-1 SEC Regulation 240.14c-1 17
CFR 240.14c-1
Distribution of
Information Pursuant to Section 14(C) Definitions
Originally issued November 20, 1986
(51 FR 42070) As revised through
January 10, 1992 (57 FR 1101)
Unless the
context otherwise requires, all terms used in this regulation have
the same meanings as in the Act or elsewhere in the general rules
and regulations thereunder. In addition, the following definitions
apply unless the context otherwise requires:
- Associate. The term "associate," used to
indicate a relationship with any person, means:
- Any
corporation or organization (other than the registrant or a
majority owned subsidiary of the registrant) of which such
person is an officer or partner or is, directly or indirectly,
the beneficial owner of 10 percent or more of any class of
equity securities;
- Any
trust or other estate in which such person has a substantial
beneficial interest or as to which such person serves as trustee
or in a similar fiduciary capacity; and
- Any
relative or spouse of such person, or any relative of such
spouse, who has the same home as such person or who is a
director or officer of the registrant or any of its parents or
subsidiaries.
- Employee benefit plan. For purposes of § 240.14c-7, the term "employee
benefit plan" means any purchase, savings, option, bonus,
appreciation, profit sharing, thrift, incentive, pension or
similar plan primarily for employees, directors, trustees or
officers.
- Entity
that exercises fiduciary powers. The term "entity that exercises
fiduciary powers" means any entity that holds securities in
nominee name or otherwise on behalf of a beneficial owner but does
not include a clearing agency registered pursuant to
Section 17A of the Act, or a broker or a dealer.
- Exempt
employee benefit plan securities. For purposes of § 240.14c-7, the term "exempt
employee benefit plan securities" means:
- Securities of the registrant held by an
employee benefit plan, as defined in paragraph (b) of this
section, where such plan is established by the registrant; or
- If
notice regarding the current distribution of information
statements has been given pursuant to § 240.14c-7(a)(1)(ii)(C) or if
notice regarding the current request for a list of names,
addresses and securities positions of beneficial owners has been
given pursuant to
§ 240.14c-7(b)(3), securities of the registrant held by
an employee benefit plan, as defined in paragraph (b) of
this section, where such plan is established by an affiliate of
the registrant.
- Information statement. The term "information
statement" means the statement required by § 240.14c-2,
whether or not contained in a single document.
- Last
fiscal year. The term "last fiscal year" of the registrant means
the last fiscal year of the registrant ending prior to the date of
the meeting with respect to which an information statement is
required to be distributed, or if the information statement
involves consents or authorizations in lieu of a meeting, the
earliest date on which they may be used to effect corporate
action.
- Proxy.
The term "proxy" includes every proxy, consent or authorization
within the meaning of Section 14(a) of the Act. The consent
or authorization may take the form of failure to object or to
dissent.
- Record
date. The term "record date" means the date as of which the record
holders of securities entitled to vote at a meeting or by written
consent or authorization shall be determined.
- Record
holder. For purposes of § 240.14c-7, the term "record
holder" means any broker, dealer, voting trustee, bank,
association or other entity that exercises fiduciary powers which
holds securities of record in nominee name or otherwise or as a
participant in a clearing agency registered pursuant to
Section 17A of the Act.
- Registrant. The term "registrant" means:
- The
issuer of a class of securities registered pursuant to
Section 12 of the Act; or
- An
investment company registered under the Investment Company Act
of 1940 that has made a public offering of its
securities.
- Respondent bank. For purposes of § 240.14c-7, the term "respondent
bank" means any bank, association or other entity that exercises
fiduciary powers which holds securities on behalf of beneficial
owners and deposits such securities for safekeeping with another
bank, association or other entity that exercises fiduciary
powers.
Securities and Exchange Commission SEC Rule 14c-7 SEC Regulation 240.14c-7 17
CFR 240.14c-7
Providing Copies
of material for certain beneficial owners.
Originally issued December 9, 1986
(51 FR 44280) As revised through
January 10, 1992 (57 FR 1102)
- (a) If
the registrant knows that securities of any class entitled to vote
at a meeting, or by written authorizations or consents if no
meeting is held, are held of record by a broker, dealer, voting
trustee, or bank, association, or other entity that exercises
fiduciary powers in nominee name or otherwise, the registrant
shall:
- By
first class mail or other equally prompt means:
- Inquire of each such record holder:
- Whether other persons are the
beneficial owners of such securities and, if so, the number
of copies of the information statement necessary to supply
such material to such beneficial owners;
- In the case of an annual (or special
meeting in lieu of the annual) meeting, or written consents
in lieu of such meeting, at which directors are to be
elected, the number of copies of the annual report to
security holders, necessary to supply such report to such
beneficial owners for whom proxy material has not been and
is not to be made available and to whom such reports are to
be distributed by such record holder or its nominee and not
by the registrant;
- If the record holder or respondent bank
has an obligation under § 240.14b- 1(b)(3) or § 240.14b-2(b)(4)(ii)
and (iii), whether an agent has been designated to
act on its behalf in fulfilling such obligation, and, if so,
the name and address of such agent; and
- Whether it holds the registrant's
securities on behalf of any respondent bank and, if so, the
name and address of each such respondent bank; and
- Indicate to each such record holder:
- Whether the registrant pursuant to
paragraph (c) of this section, intends to distribute
the annual report to security holders to beneficial owners
of its securities whose names, addresses and securities
positions are disclosed pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii)
and (iii);
- The record date; and
- At the option of the registrant, any
employee benefit plan established by an affiliate of the
registrant that holds securities of the registrant that the
registrant elects to treat as exempt employee benefit plan
securities;
- Upon
receipt of a record holder's or respondent bank's response
indicating, pursuant to § 240.14b-2(a)(1), the names and
addresses of its respondent banks, within one business day after
the date such response is received, make an inquiry of and give
notification to each such respondent bank in the same manner
required by paragraph (a)(1) of this section;
Provided, however, the inquiry required by
paragraphs (a)(1) and (a)(2) of this section shall not cover
beneficial owners of exempt employee benefit plan
securities;
- Make
the inquiry required by paragraph (a)(1) of this section
on the earlier of:
- At
least 20 business days prior to the record date of the meeting
of security holders or the record date of written consents in
lieu of a meeting; or
- At
least 20 business days prior to the date the information
statement is required to be sent or given pursuant to
§ 240.14c-2(b);
Provided, however, That, if a record
holder or respondent bank has informed the registrant that a
designated office(s) or department(s) is to receive such
inquiries, the inquiry shall be made to such designated
office(s) or department(s);
- Supply, in a timely manner, each record
holder and respondent bank of whom the inquires required by paragraphs (a)(1) and paragraphs (a)(2) of this section are made with
copies of the information statement and/or the annual report to
security holders, in such quantities, assembled in such form and
at such place(s), as the record holder or respondent bank may
reasonably request in order to send such material to each
beneficial owner of securities who is to be furnished with such
material by the record holder or respondent bank; and
- Upon
the request of any record holder or respondent bank that is
supplied with information statements and/or annual reports to
security holders pursuant to paragraph (a)(3) of this section,
pay its reasonable expenses for completing the mailing of such
material to beneficial owners.
Note 1: If the registrant's list of
security holders indicates that some of its securities are
registered in the name of a clearing agency registered pursuant
to Section 17A of the Act (e.g., "Cede & Co.," nominee
for the Depository Trust Company), the registrants shall make
appropriate inquiry of the clearing agency and thereafter of the
participants in such clearing agency who may hold on behalf of a
beneficial owner or respondent bank, and shall comply with the
above paragraph with respect to any such participant (see
§ 240.14c-1 (h)).
Note 2: The requirement for sending an
annual report to security holders of record having the same
address will be satisfied by sending at least one report to a
holder of record at that address provided that those holders of
record to whom a report is not sent agree thereto in writing.
This procedure is not available to registrants, however, where
banks, associations, other entities that exercise fiduciary
powers, brokers, dealers and other persons hold securities in
nominee accounts or "street names" on behalf of beneficial
owners, and such persons are not relieved of any obligation to
obtain or send such annual report to the beneficial owners.
Note 3: The
attention of registrants is called to the fact that each broker,
dealer, bank, association, and other entity that exercises
fiduciary powers has an obligation pursuant to § 240.14b-1 and § 240.14b-2 (except as provided
therein with respect to exempt employee benefit plan securities
held in nominee name) and, with respect to brokers and dealers,
applicable self-regulatory organization requirements to obtain
and forward, within the time periods prescribed therein, (a)
information statements to beneficial owners on whose behalf it
holds securities, and (b) annual reports to security
holders to beneficial owners on whose behalf it holds
securities, unless the registrant has notified the record holder
or respondent bank that it has assumed responsibility to mail
such material to beneficial owners whose names, addresses, and
securities positions are disclosed pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii)
and (iii).
Note 4: The attention of registrants is
called to the fact that registrants have an obligation, pursuant
to paragraph (d) of this section, to cause information
statements and annual reports to security holders to be
furnished, in accordance with § 240.14c-2, to beneficial
owners of exempt employee benefit plan securities.
- Any
registrant requesting pursuant to § 240.14b-1(b)(3) and § 240.14b- 2(b)(4)(ii)
and (iii) a list of names, addresses and securities
positions of beneficial owners of its securities who either have
consented or have not objected to disclosure of such information
shall:
- By
first class mail or other equally prompt means, inquire of each
record holder and each respondent bank identified to the
registrant pursuant to § 240.14b-2(e)(1) whether such
record holder or respondent bank holds the registrant's
securities on behalf of any respondent banks and, if so, the
name and address of each such respondent bank;
- Request such list be compiled as of a date
no earlier than five business days after the date the
registrant's request is received by the record holder or
respondent bank; Provided, however, That if the record holder or
respondent bank has informed the registrant that a designated
office(s) or department(s) is to receive such requests, the
request shall be made to such designated office(s) or
department(s);
- Make
such request to the following persons that hold the registrant's
securities on behalf of beneficial owners: all brokers, dealers,
banks, associations and other entities that exercise fiduciary
powers; Provided, however, such request shall not cover
beneficial owners of exempt employee benefit plan securities as
defined in § 240.14a-1(d)(1); and, at the
option of the registrant, such request may give notice of any
employee benefit plan established by an affiliate of the
registrant that holds securities of the registrant that the
registrant elects to treat as exempt employee benefit plan
securities;
- Use
the information furnished in response to such request
exclusively for purposes of corporate communications; and
- Upon
the request of any record holder or respondent bank to whom such
request is made, pay the reasonable expenses, both direct and
indirect, of providing beneficial owner information.
Note: A registrant
will be deemed to have satisfied its obligations under
paragraph (b) of this section by requesting consenting and
non-objecting beneficial owner lists from a designated agent
acting on behalf of the record holder or respondent bank and
paying to that designated agent the reasonable expenses of
providing the beneficial owner information.
- A
registrant, at its option, may mail its annual report to security
holders to the beneficial owners whose identifying information is
provided by record holders and respondent banks, pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii)
and (iii), provided that such registrant notifies the
record holders and respondent banks at the time it makes the
inquiry required by paragraph (a) of this section that the
registrant will mail the annual report to security holders to the
beneficial owners so identified.
- If a
registrant furnishes information statements to record holders and
respondent banks who hold securities on behalf of beneficial
owners, the registrant shall cause information statements and
annual reports to security holders to be furnished, in accordance
with § 240.14c-2, to beneficial owners of exempt employee
benefit plan securities.
National
Association of Securities Dealers (NASD)
Rule 2711.
Research Analysts and Research
Reports
SR-NASD-2002-21 effective April 24, 2002;
(amended by SR-NASD-2002-74 effective June 4,
2002 and SR-NASD-2002-154 effective July 29, 2003)
Rule 2711.
Research Analysts and Research Reports
NASD members must implement the provisions of
Rule 2711 No later than Tuesday, July 9, 2002, except for those
sections which indicate a different implementation date below
(a)
Definitions
For purposes of this rule, the following
terms shall be defined as provided.
(1) "Investment banking department" means
any department or division, whether or not identified as such,
that performs any investment banking service on behalf of a
member.
(2) "Investment banking services" include,
without limitation, acting as an underwriter in an offering for
the issuer; acting as a financial adviser in a merger or
acquisition; providing venture capital, equity lines of credit,
PIPEs or similar investments; or serving as placement agent for
the issuer.
(3) "Member of a research analyst's
household" means any individual whose principal residence is the
same as the research analyst's principal residence.
(4) "Public appearance" means any
participation in a seminar, forum (including an interactive
electronic forum), radio, television or print media interview, or
other public speaking activity, or the writing of a print media
article, in which a research analyst makes a recommendation or
offers an opinion concerning an equity security.
(5) "Research analyst" means the
associated person who is primarily responsible for, and any
associated person who reports directly or indirectly to such a
research analyst in connection with, preparation of the substance
of a research report, whether or not any such person has the job
title of "research analyst."
(6) "Research analyst account" means any
account in which a research analyst or member of the research
analyst's household has a financial interest, or over which such
analyst has discretion or control, other than an investment
company registered under the Investment Company Act of 1940.
This term does not include a "blind trust" account that is
controlled by a person other than the research analyst or member
of the research analyst's household where neither the research
analyst nor a member of the research analyst's household knows of
the account's investments or investments transactions.
(7) "Research department" means any
department or division, whether or not identified as such, that is
principally responsible for preparing the substance of a research
report on behalf of a member.
(8) "Research Report" means a written or
electronic communication that includes an analysis of equity
securities of individual companies or industries, and that
provides information reasonably sufficient upon which to base an
investment decision.
(9) "Subject company" means the company
whose equity securities are the subject of a research report or a
public appearance.
(b) Restrictions
on Relationship with Research Department
(1) No research analyst may be subject to
the supervision or control of any employee of the member's
investment banking department, and no personnel engaged in
investment banking activities may have any influence or control
over the compensatory evaluation of a research analyst.
(2) Except as provided in paragraph
(b)(3), no employee of the investment banking department or any
other employee of the member who is not directly responsible for
investment research ("non-research personnel"), other than legal
or compliance personnel, may review or approve a research report
of the member before its publication.
(3) Non-research personnel may review a
research report before its publication as necessary only to verify
the factual accuracy of information in the research report or
identify any potential conflict of interest, provided that:
(A) any written communication between
non-research personnel and research department personnel
concerning the content of a research report must be made either
through authorized legal or compliance personnel of the member or
in a transmission copied to such personnel; and
(B) any oral communication between
non-research personnel and research department personnel
concerning the content of a research report must be documented and
made either through authorized legal or compliance personnel
acting as intermediary or in a conversation conducted in the
presence of such personnel.
(c) Restrictions
on Communications with the Subject Company
(1) Except as provided in paragraphs
(c)(2) and (c)(3), a member may not submit a research report to
the subject company before its publication.
(2) A member may submit sections of such a
research report to the subject company before its publication for
review as necessary only to verify the factual accuracy of
information in those sections, provided that:
(A) the sections of the research report
submitted to the subject company do not contain the research
summary, the research rating or the price target;
(B) a complete draft of the research
report is provided to legal or compliance personnel before
sections of the report are submitted to the subject company;
and
(C) if after submitting the sections of
the research report to the subject company the research department
intends to change the proposed rating or price target, it must
first provide written justification to, and receive written
authorization from, legal or compliance personnel for the change.
The member must retain copies of any draft and the final version
of such a research report for three years following its
publication.
NASD members must implement the provisions of
Rule 2711(c)(2) No later than Wednesday, September 9, 2002
(3) The member may notify a subject
company that the member intends to change its rating of the
subject company's securities, provided that the notification
occurs on the business day before the member announces the rating
change, after the close of trading in the principal market of the
subject company's securities.
(4) No research analyst may participate in
efforts to solicit investment banking business. Accordingly, no
research analyst may, among other things, participate in any
"pitches" for investment banking business to prospective
investment banking clients, or have other communications with
companies for the purpose of soliciting investment banking
business.
(d) Restrictions
on Research Analyst Compensation
(1)No member may pay any bonus, salary or
other form of compensation to a research analyst that is based
upon a specific investment banking services transaction.
(2) The compensation of a research analyst
who is primarily responsible for the preparation of the substance
of a research report must be reviewed and approved at least
annually by a committee that reports to the members board' of
directors, or when the member has no board of directors, to a
senior executive officer of the member. This committee may not
have representation from the member's investment banking
department. The committee must consider the following factors when
reviewing such a research analyst's compensation, if
applicable:
NASD members must implement the
following provisions of Rule 2711(d)(2) no later than October 27,
2003
(A) the research analyst's individual
performance, including the analyst's productivity and the quality
of the analyst's research;
(B) the correlation between the research
analyst's recommendations and the stock price performance; and
(C) the overall ratings received from
clients, sales force, and peers independent of the member's
investment banking department, and other independent ratings
services.
The committee may not consider as a factor
in reviewing and approving such a research analyst's compensation
his or her contributions to the member's investment banking
business. The committee must document the basis upon which each
such research analyst's compensation was established. The annual
attestation required by Rule 2711(i) must certify that the
committee reviewed and approved each such research analyst's
compensation and documented the basis upon which this compensation
was established.
(e) Prohibition of
Promise of Favorable Research
No member may directly or indirectly offer
favorable research, a specific rating or a specific price target,
or threaten to change research, a rating or a price target, to a
company as consideration or inducement for the receipt of business
or compensation.
(f) Restrictions
on Publishing Research Reports and Public Appearances; Termination
of Coverage
(1) No member may publish or otherwise
distribute a research report and no research analyst may make a
public appearance regarding a subject company for which the member
acted as manager or co-manager of:
(A) an initial public offering, for 40
calendar days following the date of the offering; or
(B) a secondary offering, for 10 calendar
days following the date of the offering; provided that:
(i) paragraphs (f)(1)(A) and (f)(1)(B)
will not prevent a member from publishing or otherwise
distributing a research report, or prevent a research analyst from
making a public appearance, concerning the effects of significant
news or a significant event on the subject company within such 40-
and 10-day periods, and provided further that legal or compliance
personnel authorize publication of that research report before it
is issued or authorize the public appearance before it is made;
and
(ii) paragraph (f)(1)(B) will not prevent
a member from publishing or otherwise distributing a research
report pursuant to SEC Rule 139 regarding a subject company with
"actively-traded securities," as defined in Regulation M, 17 CFR
242.101(c)(1), and will not prevent a research analyst from making
a public appearance concerning such a company.
(2) No member that has agreed to
participate or is participating as an underwriter or dealer (other
than as manager or co-manager) of an issuer's initial public
offering may publish or otherwise distribute a research report or
make a public appearance regarding that issuer for 25 calendar
days after the date of the offering.
(3) For purposes of paragraphs (f)(1) and
(f)(2), the term "date of the offering" refers to the later of the
effective date of the registration statement or the first date on
which the security was bona fide offered to the public.
(4) No member that has acted as a manager
or co-manager of a securities offering may publish or otherwise
distribute a research report or make a public appearance
concerning a subject company 15 days prior to and after the
expiration, waiver or termination of a lock-up agreement or any
other agreement that the member has entered into with a subject
company or its shareholders that restricts or prohibits the sale
of securities held by the subject company or its shareholders
after the completion of a securities offering. This paragraph will
not prevent a member from publishing or otherwise distributing a
research report concerning the effects of significant news or a
significant event on the subject company within such period,
provided legal or compliance personnel authorize publication of
that research report before it is issued. In addition, this
paragraph shall not apply to the publication or distribution of a
research report pursuant to SEC Rule 139 regarding a subject
company with "actively traded securities," as defined in
Regulation M, 17 CFR 242.101(c)(1), or to a public appearance
concerning such a subject company.
(5) If a member intends to terminate its
research coverage of a subject company, notice of this termination
must be made. The member must make available a final research
report on the subject company using the means of dissemination
equivalent to those it ordinarily uses to provide the customer
with its research reports on the subject company. The report must
be comparable in scope and detail to prior research reports and
must include a final recommendation or rating, unless it is
impracticable for the member to produce a comparable report (e.g.,
if the research analyst covering the subject company or sector has
left the member or if the member terminates coverage of the
industry or sector). If it is impracticable to produce a final
recommendation or rating, the final research report must disclose
the member's rationale for the decision to terminate coverage.
(g) Restrictions
on Personal Trading by Research Analysts
(1) No research analyst account may
purchase or receive any securities before the issuer's initial
public offering if the issuer is principally engaged in the same
types of business as companies that the research analyst
follows.
(2) No research analyst account may
purchase or sell any security issued by a company that the
research analyst follows, or any option on or derivative of such
security, for a period beginning 30 calendar days before and
ending five calendar days after the publication of a research
report concerning the company or a change in a rating or price
target of the company's securities; provided that:
(A) a member may permit a research analyst
account to sell securities held by the account that are issued by
a company that the research analyst follows, within 30 calendar
days after the research analyst began following the company for
the member;
(B) a member may permit a research analyst
account to purchase or sell any security issued by a subject
company within 30 calendar days before the publication of a
research report or change in the rating or price target of the
subject company's securities due to significant news or a
significant event concerning the subject company, provided that
the legal or compliance personnel pre-approve the research report
and any change in the rating or price target.
(3) No research analyst account may
purchase or sell any security or any option on or derivative of
such security in a manner inconsistent with the research analyst's
recommendation as reflected in the most recent research report
published by the member.
(4) Legal or compliance personnel may
authorize a transaction otherwise prohibited by paragraphs (g)(2)
and (g)(3) based upon an unanticipated significant change in the
personal financial circumstances of the beneficial owner of the
research analyst account, provided that:
(A) legal or compliance personnel
authorize the transaction before it is entered;
(B) each exception is granted in
compliance with policies and procedures adopted by the member that
are reasonably designed to ensure that these transactions do not
create a conflict of interest between the professional
responsibilities of the research analyst and the personal trading
activities of a research analyst account; and
(C) the member maintains written records
concerning each transaction and the justification for permitting
the transaction for three years following the date on which the
transaction is approved.
(5) The prohibitions in paragraphs (g)(1)
through (g)(3) do not apply to a purchase or sale of the
securities of:
(A) any registered diversified investment
company as defined under Section (5)(b)(1) of the Investment
Company Act of 1940; or
(B) any other investment fund over which
neither the research analyst nor a member of the research
analyst's household has any investment discretion or control,
provided that:
(i) the research analyst accounts
collectively own interests representing no more than 1% of the
assets of the fund;
(ii) the fund invests no more than 20% of
its assets in securities of issuers principally engaged in the
same types of business as companies that the research analyst
follows; and
(iii) if the investment fund distributes
securities in kind to the research analyst or household member
before the issuer's initial public offering, the research analyst
or household member must either divest those securities
immediately or the research analyst must refrain from
participating in the preparation of research reports concerning
that issuer.
(6) Legal or compliance personnel of the
member shall pre-approve all transactions of persons who oversee
research analysts to the extent such transactions involve equity
securities of subject companies covered by the research analysts
that they oversee. This pre-approval requirement shall apply to
all persons, such as the director of research, supervisory
analyst, or member of a committee, who have direct influence or
control with respect to the preparation of the substance of
research reports or establishing or changing a rating or price
target of a subject company's equity securities.
(h) Disclosure
Requirements
(1) Ownership and Material Conflicts of
Interest
A member must disclose in research reports
and a research analyst must disclose in public appearances:
(A) if the research analyst or a member of
the research analyst's household has a financial interest in the
securities of the subject company, and the nature of the financial
interest (including, without limitation, whether it consists of
any option, right, warrant, future, long or short position);
(B) if, as of the end of the month
immediately preceding the date of publication of the research
report or the public appearance (or the end of the second most
recent month if the publication date is less than 10 calendar days
after the end of the most recent month), the member or its
affiliates beneficially own 1% or more of any class of common
equity securities of the subject company. Computation of
beneficial ownership of securities must be based upon the same
standards used to compute ownership for purposes of the reporting
requirements under Section 13(d) of the Securities Exchange Act of
1934;
NASD members must implement the provisions of
Rule 2711(h)(1)(B) No later than Wednesday, November 6, 2002
(C) any other actual, material conflict of
interest of the research analyst of which the research analyst or
member knows or has reason to know at the time of publication of
the research report or at the time of the public appearance.
(2) Receipt of Compensation
NASD members must implement the new
compensation and client disclosure provisions of Rule 2711(h)(2)
no sooner than January 29, 2004
(A) A member must disclose in research
reports:
(i) if the research analyst received
compensation:
(a.) based upon (among other factors) the
member's investment banking revenues; or
(b.) from the subject company in the past
12 months.
(ii) the member or affiliate:
a. managed or co-managed a public offering
of securities for the subject company in the past 12 months;
b. received compensation for investment
banking services from the subject company in the past 12 months;
or
c. expects to receive or intends to seek
compensation for investment banking services from the subject
company in the next 3 months.
(iii) if (1) as of the end of the month
immediately preceding the date of publication of the research
report (or the end of the second most recent month if the
publication date is less than 30 calendar days after the end of
the most recent month) or (2) to the extent the research analyst
or an employee of the member with the ability to influence the
substance of the research knows:
a. the member received any compensation
for products or services other than investment banking services
from the subject company in the past 12 months; or
b. the subject company currently is, or
during the 12-month period preceding the date of distribution of
the research report was, a client of the member. In such cases,
the member also must disclose the types of services provided to
the subject company. For purposes of this Rule 2711(h)(2), the
types of services provided to the subject company shall be
described as investment banking services, non-investment banking
securities-related services, and non-securities services.
(iv) if, to the extent the research
analyst or an employee of the member with the ability to influence
the substance of the research report knows an affiliate of the
member received any compensation for products or services other
than investment banking services from the subject company in the
past 12 months.
(v) if, to the extent the research analyst
or member has reason to know, an affiliate of the member received
any compensation for products or services other than investment
banking services from the subject company in the past 12
months.
a. This requirement will be deemed
satisfied if such compensation is disclosed in research reports
within 30 days after completion of the last calendar quarter,
provided that the member has taken steps reasonably designed to
identify any such compensation during that calendar quarter. This
requirement shall not apply to any subject company as to which the
member initiated coverage since the beginning of the current
calendar quarter.
b. The research analyst and the member
will be presumed not to have reason to know whether an affiliate
received any compensation for products or services other than
investment banking services from the subject company in the past
12 months if the member maintains and enforces policies and
procedures reasonably designed to prevent the research analysts
and employees of the member with the ability to influence the
substance of research reports from, directly or indirectly,
receiving information from the affiliate concerning whether the
affiliate received such compensation.
(vi) For the purposes of this Rule
2711(h)(2), an employee of the member with the ability to
influence the substance of the research report is an employee who,
in the ordinary course of that person's duties, has the authority
to review the particular research report and to change that
research report prior to publication.
(B) A research analyst must disclose in
public appearances:
(i) if, to the extent the research analyst
knows or has reason to know, the member or any affiliate received
any compensation from the subject company in the past 12
months;
(ii) if the research analyst received any
compensation from the subject company in the past 12 months;
or
(iii) if, to the extent the research
analyst knows or has reason to know, the subject company currently
is, or during the 12-month period preceding the date of
distribution of the research report, was, a client of the member.
In such cases, the research analyst also must disclose the types
of services provided to the subject company, if known by the
research analyst.
(C) A member or research analyst will not
be required to make a disclosure required by paragraphs
(h)(2)(A)(ii)(b) and (c), (h)(2)(A)(iii)(b), or (h)(2)(B)(i) and
(iii) to the extent such disclosure would reveal material
non-public information regarding specific potential future
investment banking transactions of the subject company.
NASD members must implement the
provisions of Rule 2711(h)(2)(C) as they apply to disclosures
under Rules 2711(h)(2)(A)(ii)(b) and (c) no later than July 29,
2003, and as they apply to disclosures under Rule
2711(h)(2)(A)(iii)(b), (h)(2)(B)(i) and (iii) by Jan. 26, 2004
(3) Position as Officer or
Director
A member must disclose in research reports
and a research analyst must disclose in public appearances if the
research analyst or a member of the research analyst's household
serves as an officer, director or advisory board member of the
subject company.
(4) Meaning of Ratings
A member must define in its research
reports the meaning of each rating used by the member in its
rating system. The definition of each rating must be consistent
with its plain meaning.
(5) Distribution of Ratings
(A) Regardless of the rating system that a
member employs, a member must disclose in each research report the
percentage of all securities rated by the member to which the
member would assign a "buy," "hold/neutral," or "sell" rating.
(B) In each research report, the member
must disclose the percentage of subject companies within each of
these three categories for whom the member has provided investment
banking services within the previous twelve months.
(C) The information that is disclosed
under paragraphs (h)(5)(A) and (h)(5)(B) must be current as of the
end of the most recent calendar quarter (or the second most recent
calendar quarter if the publication date is less than 15 calendar
days after the most recent calendar quarter).
NASD members must implement the provisions of
Rule 2711(h)(5) No later than Wednesday, September 9, 2002
(6) Price Chart
A member must present in any research
report concerning an equity security on which the member has
assigned any rating for at least one year, a line graph of the
security's daily closing prices for the period that the member has
assigned any rating or for a three-year period, whichever is
shorter. The line graph must:
(A) indicate the dates on which the member
assigned or changed each rating or price target;
(B) depict each rating and price target
assigned or changed on those dates; and
(C) be current as of the end of the most
recent calendar quarter (or the second most recent calendar
quarter if the publication date is less than 15 calendar days
after the most recent calendar quarter).
NASD members must implement the provisions of
Rule 2711(h)(5) No later than Wednesday, September 9, 2002
(7) Price Targets
A member must disclose in research reports
the valuation methods used to determine a price target. Price
targets must have a reasonable basis and must be accompanied by a
disclosure concerning the risks that may impede achievement of the
price target.
(8) Market Making
A member must disclose in research reports
if it was making a market in the subject company's securities at
the time that the research report was published.
(9) Disclosure Required by Other
Provisions
In addition to the disclosure required by
this rule, members and research analysts must provide disclosure
in research reports and public appearances that is required by
applicable law or regulation, including NASD Rule 2210 and the
antifraud provisions of the federal securities laws.
(10) Prominence of Disclosure
The disclosures required by this paragraph
(h) must be presented on the front page of research reports or the
front page must refer to the page on which disclosures are found.
Disclosures and references to disclosures must be clear,
comprehensive and prominent.
(11) Disclosures in Research Reports Covering
Six or More Companies
When a member distributes a research
report covering six or more subject companies, for purposes of the
disclosures required in paragraph (h), such research report may
direct the reader in a clear manner as to where they may obtain
applicable current disclosures in written or electronic
format.
(12) Records of Public
Appearances
Members must maintain records of public
appearances by research analysts sufficient to demonstrate
compliance by those research analysts with the applicable
disclosure requirements under paragraph (h) of this Rule. Such
records must be maintained for three years from the date of the
public appearance.
NASD members must implement the
provisions of Rule 2711(j) no later than Sept. 29, 2003
(i) Supervisory
Procedures
Each member subject to this rule must
adopt and implement written supervisory procedures reasonably
designed to ensure that the member and its employees comply with
the provisions of this rule (including the attestation
requirements of Rule 2711(d)(2)), and a senior officer of such a
member must attest annually to NASD by April 1 of each year that
it has adopted and implemented those procedures.
NASD members must implement the provisions of
Rule 2711(i) in accordance with the implementation schedule for
Rule 2711
(j) Prohibition of
Retaliation Against Research Analysts
No member and no employee of a member who
is involved with the member's investment banking activities may,
directly or indirectly, retaliate against or threaten to retaliate
against any research analyst employed by the member or its
affiliates as a result of an adverse, negative, or otherwise
unfavorable research report or public appearance written or made
by the research analyst that may adversely affect the member's
present or prospective investment banking relationship with the
subject company of a research report. This prohibition shall not
limit a member's authority to discipline or terminate a research
analyst, in accordance with the member's policies and procedures,
for any cause other than the writing of such an unfavorable
research report or the making of such an unfavorable public
appearance.
NASD members must implement the
provisions of Rule 2711(j) no later than July 29, 2003.
(k) Exceptions for
Small Firms
NASD members must implement the
provisions of Rule 2711(k) no later than July 29, 2003
The provisions of paragraph (b) shall not
apply to members that over the previous three years, on average
per year, have participated in 10 or fewer investment banking
services transactions as manager or co-manager and generated $5
million or less in gross investment banking services revenues from
those transactions. For purposes of this paragraph (k), the term
"investment banking services transactions" includes the
underwriting of both corporate debt and equity securities but not
municipal securities. Members that qualify for this exemption must
maintain records for three years of any communication that, but
for this exemption, would be subject to paragraph (b) of this
Rule.
[Adopted by SR-NASD-2002-21 eff. April 24,
2002; amended by SR-NASD-2002-74 eff. June 4, 2002; amended by
SR-NASD-2002-154 eff. July 29, 2003.]
Selected Notices to Members: 02-39,
03-44.
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