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Proposed Rule:
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(1) | (2) | (3) | (4) | (5) | (6) |
Name, Address, and Age | Position(s) Held with Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Director or Nominee for Director | Other Directorships Held by Director or Nominee for Director |
Instructions to paragraph (b)(1). 1. For purposes of this paragraph, the term "family relationship" means any relationship by blood, marriage, or adoption, not more remote than first cousin.
2. No nominee or person chosen to become a director or Officer who has not consented to act as such may be named in response to this Item. In this regard, see Rule 14a-4(d) under the Exchange Act (� 240.14a-4(d) of this chapter).
3. If fewer nominees are named than the number fixed by or pursuant to the governing instruments, state the reasons for this procedure and that the proxies cannot be voted for a greater number of persons than the number of nominees named.
4. For each director or nominee for election as director who is or would be an "interested person" within the meaning of section 2(a)(19) of the Investment Company Act of 1940, describe, in a footnote or otherwise, the relationship, events, or transactions by reason of which the director or nominee is or would be an interested person.
5. State the principal business of any company listed under column (4) unless the principal business is implicit in its name.
6. Include in column (5) the total number of separate portfolios that a nominee for election as director would oversee if he were elected.
7. Indicate in column (6) directorships not included in column (5) that are held by a director or nominee for election as director in any company with a class of securities registered pursuant to section 12 of the Exchange Act or subject to the requirements of section 15(d) of the Exchange Act or any company registered as an investment company under the Investment Company Act of 1940, 15 U.S.C. 80a, as amended, and name the companies in which the directorships are held. Where the other directorships include directorships overseeing two or more portfolios in the same Fund Complex, identify the Fund Complex and provide the number of portfolios overseen as a director in the Fund Complex rather than listing each portfolio separately.
(2) Describe briefly any arrangement or understanding between any director, nominee for election as director, Officer, or person chosen to become an Officer, and any other person(s) (naming the person(s)) pursuant to which he was or is to be selected as a director, nominee, or Officer.
Instruction to paragraph (b)(2). Do not include arrangements or understandings with directors or Officers acting solely in their capacities as such.
(3) Unless disclosed in the table required by paragraph (b)(1) of this Item, describe any positions, including as an officer, employee, director, or general partner, held by a director, nominee for election as director, or Immediate Family Member of the director or nominee, during the past five years, with:
(i) The Fund;
(ii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company as the Fund or having an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund;
(iii) An investment adviser, principal underwriter, Administrator, Sponsoring Insurance Company, or affiliated person of the Fund; or
(iv) Any person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund.
Instruction to paragraph (b)(3). When an individual holds the same position(s) with two or more portfolios that are part of the same Fund Complex, identify the Fund Complex and provide the number of portfolios for which the position(s) are held rather than listing each portfolio separately.
(4) For each director or nominee for election as director, state the aggregate dollar amount of equity securities of Funds in the same Fund Complex as the Fund owned beneficially or of record by the director or nominee as required by the following table:
(1) | (2) | (3) |
Name of Director or Nominee | Identity of Fund Complex | Aggregate Dollar Amount of Equity Securities in Fund Complex |
Instructions to paragraph (b)(4). 1. Information should be provided as of the most recent practicable date. Specify the valuation date by footnote or otherwise.
2. Determine "beneficial ownership" in accordance with rule 13d-3 under the Exchange Act (� 240.13d-3 of this chapter).
(5) For each director or nominee for election as director and his Immediate Family Members, furnish the information required by the following table as to each class of securities owned beneficially or of record in:
(i) An investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund; or
(ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund:
(1) | (2) | (3) | (4) | (5) | (6) |
Name of Director or Nominee | Name of Owners and Relationships to Director or Nominee | Company | Title of Class | Value of Securities | Percent of Class |
Instructions to paragraph (b)(5). 1. Information should be provided as of the most recent practicable date. Specify the valuation date by footnote or otherwise.
2. Determine "beneficial ownership" in accordance with rule 13d-3 under the Exchange Act (� 240.13d-3 of this chapter).
3. Identify the company in which the director, nominee, or Immediate Family Member of the director or nominee owns securities in column (3). When the company is a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company, describe the company's relationship with the investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company.
4. Provide the information required by columns (5) and (6) on an aggregate basis for each director (or nominee) and his Immediate Family Members.
(6) Unless disclosed in response to paragraph (b)(5) of this Item, describe any material interest, direct or indirect, of each director, nominee for election as director, or Immediate Family Member of a director or nominee, during the past five years, in:
(i) An investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund; or
(ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund.
Instruction to paragraph (b)(6). A director, nominee, or Immediate Family Member has an interest in a company if he is a party to a contract, arrangement, or understanding with respect to any securities of, or interest in, the company.
(7) Describe briefly any material interest, direct or indirect, of any director, nominee for election as director, or Immediate Family Member of a director or nominee in any material transaction, or material series of similar transactions, since the beginning of the last two completed fiscal years of the Fund, or in any currently proposed material transaction, or material series of similar transactions, to which any of the following persons was or is to be a party:
(i) The Fund;
(ii) An Officer of the Fund;
(iii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company as the Fund or having an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund;
(iv) An Officer of an investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company as the Fund or having an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund;
(v) An investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund;
(vi) An Officer of an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund;
(vii) A person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund; or
(viii) An Officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund.
Instructions to paragraph (b)(7). 1. Include the name of each director, nominee, or Immediate Family Member whose interest in any transaction or series of similar transactions is described and the nature of the circumstances by reason of which the interest is required to be described.
2. State the nature of the interest, the approximate dollar amount involved in the transaction, and, where practicable, the approximate dollar amount of the interest.
3. In computing the amount involved in the transaction or series of similar transactions, include all periodic payments in the case of any lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director, nominee, or Immediate Family Member of the director or nominee without regard to the amount of profit or loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets, state the cost of the assets to the purchaser and, if acquired by the seller within two years prior to the transaction, the cost to the seller. Describe the method used in determining the purchase or sale price and the name of the person making the determination.
6. If the proxy statement relates to multiple portfolios of a series Fund with different fiscal years, then, in determining the date that is the beginning of the last two completed fiscal years of the Fund, use the earliest date of any series covered by the proxy statement.
7. Disclose indirect, as well as direct, material interests in transactions. A person who has a position or relationship with, or interest in, a company that engages in a transaction with one of the persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item may have an indirect interest in the transaction by reason of the position, relationship, or interest. The interest in the transaction, however, will not be deemed "material" within the meaning of paragraph (b)(7) of this Item where the interest of the director, nominee, or Immediate Family Member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that is a party to the transaction with one of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item, and the transaction is not material to the company.
8. No information need be given as to any transaction where the interest of the director, nominee, or Immediate Family Member arises solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item and the director, nominee, or Immediate Family Member receives no extra or special benefit not shared on a pro rata basis by all holders of the class of securities.
9. Transactions include loans, lines of credit, and other indebtedness. For indebtedness, indicate the largest aggregate amount of indebtedness outstanding at any time during the period, the nature of the indebtedness and the transaction in which it was incurred, the amount outstanding as of the latest practicable date, and the rate of interest paid or charged.
10. No information need be given as to any routine, retail transaction. For example, the Fund need not disclose that a director holds a credit card or bank or brokerage account with a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item unless the director is accorded special treatment.
(8) Describe briefly any material relationship, direct or indirect, of any director, nominee for election as director, or Immediate Family Member of a director or nominee that exists, or has existed at any time since the beginning of the last two completed fiscal years of the Fund, or is currently proposed, with any of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item. Relationships include:
(i) Payments for property or services to or from any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item;
(ii) Provision of legal services to any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item;
(iii) Provision of investment banking services to any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item, other than as a participating underwriter in a syndicate; and
(iv) Any consulting or other relationship that is substantially similar in nature and scope to the relationships listed in paragraphs (b)(8)(i) through (b)(8)(iii) of this Item.
Instructions to paragraph (b)(8). 1. Include the name of each director, nominee, or Immediate Family Member whose relationship is described and the nature of the circumstances by reason of which the relationship is required to be described.
2. State the nature of the relationship and the amount of business conducted between the director, nominee, or Immediate Family Member and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item as a result of the relationship since the beginning of the last two completed fiscal years of the Fund or proposed to be done during the Fund's current fiscal year.
3. In computing the amount involved in a relationship, include all periodic payments in the case of any agreement providing for periodic payments.
4. If the proxy statement relates to multiple portfolios of a series Fund with different fiscal years, then, in determining the date that is the beginning of the last two completed fiscal years of the Fund, use the earliest date of any series covered by the proxy statement.
5. Disclose indirect, as well as direct, material relationships. A person who has a position or relationship with, or interest in, a company that has a relationship with one of the persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item may have an indirect relationship by reason of the position, relationship, or interest. The relationship, however, will not be deemed "material" within the meaning of paragraph (b)(8) of this Item where the relationship of the director, nominee, or Immediate Family Member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that has a relationship with one of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item, and the relationship is not material to the company.
6. In the case of an indirect interest, identify the company with which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item has a relationship; the name of the director, nominee, or Immediate Family Member affiliated with the company and the nature of the affiliation; and the amount of business done between the company and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item since the beginning of the last two completed fiscal years of the Fund or proposed to be done during the Fund's current fiscal year.
7. In calculating payments for property and services for purposes of paragraph (b)(8)(i) of this Item, the following may be excluded:
A. Payments where the transaction involves the rendering of services as a common contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; or
B. Payments that arise solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item and no extra or special benefit not shared on a pro rata basis by all holders of the class of securities is received.
8. No information need be given as to any routine, retail relationship. For example, the Fund need not disclose that a director holds a credit card or bank or brokerage account with a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item unless the director is accorded special treatment.
(9) If an Officer of an investment adviser, principal underwriter, Administrator, or
Sponsoring Insurance Company of the Fund, or an Officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company of the Fund, serves, or has served since the beginning of the last two completed fiscal years of the Fund, on the board of directors of a company where a director of the Fund, nominee for election as director, or Immediate Family Member of a director or nominee is, or was since the beginning of the last two completed fiscal years of the Fund, an Officer, identify:
(i) The company;
(ii) The individual who serves or has served as a director of the company and the period of service as director;
(iii) The investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company or person controlling, controlled by, or under common control with the investment adviser, principal underwriter, Administrator, or Sponsoring Insurance Company where the individual named in paragraph (b)(9)(ii) of this Item holds or held office and the office held; and
(iv) The director of the Fund, nominee for election as director, or Immediate Family Member who is or was an Officer of the company; the office held; and the period of holding the office.
Instruction to paragraph (b)(9). If the proxy statement relates to multiple portfolios of a series Fund with different fiscal years, then, in determining the date that is the beginning of the last two completed fiscal years of the Fund, use the earliest date of any series covered by the proxy statement.
(10) Provide in tabular form, to the extent practicable, the information required by Items 401(f) and (g), 404(a) and (c), and 405 of Regulation S-K (�� 229.401(f) and (g), 229.404(a) and (c), and 229.405 of this chapter).
Instruction to paragraph (b)(10). Information provided under paragraph (b)(7) of this Item 22 is deemed to satisfy the requirements of Items 404(a) and (c) of Regulation S-K for information about directors, nominees for election as directors, and Immediate Family Members of directors and nominees, and need not be provided under this paragraph (b)(10).
(11) Describe briefly any material pending legal proceedings, other than ordinary routine litigation incidental to the Fund's business, to which any director or nominee for director or affiliated person of such director or nominee is a party adverse to the Fund or any of its affiliated persons or has a material interest adverse to the Fund or any of its affiliated persons. Include the name of the court where the case is pending, the date instituted, the principal parties, a description of the factual basis alleged to underlie the proceeding, and the relief sought.
(12) For all directors, and for each of the three highest-paid Officers that have aggregate compensation from the Fund for the most recently completed fiscal year in excess of $60,000 ("Compensated Persons"):
(i) Furnish the information required by the following table for the last fiscal year:
Compensation Table
(1) | (2) | (3) | (4) | (5) |
Name of Person, Position | Aggregate Compensation From Fund | Pension or Retirement Benefits Accrued as Part of Fund Expenses | Estimated Annual Benefits Upon Retirement | Total Compensation From Fund and Fund Complex Paid to Directors |
Instructions to paragraph (b)(12)(i). 1. For column (1), indicate, if necessary, the capacity in which the remuneration is received. For Compensated Persons that are directors of the Fund, compensation is amounts received for service as a director.
2. If the Fund has not completed its first full year since its organization, furnish the information for the current fiscal year, estimating future payments that would be made pursuant to an existing agreement or understanding. Disclose in a footnote to the Compensation Table the period for which the information is furnished.
3. Include in column (2) amounts deferred at the election of the Compensated Person, whether pursuant to a plan established under Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)) or otherwise, for the fiscal year in which earned. Disclose in a footnote to the Compensation Table the total amount of deferred compensation (including interest) payable to or accrued for any Compensated Person.
4. Include in columns (3) and (4) all pension or retirement benefits proposed to be paid under any existing plan in the event of retirement at normal retirement date, directly or indirectly, by the Fund or any of its Subsidiaries, or by other companies in the Fund Complex. Omit column (4) where retirement benefits are not determinable.
5. For any defined benefit or actuarial plan under which benefits are determined primarily by final compensation (or average final compensation) and years of service, provide the information required in column (4) in a separate table showing estimated annual benefits payable upon retirement (including amounts attributable to any defined benefit supplementary or excess pension award plans) in specified compensation and years of service classifications. Also provide the estimated credited years of service for each Compensated Person.
6. Include in column (5) only aggregate compensation paid to a director for service on the board and other boards of investment companies in a Fund Complex specifying the number of such other investment companies.
(ii) Describe briefly the material provisions of any pension, retirement, or other plan or any arrangement other than fee arrangements disclosed in paragraph (b)(12)(i) of this Item pursuant to which Compensated Persons are or may be compensated for any services provided, including amounts paid, if any, to the Compensated Person under any such arrangements during the most recently completed fiscal year. Specifically include the criteria used to determine amounts payable under any plan, the length of service or vesting period required by the plan, the retirement age or other event that gives rise to payments under the plan, and whether the payment of benefits is secured or funded by the Fund.
(iii) With respect to each Compensated Person, business development companies
must include the information required by Items 402(b)(2)(iv) and 402(c) of Regulation S-K (�� 229.402(b)(2)(iv) and 229.402(c) of this chapter).
(13) Identify the standing committees of the Fund's board of directors, and provide the following information about each committee:
(i) A concise statement of the functions of the committee;
(ii) The members of the committee;
(iii) The number of committee meetings held during the last fiscal year; and
(iv) If the committee is a nominating or similar committee, state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting recommendations.
* * * * *
Part 270 - RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
8. The authority citation for Part 270 is amended by adding the following citation:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39 unless otherwise noted:
* * * * *
Section 270.10e-1 is also issued under 15 U.S.C. 80a-10(e).
* * * * *
Section 270.0-1 is amended by adding paragraphs (a)(5) and (a)(6) to read as follows:
� 270.0-1 Definition of terms used in this part.
* * * * *
(a) * * *
(5) The term administrator means any person who provides significant administrative or business affairs management services to an investment company.
(6)(i) A person is an independent legal counsel with respect to the directors who are not interested persons of an investment company ("disinterested directors") if:
(A) The investment company reasonably believes that the person has not acted as legal counsel for the company's investment adviser, principal underwriter, administrator (collectively, "management organizations"), or any of their control persons at any time since the beginning of the company's last two completed fiscal years; or
(B) A majority of the disinterested directors determine (and record the basis for that determination in the minutes of their meeting) that the person's representation of any of the company's management organizations or any of their control persons is or was so limited that it would not adversely affect the person's ability to provide impartial, objective, and unbiased legal counsel to the disinterested directors.
(ii) For purposes of paragraph (a)(6)(i) of this section:
(A) The term person has the same meaning as in section 2(a)(28) of the Act (15 U.S.C. 80a-2(a)(28)) and, in addition, includes a partner, co-member, or employee of any person; and
(B) The term control person means any person (other than an investment company) directly or indirectly controlling, controlled by, or under common control with any of the investment company's management organizations.
* * * * *
9. The section heading for � 270.2a19-1 is revised to read as follows:
� 270.2a19-1 Certain investment company directors not considered interested persons because of broker-dealer affiliation.
* * * * *
10. Section 270.2a19-1 is amended by removing the phrase "a minority of the directors f" in paragraph (a)(3) and adding in its place the phrase "one-half of the directors of".
11. Section 270.2a19-3 is added to read as follows:
� 270.2a19-3 Certain investment company directors not considered interested persons because of ownership of index fund securities.
If a director of a registered investment company ("Fund") owns shares of a registered investment company (including the Fund) with an investment objective to replicate the performance of one or more securities indices ("Index Fund"), ownership of the Index Fund shares will not cause the director to be considered an "interested person" of the Fund or of the Fund's investment adviser or principal underwriter (as defined by section 2(a)(19)(A)(iii) and (B)(iii) of the Act (15 U.S.C. 80a-2(a)(19)(A)(iii) and (B)(iii))), if the value of the securities of the Fund's investment adviser or principal underwriter (or a controlling person of the investment adviser or principal underwriter) in any of the securities indices constitutes no more than five percent of the value of that index.
Section 270.10e-1 is added to read as follows:
� 270.10e-1 Death, disqualification, or bona fide resignation of directors.
If a registered investment company, by reason of the death, disqualification, or bona fide resignation of any director, does not meet any requirement of the Act or any rule or regulation regarding the composition of the company's board of directors, the operation of the relevant subsection of the Act, rule, or regulation will be suspended as to the company:
(a) For 60 days if the vacancy may be filled by action of the board of directors; or
(b) For 150 days if a vote of stockholders is required to fill the vacancy.
12. Section 270.10f-3 is amended by redesignating paragraph (b)(11) as paragraph (b)(12) and adding new paragraph (b)(11) to read as follows:
� 270.10f-3 Exemption for the acquisition of securities during the existence of an underwriting or selling syndicate.
* * * * *
(b) * * *
(11) Board Composition, Selection, and Representation:
(i) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(ii) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel.
* * * * *
13. Section 270.12b-1 is amended by revising paragraph (c) to read as follows:
� 270.12b-1 Distribution of shares by registered open-end management investment company.
* * * * *
(c) A registered open-end management investment company may rely on the provisions of paragraph (b) of this section only if:
(1) [A majority / At least two-thirds] of the directors of the company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(2) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel;
* * * * *
14. Section 270.15a-4 is amended by removing the word "and" at the end of paragraph (a), removing the period at the end of paragraph (b) and adding in its place "; and" and adding paragraph (c) to read as follows:
� 270.15a-4 Temporary exemption for certain investment advisers.
* * * * *
(c)(1) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(2) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel.
15. Section 270.17a-7 is amended by removing the "and" at the end of paragraph (e), redesignating paragraph (f) as paragraph (g), and adding new paragraph (f) to read as follows:
� 270.17a-7 Exemption of certain purchase or sale transactions between an investment company and certain affiliated persons thereof.
* * * * *
(f)(1) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(2) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel; and
* * * * *
16. Section 270.17a-8 is amended by removing the ", and" at the end of paragraph (a) and in its place adding a semi-colon, removing the period at the end of paragraph (b) and adding in its place "; and", and adding paragraph (c) to read as follows:
� 270.17a-8 Mergers of certain affiliated investment companies.
* * * * *
(c)(1) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(2) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel.
17. Section 270.17d-1 is amended by removing the word "and" at the end of paragraph (d)(7)(ii), removing the period at the end of paragraph (d)(7)(iii) and adding in its place "; and", redesignating paragraph (d)(7)(iii) as paragraph (d)(7)(iv), and adding new paragraphs (d)(7)(iii) and (d)(7)(v) to read as follows:
� 270.17d-1 Applications regarding joint enterprises or arrangements and certain profit-
sharing plans.
* * * * *
(d) * * *
(7) * * *
(iii) The joint liability insurance policy does not exclude coverage for bona fide claims made against any director who is not an interested person of the investment company, or against the investment company if it is a co-defendant in the claim with the disinterested director, by another person insured under the joint liability insurance policy;
(iv) * * *
(v)(A) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(B) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel.
* * * * *
18. Section 270.17e-1 is amended by removing the word "and" at the end of paragraph (b)(3), redesignating paragraph (c) as paragraph (d), and adding new paragraph (c) to read as follows:
� 270.17e-1 Brokerage transactions on a securities exchange.
* * * * *
(c)(1) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(2) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel; and
* * * * *
19. Section 270.17g-1 is amended by revising paragraph (j) to read as follows:
� 270.17g-1 Bonding of officers and employees of registered management investment companies.
* * * * *
(j) Any joint insured bond provided and maintained by a registered management investment company and one or more other parties shall be a transaction exempt from the provisions of section 17(d) of the Act (15 U.S.C. 80a-17(d)) and the rules thereunder, if:
(1) The terms and provisions of the bond comply with the provisions of this section;
(2) The terms and provisions of any agreement required by paragraph (f) of this section comply with the provisions of that paragraph; and
(3)(i) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(ii) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel.
* * * * *
20. Section 270.18f-3 is amended by redesignating paragraph (e) as paragraph (f), and adding new paragraph (e) to read as follows:
� 270.18f-3 Multiple class companies.
* * * * *
(e) (1) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(2) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel.
* * * * *
21. Section 270.23c-3 is amended by revising paragraph (b)(8) to read as follows:
� 270.23c-3 Repurchase offers by closed-end companies.
* * * * *
(b) * * *
(8)(i) [A majority / At least two-thirds] of the directors of the investment company are not interested persons of the company, and those directors select and nominate any other disinterested directors of the company; and
(ii) Any person who acts as legal counsel for the disinterested directors of the company is an independent legal counsel.
* * * * *
Amend � 270.30d-1 to redesignate as � 270.30e-1, in newly designated � 270.30e-1 in paragraph (a) revise "financial statements" to read "information", and revise paragraph (d) to read as follows:
� 270.30e-1 Reports to stockholders of management companies.
* * * * *
(d) An open-end company may transmit a copy of its currently effective prospectus or Statement of Additional Information, or both, under the Securities Act, in place of any report required to be transmitted to shareholders by this section, provided that the prospectus or Statement of Additional Information, or both, include all the information that would otherwise be required to be contained in the report by this section. Such prospectus or Statement of Additional Information, or both, shall be transmitted within 60 days after the close of the period for which the report is being made.
* * * * *
Amend � 270.30d-2 to redesignate as � 270.30e-2 and in newly designated
� 270.30e-2 revise "Rule N-30D-1" to read "� 270.30e-1 of this chapter" in the first and second sentence.
23. Section 270.31a-2 is amended by removing the period at end of paragraph (a)(3) and in its place adding a semi-colon, and adding paragraphs (a)(4) and (a)(5) to read as follows:
� 270.31a-2 Records to be preserved by registered investment companies, certain majority-owned subsidiaries thereof, and other persons having transactions with registered investment companies.
(a) * * *
(4) Preserve for a period not less than six years, the first two years in an easily accessible place, any record of the initial determination that a director is not an interested person of the investment company, and each subsequent determination that the director is not an interested person of the investment company. These records must include any questionnaire and any other document used to determine that a director is not an interested person of the company; and
(5) Preserve for a period not less than six years, the first two years in an easily accessible place, any document used by an investment company to establish a reasonable belief that any person who acts as legal counsel to the directors who are not interested persons of the company is an independent legal counsel and any document used by the disinterested directors to determine that any current or prior representation is or was so limited that it will not adversely affect the counsel's ability to provide impartial, objective, and unbiased legal advice.
* * * * *
Section 270.32a-4 is added to read as follows:
� 270.32a-4 Exemption from ratification or rejection requirement of section 32(a)(2) for certain registered investment companies with independent audit committees.
A registered management investment company or a registered face-amount certificate company is exempt from the requirement of section 32(a)(2) of the Act (15 U.S.C. 80a-31(a)(2)) that the selection of the company's independent public accountant be submitted for ratification or rejection at the next succeeding annual meeting of shareholders, if:
(a) The company's board of directors has established a committee that has responsibility for overseeing the fund's accounting and auditing processes ("audit committee");
(b) The audit committee is composed solely of directors who are not interested persons of the fund;
(c) The company's board of directors has adopted a charter for the audit committee setting forth the committee's structure, duties, powers, and methods of operation; and
(d) The company maintains and preserves permanently in an easily accessible place a copy of the audit committee's charter and any modification to the charter.
Part 239 -- FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
The authority citation for part 239 continues to read, in part, as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37, unless otherwise noted.
* * * * *
Part 274 -- FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
The authority citation for part 274 continues to read as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.
Note: The text of Form N-1A does not and these amendments will not appear in the Code of Federal Regulations.
Item 13 of Form N-1A (referenced in �� 239.15A and 274.11A) is amended by adding Instructions 1 and 2 before paragraph (a); revising paragraphs (a), (b), and (c) as paragraphs (a) and (b); redesignating paragraphs (d) and (e) as paragraphs (c) and (d); and removing "executive" from the first sentence of newly redesignated paragraph (c) to read as follows:
Form N-1A
* * * * *
Item 13. Management of the Fund
Instructions.
1. For purposes of this Item 13, the terms below have the following meanings:
(a) The term "fund complex" means two or more registered investment companies that:
(1) Hold themselves out to investors as related companies for purposes of investment and investor services; or
(2) Have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies.
(b) The term "immediate family member" means a person's spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in-law, or brother- or sister-in-law, and includes step and adoptive relationships.
(c) The term "officer" means the president, vice-president, secretary, treasurer, controller, or any other officer who performs policy-making functions.
2. When providing information about directors, furnish information for directors who are interested persons separately from the information for directors who are not interested persons. For example, when furnishing information in a table, you should provide separate tables (or separate sections of a single table) for directors who are interested persons and for directors who are not interested persons. When furnishing information in narrative form, indicate by heading or otherwise the directors who are interested persons and the ones who are not interested persons.
(a) Management Information.
(1) Provide the information required by the following table for each director and officer of the Fund, and, if the Fund has an advisory board, member of the board. Explain in a footnote to the table any family relationship between the persons listed.
(1) | (2) | (3) | (4) | (5) | (6) |
Name, Address, and Age | Position(s) Held with Fund | Term of Office and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
Instructions.
1. For purposes of this paragraph, the term "family relationship" means any relationship by blood, marriage, or adoption, not more remote than first cousin.
2. For each director who is an interested person, describe, in a footnote or otherwise, the relationship, events, or transactions by reason of which the director is an interested person.
3. State the principal business of any company listed under column (4) unless the principal business is implicit in its name.
4. Indicate in column (6) directorships not included in column (5) that are held by a director in any company with a class of securities registered pursuant to section 12 of the Securities Exchange Act (15 U.S.C. 78l) or subject to the requirements of section 15(d) of the Securities Exchange Act (15 U.S.C. 78o(d)) or any company registered as an investment company under the Investment Company Act, and name the companies in which the directorships are held. Where the other directorships include directorships overseeing two or more portfolios in the same fund complex, identify the fund complex and provide the number of portfolios overseen as a director in the fund complex rather than listing each portfolio separately.
(2) For each individual listed in column (1) of the table required by paragraph (a)(1) of this Item 13 who is not a director, describe any positions, including as an officer, employee, director, or general partner, held with affiliated persons or principal underwriters of the Fund.
Instruction. When an individual holds the same position(s) with two or more registered investment companies that are part of the same fund complex, identify the fund complex and provide the number of registered investment companies for which the position(s) are held rather than listing each registered investment company separately.
(3) Describe briefly any arrangement or understanding between any director or officer and any other person(s) (naming the person(s)) pursuant to which he was selected as a director or officer.
Instruction. Do not include arrangements or understandings with directors or officers acting solely in their capacities as such.
(b) Board of Directors.
(1) Briefly describe the responsibilities of the board of directors with respect to the Fund's management.
Instruction. A Fund may respond to this paragraph by providing a general statement as to the responsibilities of the board of directors with respect to the Fund's management under the applicable laws of the state or other jurisdiction in which the Fund is organized.
(2) Identify the standing committees of the Fund's board of directors, and provide the following information about each committee:
(i) A concise statement of the functions of the committee;
(ii) The members of the committee;
(iii) The number of committee meetings held during the last fiscal year; and
(iv) If the committee is a nominating or similar committee, state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting recommendations.
(3) Unless disclosed in the table required by paragraph (a)(1) of this Item 13, describe any positions, including as an officer, employee, director, or general partner, held by a director or immediate family member of the director during the past five years with:
(i) The Fund;
(ii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, or administrator as the Fund or having an investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, or administrator of the Fund;
(iii) An investment adviser, principal underwriter, administrator, or affiliated person of the Fund; or
(iv) Any person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Fund.
Instruction. When an individual holds the same position(s) with two or more portfolios that are part of the same fund complex, identify the fund complex and provide the number of portfolios for which the position(s) are held rather than listing each portfolio separately.
(4) For each director, state the aggregate dollar amount of equity securities of registered investment companies in the same fund complex as the Fund owned beneficially or of record by the director as required by the following table:
(1) | (2) | (3) |
Name of Director | Identity of Fund Complex | Aggregate Dollar Amount of Equity Securities in Fund Complex |
Instructions.
1. Information should be provided as of the most recent practicable date. Specify the valuation date by footnote or otherwise.
2. Determine "beneficial ownership" in accordance with rule 13d-3 under the Exchange Act (� 240.13d-3 of this chapter).
(5) For each director and his immediate family members, furnish the information required by the following table as to each class of securities owned beneficially or of record in:
(i) An investment adviser, principal underwriter, or administrator of the Fund; or
(ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Fund:
(1) | (2) | (3) | (4) | (5) | (6) |
Name of Director | Name of Owners and Relationships to Director | Company | Title of Class | Value of Securities | Percent of Class |
Instructions.
1. Information should be provided as of the most recent practicable date. Specify the valuation date by footnote or otherwise.
2. Determine "beneficial ownership" in accordance with rule 13d-3 under the Exchange Act (� 240.13d-3 of this chapter).
3. Identify the company in which the director or immediate family member of the director owns securities in column (3). When the company is a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator, describe the company's relationship with the investment adviser, principal underwriter, or administrator.
4. Provide the information required by columns (5) and (6) on an aggregate basis for each director and his immediate family members.
(6) Unless disclosed in response to paragraph (b)(5) of this Item 13, describe any material interest, direct or indirect, of each director or immediate family member of a director, during the past five years, in:
(i) An investment adviser, principal underwriter, or administrator of the Fund; or
(ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Fund.
Instruction. A director or immediate family member has an interest in a company if he is a party to a contract, arrangement, or understanding with respect to any securities of, or interest in, the company.
(7) Describe briefly any material interest, direct or indirect, of any director or immediate family member of a director in any material transaction, or material series of similar transactions, since the beginning of the last two completed fiscal years of the Fund, or in any currently proposed material transaction, or material series of similar transactions, to which any of the following persons was or is to be a party:
(i) The Fund;
(ii) An officer of the Fund;
(iii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, or administrator as the Fund or having an investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, or administrator of the Fund;
(iv) An officer of an investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (7)), having the same investment adviser, principal underwriter, or administrator as the Fund or having an investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, or administrator of the Fund;
(v) An investment adviser, principal underwriter, or administrator of the Fund;
(vi) An officer of an investment adviser, principal underwriter, or administrator of the Fund;
(vii) A person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Fund; or
(viii) An officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Fund.
Instructions.
1. Include the name of each director or immediate family member whose interest in any transaction or series of similar transactions is described and the nature of the circumstances by reason of which the interest is required to be described.
2. State the nature of the interest, the approximate dollar amount involved in the transaction, and, where practicable, the approximate dollar amount of the interest.
3. In computing the amount involved in the transaction or series of similar transactions, include all periodic payments in the case of any lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director or immediate family member of the director without regard to the amount of profit or loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets, state the cost of the assets to the purchaser and, if acquired by the seller within two years prior to the transaction, the cost to the seller. Describe the method used in determining the purchase or sale price and the name of the person making the determination.
6. If the Registrant is a Series company whose Series have different fiscal years, then, in determining the date that is the beginning of the last two completed fiscal years of the Registrant, use the earliest date of any Series.
7. Disclose indirect, as well as direct, material interests in transactions. A person who has a position or relationship with, or interest in, a company that engages in a transaction with one of the persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 may have an indirect interest in the transaction by reason of the position, relationship, or interest. The interest in the transaction, however, will not be deemed "material" within the meaning of paragraph (b)(7) of this Item 13 where the interest of the director or immediate family member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that is a party to the transaction with one of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13, and the transaction is not material to the company.
8. No information need be given as to any transaction where the interest of the director or immediate family member arises solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 and the director or immediate family member receives no extra or special benefit not shared on a pro rata basis by all holders of the class of securities.
9. Transactions include loans, lines of credit, and other indebtedness. For indebtedness, indicate the largest aggregate amount of indebtedness outstanding at any time during the period, the nature of the indebtedness and the transaction in which it was incurred, the amount outstanding as of the latest practicable date, and the rate of interest paid or charged.
10. No information need be given as to any routine, retail transaction. For example, the Fund need not disclose that a director holds a credit card or bank or brokerage account with a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 unless the director is accorded special treatment.
(8) Describe briefly any material relationship, direct or indirect, of any director or immediate family member of a director that exists, or has existed at any time since the beginning of the last two completed fiscal years of the Fund, or is currently proposed, with any of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13. Relationships include:
(i) Payments for property or services to or from any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13;
(ii) Provision of legal services to any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13;
(iii) Provision of investment banking services to any person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13, other than as a participating underwriter in a syndicate; and
(iv) Any consulting or other relationship that is substantially similar in nature and scope to the relationships listed in paragraphs (b)(8)(i) through (b)(8)(iii) of this Item 13.
Instructions.
1. Include the name of each director or immediate family member whose relationship is described and the nature of the circumstances by reason of which the relationship is required to be described.
2. State the nature of the relationship and the amount of business conducted between the director or immediate family member and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 as a result of the relationship since the beginning of the last two completed fiscal years of the Fund or proposed to be done during the Fund's current fiscal year.
3. In computing the amount involved in a relationship, include all periodic payments in the case of any agreement providing for periodic payments.
4. If the Registrant is a Series company whose Series have different fiscal years, then, in determining the date that is the beginning of the last two completed fiscal years of the Registrant, use the earliest date of any Series.
5. Disclose indirect, as well as direct, material relationships. A person who has a position or relationship with, or interest in, a company that has a relationship with one of the persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 may have an indirect relationship by reason of the position, relationship, or interest. The relationship, however, will not be deemed "material" within the meaning of paragraph (b)(8) of this Item 13 where the relationship of the director or immediate family member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that has a relationship with one of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13, and the relationship is not material to the company.
6. In the case of an indirect interest, identify the company with which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 has a relationship; the name of the director or immediate family member affiliated with the company and the nature of the affiliation; and the amount of business done between the company and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 since the beginning of the last two completed fiscal years of the Fund or proposed to be done during the Fund's current fiscal year.
7. In calculating payments for property and services for purposes of paragraph (b)(8)(i) of this Item 13, the following may be excluded:
A. Payments where the transaction involves the rendering of services as a common contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; or
B. Payments that arise solely from the ownership of securities of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 and no extra or special benefit not shared on a pro rata basis by all holders of the class of securities is received.
8. No information need be given as to any routine, retail relationship. For example, the Fund need not disclose that a director holds a credit card or bank or brokerage account with a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 unless the director is accorded special treatment.
(9) If an officer of an investment adviser, principal underwriter, or administrator of the Fund, or an officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Fund, serves, or has served since the beginning of the last two completed fiscal years of the Fund, on the board of directors of a company where a director of the Fund or immediate family member of a director is, or was since the beginning of the last two completed fiscal years of the Fund, an officer, identify:
(i) The company;
(ii) The individual who serves or has served as a director of the company and the period of service as director;
(iii) The investment adviser, principal underwriter, or administrator or person controlling, controlled by, or under common control with the investment adviser, principal underwriter, or administrator where the individual named in paragraph (b)(9)(ii) of this Item 13 holds or held office and the office held; and
(iv) The director of the Fund or immediate family member who is or was an officer of the company; the office held; and the period of holding the office.
Instruction. If the Registrant is a Series company whose Series have different fiscal years, then, in determining the date that is the beginning of the last two completed fiscal years of the Registrant, use the earliest date of any Series.
(10) Discuss in reasonable detail the material factors and the conclusions with respect thereto that formed the basis for the board of directors approving the existing investment advisory contract. If applicable, include a discussion of any benefits derived or to be derived by the investment adviser from the relationship with the Fund such as soft dollar arrangements by which brokers provide research to the Fund or its investment adviser in return for allocating fund brokerage.
Instruction. Conclusory statements or a list of factors will not be considered sufficient disclosure. The discussion should relate the factors to the specific circumstances of the Fund and the investment advisory contract.
* * * * *
Item 22 of Form N-1A (referenced in �� 239.15A and 274.11A) is amended by adding paragraphs (b)(5) and (b)(6) to read as follows:
Form N-1A
* * * * *
Item 22. Financial Statements
* * * * *
(b) * * *
(5) The management information required by Item 13(a)(1).
(6) A statement that the SAI includes additional information about Fund directors and is available, without charge, upon request, and a toll-free (or collect) telephone number for shareholders to call to request the SAI.
* * * * *
Note: The text of Form N-2 does not and these amendments will not appear in the Code of Federal Regulations.
Item 18 of Form N-2 (referenced in �� 239.14 and 274.11a-1) is amended by adding Instructions 1 and 2 before paragraph 1; revising paragraphs 1 and 2; redesignating paragraphs 3 and 4 as paragraphs 4 and 14; adding new paragraphs 3 and 5 through 13; and removing "executive" from the first sentence of newly designated paragraph 14 to read as follows:
Form N-2
* * * * *
Item 18. Management
Instructions:
1. For purposes of this Item 18, the terms below have the following meanings:
a. The term "fund complex" means two or more registered investment companies that:
(i) Hold themselves out to investors as related companies for purposes of investment and investor services; or
(ii) Have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies.
b. The term "immediate family member" means a person's spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in-law, or brother- or sister-in-law, and includes step and adoptive relationships.
c. The term "officer" means the president, vice-president, secretary, treasurer, controller, or any other officer who performs policy-making functions.
2. When providing information about directors, furnish information for directors who are interested persons as defined in Section 2(a)(19) of the 1940 Act (15 U.S.C.
80a-2(a)(19)) and the rules thereunder separately from the information for directors who are not interested persons. For example, when furnishing information in a table, you should provide separate tables (or separate sections of a single table) for directors who are interested persons and for directors who are not interested persons. When furnishing information in narrative form, indicate by heading or otherwise the directors who are interested persons and the ones who are not interested persons.
1. Provide the information required by the following table for each director and officer of the Registrant, and, if the Registrant has an advisory board, member of the board. Explain in a footnote to the table any family relationship between the persons listed.
(1) | (2) | (3) | (4) | (5) | (6) |
Name, Address, and Age | Position(s) Held with Registrant | Term of Office and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
Instructions:
1. For purposes of this paragraph, the term "family relationship" means any relationship by blood, marriage, or adoption, not more remote than first cousin.
2. For each director who is an interested person as defined in Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder, describe, in a footnote or otherwise, the relationship, events, or transactions by reason of which the director is an interested person.
3. State the principal business of any company listed under column (4) unless the principal business is implicit in its name.
4. Indicate in column (6) directorships not included in column (5) that are held by a director in any company with a class of securities registered pursuant to section 12 of the Exchange Act (15 U.S.C. 78l) or subject to the requirements of section 15(d) of the Exchange Act (15 U.S.C. 78o(d)) or any company registered as an investment company under the 1940 Act, and name the companies in which the directorships are held. Where the other directorships include directorships overseeing two or more portfolios in the same fund complex, identify the fund complex and provide the number of portfolios overseen as a director in the fund complex rather than listing each portfolio separately.
2. For each individual listed in column (1) of the table required by paragraph 1 who is not a director, describe any positions, including as an officer, employee, director, or general partner, held with affiliated persons or principal underwriters of the Registrant.
Instruction:
When an individual holds the same position(s) with two or more registered investment companies that are part of the same fund complex, identify the fund complex and provide the number of registered investment companies for which the position(s) are held rather than listing each registered investment company separately.
3. Describe briefly any arrangement or understanding between any director or officer and any other person(s) (naming the person(s)) pursuant to which he was selected as a director or officer.
Instruction:
Do not include arrangements or understandings with directors or officers acting solely in their capacities as such.
4. For each non-resident director or officer of the Registrant listed in column (1) of the table required by paragraph 1, disclose whether he has authorized an agent in the United States to receive notice and, if so, disclose the name and address of the agent.
5. Identify the standing committees of the Registrant's board of directors, and provide the following information about each committee:
(a) A concise statement of the functions of the committee;
(b) The members of the committee;
(c) The number of committee meetings held during the last fiscal year; and
(d) If the committee is a nominating or similar committee, state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting recommendations.
6. Unless disclosed in the table required by paragraph 1 of this Item 18, describe any positions, including as an officer, employee, director, or general partner, held by a director or immediate family member of the director during the past five years with:
(a) The Registrant;
(b) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, or administrator as the Registrant or having an investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, or administrator of the Registrant;
(c) An investment adviser, principal underwriter, administrator, or affiliated person of the Registrant; or
(d) Any person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Registrant.
Instruction:
When an individual holds the same position(s) with two or more portfolios that are part of the same fund complex, identify the fund complex and provide the number of portfolios for which the position(s) are held rather than listing each portfolio separately.
7. For each director, state the aggregate dollar amount of equity securities of registered investment companies in the same fund complex as the Registrant owned beneficially or of record by the director as required by the following table:
(1) | (2) | (3) |
Name of Director | Identity of Fund Complex | Aggregate Dollar Amount of Equity Securities in Fund Complex |
Instructions:
1. Information should be provided as of the most recent practicable date. Specify the valuation date by footnote or otherwise.
2. Determine "beneficial ownership" in accordance with rule 13d-3 under the Exchange Act (� 240.13d-3 of this chapter).
8. For each director and his immediate family members, furnish the information required by the following table as to each class of securities owned beneficially or of record in:
(a) An investment adviser, principal underwriter, or administrator of the Registrant; or
(b) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Registrant:
(1) | (2) | (3) | (4) | (5) | (6) |
Name of Director | Name of Owners and Relationships to Director | Company | Title of Class | Value of Securities | Percent of Class |
Instructions:
1. Information should be provided as of the most recent practicable date. Specify the valuation date by footnote or otherwise.
2. Determine "beneficial ownership" in accordance with rule 13d-3 under the Exchange Act (� 240.13d-3 of this chapter).
3. Identify the company in which the director or immediate family member of the director owns securities in column (3). When the company is a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator, describe the company's relationship with the investment adviser, principal underwriter, or administrator.
4. Provide the information required by columns (5) and (6) on an aggregate basis for each director and his immediate family members.
9. Unless disclosed in response to paragraph 8 of this Item 18, describe any material interest, direct or indirect, of each director or immediate family member of a director, during the past five years, in:
(a) An investment adviser, principal underwriter, or administrator of the Registrant; or
(b) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Registrant.
Instruction:
A director or immediate family member has an interest in a company if he is a party to a contract, arrangement, or understanding with respect to any securities of, or interest in, the company.
10. Describe briefly any material interest, direct or indirect, of any director or immediate family member of a director in any material transaction, or material series of similar transactions, since the beginning of the last two completed fiscal years of the Registrant, or in any currently proposed material transaction, or material series of similar transactions, to which any of the following persons was or is to be a party:
(a) The Registrant;
(b) An officer of the Registrant;
(c) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, or administrator as the Registrant or having an investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, or administrator of the Registrant;
(d) An officer of an investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, principal underwriter, or administrator as the Registrant or having an investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with an investment adviser, principal underwriter, or administrator of the Registrant;
(e) An investment adviser, principal underwriter, or administrator of the Registrant;
(f) An officer of an investment adviser, principal underwriter, or administrator of the Registrant;
(g) A person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Registrant; or
(h) An officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Registrant.
Instructions:
1. Include the name of each director or immediate family member whose interest in any transaction or series of similar transactions is described and the nature of the circumstances by reason of which the interest is required to be described.
2. State the nature of the interest, the approximate dollar amount involved in the transaction, and, where practicable, the approximate dollar amount of the interest.
3. In computing the amount involved in the transaction or series of similar transactions, include all periodic payments in the case of any lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director or immediate family member of the director without regard to the amount of profit or loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets, state the cost of the assets to the purchaser and, if acquired by the seller within two years prior to the transaction, the cost to the seller. Describe the method used in determining the purchase or sale price and the name of the person making the determination.
6. Disclose indirect, as well as direct, material interests in transactions. A person who has a position or relationship with, or interest in, a company that engages in a transaction with one of the persons listed in paragraphs 10(a) through (h) of this Item 18 may have an indirect interest in the transaction by reason of the position, relationship, or interest. The interest in the transaction, however, will not be deemed "material" within the meaning of paragraph 10 of this Item 18 where the interest of the director or immediate family member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that is a party to the transaction with one of the persons specified in paragraphs 10(a) through (h) of this Item 18, and the transaction is not material to the company.
7. No information need be given as to any transaction where the interest of the director or immediate family member arises solely from the ownership of securities of a person specified in paragraphs 10(a) through (h) of this Item 18 and the director or immediate family member receives no extra or special benefit not shared on a pro rata basis by all holders of the class of securities.
8. Transactions include loans, lines of credit, and other indebtedness. For indebtedness, indicate the largest aggregate amount of indebtedness outstanding at any time during the period, the nature of the indebtedness and the transaction in which it was incurred, the amount outstanding as of the latest practicable date, and the rate of interest paid or charged.
9. No information need be given as to any routine, retail transaction. For example, the Registrant need not disclose that a director holds a credit card or bank or brokerage account with a person specified in paragraphs 10(a) through (h) of this Item 18 unless the director is accorded special treatment.
11. Describe briefly any material relationship, direct or indirect, of any director or immediate family member of a director that exists, or has existed at any time since the beginning of the last two completed fiscal years of the Registrant, or is currently proposed, with any of the persons specified in paragraphs 10(a) through (h) of this Item 18. Relationships include:
(a) Payments for property or services to or from any person specified in paragraphs 10(a) through (h) of this Item 18;
(b) Provision of legal services to any person specified in paragraphs 10(a) through (h) of this Item 18;
(c) Provision of investment banking services to any person specified in paragraphs 10(a) through (h) of this Item 18, other than as a participating underwriter in a syndicate; and
(d) Any consulting or other relationship that is substantially similar in nature and scope to the relationships listed in paragraphs 11(a) through (c) of this Item 18.
Instructions:
1. Include the name of each director or immediate family member whose relationship is described and the nature of the circumstances by reason of which the relationship is required to be described.
2. State the nature of the relationship and the amount of business conducted between the director or immediate family member and the person specified in paragraphs 10(a) through (h) of this Item 18 as a result of the relationship since the beginning of the last two completed fiscal years of the Registrant or proposed to be done during the Registrant's current fiscal year.
3. In computing the amount involved in a relationship, include all periodic payments in the case of any agreement providing for periodic payments.
4. Disclose indirect, as well as direct, material relationships. A person who has a position or relationship with, or interest in, a company that has a relationship with one of the persons listed in paragraphs 10(a) through (h) of this Item 18 may have an indirect relationship by reason of the position, relationship, or interest. The relationship, however, will not be deemed "material" within the meaning of paragraph 11 of this Item 18 where the relationship of the director or immediate family member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that has a relationship with one of the persons specified in paragraphs 10(a) through (h) of this Item 18, and the relationship is not material to the company.
5. In the case of an indirect interest, identify the company with which a person specified in paragraphs 10(a) through (h) of this Item 18 has a relationship; the name of the director or immediate family member affiliated with the company and the nature of the affiliation; and the amount of business done between the company and the person specified in paragraphs 10(a) through (h) of this Item 18 since the beginning of the last two completed fiscal years of the Registrant or proposed to be done during the Registrant's current fiscal year.
6. In calculating payments for property and services for purposes of paragraph 11(a) of this Item 18, the following may be excluded:
a. Payments where the transaction involves the rendering of services as a common contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; or
b. Payments that arise solely from the ownership of securities of a person specified in paragraphs 10(a) through (h) of this Item 18 and no extra or special benefit not shared on a pro rata basis by all holders of the class of securities is received.
7. No information need be given as to any routine, retail relationship. For example, the Registrant need not disclose that a director holds a credit card or bank or brokerage account with a person specified in paragraphs 10(a) through (h) of this Item 18 unless the director is accorded special treatment.
12. If an officer of an investment adviser, principal underwriter, or administrator of the Registrant, or an officer of a person directly or indirectly controlling, controlled by, or under common control with an investment adviser, principal underwriter, or administrator of the Registrant, serves, or has served since the beginning of the last two completed fiscal years of the Registrant, on the board of directors of a company where a director of the Registrant or immediate family member of a director is, or was since the beginning of the last two completed fiscal years of the Registrant, an officer, identify:
(a) The company;
(b) The individual who serves or has served as a director of the company and the period of service as director;
(c) The investment adviser, principal underwriter, or administrator or person controlling, controlled by, or under common control with the investment adviser, principal underwriter, or administrator where the individual named in paragraph 12(b) of this Item 18 holds or held office and the office held; and
(d) The director of the Registrant or immediate family member who is or was an officer of the company; the office held; and the period of holding the office.
13. Discuss in reasonable detail the material factors and the conclusions with respect thereto that formed the basis for the board of directors approving the existing investment advisory contract. If applicable, include a discussion of any benefits derived or to be derived by the investment adviser from the relationship with the Registrant such as soft dollar arrangements by which brokers provide research to the Registrant or its investment adviser in return for allocating fund brokerage.
Instruction:
Conclusory statements or a list of factors will not be considered sufficient disclosure. The discussion should relate the factors to the specific circumstances of the Registrant and the investment advisory contract.
* * * * *
Instruction 4 to Item 23 of Form N-2 (referenced in �� 239.14 and 274.11a-1) is amended by removing "and" from the end of paragraph c., removing the period at the end of paragraph d. and in its place adding a semi-colon, and adding paragraphs e. and f. to read as follows:
Form N-2
* * * * *
Item 23. Financial Statements
* * * * *
Instructions
* * * * *
4. * * *
e. the management information required by paragraph 1 of Item 18; and
f. a statement that the SAI includes additional information about directors of the Registrant and is available, without charge, upon request, and a toll-free (or collect) telephone number for shareholders to call to request the SAI.
* * * * *
Note: The text of Form N-3 does not and these amendments will not appear in the Code of Federal Regulations.
Item 20 of Form N-3 (referenced in �� 239.17a and 274.11b) is amended by adding instructions 1 and 2 before paragraph (a); revising paragraphs (a) and (b); redesignating paragraph (c) as paragraph (m); adding paragraphs (c) through (l); and removing "executive" from the first sentence of newly designated paragraph (m) to read as follows:
Form N-3
* * * * *
Item 20. Management
Instructions:
1. For purposes of this Item 20, the terms below have the following meanings:
a. The term "fund complex" means two or more registered investment companies that:
(i) Hold themselves out to investors as related companies for purposes of investment and investor services; or
(ii) Have a common investment adviser or have an investment adviser that is an affiliated person of the investment adviser of any of the other registered investment companies.
b. The term "immediate family member" means a person's spouse, parent, child, sibling, mother- or father-in-law, son- or daughter-in-law, or brother- or sister-in-law, and includes step and adoptive relationships.
c. The term "officer" means the president, vice-president, secretary, treasurer, controller, or any other officer who performs policy-making functions.
2. When providing information about directors, furnish information for directors who are interested persons as defined in Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder separately from the information for directors who are not interested persons. For example, when furnishing information in a table, you should provide separate tables (or separate sections of a single table) for directors who are interested persons and for directors who are not interested persons. When furnishing information in narrative form, indicate by heading or otherwise the directors who are interested persons and the ones who are not interested persons.
(a) Provide the information required by the following table for each member of the board of managers ("director") and officer of the Registrant, and, if the Registrant has an advisory board, member of the board. Explain in a footnote to the table any family relationship between the persons listed.
(1) | (2) | (3) | (4) | (5) | (6) |
Name, Address, and Age | Position(s) Held with Registrant | Term of Office and Length of Time Served | Principal Occupation(s) During Past 5 Years | Number of Portfolios in Fund Complex Overseen by Director | Other Directorships Held by Director |
Instructions:
1. For purposes of this paragraph, the term "family relationship" means any relationship by blood, marriage, or adoption, not more remote than first cousin.
2. For each director who is an interested person as defined in Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder, describe, in a footnote or otherwise, the relationship, events, or transactions by reason of which the director is an interested person.
3. State the principal business of any company listed under column (4) unless the principal business is implicit in its name.
4. Indicate in column (6) directorships not included in column (5) that are held by a director in any company with a class of securities registered pursuant to section 12 of the Exchange Act (15 U.S.C. 78l) or subject to the requirements of section 15(d) of the Exchange Act (15 U.S.C. 78o(d)) or any company registered as an investment company under the 1940 Act, and name the companies in which the directorships are held. Where the other directorships include directorships overseeing two or more portfolios in the same fund complex, identify the fund complex and provide the number of portfolios overseen as a director in the fund complex rather than listing each portfolio separately.
(b) For each individual listed in column (1) of the table required by paragraph (a) of this Item 20 who is not a director, describe any positions, including as an officer, employee, director, or general partner, held with affiliated persons or principal underwriters of the Registrant.
Instruction:
When an individual holds the same position(s) with two or more registered investment companies that are part of the same fund complex, identify the fund complex and provide the number of registered investment companies for which the position(s) are held rather than listing each registered investment company separately.
(c) Describe briefly any arrangement or understanding between any director or officer and any other person(s) (naming the person(s)) pursuant to which he was selected as a director or officer.
Instruction:
Do not include arrangements or understandings with directors or officers acting solely in their capacities as such.
(d) Identify the standing committees of the Registrant's board of managers, and provide the following information about each committee:
(i) A concise statement of the functions of the committee;
(ii) The members of the committee;
(iii) The number of committee meetings held during the last fiscal year; and
(iv) If the committee is a nominating or similar committee, state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting recommendations.
(e) Unless disclosed in the table required by paragraph (a) of this Item 20, describe any positions, including as an officer, employee, director, or general partner, held by a director or immediate family member of the director during the past five years with:
(i) The Registrant;
(ii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same Insurance Company, investment adviser, principal underwriter, or administrator as the Registrant or having an Insurance Company, investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant;
(iii) The Insurance Company or an investment adviser, principal underwriter, administrator, or affiliated person of the Registrant; or
(iv) Any person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant.
Instruction:
When an individual holds the same position(s) with two or more portfolios that are part of the same fund complex, identify the fund complex and provide the number of portfolios for which the position(s) are held rather than listing each portfolio separately.
(f) For each director, state the aggregate dollar amount of equity securities of registered investment companies in the same fund complex as the Registrant owned beneficially or of record by the director as required by the following table:
(1) | (2) | (3) |
Name of Director | Identity of Fund Complex | Aggregate Dollar Amount of Equity Securities in Fund Complex |
Instructions:
1. Information should be provided as of the most recent practicable date. Specify the valuation date by footnote or otherwise.
2. Determine "beneficial ownership" in accordance with rule 13d-3 under the Exchange Act (� 240.13d-3 of this chapter).
(g) For each director and his immediate family members, furnish the information required by the following table as to each class of securities owned beneficially or of record in:
(i) The Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant; or
(ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant:
(1) | (2) | (3) | (4) | (5) | (6) |
Name of Director | Name of Owners and Relationships to Director | Company | Title of Class | Value of Securities | Percent of Class |
Instructions:
1. Information should be provided as of the most recent practicable date. Specify the valuation date by footnote or otherwise.
2. Determine "beneficial ownership" in accordance with rule 13d-3 under the Exchange Act (� 240.13d-3 of this chapter).
3. Identify the company in which the director or immediate family member of the director owns securities in column (3). When the company is a person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator, describe the company's relationship with the Insurance Company, investment adviser, principal underwriter, or administrator.
4. Provide the information required by columns (5) and (6) on an aggregate basis for each director and his immediate family members.
(h) Unless disclosed in response to paragraph (g) of this Item 20, describe any material interest, direct or indirect, of each director or immediate family member of a director, during the past five years, in:
(i) The Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant; or
(ii) A person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant.
Instruction:
A director or immediate family member has an interest in a company if he is a party to a contract, arrangement, or understanding with respect to any securities of, or interest in, the company.
(i) Describe briefly any material interest, direct or indirect, of any director or immediate family member of a director in any material transaction, or material series of similar transactions, since the beginning of the last two completed fiscal years of the Registrant, or in any currently proposed material transaction, or material series of similar transactions, to which any of the following persons was or is to be a party:
(i) The Registrant;
(ii) An officer of the Registrant;
(iii) An investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same Insurance Company, investment adviser, principal underwriter, or administrator as the Registrant or having an Insurance Company, investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant;
(iv) An officer of an investment company, or a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same Insurance Company, investment adviser, principal underwriter, or administrator as the Registrant or having an Insurance Company, investment adviser, principal underwriter, or administrator that directly or indirectly controls, is controlled by, or is under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant;
(v) The Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant;
(vi) An officer of the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant;
(vii) A person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant; or
(viii) An officer of a person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant.
Instructions:
1. Include the name of each director or immediate family member whose interest in any transaction or series of similar transactions is described and the nature of the circumstances by reason of which the interest is required to be described.
2. State the nature of the interest, the approximate dollar amount involved in the transaction, and, where practicable, the approximate dollar amount of the interest.
3. In computing the amount involved in the transaction or series of similar transactions, include all periodic payments in the case of any lease or other agreement providing for periodic payments.
4. Compute the amount of the interest of any director or immediate family member of the director without regard to the amount of profit or loss involved in the transaction(s).
5. As to any transaction involving the purchase or sale of assets, state the cost of the assets to the purchaser and, if acquired by the seller within two years prior to the transaction, the cost to the seller. Describe the method used in determining the purchase or sale price and the name of the person making the determination.
6. Disclose indirect, as well as direct, material interests in transactions. A person who has a position or relationship with, or interest in, a company that engages in a transaction with one of the persons listed in paragraphs (i) through (viii) of paragraph (i) of this Item 20 may have an indirect interest in the transaction by reason of the position, relationship, or interest. The interest in the transaction, however, will not be deemed "material" within the meaning of paragraph (i) of this Item 20 where the interest of the director or immediate family member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that is a party to the transaction with one of the persons specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20, and the transaction is not material to the company.
7. No information need be given as to any transaction where the interest of the director or immediate family member arises solely from the ownership of securities of a person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20 and the director or immediate family member receives no extra or special benefit not shared on a pro rata basis by all holders of the class of securities.
8. Transactions include loans, lines of credit, and other indebtedness. For indebtedness, indicate the largest aggregate amount of indebtedness outstanding at any time during the period, the nature of the indebtedness and the transaction in which it was incurred, the amount outstanding as of the latest practicable date, and the rate of interest paid or charged.
9. No information need be given as to any routine, retail transaction. For example, the Registrant need not disclose that a director holds a credit card or bank or brokerage account with a person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20 unless the director is accorded special treatment.
(j) Describe briefly any material relationship, direct or indirect, of any director or immediate family member of a director that exists, or has existed at any time since the beginning of the last two completed fiscal years of the Registrant, or is currently proposed, with any of the persons specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20. Relationships include:
(i) Payments for property or services to or from any person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20;
(ii) Provision of legal services to any person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20;
(iii) Provision of investment banking services to any person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20, other than as a participating underwriter in a syndicate; and
(iv) Any consulting or other relationship that is substantially similar in nature and scope to the relationships listed in paragraphs (j)(i) through (j)(iii) of this Item 20.
Instructions:
1. Include the name of each director or immediate family member whose relationship is described and the nature of the circumstances by reason of which the relationship is required to be described.
2. State the nature of the relationship and the amount of business conducted between the director or immediate family member and the person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20 as a result of the relationship since the beginning of the last two completed fiscal years of the Registrant or proposed to be done during the Registrant's current fiscal year.
3. In computing the amount involved in a relationship, include all periodic payments in the case of any agreement providing for periodic payments.
4. Disclose indirect, as well as direct, material relationships. A person who has a position or relationship with, or interest in, a company that has a relationship with one of the persons listed in paragraphs (i) through (viii) of paragraph (i) of this Item 20 may have an indirect relationship by reason of the position, relationship, or interest. The relationship, however, will not be deemed "material" within the meaning of paragraph (j) of this Item 20 where the relationship of the director or immediate family member arises solely from the holding of an equity interest (including a limited partnership interest, but excluding a general partnership interest) or a creditor interest in a company that has a relationship with one of the persons specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20, and the relationship is not material to the company.
5. In the case of an indirect interest, identify the company with which a person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20 has a relationship; the name of the director or immediate family member affiliated with the company and the nature of the affiliation; and the amount of business done between the company and the person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20 since the beginning of the last two completed fiscal years of the Registrant or proposed to be done during the Registrant's current fiscal year.
6. In calculating payments for property and services for purposes of paragraph (j)(i) of this Item 20, the following may be excluded:
a. Payments where the transaction involves the rendering of services as a common contract carrier, or public utility, at rates or charges fixed in conformity with law or governmental authority; or
b. Payments that arise solely from the ownership of securities of a person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20 and no extra or special benefit not shared on a pro rata basis by all holders of the class of securities is received.
7. No information need be given as to any routine, retail relationship. For example, the Registrant need not disclose that a director holds a credit card or bank or brokerage account with a person specified in paragraphs (i) through (viii) of paragraph (i) of this Item 20 unless the director is accorded special treatment.
(k) If an officer of the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant, or an officer of a person directly or indirectly controlling, controlled by, or under common control with the Insurance Company or an investment adviser, principal underwriter, or administrator of the Registrant, serves, or has served since the beginning of the last two completed fiscal years of the Registrant, on the board of directors of a company where a director of the Registrant or immediate family member of a director is, or was since the beginning of the last two completed fiscal years of the Registrant, an officer, identify:
(i) The company;
(ii) The individual who serves or has served as a director of the company and the period of service as director;
(iii) The Insurance Company, investment adviser, principal underwriter, or administrator or person controlling, controlled by, or under common control with the Insurance Company, investment adviser, principal underwriter, or administrator where the individual named in paragraph (k)(ii) of this Item 20 holds or held office and the office held; and
(iv) The director of the Registrant or immediate family member who is or was an officer of the company; the office held; and the period of holding the office.
(l) Discuss in reasonable detail the material factors and the conclusions with respect thereto that formed the basis for the board of managers approving the existing investment advisory contract. If applicable, include a discussion of any benefits derived or to be derived by the investment adviser from the relationship with the Registrant such as soft dollar arrangements by which brokers provide research to the Registrant or its investment adviser in return for allocating fund brokerage.
Instruction:
Conclusory statements or a list of factors will not be considered sufficient disclosure. The discussion should relate the factors to the specific circumstances of the Registrant and the investment advisory contract.
* * * * *
Instruction 4 to Item 27 of Form N-3 (referenced in �� 239.17a and 274.11b) is amended by removing "and" from the end of paragraph (iii), removing the period at the end of paragraph (iv) and in its place adding a semi-colon, and adding paragraphs (v) and (vi) to read as follows:
Item 27. Financial Statements
* * * * *
Instructions
* * * * *
4. * * *
(v) the management information required by paragraph (a) of Item 20; and
(vi) a statement that the SAI includes additional information about members of the board of managers of the Registrant and is available, without charge, upon request, and a toll-free (or collect) telephone number for contract owners to call to request the SAI.
* * * * *
By the Commission.
Jonathan G. Katz
Secretary
Note: Appendix A to the preamble will not appear in the Code of Federal Regulations.
October 14, 1999
Analysis of Proposed Amendments to Schedule 14A under the Exchange Act
and Form N-1A under the Investment Company Act
Proposed Item 22 of Schedule 14A | Proposed Items 13 and 22 of Form N-1A | Source of Proposed Items in Current Rules and Forms |
Item 22. Information Required in Investment Company Proxy Statement | Item 13. Management Information | |
Instr. 1.a. to Item 13 (Defn. of fund complex) | Item 22(a)(v) of Schedule 14A. | |
22(a)(1)(i) (Defn. of Administrator) | Item 15(h)(1) of Form N-1A. | |
22(a)(1)(vi) (Defn. of Immediate Family Member) | Instr. 1.b. to Item 13 | Instruction 2 to 404(a) of Reg. S-K. |
22(a)(1)(vii) (Defn. of Officer) | Instr. 1.c. to Item 13 | Instruction 1 to Item 13(b) of Form N-1A. |
22(a)(1)(ix) (Defn. of Registrant) | Item 22(a)(1)(vii) of Schedule 14A. | |
22(a)(1)(x) (Defn. of Sponsoring Insurance Company | Instruction D. of General Instructions to Form N-3. | |
22(b) (Applies when there is an election of directors) | ||
Instr. 1 | Instruction 1 to Item 22(b) of Schedule 14A. | |
Instr. 2 | Instruction 2 to Item 22(b) of Schedule 14A. | |
Instr. 3 | Instr. 2 to Item 13 | New. |
Instr. 4 | Instruction 3 to Item 401(a) of Reg. S-K. | |
22(b)(1) (Table of core information about each director, nominee, officer, and advisory board member) | Item 13(a)(1) | Items 401(a), (b), (d), and (e) of Reg. S-K and Item 13 of Form N-1A. |
Instr. 1 | Instr. 1 to Item 13(a)(1) | Instruction to 401(d) of Reg. S-K and Instruction 1 to Item 13(b) of Form N-1A. |
Instr. 2 | Instruction 2 to Item 401(a) and Instruction 2 to Item 401(b) to Reg. S-K. | |
Instr. 3 | Instruction 4 to Item 401(a) of Reg. S-K. | |
Instr. 4 | Instr. 2 to Item 13(a)(1) | Instruction 1 to Item 22(b)(4) of Schedule 14A. |
Instr. 5 | Instr. 3 to Item 13(a)(1) | Instruction 2 to Item 13(b) of Form N-1A. |
Instr. 6 | New. | |
Instr. 7 | Instr. 4 to Item 13(a)(1) | Item 401(e)(2) and Instruction to Item 401(e)(2) of Reg. S-K. |
Item 13(a)(2) (Positions held by officers) | Item 13(c) of Form N-1A. | |
Instr. to Item 13(a)(2) | Instruction to Item 13(c) of Form N-1A. | |
22(b)(2) (Any agreement regarding selection as director, nominee, or officer) | Item 13(a)(3) | Items 401(a) and 401(b) of Reg. S-K. |
Instr. | Instr. to Item 13(a)(3) | Instruction 1 to Item 401(a) and Instruction 1 to Item 401(b) of Reg. S-K. |
Item 13(b)(1) (Description of board responsibilities) | Item 13(a) of Form N-1A. | |
Instr. to Item 13(b)(1) | Instruction to Item 13(a) of Form N-1A. |
22(b)(3) (Positions held by director, nominee, or immediate family members at fund and related persons (i.e., other funds in fund complex, investment adviser, principal underwriter, administrator, or control-affiliates of adviser, underwriter, or administrator) | Item 13(b)(3) | Item 22(b)(1) of Schedule 14A and Item 13(c) of Form N-1A. |
Instr. | Instr. to Item 13(b)(3) | Instruction to Item 13(c) of Form N-1A. |
22(b)(4) (Ownership of funds in fund complex) | Item 13(b)(4) | New. |
Instr. 1 | Instr. 1 to Item 13(b)(4) | Item 403(b) of Reg. S-K. |
Instr. 2 | Instr. 2 to Item 13(b)(4) | Instruction 2 to Item 403 of Reg. S-K. |
22(b)(5) (Ownership of securities of investment adviser, principal underwriter, administrator, and control-affiliates of adviser, underwriter, and administrator) | Item 13(b)(5) | Item 22(b)(1) of Schedule 14A. |
Instr. 1 | Instr. 1 to Item 13(b)(5) | Item 403(b) of Reg. S-K. |
Instr. 2 | Instr. 2 to Item 13(b)(5) | Instruction 2 to Item 403 of Reg. S-K. |
Instr. 3 | Instr. 3 to Item 13(b)(5) | New. |
Instr. 4 | Instr. 4 to Item 13(b)(5) | New. |
22(b)(6) (Material interests in fund and related persons) | Item 13(b)(6) | Items 22(b)(1) and (2) of Schedule 14A. |
Instr. | Instr. to Item 13(b)(6) | Item 5(b)(1)(viii) of Schedule 14A. |
22(b)(7) (Material interests in material transactions involving fund and related persons) | Item 13(b)(7) | Item 22(b)(3) of Schedule 14A and Item 404(a) of Reg. S-K. |
Instr. 1 | Instr. 1 to Item 13(b)(7) | Instruction 1 to Item 22(b)(3) of Schedule 14A. |
Instr. 2 | Instr. 2 to Item 13(b)(7) | Item 404(a) of Reg. S-K. |
Instr. 3 | Instr. 3 to Item 13(b)(7) | Instruction 3 of Item 404(a) of Reg. S-K. |
Instr. 4 | Instr. 4 to Item 13(b)(7) | Instruction 4 to Item 404(a) of Reg. S-K. |
Instr. 5 | Instr. 5 to Item 13(b)(7) | Instruction 2 to Item 22(b)(3) of Schedule 14A and Instruction 5 to Item 404(a) of Reg. S-K. |
Instr. 6 | Instr. 6 to Item 13(b)(7) | New. |
Instr. 7 | Instr. 7 to Item 13(b)(7) | Instruction 8 to Item 404(a) of Reg. S-K. |
Instr. 8 | Instr. 8 to Item 13(b)(7) | Instruction 7.C to Item 404(a) of Reg. S-K. |
Instr. 9 | Instr. 9 to Item 13(b)(7) | New. |
22(b)(8) (Material relationships with fund and related persons) | Item 13(b)(8) | New. Derived from Item 404(b) of Reg. S-K. |
Instr. 1 | Instr. 1 to Item 13(b)(8) | New. Derived from Instruction 1 to Item 22(b)(3) of Schedule 14A. |
Instr. 2 | Instr. 2 to Item 13(b)(8) | New. Derived from Item 404(b) of Reg. S-K. |
Instr. 3 | Instr. 3 to Item 13(b)(8) | New. Derived from Instruction 3 of Item 404(a) of Reg. S-K. |
Instr. 4 | Instr. 4 to Item 13(b)(8) | New. |
Instr. 5 | Instr. 5 to Item 13(b)(8) | New. Derived from Instruction 8 of Item 404(a) of Reg. S-K. |
Instr. 6 | Instr. 6 to Item 13(b)(8) | New. Derived from Item 404(b) of Reg. S-K. |
Instr. 7 | Instr. 7 to Item 13(b)(8) | New. Derived from Instructions 2.A and B to 404(b) of Reg. S-K. |
22(b)(9) (Cross-directorships) | Item 13(b)(9) | New. |
Instr. | Instr. to Item 13(b)(9) | New. |
22(b)(10) (Incorporates parts of Reg. S-K into Item 22) | Item 22(b)(4) of Schedule 14A. | |
Instr. | New. | |
22(b)(11) (Material pending legal proceedings) | Item 22(b)(5) of Schedule 14A. | |
22(b)(12) (Compensation table) | Item 13(c) | Item 22(b)(6) of Schedule 14A and Item 13(d) of Form N-1A. |
22(b)(13) (Board committees) | Item 13(b)(2) | Item 7(e)(1) and (2) of Schedule 14A and Instruction 3 of Item 13(b) of Form N-1A. |
Item 13(b)(10) (Basis for approving advisory contract) | Item 22(c)(11) of Schedule 14A. | |
Item 22. Financial Statements | ||
Item 22(b)(5) (Management information required by Item 13(a)(1) | New. | |
Item 22(b)(6) (Reference to SAI) | New. |
1 | Interpretive Matters Concerning Independent Directors of Investment Companies, Investment Company Act Release No. 24083 (Oct. 14, 1999) ["Interpretive Release"]. |
2 | For simplicity, this release focuses on mutual funds (i.e., open-end funds). Our proposed rule amendments, however, would apply to all management investment companies, except where noted. |
3 | See Investment Company Institute, Mutual Fund Fact Book 3 (1999) ["1999 Mutual Fund Fact Book"]. Total assets of mutual funds were $5.525 trillion at the end of 1998, compared to $809.4 billion in 1988. In 1998, an estimated 44 percent of U.S. households owned mutual funds, up from 5.7 percent in 1980 and 24.4 percent in 1988. Id. at 45. As of December 31, 1998, an estimated 77.3 million individuals owned shares of mutual funds. Id. at 41. At the end of 1998, assets of all funds (open-end funds, closed-end funds, and unit investment trusts) totaled $5.778 trillion. See id. at 3 (stating that assets of open-end funds totaled $5.525 trillion at the end of 1998); Lipper Inc., Lipper Closed-End Fund Performance Analysis 1-2 (Jan. 1999) (stating that assets of closed-end funds totaled $158 billion at the end of 1998); Investment Company Institute, Release No. 99-36 (stating that assets of unit investment trusts totaled $94.54 billion at the end of 1998). |
4 | At the end of 1998, assets totaling approximately $1.9 trillion, or 35 percent of all mutual fund assets, were held in retirement accounts, up from $348 billion at the end of 1991. 1999 Mutual Fund Fact Book, supra note 3, at 47-48; see also Jennifer Karchmer, Planning for Retirement Has Given Mutual Fund Assets a Steady Boost, Bond Buyer, May 24, 1999, at 6. |
5 | At the end of 1998, money market fund assets totaled approximately $1.352 trillion. See 1999 Mutual Fund Fact Book, supra note 3, at 4. |
6 | See generally Investment Company Institute, Money Market Mutual Funds (1990). |
7 | Assets in funds investing primarily in foreign securities totaled over $448.5 billion at the end of 1998. See Investment Company Institute, Release No. 99-07 (stating that assets of open-end funds investing primarily in foreign securities totaled $416.5 billion at the end of 1998); Lipper Inc., Lipper Closed-End Fund Performance Analysis -- Fourth quarter 1998 Report (stating that assets of closed-end funds investing primarily in foreign securities totaled $32 billion at the end of 1998). |
8 | 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). |
9 | Division of Investment Management, SEC, Protecting Investors: A Half Century of Investment Company Regulation 251 (1992) ["1992 Protecting Investors Report"]; see also 1 Tamar Frankel, Regulation of Money Managers 10 (1978). |
10 | See SEC, Report on the Public Policy Implications of Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d. Sess. 12, 127, 148 (1966) ["Public Policy Report"] (stating that funds generally are formed by their advisers and remain under their control, and that advisers' influence permeates fund activities); Wharton School of Finance and Commerce, A Study of Mutual Funds, H.R. Rep. No. 2274, 87th Cong., 2d Sess. 463 (1962) ["Wharton Report"] (discussing the dominant position of advisers in the control of funds and the infrequency with which funds have a separate existence from their advisers); see also Clarke Randall, Fiduciary Duties of Investment Company Directors and Management Companies Under the Investment Company Act of 1940, 31 Okla. L. Rev. 635, 636 (1978) ("The adviser's control and influence over the fund is very nearly total."); In the Matter of Steadman Security Corporation, Investment Company Act Release No. 9830 [1977 Transfer Binder] Fed. Sec. L. Rep. (CCH) � 81,243, at n.81 (Jun. 29, 1977) ("[T]he investment adviser almost always controls the fund."). |
11 | See section 1(b)(2) of the Act [15 U.S.C. 80a-1(b)(2)]; SEC, Report on Investment Trusts and Investment Companies, Part III (1939); see also Storey & Clyde, supra note 8, at � 2.2; Joseph F. Krupsky, The Role of Investment Company Directors, 32 Bus. Law. 1733, 1737-40 (1977); William J. Nutt, A Study of Mutual Fund Independent Directors, 120 U. Pa. L. Rev. 179, 181 (1971). |
12 | Section 17(a) of the Act [15 U.S.C. 80a-17(a)]. |
13 | See Jean Gleason Stromberg, Governance of Investment Companies, in The Investment Company Regulation Deskbook �� 4.1-.2 (Amy L. Goodman, ed. 1997). |
14 | See section 15(a) of the Act [15 U.S.C. 80a-15(a)] (requiring annual approval of the advisory contract by the fund's board of directors or shareholders and requiring that the contract empower the board to terminate the contract); section 15(c) of the Act [15 U.S.C. 80a-15(c)] (requiring that a fund's independent directors separately evaluate and approve any advisory contract with the fund). |
15 | See section 15(b) of the Act [15 U.S.C. 80a-15(b)] (requiring annual approval of the principal underwriting contract by the fund's board or shareholders); section 15(c) of the Act (requiring that a fund's independent directors separately evaluate and approve the fund's contract with its principal underwriter). |
16 | See section 32(a)(1) of the Act [15 U.S.C. 80a-31(a)(1)] (requiring that a fund's independent directors select the fund's independent public accountant). |
17 | See section 2(a)(41) of the Act [15 U.S.C. 80a-2(a)(41)] (requiring, in effect, that any security for which no market quotation is readily available be valued at fair value as determined in good faith by the board of directors). |
18 | See sections 15(a)-(c) of the Act (board review of fees paid to a fund's adviser and principal underwriter); rule 12b-1 under the Act [17 CFR 270.12b-1] (board review of asset-based distribution fees paid pursuant to a "rule 12b-1 plan"). |
19 | See Personal Investment Activities of Investment Company Personnel, Investment Company Act Release No. 23958 (Aug. 20, 1999) [64 FR 46821 (Aug. 27, 1999)] (adopting amendments to rule 17j-1 under the Act [17 CFR 270.17j-1]). |
20 | Section 10(a) of the Act [15 U.S.C. 80a-10(a)] (prohibiting more than 60 percent of a fund's directors from being interested persons of the fund). We refer to directors who are not "interested persons" of the fund as "independent directors." See also section 10(b)(2) of the Act [15 U.S.C. 80a-10(b)(2)] (requiring, in effect, that independent directors comprise a majority of a fund's board if the fund's principal underwriter is an affiliate of the fund's investment adviser); section 15(f)(1) of the Act [15 U.S.C. 80a-15(f)(1)] (providing a safe harbor for the sale of an advisory business if directors who are not interested persons of the investment adviser constitute at least 75 percent of a fund's board for at least three years following the assignment of the advisory contract). |
21 | Section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)] (defining "interested person"); see infra note 170 (discussing the elements of the definition of "interested person"). |
22 | See Burks v. Lasker, 441 U.S. 471, 484 (1979) (quoting Tannenbaum v. Zeller, 552 F.2d 402, 406 (2d Cir. 1977)). |
23 | S. Rep. No. 184, 91st Cong., 2d Sess. 31 (1969). |
24 | See section 15(c) of the Act. |
25 | See, e.g., rule 10f-3 [17 CFR 270.10f-3] (permitting funds to purchase securities in a primary offering when an affiliated broker-dealer is a member of the underwriting syndicate if the fund's board, including a majority of its independent directors, (i) approves procedures regulating purchases of these securities and (ii) determines at least quarterly that the purchases complied with the board-approved procedures). In addition, we have eliminated certain rule provisions that arguably required directors to "micro-manage" fund operations. See Custody of Investment Company Assets Outside the United States, Investment Company Act Release No. 22658 (May 12, 1997) [62 FR 26923 (May 16, 1997)] (amending rule 17f-5 to permit fund directors to delegate certain responsibilities related to foreign custody arrangements and eliminating the requirement that directors annually review those arrangements); Revision of Certain Annual Review Requirements of Investment Company Boards of Directors, Investment Company Act Release No. 19719 (Sept. 17, 1993) [58 FR 49919 (Sept. 24, 1993)] (eliminating certain annual board review requirements of rules 10f-3, 17a-7, 17e-1, 17f-4, and 22c-1). See also Investment Company Institute, SEC No-Action Letter (Jun. 15, 1999) (revising the staff's previous position to permit a fund's adviser, rather than the fund's board, to evaluate the creditworthiness of repurchase agreement counterparties and otherwise assume primary responsibility for monitoring and evaluating the fund's use of repurchase agreements). |
26 | See SEC, Notice of Sunshine Act Meetings (Feb. 18, 1999) [64 FR 8632 (Feb. 22, 1999)]; see also Transcripts from the Roundtable on the Role of Independent Investment Company Directors, February 23-24, 1999 ["Roundtable Transcripts"]. The Roundtable Transcripts are available to the public in the Commission's public reference room and the Commission's Louis Loss Library. They also are available on the Commission's Internet web site <http://www.sec.gov/offices/invmgmt/roundtab.htm>. |
27 | See infra notes 41, 63, and 76 (citing testimony of Roundtable participants). We discuss the merits of each of these recommendations below. |
28 | Investment Company Institute, Report of the Advisory Group on Best Practices for Fund Directors: Enhancing a Culture of Independence and Effectiveness (June 24, 1999). On July 7, 1999, the Board of Governors of the Investment Company Institute unanimously endorsed the recommended "best practices." See "ICI Board Adopts Resolution Urging Fund Industry to Strengthen Governance," at <http://www.ici.org/issues/dtrs_best_prac.htm>. |
29 | See, e.g., Roundtable Transcript of Feb. 24, 1999 at 174 (statement of John C. Coffee, Jr.) (stating that the need for activism by independent directors is most evident in the context of conflicts of interest); id. at 197 (statement of Richard M. Phillips) ("[T]he focal point of independent directors is conflicts of interest."). |
30 | Rule 12b-1, one of the exceptions, permits the use of fund assets to pay for distribution of fund shares, but only if the fund's independent directors select and nominate other independent directors. See rule 12b-1(c) under the Act [17 CFR 270.12b-1(c)]. In adopting this requirement, we stated our view that "as a general proposition disinterested directors should not be entrusted with a decision on the use of fund assets for distribution without receiving the benefit of measures designed to enhance their ability to act independently." Bearing of Distribution Expenses by Mutual Funds, Investment Company Act Release No. 11414 (Oct. 28, 1980) [45 FR 73898 (Nov. 7, 1980)] ["Rule 12b-1 Adopting Release"], at text following n.50. Rule 23c-3, the other exception, permits the creation of so-called "interval funds" (i.e., closed-end funds that periodically offer to repurchase their securities from investors), but only if independent directors constitute a majority of the board, and select and nominate other independent directors. Rule 23c-3(b)(8) under the Act [17 CFR 270.23c-3(b)(8)]. These requirements were included in the rule to "ensure that the board of directors provides independent decisions or scrutiny for actions or decisions that may involve a conflict of interest between the adviser and [the fund's] shareholders." Repurchase Offers by Closed-End Management Investment Companies, Investment Company Act Release No. 19399 (Apr. 7, 1993) [58 FR 19330 (Apr. 14, 1993)] ["Rule 23c-3 Adopting Release"], at Section II.D. |
31 | A number of the Exemptive Rules exempt fund affiliates, rather than the fund, from certain statutory prohibitions. For ease of reference, this Release generally refers to funds that rely on the Exemptive Rules, rather than reiterating that funds or their affiliated persons may be relying on the rules. |
32 | These rules also require boards of funds relying on the rules to exercise vigilance in protecting funds and their investors. See, e.g., Exemption for the Acquisition of Securities During the Existence of an Underwriting or Selling Syndicate, Investment Company Act Release No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7, 1997)], at n.52 and accompanying text (the fund's board should be "vigilant" not only in reviewing the fund's compliance with the procedures required by rule 10f-3, but also "in conducting any additional reviews that it determines are needed to protect the interests of investors"). |
33 | See rule 15a-4 [17 CFR 270.15a-4]. Under section 15(a) of the Act, shareholders generally must approve a fund's contract with its adviser. |
34 | ICI Advisory Group Report, supra note 28. |
35 | In addition, because our rules apply to all funds (or, in the case of the Exemptive Rules, all funds that rely on those rules), we have designed our amendments by considering, among other things, the costs, benefits, and paperwork burdens for funds and investors (including small entities) that may result from the changes. See, e.g., infra Section III (cost-benefit analysis); Section IV (Paperwork Reduction Act analysis); Section V (Regulatory Flexibility Act analysis). In each area of consideration, we have requested comment on the costs, benefits, and burdens of the proposed rule amendments. |
36 | See 1992 Protecting Investors Report, supra note 9, at 267 ("[A]n increased measure of independence is necessary to allow independent directors to perform these responsibilities appropriately."). In the context of business development companies, Congress has recognized that having a majority of independent directors is particularly important "where board approval is made expressly a substitute for Commission review or for a per se restriction." H.R. Rep. No. 1341, 96th Cong., 2d Sess. 25 (1980). See also S. Rep. No. 75, 94th Cong., 1st Sess. 71 (1975) (stating that the requirement in section 15(f) that 75 percent of a fund's board consist of directors who are not interested persons of the adviser for three years following the sale of an advisory contract is a "safeguard [ ] to protect the investment company and its shareholders"). |
37 | The original Senate bill that culminated in the Investment Company Act would have required a majority of a fund's directors to be independent from management. See S. 3580, 76th Cong., 3d Sess. � 10(a) (1940). That requirement was changed to 40 percent out of concern that a board with an independent majority would repudiate the recommendations of the investment adviser, depriving fund shareholders of those recommendations. See Investment Trusts and Investment Companies: Hearings on H.R. 10065 Before the House Subcomm. on Interstate and Foreign Commerce, 76th Cong., 3d Sess. 109-10 (1940) (statement of David Schenker). Experience has shown that this concern was unfounded. See 1992 Protecting Investors Report, supra note 9, at 267. Rather, we believe that an independent majority enhances board oversight without unnecessarily impeding fund operations or significantly increasing costs. |
38 | We expressly recognized this when we adopted rule 23c-3. We included the requirements that independent directors constitute a majority of the board and select and nominate their successors to "ensure that the board of directors provides independent decisions or scrutiny for actions or decisions that may involve a conflict of interest between the adviser and [fund] shareholders." Rule 23c-3 Adopting Release, supra note 30; cf. Peter Tufano & Matthew Sevick, Board Structure and Fee-setting in the U.S. Mutual Fund Industry, J. Fin. Econ. 321, 350 (1997) ("[T]he salutary benefits of . . . a higher fraction of independent directors [on a fund's board] should be most visible when management's and shareholders' interests are most at odds."). |
39 | See ICI Advisory Group Report, supra note 28, at 5 ("The vast majority of fund boards today consist of a majority of independent directors."); Investment Company Institute, Understanding the Role of Mutual Fund Directors 5 (1998) (noting that most fund boards have a majority of independent directors). In some cases, fund boards have an independent majority in order to comply with certain requirements of the Act and our rules. See, e.g., section 10(b)(2) (requiring, in effect, that independent directors comprise a majority of a fund's board if the fund's principal underwriter is an affiliate of the fund's investment adviser); section 15(f)(1) (providing a safe harbor for the sale of an advisory business if directors independent of the adviser constitute at least 75 percent of a fund's board for at least three years following the assignment of the advisory contract); rule 6e-3(T)(b)(15) [17 CFR 270.6e-3(T)(b)(15)] (exempting certain funds underlying insurance products from various Investment Company Act provisions provided that independent directors constitute a majority of the boards of those funds); rule 23c-3(b)(8) (permitting the operation of interval funds if, among other conditions, independent directors comprise a majority of the board). |
40 | See 1992 Protecting Investors Report, supra note 9, at 267 (Division recommended that Investment Company Act be amended to require that independent directors constitute more than 50 percent of a fund's board); see also Wharton Report, supra note 10, at 35 (increasing the proportion of unaffiliated directors may enhance the value of those directors as a check on management). |
41 | See Roundtable Transcript of Feb. 24, 1999 at 241 (statement of Aulana L. Peters) ("My experience . . . dictates that for a board to have a chance of operating truly independently . . . there should be at least two independent [ ] [directors] to one [inside director]."); id. at 265 (statement of Gerald C. McDonough) (recommending that fund boards be required to have "a certain majority, 60, 66 percent, . . . certainly a clear majority of truly independent [directors]"); Roundtable Transcript of Feb. 23, 1999 at 136 (statement of Faith Colish) (endorsing a "substantial majority" of independent directors as a positive corporate governance feature for fund boards). See also Tufano & Sevick, supra note 38 (using empirical analysis to suggest that funds with boards that have a larger fraction of independent directors tend to have lower fees). |
42 | See ICI Advisory Group Report, supra note 28, at 11. |
43 | As noted above, the Board of Governors of the ICI also unanimously endorsed the recommendations of the ICI Advisory Group Report. See supra note 28. |
44 | The Report also noted that, while many funds already have a two-thirds majority of independent directors, the practice is "far from universal." ICI Advisory Group Report, supra note 28, at 11. |
45 | See, e.g., section 15(f)(1) of the Act (providing a safe harbor for the sale of an advisory business if directors who are independent of the adviser constitute at least 75 percent of a fund's board for at least three years following the assignment of the advisory contract). The ICI Advisory Group Report discussed, but did not recommend as a best practice, having fund boards comprised exclusively of independent directors. See ICI Advisory Group Report, supra note 28, at 11-12. As a result of the Glass-Steagall Act, most bank-sponsored funds have boards comprised entirely of independent directors. See section 32 of the Glass Steagall Act [12 U.S.C. 78] (prohibiting directors of any entity issuing securities, such as a fund, from simultaneously serving as an officer, director, or employee of a national bank); see also Roundtable Transcript of Feb. 24, 1999 at 111 (statement of Richard J. Herring, independent director of a family of bank-related mutual funds and business school professor of international banking) (noting that a bank-related fund board comprised entirely of independent directors "works quite well"). |
46 | We use the term "charters" generally to include the organizational documents of a fund -- typically articles of incorporation or declarations of trust, and corporate by-laws. |
47 | There are several methods by which funds
could effect the transition to majority independent representation on their
boards. For instance, funds could (i) increase the size of their boards and
elect new independent board members; (ii) decrease the size of their boards and
allow some inside directors to resign; or (iii) allow some inside directors to
resign and replace them with independent board members. A fund's ability to
alter the composition of its board without holding a shareholder vote will be
determined by state law and by section 16(a) of the Act [15 U.S.C. 80a-16(a)],
which states that a fund's board may fill a board vacancy without a shareholder
vote if, after the new director takes office, at least two-thirds of the board
has been elected by shareholders. Section 16(a) further requires a shareholder
meeting to elect directors if the number of shareholder-elected board members
decreases to less than half of the board.
Newly organized funds could begin operations during the one-year transition period without a majority of independent directors and still rely on the Exemptive Rules, but they, like other funds, would be required to have boards with a majority of independent directors if they rely on any of the Exemptive Rules after the compliance date for the amendments. |
48 | Various provisions of the Investment Company Act require a particular percentage or minimum number of independent directors. See sections 10(a), 10(b)(2), 10(d) [15 U.S.C. 80a-10(d)], and 15(f)(1); see also supra notes 20, 39, and 45 (discussing sections 10(a), 10(b)(2), and 15(f)(1) and their percentage requirements). Section 10(e) [15 U.S.C. 80a-10(e)] similarly suspends the board composition requirements of sections 10(b)(1), 10(b)(3), and 10(c) [15 U.S.C. 80a-10(b)(1), -10(b)(3), and -10(c)]. For convenience, we refer to all of the above requirements as "percentage requirements." |
49 | See section 16(a) of the Act (permitting directors to fill a board vacancy if, after the new director takes office, at least two-thirds of the board has been elected by shareholders, but requiring a shareholder meeting to elect directors if the number of shareholder-elected board members decreases to less than half of the board). |
50 | Sections 10(e)(1) and (2) [15 U.S.C. 80a-10(e)(1) and (2)]. |
51 | Section 10(e)(3) [15 U.S.C. 80a-10(e)(3)]. |
52 | See supra Section II.A.1.a. |
53 | Currently, the loss of an independent director that causes a fund to fall below a statutorily required percentage of independent directors does not result in immediate consequences for a fund. Issues arise only when the fund's next board vote is required. Under the proposed amendments to the Exemptive Rules, however, the fund would be unable, for example, to offer multiple classes of shares, pay distribution fees under rule 12b-1, engage in securities transactions with fund affiliates, or participate in a joint liability insurance policy from the date of the loss of the independent director until the fund replaces the independent director. |
54 | See proposed rule 10e-1. |
55 | See infra Section II.A.2 (discussing the selection and nomination of independent directors by other independent directors); cf. Temporary Exemption for Certain Investment Advisers, Investment Company Act Release No. 23325 (July 22, 1998) [63 FR 40231 (July 28, 1998)] (proposing amendments to rule 15a-4 in part to extend, from 120 days to 150 days, the period of time funds are permitted to operate with an interim advisory contract that has not been approved by shareholders to allow funds more time to seek shareholder approval of an advisory contract). |
56 | See section 2(a)(19)(B) [15 U.S.C. 80a-2(a)(19)(B)] (outlining the types of affiliations and relationships that render a director an "interested person" of a fund's adviser or principal underwriter). |
57 | See Bearing of Distribution Expenses by Mutual Funds, Investment Company Act Release No. 10862 (Sept. 7, 1979) [44 FR 54014 (Sept. 17, 1979)] (proposing rule 12b-1) ("[P]roper fulfillment of directors' duties depends primarily on the character, ability, and diligence of directors."); William G. Bowen, Inside the Boardroom: Governance by Directors and Trustees 47 (1994) ("Effective governance by any board surely depends, most of all, on having an outstanding group of members."); Roundtable Transcript of Feb. 23, 1999 at 14-15 (statement of Arthur Levitt, Chairman, SEC) ("[B]oard independence does not come from a specific legal structure. . . . I believe passionately in boards made up of men and women of good, sound independent judgment. Board independence comes from directors who do their jobs aggressively."). |
58 | Selection nd nomination refers to the process by which board candidates are researched, recruited, considered, and formally named. Some funds establish a nominating committee of the board that is comprised entirely of independent directors to select and nominate directors. |
59 | See ICI Advisory Group Report, supra note 28, at 14 ("[I]ndependent directors are uniquely qualified to evaluate whether a present or prospective director is likely to contribute to the continuing independence and effectiveness of the independent directors as a group."). |
60 | See ICI Advisory Group Report, supra note 28, at 14 ("[C]ontrol of the nominating process by the independent directors helps dispel any notion that the directors are `hand picked' by the adviser and therefore not in a position to function in a true spirit of independence."). |
61 | See 1992 Protecting Investors Report, supra note 9, at 266-67 (recommending that the Act be amended to require that independent directors be self-nominating); Wharton Report, supra note 10, at 465-66 (noting that the selection of unaffiliated directors by management limits those directors' independence). |
62 | See A.B.A., Section of Business Law, Fund Director's Guidebook 27 (1996) ["Fund Director's Guidebook"] ("The independence of a fund's independent directors is enhanced by providing that persons nominated by the board for election as independent directors be nominated by a committee of the fund's incumbent independent directors."). |
63 | See Roundtable Transcript of Feb. 24, 1999 at 182 (statement of John C. Coffee, Jr.) ("[W]e should have" independent nominating committees.); Roundtable Transcript of Feb. 23, 1999 at 136 (statement of Faith Colish) ("a very good idea"); Roundtable Transcript of Feb. 24, 1999 at 63 (statement of Dawn-Marie Driscoll) ("I'm a great believer in independent directors choosing other independent directors who the adviser does not know. . . . The more ways you can ensure independence, the better the process will be."); id. at 148 (statement of Ronald J. Gilson) ("A nominating committee made up of independent directors makes an enormous amount of sense."); id. at 215 (statement of John R. Haire) ("[Self-selection and self-nomination are] very helpful in the process of seeing that . . . independent directors . . . bring to the board a diversity of skills that are useful . . . in the role of overseeing management."); id. at 243 (statement of Aulana L. Peters) ("[I]t is not a good idea to have the adviser or the CEO of the adviser . . . be the sole decisionmaker on who should serve as a disinterested member of the board."). But see id. at 245 (statement of Aulana L. Peters) (stating that the involvement of a fund's adviser in the selection and nomination of independent directors may facilitate increasing diversity on a fund's board). |
64 | See ICI Advisory Group Report, supra note 28, at 14-16. |
65 | Rule 12b-1 permits the use of fund assets to pay for distribution of fund shares, but only if the fund's independent directors select and nominate other independent directors. See supra note 30 (discussing rule 12b-1). In discussing our decision to include this condition in the rule, we noted that "the likelihood that a decision will be in the best interests of a fund and its shareholders will be increased if the disinterested directors are genuinely independent of management," and that "formal independence will breed an atmosphere in which actual independence will develop." Rule 12b-1 Adopting Release, supra note 30, at discussion of "Independence of Directors." See also supra note 30 (discussing rule 23c-3, which permits the operation of interval funds if independent directors are self-selecting, self-nominating, and comprise a majority of the board). The Act also requires independent directors to select and nominate individuals to fill independent director vacancies for a period of three years following the sale of an investment advisory contract. Section 16(b) [15 U.S.C. 80a-16(b)]. |
66 | See ICI Advisory Group Report, supra note 28, at 15 (noting that funds with rule 12b-1 plans, which are required to have self-selecting and self-nominating independent directors, represent a majority of all mutual funds and that many funds without rule 12b-1 plans also assign to independent directors the selection and nomination of other independent directors); Joel H. Goldberg & Gregory N. Bressler, Revisiting Rule 12b-1 Under the Investment Company Act, 31 Rev. Sec. & Commodities Reg. 147, 147 (1998) (since the adoption of rule 12b-1 in 1980, over 7,000 mutual funds have adopted rule 12b-1 plans). |
67 | See proposed rules 10f-3(b)(11)(i); 15a-4(c)(1); 17a-7(f)(1); 17a-8(c)(1); 17d-1(d)(7)(v)(A); 17e-1(c)(1); 17g-1(j)(3)(i); 18f-3(e)(1). In addition, we are proposing to amend rules 12b-1 and 23c-3 to conform their current language regarding the self-selection and self-nomination of independent directors to the language of the proposed amendments. Proposed rules 12b-1(c)(1) and 23c-3(b)(8)(i). |
68 | Our proposals to amend rules 12b-1 and 23c-3 to conform their language regarding self-selection and self-nomination to the language of our proposed amendments are not intended to have any substantive effect on the operation of those rules. See proposed rules 12b-1(c)(1), 23c-3(b)(8)(i). |
69 | Our proposed amendments would have no impact on the initial selection of an organizing fund's directors because, at the time of organization, the fund would not yet be registered under the Investment Company Act and therefore would not be relying on our Exemptive Rules. Any organizing fund that intends to rely on the Exemptive Rules, however, should adopt a self-selection and self-nomination practice, and once the fund begins operations, independent directors should select and nominate other independent directors as board vacancies occur. |
70 | See, e.g., ICI Advisory Group Report, supra note 28, at n.28 (discussing Md. Code Ann., Corps. & Ass'ns � 2-411(a)(2), which prohibits the bylaws of a Maryland corporation from authorizing the board to delegate to a committee the power to recommend to stockholders any action that requires stockholder approval). Section 2-411(a)(2) may have a greater effect on closed-end funds, which, unlike mutual funds, generally must hold annual meetings of shareholders at which shareholders elect directors. |
71 | See Item 7(e)(2) of Schedule 14A (requiring that any proxy sent to shareholders for the purpose of electing directors state whether a registrant's nominating committee will consider nominees recommended by shareholders and describe the procedures to be followed by shareholders submitting nominee recommendations); see also infra note 224 and accompanying text. |
72 | The ICI Advisory Group Report recommends that, to the extent permitted by state law, fund boards delegate to a fund's incumbent independent directors the authority to elect independent directors in the absence of a shareholder vote. See ICI Advisory Group Report, supra note 28, at 15-16; see also supra note 47 (discussing section 16(a) of the Act and the circumstances under which fund directors may elect a board member without holding a shareholder vote). |
73 | See generally Grover C. Brown, Michael J. Maimone, and Joseph C. Schoell, Director and Advisor Disinterestedness and Independence Under Delaware Law, 23 Del. J. Corp. L. 1157 (1998). |
74 | See ICI Advisory Group Report, supra note 28, at 18 ("[Independent] counsel can help to ensure that the directors understand their responsibilities, ask the pertinent questions, and receive the information necessary to carry out those responsibilities."); What's the Job of Your Fund Counsel?, Fund Directions, Nov. 1995, at 4, 5 (Independent directors "`look to their lawyer for assistance in resolving and acting upon any matters where the adviser potentially has a conflict of interest with the shareholders.'") (quoting Edward T. O'Dell, partner, Goodwin, Procter & Hoar LLP). |
75 | Joel H. Goldberg, Disinterested Directors, Independent Directors and the Investment Company Act of 1940, 9 Loy. U. Chi. L.J. 565, 585 (1978). |
76 | See Roundtable Transcript of Feb. 24, 1999 at 178 (statement of John C. Coffee, Jr.) ("[T]he central lesson from corporate governance generally is that independent directors can function well as a committee if and probably only if they have the effective assistance of a truly independent legal counsel who does not generally represent the investment adviser and who does not have any other conflict."); id. at 190-97 (statement of Leslie L. Ogg) (discussing the important role of service providers, including separate counsel, to fund independent directors); id. at 52 (statement of David M. Butowsky) (stating that independent directors should be counseled by someone "who is completely independent of any affiliation with management" when reviewing fund reorganizations following the acquisition of an adviser); id. at 67 (statement of Joseph Hankin) (noting that retaining counsel separate from fund management is "absolutely a prudent step" when reviewing fund mergers and advisory contracts); see also id. at 222-23 (statement of David A. Sturms) (reviewing various structures of legal representation of a fund, its independent directors, and its adviser). |
77 | See, e.g., Martin Lipton, Directors of Mutual Funds: Special Problems, 31 Bus. Law. 1259, 1262 (1976) ("[M]utual funds should have separate counsel. Either the independent directors of a fund should have separate counsel or the fund itself should have separate counsel. That is, separate counsel from counsel for the management company. Independent counsel plays a very important role."); Goldberg, supra note 75, at 585 ("[T]he value of [independent] counsel in helping to ensure independent consideration of issues by disinterested directors is beyond dispute . . . ."); Jean W. Gleason, Mutual Fund Governance: Independent Directors -- Their Role and Incentives and Tools for Fulfilling It, VI-A-9, VI-A-16 (1994) (materials prepared for the 1994 Mutual Funds and Investment Management Conference) ("Access to, and use of, outside experts [such as independent legal counsel] can provide increased independence and allow for informed judgments [by independent directors] . . . ."). See also Public Policy Report, supra note 10, at 130-31 (listing the absence of separate legal counsel as one of the factors contributing to the relative ineffectiveness of unaffiliated directors). |
78 | See ICI Advisory Group Report, supra note 28, at 18-20. The Advisory Group concluded that "[c]ounsel to the independent directors must be independent from the adviser and other fund service providers in order to render objective advice on areas of potential conflict between the fund and its service providers." Id. at 18. See also Fund Director's Guidebook, supra note 62, at 23 ("[G]enerally it is important that the independent directors have ready access to counsel who views the board and the fund, not the adviser, as the client."). |
79 | See Tannenbaum v. Zeller, 552 F.2d 402, 428 (2d Cir. 1977) (stating that it would have been preferable if the fund's independent directors received advice from an independent counsel, rather than counsel who also represented the fund, the fund's adviser, and the fund's distributor); Fogel v. Chestnutt, 533 F.2d 731, 750 (2d Cir. 1975) ("It would have been . . . better to have the investigation of recapture methods and their legal consequences performed by disinterested counsel furnished to the independent directors."); Schuyt v. Rowe Price Prime Reserve Fund, Inc., 663 F. Supp. 962, 965, 982, 986 (S.D.N.Y.) (noting that "[d]uring all relevant times, the independent directors . . . had their own counsel" who was an "important resource" and whose advice "the record indicates the directors made every effort to keep . . . in mind as they deliberated"), aff'd, 835 F.2d 45 (2d Cir. 1987); Gartenberg v. Merrill Lynch Asset Management, Inc., 528 F. Supp. 1038, 1064 (S.D.N.Y. 1981) (noting that the "non-interested Trustees were represented by their own independent counsel . . . who acted to give them conscientious and competent advice"), aff'd, 694 F.2d 923 (2d Cir. 1982). See also Papilsky v. Berndt, [1976-1977 Transfer Binder] Fed. Sec. L. Rep. (CCH) � 95,627, at 90,133 (S.D.N.Y. June 24, 1976) (noting that a law firm, in advising both a fund and the fund's adviser, "was counseling people with contrary interests. . . . The effect of the inadequate advice was to discourage any independent inquiry by . . . [the] Board."). |
80 | See American Bar Association, Center for Professional Responsibility, Model Rules of Professional Conduct ["ABA Model Rules"], Rule 1.7 (1998); see also Del. Prof. Cond. R. 1.7 (1998); Mass. Sup. Jud. Ct. R. 3:07, R.P.C. 1.7 (1999); Md. Rule 1.7 (1998). |
81 | Our proposals are not intended to regulate the practice of law, but rather to delimit the ability of independent fund directors to waive certain conflicts of interest. In other contexts, fiduciaries have been similarly restricted in their ability to waive conflicts. See, e.g., section 327 of the U.S. Bankruptcy Code [11 U.S.C. 327] (bankruptcy trustee generally cannot employ a counsel who represents an interest adverse to the estate in bankruptcy, and any counsel employed by the trustee must be a disinterested person); Md. Regs. Code tit. 13, � 105 (attorney to a receiver or assignee in bankruptcy must meet prescribed independence standards, including that the attorney does not represent an interest adverse to the estate). See also rule 116.5 of the Bureau of Indian Affairs [25 CFR 116.5] (no person with a personal, financial, or business connection to a trustee of restricted Indian property may act as an appraiser of that property in connection with loans made from the trust). |
82 | In the 1992 Protecting Investors Report, the staff of the Division of Investment Management considered, but did not recommend, requiring funds to provide independent directors with their own counsel. While the staff recognized the benefits of separate counsel for independent directors, it was concerned about the costs associated with requiring separate counsel in all cases. See 1992 Protecting Investors Report, supra note 9, at 268. |
83 | See proposed rules 10f-3(b)(11)(ii); 12b-1(c)(2); 15a-4(c)(2); 17a-7(f)(2); 17a-8(c)(2); 17d-1(d)(7)(v)(B); 17e-1(c)(2); 17g-1(j)(3)(ii); 18f-3(e)(2); 23c-3(b)(8)(ii). |
84 | The proposed definition of an independent legal counsel would apply to a "person." See proposed rule 0-1(a)(6)(i). The term "person" would have the same meaning as in section 2(a)(28) of the Act [15 U.S.C. 80a-2(a)(28)] and, in addition, would include a partner, co-member, or employee of any person. See proposed rule 0-1(a)(6)(ii)(A). The term "co-member" is intended to address law firms organized as limited liability companies. The interest-holders of limited liability companies generally are called "members." |
85 | See infra note 89. |
86 | See infra note 91 and accompanying text. |
87 | See proposed rule 0-1(a)(6)(i)(A). We
intend that the phrase "acts as legal counsel" as used in the proposed
definition of "independent legal counsel" will have the same meaning
that it has for purposes of section 2(a)(19)(B)(iv) [15 U.S.C.
80a-2(a)(19)(B)(iv)]. The staff has interpreted the phrase "acts as legal
counsel" broadly. See 399 Fund, SEC No-Action Letter (Sept. 2, 1973)
(fund director would be an "interested person" because his firm had
entered an appearance on behalf of certain officers and directors of the fund's
adviser in litigation unrelated to the fund); Alpha Investors Fund, Inc., SEC
No-Action Letter (Jan. 9, 1972) (fund director would be an "interested
person" because his firm had performed two small legal projects for a
company that owned a 50 percent share of an adviser to a fund).
In some cases, ethics rules permit counsel to accept payment for legal services from a non-client third party. See ABA Model Rules, supra note 79, rule 1.8(f) (1998) (counsel may accept compensation from a third party if (i) the client consents after consultation, (ii) there is no interference with counsel's independence of professional judgment or with the attorney-client relationship, and (iii) counsel maintains client confidentiality); see also id. Rule 1.7 cmt. 10 ("Interest of Person Paying for a Lawyer's Service"). Under our proposed amendments, we would not view a lawyer as "acting as legal counsel" to a fund's investment adviser merely because the lawyer accepts payment of fees from the adviser for legal services performed on behalf of the fund or its independent directors as permitted by relevant professional ethics rules. |
88 | See infra Section II.A.3.(d) "Exception"; proposed rule 0-1(a)(6)(i)(B). |
89 | We are proposing to define "administrator" as any person who provides significant administrative or business affairs management services to a fund. Proposed rule 0-1(a)(5). This definition is substantially similar to, and has the same meaning as, the definition of administrator contained in Item 22(a)(1)(i) of Schedule 14A and Item 15(h)(1) of Form N-1A. |
90 | Funds are increasingly turning to third-party fund administrators to provide an array of services, including shareholder servicing, recordkeeping, accounting, and fund distribution. See Jackie Cohen, Priming the Pump for Better Mutual Fund Sales, Bank Tech. News, June 1998, at 43; Katharine Fraser, Fund Administrators Vie for Megabank Pacts, Am. Banker, May 27, 1998, at 10. As of December 31, 1998, third-party fund administrators had approximately $527 billion in assets under administration. See generally Lipper Inc., Lipper Directors' Analytical Data: Executive Summary (1st ed. 1999) (providing estimates of fund assets administered by entities other than funds, from which estimates of fund assets administered by entities unaffiliated with the fund may be derived). |
91 | The definition of "control person" would exclude funds. This exclusion enables the same counsel to represent a fund and its independent directors. See proposed rule 0-1(a)(6)(ii)(B); see also infra note 94 and accompanying text. |
92 | This could be the case even if the legal work performed for the control person is unrelated to the fund or its operations. |
93 | See ICI Advisory Group Report, supra note 28, at 18 (recommending counsel for the independent directors who is independent from all of the fund's service providers). |
94 | See id. at 18-19 ("The Advisory Group believes that counsel for the independent directors also may serve as fund counsel because, in virtually every situation except possibly litigation, the interests of the fund and its directors are aligned."). But see Roundtable Transcript of Feb. 24, 1999 at 179 (statement of John C. Coffee, Jr.) (noting that counsel to a fund invariably works closely with, and generally receives work requests from, personnel of the adviser who manages the fund, and that the close association with the adviser that results from representing the fund could influence the counsel's representation of the independent directors). |
95 | Section 2(a)(19)(B)(iv). Section 2(a)(19)(A)(iv) of the Act [15 U.S.C. 80a-2(a)(19)(A)(iv)] also precludes a person who has acted as fund counsel from serving as an independent director of that fund for at least two years. As discussed above, our proposal would not preclude counsel to a fund from serving as counsel to a fund's independent directors. See supra note 94 and accompanying text. |
96 | See proposed rule 0-1(a)(6)(ii)(A); see also supra note 84.* |
97 | See proposed rule 0-1(a)(6)(i)(B). |
98 | See id. |
99 | See Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committees 11 (1999) ["Blue Ribbon Committee Report"]. |
100 | See supra notes 12-24 and accompanying text; see also section 36(a) of the Act [15 U.S.C. 80a-35(a)] (enabling federal lawsuits to be brought against fund directors for breaches of fiduciary duty involving personal misconduct). |
101 | See Roundtable Transcript of Feb. 24, 1999 at 234 (statement of Gerald C. McDonough) ("The adversarial role . . . of independent [directors] and fund advisers is a healthy and desirable one."). |
102 | See David A. Sturms, The Debate: The System is Broken -- Fix It or Scrap It vs. The System Works -- Don't Fix What Isn't Broken 4-7 (materials prepared for SEC Roundtable on the Role of Independent Investment Company Directors, Feb. 23-24, 1999) (discussing recent disputes between independent directors of funds and the funds' advisers). |
103 | See ICI Advisory Group Report, supra note 28, at 26 ("[L]itigation [involving independent directors] can be extremely expensive and may even carry with it a potential for personal financial ruin."). |
104 | D&O/E&O policies generally insure directors and officers of an insured entity (e.g., a fund) for claims made against them for their designated acts, errors, or omissions. See generally Spiro K. Bantis, "What Mutual Fund D&O/E&O Policies Don't Cover"; Ellen Metzger, Mutual Fund D&O/E&O Insurance: Considerations in Selecting and Maintaining a Policy; Natalie Shirley, Claims -- What to Do When the Unthinkable Happens; Daniel T. Steiner, Selected Issues Regarding Basic Policy Forms (collected materials from 1995 Mutual Funds and Investment Management Conference, Mutual Fund D&O/E&O Insurance 101). |
105 | Under the Act, a fund's organizational documents cannot contain any provision protecting a director or officer of the fund from any liability to the fund or its shareholders to which he is subject by reason of willful misfeasance, bad faith, gross negligence, or reckless disregard of the duties involved in the conduct of his office. See section 17(h) of the Act [15 U.S.C. 80a-17(h)]; see also Interpretive Release, supra note 1, Section II.C (discussing section 17(h) and providing guidance regarding when a fund may pay an advance of legal fees to its directors). |
106 | See section 17(d) [15 U.S.C. 80a-17(d)] (prohibiting an affiliated person of a fund from effecting a joint transaction with the fund in contravention of Commission rules); rule 17d-1 [17 CFR 270.17d-1] (prohibiting a fund affiliate from participating in any joint enterprise, joint arrangement, or profit-sharing plan with a fund without first obtaining a Commission order, except in certain designated circumstances); see also Interpretive Release, supra note 1, Section II.B (discussing section 17(d) and rule 17d-1 and explaining the view of the staff that actions taken by fund directors within the scope of their duties for the fund generally would not be joint transactions under section 17(d) and rule 17d-1). |
107 | 17 CFR 270.17d-1(d)(7). Reliance on rule 17d-1(d)(7) currently is conditioned on a fund's board, and a majority of its independent directors, annually determining that the joint policy is in the best interests of the fund and that the proportion of the policy's premium allocated to the fund is fair and reasonable. |
108 | See ICI Advisory Group Report, supra note 28, at 26. The general purpose of these standard "insured versus insured" exclusions is to prevent collusion among insureds. |
109 | See Paul H. Dykstra and Paulita Pike-Bokhari, The Yacktman Battle: Manager Bites the Watchdogs, Investment Law., Nov./Dec. 1998, at 1, 9-10 (discussing the effect of an "insured versus insured" exclusion of insurance coverage on independent directors of the Yacktman Fund). |
110 | Proposed rule 17d-1(d)(7)(iii). The proposed amendments would prohibit exclusions for bona-fide (i.e., non-collusive) claims made against any independent director by another person insured under the joint insurance policy. The proposed amendments also would prohibit exclusion of coverage for the fund if it is a co-defendant with an independent director in a claim brought by a co-insured. We believe that the ability of fund directors to perform their duties may be further impaired if an adviser's lawsuit poses a threat to fund assets as well as to directors' personal assets. |
111 | Earlier this year, Chairman Levitt expressed concern about standard "insured versus insured" exclusions. See Arthur Levitt, Keeping Faith with the Shareholder Interest: Strengthening the Role of Independent Directors of Mutual Funds (remarks at the Mutual Funds and Investment Management Conference, Palm Springs, CA, Mar. 22, 1999), available at <http://www.sec.gov/news/speeches/spch259.htm>. In response, the ICI Mutual Insurance Company ("ICI Mutual"), which insures funds representing approximately 70 percent of all mutual fund assets, recently announced that it has revised its D&O/E&O policies to clarify that these types of claims are covered under its standard insurance policy. See Aaron Lucchetti, Direct and Protect, Wall St. J., Apr. 2, 1999, at C23. ICI Mutual now makes available a standard policy endorsement that permits independent directors to recover defense costs, settlements, and judgments in "insured versus insured" claims otherwise covered under the policy. This change by ICI Mutual is a significant step toward ensuring the ability of independent directors to vigorously fulfill their duties under the Act without concerns of personal liability. We believe, however, that all independent directors who serve on funds that obtain joint liability insurance policies should have the benefit of protections similar to those provided by ICI Mutual. |
112 | ICI Advisory Group Report, supra note 28, at 26. The Report also noted that independent directors may need to be covered by insurance after their service on the board has ended for claims involving their service as directors. Id. at 26-27. |
113 | Section 32(a)(1). |
114 | Section 32(a)(2) [15 U.S.C. 80a-31(a)(2)]. |
115 | See supra note 3 and accompanying text. |
116 | See generally A.B.A., Section of Business Law, Corporate Director's Guidebook 27-32 (2d ed. 1994) ["1994 Corporate Director's Guidebook"]; see also Investment Company Institute, Understanding the Role of Mutual Fund Directors 7 (1998) (noting that although not required by law, it is common practice for mutual funds to have an audit committee oversee the financial reporting and internal controls of the fund and stating that the results of a 1998 survey conducted by Management Practice Inc. indicated that 100 percent of fund boards surveyed had an audit committee); Fund Director's Guidebook, supra note 62, at 26 (stating that the audit committees of many funds are comprised of all of the fund's independent directors). |
117 | See, e.g., New York Stock Exchange Listed Company Manual � 303.00. |
118 | See, e.g., Roundtable Transcript of Feb. 23, 1999 at 236 (statement of Manuel H. Johnson) (noting that an audit committee comprised entirely of independent directors serves as a check and balance); 1994 Corporate Director's Guidebook, supra note 116, at 27 ("The Audit Committee should be composed solely of independent directors."); Fund Director's Guidebook, supra note 62, at 25-26 (noting that the boards of many public companies, including funds, have established audit committees at the urging of many governmental and non-governmental institutions that have determined that audit committees can play a meaningful role in ensuring corporate accountability); The Role and Composition of the Board of Directors of the Large Publicly Owned Corporation: Statement of the Business Roundtable, 33 Bus. Law. 2083, 2108, 2109 (1978) ("[W]e believe it highly desirable . . . that the board be served by an Audit Committee." The audit committee should be "composed entirely of non-management directors."); Report of the National Commission on Fraudulent Financial Reporting 12 (Oct. 1987) ["Treadway Report"] ("The audit committee of the board of directors plays a role critical to the integrity of the company's financial reporting. [We] recommend[ ] that all public companies be required to have audit committees composed entirely of independent directors."); Advisory Panel on Auditor Independence, Strengthening the Professionalism of the Independent Auditor 14 (Sept. 13, 1994) (Special Report to the Oversight Board of the SEC Practice Section, AICPA) ["Kirk Panel Report"] (noting that it is important that companies have audit committees of independent directors). |
119 | Blue Ribbon Committee Report, supra note
99. With respect to independence of audit committee members, the Blue Ribbon
Committee Report states:
[I]t is widely recognized that each member of the audit committee should be an independent director. Several recent studies have produced a correlation between audit committee independence and two desirable outcomes: a higher degree of active oversight and a lower incidence of financial statement fraud. In addition, common sense dictates that a director without any financial, family, or other material personal ties to management is more likely to be able to evaluate objectively the propriety of management's accounting, internal control and reporting practices. Id. at 22. |
120 | ICI Advisory Group Report, supra note 28, at 22-23. |
121 | See proposed rule 32a-4(b). A closed-end fund listed on a stock exchange also is subject to the exchange's listing requirements regarding audit committees. See, e.g., supra note 117 and accompanying text. |
122 | Proposed rule 32a-4(a). |
123 | Proposed rule 32a-4(c). |
124 | Proposed rule 32a-4(d). Under the current requirements of rule 31a-1(b)(4) [17 CFR 270.31a-1(b)(4)], funds also would be required to maintain minute books of the audit committee's meetings. |
125 | See ICI Advisory Group Report, supra note 28, at 22-23. Cf. Independence Standards Board Standard No. 1: Independence Discussions with Audit Committees (Jan. 1999) (requiring, for all funds with fiscal years ending after July 19, 1999, that a fund's auditor provide an annual representation of the auditor's independence). |
126 | For example, the Act provides that no person can be an independent director to a fund if he is affiliated with the fund itself, or with the fund's investment adviser or principal underwriter. Section 2(a)(19)(A)(i), (A)(iii), (B)(i) [15 U.S.C. 80a-2(a)(19)(A)(i), (A)(iii), (B)(i)]. See generally infra note 170. |
127 | See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 15 (1970). |
128 | Sections 2(a)(19)(A)(v), (B)(v) [15 U.S.C. 80a-2(a)(19)(A)(v), (B)(v)]. |
129 | See The First Australia Fund, Inc., SEC No-Action Letter, at n.8 and accompanying text (Oct. 8, 1987) ("The broad scope of section 2(a)(19) with respect to brokers and dealers appears to have been prompted by the many subtle relationships that exist between persons who are active in the securities markets.") (citing Public Policy Report, supra note 10, at 162-88). Congress also may have adopted this broad prohibition in reaction to the nature of fund brokerage arrangements when fixed commission rates were prevalent. See Certain Persons Not Deemed Interested Persons; Definition of Regular Broker or Dealer, Investment Company Act Release No. 13920 (May 2, 1984) [49 FR 19519 (May 8, 1984)] at n.1 ["Rule 2a19-1 Proposing Release"]. |
130 | Rule 2a19-1(a)(3) [17 CFR 270.2a19-1(a)(3)]. Rule 2a19-1 also requires that the broker-dealer not execute any portfolio transactions for, engage in any principal transactions with, or distribute shares for, the fund's "complex," and that the board determine that the fund and its shareholders will not be adversely affected if the broker-dealer does not perform those functions for the fund. Rule 2a19-1(a)(1), (2) [17 CFR 270.2a19-1(a)(1), (2)]. The rule defines "complex" to include the fund on whose board the director serves, its investment adviser and principal underwriter, and other funds having the same adviser or principal underwriter. Rule 2a19-1(b) [17 CFR 270.2a19-1(b)]. |
131 | See Rule 2a19-1 Proposing Release, supra note 129, at n.36 and accompanying text. |
132 | See Bergstrom Capital Corporation, Investment Company Act Release Nos. 23629 (Dec. 31, 1998) [64 FR 1035 (Jan. 7, 1999)] (notice) and 23666 (Jan. 26, 1999) [68 SEC Docket 3501 (Feb. 23, 1999)] (order); Counsellors Tandem Securities Fund, Inc. and Warburg, Pincus Counsellors, Inc., Investment Company Act Release Nos. 15636 (Mar. 24, 1987) [52 FR 10278 (Mar. 31, 1987)] (notice) and 15697 (Apr. 22, 1987) [38 SEC Docket 318 (May 5, 1987)] (order). |
133 | Proposed amendment to rule 2a19-1(a)(3). |
134 | We also are proposing to amend the title of rule 2a19-1 to refer specifically to broker-dealers, the subject of the rule. |
135 | Section 2(a)(19)(B)(iii) [15 U.S.C. 80a-2(a)(19)(B)(iii)]. |
136 | See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 13-14 (1970) (expressing policy concerns about the use of "affiliated person" in the Act because, among other things, it permitted a director to be classified as "unaffiliated" even though he had substantial business relationships with the fund, its adviser, or its underwriter); Public Policy Report, supra note 10, at 332-34 (same); see also section 15(c) of the Act (requiring independent directors to scrutinize and approve the fund's contracts with investment advisers and principal underwriters). |
137 | An index fund is a type of fund that selects the securities in its portfolio in an effort to replicate the investment performance of the securities in a market index. Nearly 20 percent of the index funds registered with the Commission track the performance of the Standard & Poor's 500 Composite Stock Price Index. � For a discussion of other types of indexes, see John Waggoner, Index Funds Race Into New Venues; Investors Can Track Europe or Racing Firms, USA Today, Nov. 27, 1998, at 3B. |
138 | Cf. The Massachusetts Company, SEC No-Action Letter (Jan. 29, 1972) (fund director who serves as a trustee of an irrevocable trust that holds shares of a controlling person of the fund's adviser and underwriter would be an interested person of the fund under section 2(a)(19)(B)(iii)). |
139 | Cf., e.g., The Victory Stock Index Fund, SEC No-Action Letter (Feb. 7, 1995) (staff would not recommend enforcement action under section 12(d)(3) or rule 12d3-1 when an index fund purchased securities of an affiliated person of the fund's adviser or principal underwriter, because, among other things, the "non-volitional nature of the index fund's purchases" made it unlikely that the fund's portfolio securities would be selected in the interest of the fund's adviser or principal underwriter, rather than the fund's shareholders). |
140 | The proposed rule would not address an independent director's ownership of securities of an actively managed fund. The holdings of this type of fund can vary from day to day without the knowledge of the fund's shareholders, and periodic disclosure of fund holdings may be out of date by the time an investor receives them. We therefore believe it is clear that an independent director who owns shares of an actively managed fund ordinarily would not "knowingly" have an indirect beneficial interest in the issuers of securities the fund holds. |
141 | Proposed rule 2a19-3. |
142 | Id. |
143 | See, e.g., statement of Bruce K. MacLaury, Roundtable Transcript of Feb. 23, 1999, at 42 ("It should be apparent that boards work best when the possibilities for conflict of interest are minimized so that truly independent directors can exercise their best judgment on behalf of the interest of the shareholders."); statement of Dawn-Marie Driscoll, Roundtable Transcript of Feb. 24, 1999, at 63 ("[I]ndependence is one of the most important characteristics of an independent director. The more ways that you can ensure independence the better the process will be."); statement of Thomas R. Smith, Jr., Roundtable Transcript of Feb. 24, 1999, at 253 ("There is something beyond what is in the statute that you consider when you pick new directors. You've got to look at material business relationships, and, quite frequently, in the selection process you will rule somebody out, although technically they are independent, because of relationships."). |
144 | Items 13(b) and (d) of Form N-1A; Items 18.1 and 18. 4 of Form N-2; Items 20(a) and (c) of Form N-3; Items 401(a) and (e) of Regulation S-K, through Item 22(b)(4) of Schedule 14A. Funds also are required to disclose for each director the positions held with affiliated persons or principal underwriters of the fund. Item 13(c) of Form N-1A; Item 18.2 of Form N-2; Item 20(b) of Form N-3. Funds also must provide the percentage of the fund's equity securities owned as a group by all officers, directors, and advisory board members. Item 14(c) of Form N-1A and Item 19.3 of Form N-2. See also Items 23(f) and 25 of Form N-1A; Items 24.2.i and 29 of Form N-2; Items 21(a)(ii) and (f)(ii), 28(b)(10), and 32 of Form N-3. |
145 | See Item 22(b)(1) of Schedule 14A (requiring disclosure of director's positions with the investment adviser and a director's securities holdings or material interest in the investment adviser and any person controlling, controlled by, or under common control with the investment adviser); Item 401 of Regulation S-K, through Item 22(b)(4) of Schedule 14A (requiring disclosure of director's positions with the fund); Item 22(b)(2) of Schedule 14A (requiring disclosure of any material interests of a director in the fund's principal underwriter or administrator); Item 22(b)(3) of Schedule 14A (requiring disclosure of any material interests of a director in any material transactions with the fund, the investment adviser, the principal underwriter, or the administrator, and any person controlling, controlled by, or under common control with the investment adviser, principal underwriter, or administrator); Item 404(a) of Regulation S-K, through Item 22(b)(4) of Schedule 14A (requiring disclosure of a director's material interests in transactions with the fund involving amounts over $60,000). Funds also must disclose in proxy statements a director's securities holdings in the fund. Item 403(b) of Regulation S-K, through Item 6(d) of Schedule 14A. See also Items 5, 7(e), (f), and (g), and 22(b)(5) and (b)(6) of Schedule 14A (requiring other information about directors). |
146 | Registration Form Used by Open-End Management Investment Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916, 13931 (Mar. 23, 1998)] ("1998 Form N-1A Release"). |
147 | John Markese, president of the American Association of Individual Investors, discussed his view that there is a "disconnect" between shareholders and the independent directors at our recent Roundtable. Roundtable Transcript of Feb. 23, 1999, at 48-49. See also Paul J. Lim, Despite Plan to Fortify Independent Directors, Shareholders Must be Their Own Watchdogs, L.A. Times, Mar. 28, 1999, at C3; Russ Wiles, "Fund Directors Losing Clout," The Arizona Republic D1 (Mar. 28, 1999). |
148 | See, e.g., Edward Wyatt, Empty Suits In the Board Room; Under Fire, Mutual Fund Directors Seem Increasingly Hamstrung, N.Y. Times, June 7, 1998, at C1; Steven D. Kaye, Whose board is it?, U.S. News & World Rep., Feb. 2, 1998, at 64; Jason Zweig, How Funds Can Do Better, Money, Feb. 1998, at 42. |
149 | See John Nuveen & Co., Inc. SEC
No-Action Letter (Nov. 18, 1986) ("Nuveen Letter") (annual meetings to
elect directors not required by Investment Company Act). The Nuveen Letter took
the position that annual meeting requirements generally are a question of state
law.
For historical and other reasons, most funds are organized under the laws of Massachusetts or Maryland. The organizational and operational requirements of Massachusetts business trusts are not specified by statute, and a fund's essential structure is contained in the trust agreement, which generally includes a provision eliminating the need for annual shareholder meetings to elect directors. See generally Jones, Moret and Storey, The Massachusetts Business Trust and Registered Investment Companies, 13 Del. J. Corp. L. 421 (1988). Under Maryland corporate law, fund charters or by-laws are not required to provide that annual meetings be held in any year in which the election of directors is not required by the Investment Company Act. Md. Code Ann., Corps. & Ass'ns Code � 2-501(b) (1999). In addition, Delaware, Minnesota, and California also have business trust or special corporate law structures that have the effect of not requiring shareholder meetings other than those required by the Investment Company Act. Del. Code Ann. tit. 12, � 3806 (1999); Minn. Stat. � 302A.431 (1999); Cal. Corp. Code � 600(b) (West 1999). Closed-end funds registered on national securities exchanges, however, are required to hold an annual meeting to elect directors under the rules of the exchanges. See, e.g., American Stock Exchange Listing Standards, Policies, and Requirements � 704; New York Stock Exchange Listed Company Manual � 302.00. Closed-end fund shareholders therefore generally would receive annual proxy statements. |
150 | Form N-1A is the registration form used by open-end management investment companies to register under the Investment Company Act and to offer their shares under the Securities Act. We also are proposing parallel changes to Forms N-2 (closed-end funds) and N-3 (managed separate accounts offering variable annuity contracts). |
151 | Proposed Item 22(b)(1) of Schedule 14A; proposed Items 13(a)(1) and 22(b)(5) of Form N-1A; proposed Item 18.1 and Instruction 4.e. to Item 23 of Form N-2; proposed Item 20(a) and Instruction 4(v) to Item 27 of Form N-3. For convenience in discussing the proposed requirements, we are not specifically referring to nominees for election as directors. The proposed requirements, however, would be applicable to nominees in proxy solicitations for the election of directors. The disclosure requirements in Item 22 of Schedule 14A also are applicable to information statements prepared in accordance with Regulation 14C and Schedule 14C [17 CFR 240.14c-101]. |
152 | See Item 13(b) of Form N-1A; Item 18.1 to Form N-2; Item 20(a) of Form N-3; Items 401(a) and (e) of Regulation S-K, through Item 22(b)(4) of Schedule 14A. As currently required, funds would continue to include in the table information about officers and advisory board members of the fund, as well as directors. See Items 13(b) of Form N-1A; Item 18.1 of Form N-2; Item 20(a) of Form N-3; Items 401(b) and (e) of Regulation S-K, through Item 22(b)(4) of Schedule 14A. |
153 | See 1998 Form N-1A Release, supra note 146, at 13930-13931. |
154 | See id. |
155 | Proposed Item 22(b)(5) of Form N-1A; proposed Instruction 4.e. to Item 23 of Form N-2; proposed Instruction 4(v) to Item 27 of Form N-3. |
156 | Proposed Item 22(b)(6) of Form N-1A; proposed Instruction 4.f. to Item 23 of Form N-2; proposed Instruction 4(vi) to Item 27 of Form N-3. |
157 | As is currently required, the fund also would be required to explain any family relationship between the persons listed in the table. See current Item 401(d) of Regulation S-K, through Item 22(b)(4) of Schedule 14A; Item 13(b) of Form N-1A; Item 18.1 of Form N-2; Item 20(a) of Form N-3; proposed Item 22(b)(1) of Schedule 14A; proposed Item 13(a)(1) of Form N-1A; proposed Item 18.1 of Form N-2; proposed Item 20(a) of Form N-3. |
158 | Proposed Instruction 4 to Item 22(b)(1) of Schedule 14A; proposed Instruction 2 to Item 13(a)(1) of Form N-1A; proposed Instruction 2 to Item 18.1 of Form N-2; proposed Instruction 2 to Item 20(a) of Form N-3. |
159 | See Item 401(e)(2) and Instruction to Item 401(e)(2) of Regulation S-K, through Item 22(b)(4) of Schedule 14A; Item 13(c) and Instruction to Item 13(c) of Form N-1A; Item 18.2 and Instruction to Item 18.2 of Form N-2; Item 20(b) and Instruction to Item 20(b) of Form N-3. |
160 | Proposed Item 22(b)(1) of Schedule 14A; proposed Item 13(a)(1) of Form N-1A; proposed Item 18.1 of Form N-2; proposed Item 20(a) of Form N-3. |
161 | See supra note 148 and accompanying text. |
162 | See Peter McKenna, Mutual Funds Are Built to Last With Embedded Checks, Balances, Investor's Business Daily, May 1, 1998, at B4 (quoting fund industry consultant Geoffrey H. Bobroff) ("It's useful to see how many shares are owned by members of the board. . . . Most investors like board members to share the fund's risk and possible reward."). |
163 | Proposed Item 22(b)(4) of Schedule 14A; proposed Item 13(b)(4) of Form N-1A; proposed Item 18.7 of Form N-2; proposed Item 20(f) of Form N-3. |
164 | As noted earlier, supra note 149, closed-end funds are not required to update their registration statements annually; however, shareholders would receive the information annually in proxy statements for the election of directors. |
165 | See Item 22(a)(1)(v) of Schedule 14A. |
166 | See proposed Instruction 1(a) to Item 13 of Form N-1A; proposed Instruction 1.b. to Item 18 of Form N-2; proposed Instruction 1.a. to Item 20 of Form N-3. The proposed definition of "fund complex" also would apply to the proposed disclosure requirement for basic information about directors. See supra note 157 and accompanying text (proposing to require disclosure for each director of the number of portfolios overseen within the fund complex and other directorships held outside of the fund complex). |
167 | See Item H of Form N-SAR [17 CFR 274.101] (defining "family of investment companies" to mean any two or more investment companies that share the same investment adviser or principal underwriter and hold themselves out to investors as related companies for purposes of investment and investor services); see also Rule 11a-3 under the Act [17 CFR 270.11a-3] (defining "group of investment companies" to mean any two or more open-end investment companies that hold themselves out to investors as related companies for purposes of investment and investor services and that either (1) have a common investment adviser or principal underwriter or (2) the investment adviser or principal underwriter of one of the companies is an affiliated person of the investment adviser or principal underwriter of each of the other companies). |
168 | See supra notes 20, 22, and 23 and accompanying text. |
169 | See section 10(a) of the Act. |
170 | Sections 2(a)(19)(A)(i)-(v) of the Act [15
U.S.C. 80a-2(a)(19)(A)(i)-(v)]. Section 2(a)(3) of the Act [15 U.S.C.
80a-2(a)(3)] defines affiliated person of another person to mean (A) any person
directly or indirectly owning, controlling, or holding with power to vote, 5 per
centum or more of the outstanding voting securities of such other person; (B)
any person 5 per centum or more of whose outstanding voting securities are
directly or indirectly owned, controlled, or held with power to vote, by such
other person; (C) any person directly or indirectly controlling, controlled by,
or under common control with, such other person; (D) any officer, director,
partner, copartner, or employee of such other person; (E) if such other person
is an investment company, any investment adviser thereof or any member of an
advisory board thereof; and (F) if such other person is an unincorporated
investment company not having a board of directors, the depositor thereof.
Section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)] defines immediate family member to mean any parent, spouse of a parent, child, spouse of a child, spouse, brother, or sister, and includes step and adoptive relationships. Sections 2(a)(19)(B)(i)-(v) of the Act [15 U.S.C. 80a-2(a)(19)(B)(i)-(v)] define an interested person of an investment adviser or principal underwriter of a fund to include: (1) any affiliated person of the investment adviser or principal underwriter; (2) any member of the immediate family of any natural person who is an affiliated person of the investment adviser or principal underwriter; (3) any person who knowingly has any direct or indirect beneficial interest in, or who is designated as trustee, executor, or guardian of any legal interest in, any security issued either by the investment adviser or principal underwriter or by a controlling person of the investment adviser or principal underwriter; (4) any person or partner or employee of any person who at any time since the beginning of the last two completed fiscal years of the fund has acted as legal counsel for the investment adviser or principal underwriter; and (5) any broker or dealer registered under the Exchange Act or any affiliated person of a broker or dealer. |
171 | See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 14-15 (1970). |
172 | Section 2(a)(19)(A)(vi) of the Act [15 U.S.C. 80a-2(a)(19)(A)(vi)]. The statute also provides that no person shall be deemed an interested person of a fund solely by reason of being a member of its board of directors or advisory board or an owner of its securities, or his membership in the immediate family of any person who is a member of the fund's board of directors or advisory board or an owner of its securities. Id. |
173 | Section 2(a)(19)(B)(vi) of the Act [15
U.S.C. 80a-2(a)(19)(B)(vi)].
Section 2(a)(9) of the Act [15 U.S.C. 80a-2(a)(9)] defines control to mean the power to exercise a controlling influence over the management or policies of a company, unless such power is solely the result of an official position with such company. Any person who owns beneficially, either directly or through one or more controlled companies, more than 25 percent of the voting securities of a company shall be presumed to control such company. Any person who does not own more than 25 percent of the voting securities of any company shall be presumed not to control such company. |
174 | See Interpretive Release, supra note 1. |
175 | See supra note 145 and accompanying text. |
176 | See Item 22(b)(1) of Schedule 14A. |
177 | See Item 22(b)(2) of Schedule 14A. |
178 | See Item 22(b)(3) of Schedule 14A, and Item 404(a) of Regulation S-K, through Item 22(b)(4) of Schedule 14A. |
179 | See supra note 149 and accompanying text. |
180 | See supra note 170 and accompanying text. |
181 | See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 14-15 (1970). Ordinarily, a business or professional relationship would not be deemed to impair independence where the benefits flow from the director of an investment company to the other party to the relationship. Id. |
182 | Id. Over the years, Division of
Investment Management staff analyzed issues arising under sections
2(a)(19)(A)(vi) or (B)(vi) of the Act on the particular facts of each case to
determine whether a director's relationships might tend to impair the
independence of the director. See, e.g., Travelers Equities
Fund Inc, SEC No-Action Letter (Jan. 11, 1982); Securities Groups,
SEC No-Action Letter (Apr. 20, 1981); Equitable of Iowa Variable Annuity
Account A, SEC No-Action Letter (Jan. 6, 1980); American Medical
Association, SEC No-Action Letter (Dec. 5, 1979); American Medical
Association Tax-Exempt Income Fund, Inc., SEC No-Action Letter (Jun. 18,
1978); Cal-Western Separate Account A, SEC No-Action Letter (Mar. 8,
1976); Southwestern Investors, Inc., SEC No-Action Letter (Jun. 13,
1971).
Beginning in 1984, the staff stated that it did not believe that it was appropriate for the staff to consider no-action requests under section 2(a)(19)(A)(vi) or (B)(vi) as a matter of policy. Capital Supervisors Helios Fund, Inc., SEC No-Action Letter (Jun. 13, 1984); see also Daniel Calabria, SEC No-Action Letter (Sept. 12, 1984). See also Interpretive Release, supra note 1. |
183 | See Items 22(b)(1) (positions with and interests in the investment adviser), 22(b)(2) (interests in the principal underwriter or administrator), 22(b)(3) (interests in transactions with the investment adviser, principal underwriter, or administrator), and 22(b)(4) (interests in transactions with the fund) of Schedule 14A. |
184 | Proposed Item 22(b)(3) of Schedule 14A; proposed Item 13(b)(3) of Form N-1A; proposed Item 18.6 of Form N-2; proposed Item 20(e) of Form N-3. |
185 | Proposed Items 22(b)(5) and (6) of Schedule 14A; proposed Items 13(b)(5) and (6) of Form N-1A; proposed Items 18.8 and 18.9 of Form N-2; proposed Items 20(g) and (h) of Form N-3. |
186 | Proposed Items 22(b)(7) and (8) of Schedule 14A; proposed Items 13(b)(7) and (8) of Form N-1A; proposed Items 18.10 and 18.11 of Form N-2; proposed Items 20(i) and (j) of Form N-3. |
187 | See Items 22(b)(1) (positions and interests); 22(b)(2) (interests); 22(b)(3) (transactions); and 22(b)(4) (transactions) of Schedule 14A. |
188 | Proposed Item 22(a)(1)(vi) of Schedule 14A; proposed Instruction 1(b) to Item 13 of Form N-1A; proposed Instruction 1.b. to Item 18 of Form N-2; proposed Instruction 1.b. to Item 20 of Form N-3. |
189 | See Instruction 2 to Item 404(a) of Regulation S-K, through Item 22(b)(4) of Schedule 14A. |
190 | See sections 2(a)(19)(A)(vi) and (B)(vi) of the Act [15 U.S.C. 80a-2(a)(19)(A)(vi) and (B)(vi)]. |
191 | Separate accounts offering variable insurance products that are registered as management companies also would be required to disclose circumstances involving the insurance company that sponsors the separate account. We are proposing to define "sponsoring insurance company" in the proxy rules to mean the insurance company that establishes and maintains the separate account and that owns the assets of the separate account. Proposed Item 22(a)(1)(x) of Schedule 14A. |
192 | See supra notes 89-90 and accompanying text. |
193 | See Items 22(b)(1) of Schedule 14A (requiring funds to disclose directors' ownership of any securities and any other material direct or indirect interest in the investment adviser or any person controlling, controlled by, or under common control with the investment adviser unless the director is a general partner or director of the investment adviser) and 22(b)(3) of Schedule 14A (requiring funds to disclose any material interest, direct or indirect, of any director or nominee for election as director in any material transactions or any proposed material transactions to which the investment adviser, principal underwriter, the administrator, or a person controlling, controlled by, or under common control with those entities (other than a fund) was or is to be a party). |
194 | Instruction 1 to Item 13(b) of Form N-1A; see also Instruction 1 to Item 18.1 of Form N-2 and Instruction 1 to Item 20(a) of Form N-3. |
195 | Proposed Item 22(a)(1)(vii) of Schedule 14A; proposed Instruction 1(c) to Item 13 of Form N-1A; proposed Instruction 1.c. to Item 18 of Form N-2; proposed Instruction 1.c. to Item 20 of Form N-3. |
196 | This category would include a foreign fund (i.e., an investment company that is organized under the laws of a jurisdiction other than the United States). The proposed rule also would require disclosure of positions with a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the Investment Company Act. See proposed Item 22(b)(3)(ii) of Schedule 14A; proposed Item 13(b)(3)(ii) of Form N-1A; proposed Item 18.6(b) of Form N-2; proposed Item 20(e)(ii) of Form N-3. |
197 | Proposed Item 22(b)(3) of Schedule 14A;
proposed Item 13(b)(3) of Form N-1A; proposed Item 18.6 of Form N-2; proposed
Item 20(e) of Form N-3. Cf. Item 13(b) of Form N-1A, Item 18.1 of Form
N-2, and Item 20(a) of Form N-3 (requiring disclosure of directors' positions
with the fund); Item 13(c) of Form N-1A, Item 18.2 of Form N-2; and Item 20(b)
of Form N-3 (requiring disclosure of directors' positions with affiliated
persons of the fund and the principal underwriter); Item 22(b)(1) of Schedule
14A (requiring the fund to identify each director or nominee who is, or was
during the past five years, an officer, employee, director, general partner, or
shareholder of the investment adviser); and Item 401(a) and (b) of Regulation
S-K, through Item 22(b)(4) of Schedule 14A (requiring disclosure of directors'
and executive officers' positions and offices with the fund). We have proposed
to include disclosure of positions with affiliated persons of the fund
consistent with current SAI requirements.
Separate accounts offering variable insurance products that are registered as management companies also would be required to disclose directors' positions with the insurance company that sponsors the separate account. See supra note 191. |
198 | See Item 22(b)(1) of Schedule 14A. |
199 | Separate accounts offering variable insurance products that are registered as management companies also would be required to disclose directors' interests in the insurance company that sponsors the separate account. See supra note 191. |
200 | Proposed Items 22(b)(5) and (6) of Schedule 14A; proposed Items 13(b)(5) and (6) of Form N-1A; proposed Items 18.8 and 18.9 of Form N-2; proposed Items 20(g) and (h) of Form N-3. Cf. Item 22(b)(1) of Schedule 14A (generally requiring disclosure of directors' current ownership of securities, and material interests during the past five years, in the investment adviser or any person controlling, controlled by, or under common control with the investment adviser); Item 22(b)(2) of Schedule 14A (requiring disclosure of directors' material interests during the past five years in a fund's principal underwriter and administrator). |
201 | Proposed Instruction 4 to Item 22(b)(5) of Schedule 14A; proposed Instruction 4 to Item 13(b)(5) of Form N-1A; proposed Instruction 4 to Item 18.8 of Form N-2; proposed Instruction 4 to Item 20(g) of Form N-3. |
202 | Proposed Instruction 1 to Item 22(b)(5) of Schedule 14A; proposed Instruction 1 to Item 13(b)(5) of Form N-1A; proposed Instruction 1 to Item 18.8 of Form N-2; proposed Instruction 1 to Item 20(g) of Form N-3. |
203 | This category would include a foreign fund (i.e., an investment company that is organized under the laws of a jurisdiction other than the United States). The proposed rule also would require disclosure of transactions with a person that would be an investment company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) of the Investment Company Act. See proposed Item 22(b)(7)(iii) of Schedule 14A; proposed Item 13(b)(7)(iii) of Form N-1A; proposed Item 18.10(c) of Form N-2; proposed Item 20(i)(iii) of Form N-3 . |
204 | Proposed Items 22(b)(7) and (8) of Schedule
14A; proposed Items 13(b)(7) and (8) of Form N-1A; proposed Items 18.10 and
18.11 of Form N-2; proposed Items 20(i) and (j) of Form N-3. Cf. Item
22(b)(3) of Schedule 14A (generally requiring disclosure of directors' material
interests in material transactions since the beginning of the most recently
completed fiscal year, or proposed material transactions, to which the
investment adviser, principal underwriter, administrator, or a person
controlling, controlled by, or under common control with those entities was or
is to be a party). See also Item 404(a) of Regulation S-K [17 CFR
229.404(a)], through Item 22(b)(4) of Schedule 14A (requiring disclosure of
transactions since the beginning of the last fiscal year, or proposed
transactions, to which the fund was or is to be a party, in which any director
or immediate family member had, or will have, a material interest and in which
the amount involved exceeds $60,000).
Separate accounts offering variable insurance products that are registered as management companies also would be required to disclose directors' transactions with the insurance company that sponsors the separate account. See supra note 191. |
205 | Proposed Item 22(b)(7) of Schedule 14A; proposed Item 13(b)(7) of Form N-1A; proposed Item 18.10 of Form N-2; proposed Item 20(i) of Form N-3. |
206 | Proposed Instructions 1 and 2 to Item 22(b)(7) of Schedule 14A; proposed Instructions 1 and 2 to Item 13(b)(7) of Form N-1A; proposed Instructions 1 and 2 to Item 18.10 of Form N-2; proposed Instructions 1 and 2 to Item 20(i) of Form N-3. |
207 | Proposed Instruction 9 to Item 22(b)(7) of Schedule 14A; proposed Instruction 9 to Item 13(b)(7) of Form N-1A; proposed Instruction 8 to Item 18.10 of Form N-2; proposed Instruction 8 to Item 20(i) of Form N-3. |
208 | oposed Item 22(b)(8) of Schedule 14A; proposed Item 13(b)(8) of Form N-1A; proposed Item 18.11 of Form N-2; proposed Item 20(j) of Form N-3. |
209 | Proposed Instructions 1 and 2 to Item 22(b)(8) of Schedule 14A; proposed Instructions 1 and 2 to Item 13(b)(8) of Form N-1A; proposed Instructions 1 and 2 to Item 18.11 of Form N-2; proposed Instructions 1 and 2 to Item 20(j) of Form N-3. |
210 | Proposed Instruction 10 to Item 22(b)(7) and Instruction 8 to Item 22(b)(8) of Schedule 14A; proposed Instruction 10 to Item 13(b)(7) and Instruction 8 to Item 13(b)(8) of Form N-1A; proposed Instruction 9 to Item 18.10 of and Instruction 7 to Item 18.11 of Form N-2; proposed Instruction 9 to Item 20(i) and Instruction 7 to Item 20(j) of Form N-3. See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 14-15 (1970) ("[A] director ordinarily would not be considered to have a material business relationship with the investment adviser simply because he is a brokerage customer who is not accorded special treatment."); Interpretive Release, supra note 1. |
211 | Proposed Instruction 7 to Item 22(b)(7) and Instruction 5 to Item 22(b)(8) of Schedule 14A; proposed Instruction 7 to Item 13(b)(7) and Instruction 5 to Item 13(b)(8) of Form N-1A; proposed Instruction 6 to Item 18.10 and Instruction 4 to Item 18.11 of Form N-2; proposed Instruction 6 to Item 20(i) and Instruction 4 to Item 20(j) of Form N-3. |
212 | See sections 2(a)(19)(A)(vi) and 2(a)(19)(B)(vi) of the Act. |
213 | Cf. Item 404(a) of Regulation S-K, through Item 22(b)(4) of Schedule 14A (requiring disclosure of a director's or immediate family member's material interest in a transaction with the fund only when the amount involved in the transaction is greater than $60,000). |
214 | Currently, Instruction 8(A) of Item 404(a) of Regulation S-K states that a director's interest in a material transaction is not material when he and all other directors, nominees, executive officers, security holders who own more than 5% of any class of the registrant's voting securities, and immediate family members, in the aggregate, own less than a 10% equity interest in another person that is a party to the transaction. |
215 | See supra note 214 (Instruction 8(A) of Item 404(a) of Regulation S-K). |
216 | Proposed Item 22(b)(9) of Schedule 14A;
proposed Item 13(b)(9) of Form N-1A; proposed Item 18.12 of Form N-2; proposed
Item 20(k) of Form N-3.
Separate accounts offering variable insurance products that are registered as management companies also would be required to disclose cross-directorships involving the insurance company that sponsors the separate account. See supra note 191. |
217 | Cf. Report and Recommendations of the Blue Ribbon Committee on Improving the Effectiveness of Corporate Audit Committee at 11 (1999) (director not independent when he is employed as an executive of another company where any of the corporation's executives serves on that company's compensation committee). |
218 | Item 22(c)(11) of Schedule 14A. |
219 | Proposed Item 13(b)(10) of Form N-1A; proposed Item 18.13 of Form N-2; proposed Item 20(l) of Form N-3. |
220 | See sections 15(a) and (c) of the Investment Company Act [15 U.S.C. 80a-15(a) and (c)]. |
221 | See Negotiating Fees and Expenses Panel, Roundtable Transcript of Feb. 23, 1999 at 26-91. |
222 | The fund must state whether it has a standing audit, nominating, compensation, or similar committee, identify each committee member, state the number of committee meetings held by each committee during the last fiscal year, and describe briefly the functions performed by the committees. Item 7(e)(1) of Schedule 14A. If the fund has a nominating or similar committee, the fund must state whether the committee will consider nominees recommended by security holders and, if so, describe the procedures to be followed by security holders in submitting such recommendations. Item 7(e)(2) of Schedule 14A. |
223 | Instruction 3 to Item 13(b) of Form N-1A; Instruction 3 to Item 18.1 of Form N-2; Instruction 3 to Item 20(a) of Form N-3. |
224 | Proposed Item 22(b)(13) of Schedule 14A;
proposed Item 13(b)(2) of Form N-1A; proposed Item 18.5 of Form N-2; proposed
Item 20(d) of Form N-3. Cf. Item 7(e)(1) of Schedule 14A.
Because this proposed disclosure requirement covers information that is similar to that already required for proxy statements in Item 7(e) of Schedule 14A, the Commission is proposing to amend Item 7 to state that investment companies must furnish the information on committees proposed in Item 22(b)(13) in lieu of the information currently required in Item 7(e). See proposed Items 7(d) and (e) of Schedule 14A. We also recently proposed to require additional information about a closed-end fund's audit committee. See Audit Committee Disclosure, Securities Exchange Act Release No. 41987 (Oct. 7, 1999) [64 FR 55648 (Oct. 14, 1999)] (proposed Item 7(e)(3) of Schedule 14A). |
225 | See Instruction 1 to Item 22(b)(4) of Schedule 14A (table containing information about directors' background and experience and table containing information about directors' transactions with the fund); Instruction 4 to Item 13(b) of Form N-1A (management information table). |
226 | Proposed Instruction 3 to Item 22(b) of Schedule 14A; proposed Instruction 2 to Item 13 of Form N-1A; proposed Instruction 2 to Item 18 of Form N-2; proposed Instruction 2 to Item 20 of Form N-3. |
227 | Proposed Item 22(a)(1)(viii) of Schedule 14A. Business development companies are subject to special provisions under the Act designed to accommodate their venture capital investments. See sections 54-65 of the Investment Company Act [15 U.S.C. 80a-53 to 80a-64]. Business development companies are required to have a majority of directors who are not "interested persons." See section 56 of the Investment Company Act [15 U.S.C. 80a-55]. |
228 | We also are proposing to redesignate Item 22(b)(4) as Item 22(b)(10). Funds would not be required to provide information for directors, nominees, and their immediate family members as required by Items 404(a) and (c) of Regulation S-K, through Item 22(b)(10) of Schedule 14A, because we are proposing to require the information under Item 22(b)(7) of Schedule 14A. Proposed Instruction to Item 22(b)(10) of Schedule 14A. |
229 | Proposed Item 22(b)(12) of Schedule 14A; proposed Item 13(c) of Form N-1A, proposed Item 18.14 of Form N-2; proposed Item 20(m) of Form N-3. |
230 | See proposed Item 22(a)(1) of Schedule 14A. |
231 | See Items 13(c) of Form N-1A; Item 18.2 of Form N-2; Item 20(b) of Form N-3; proposed Item 13(a)(2) of Form N-1A; proposed Item 18.2 of Form N-2; proposed Item 20(b) of Form N-3 (requiring disclosure of officers' positions with affiliated persons of the fund and the principal underwriter). |
232 | Proposed Item 22(b)(2) of Schedule 14A; proposed Item 13(a)(3) of Form N-1A; proposed Item 18.3 of Form N-2; proposed Item 20(c) of Form N-3. See Items 401(a) and 401(b) of Regulation S-K and Instruction 1 to Items 401(a) and 401(b) of Regulation S-K, through Item 22(b)(4) of Schedule 14A. |
233 | 17 CFR 270.30d-1. |
234 | Proposed rule 30e-1(d) under the Investment Company Act. We also are proposing to amend rule 30d-1(a) to require funds to include in their shareholder reports any information (not just financial statements) required to be included in those reports by the company's registration statement form under the Investment Company Act. Proposed rule 30e-1(a) under the Investment Company Act. We are redesignating rules 30d-1 and 30d-2 as rules 30e-1 and 30e-2 respectively to reflect the National Securities Markets Improvement Act of 1996 amendments to section 30 of the Act. [Pub. L. No. 104-290, 110 Stat. 3416 (1996) (codified in various sections of the United States Code)]. |
235 | See supra notes 21, 170 and accompanying text. |
236 | A fund must indicate which individuals are independent directors in its registration statement, as well as in proxy statements for the election of directors. See supra note 225 and accompanying text. |
237 | Proposed rule 31a-2(a)(4). The proposed rule states that these records must include any questionnaire and any other document used to determine that a director qualifies as independent. |
238 | Id. |
239 | See, e.g., ICI Advisory Group Report, supra note 28, at 21 (recommending that funds require independent directors to complete a questionnaire each year on business, financial, and family relationships that could affect their independence). |
240 | See section 31(a)(2) of the Act [15 U.S.C. 80a-30(a)(2)] (requiring Commission to consider and request public comment on minimizing recordkeeping compliance burdens). |
241 | Section 2(c) of the Investment Company Act [15 U.S.C. 80a-2(c)], section 2(b) of the Securities Act [15 U.S.C. 77b(b)], and section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] require the Commission, when it engages in rulemaking and is required to consider whether an action is consistent with the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. |
242 | Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996). |
243 | See supra notes 34-35 and accompanying and following text. |
244 | See supra text following note 33. |
245 | See supra note 39 and accompanying text. |
246 | See supra note 44. As noted above, however, the ICI Advisory Group Report has recommended that independent directors constitute two-thirds of a fund's board. See supra note 42 and accompanying text. It is therefore likely that in the future the number of funds following this practice will increase, even absent the Commission's proposal. |
247 | Under some circumstances a vacancy on the board may be filled by the board of directors. See section 16(a) of the Act. In those cases, the fund would only incur the costs of compensating the new independent directors. |
248 | See supra note 66 and accompanying text. |
249 | As discussed above, we are proposing to amend rule 0-1 to include a definition of "independent legal counsel." See supra note 87 and accompanying text; see also infra notes 250-256 and accompanying text (discussing the costs and benefits of this proposed definition). |
250 | In connection with this proposal, we also are proposing to amend rule 0-1 to define an "administrator" as any person who provides significant administrative or business affairs management services to a fund. This definition is substantially similar to the definition of administrator that is currently contained in Item 22(a)(1)(i) of Schedule 14A and Item 15(h)(1) of Form N-1A. Adding this definition to rule 0-1 should benefit funds by helping to clarify the scope of the proposed definition of independent legal counsel. We are not aware of any costs that would be associated with this definition of administrator. |
251 | We are proposing to amend rule 0-1 to define "control person" as any person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with a fund's investment adviser, principal underwriter, or administrator. This definition should benefit funds by helping to clarify the scope of the proposed definition of independent legal counsel. We are not aware of any costs that would be associated with this definition. |
252 | Among other things, the proposed amendments to the Exemptive Rules would require that, for funds relying on those rules, any legal counsel for the independent directors of the fund be an "independent legal counsel." |
253 | Based on statistics compiled by Commission staff from January 1, 1997 through December 31, 1998, we estimate that there are approximately 3,560 funds that could rely on one or more of the Exemptive Rules. Of those funds, we assume that approximately 90 percent (3,200) actually rely on at least one Exemptive Rule annually. |
254 | We assume that the independent directors of the remaining two-thirds of those funds (2,135) either would not have legal counsel, or would have legal counsel who meets the requirements of the first part of the proposed definition, so that no determination by the independent directors would be necessary. |
255 | This estimate is based on a staff assessment of the burden associated with this proposed recordkeeping requirement in light of the estimated hour burdens currently associated with other rules under the Act that impose similar collection of information requirements. |
256 | To calculate this total annual cost, the Commission staff assumed that two-thirds of the total annual industry hour burden (532 hours) would be incurred by professionals with an average hourly wage rate of $125 per hour, and one-third of that annual hour burden (267 hours) would be incurred by clerical staff with an average hourly wage rate of $15 per hour ((532 x $125/hour) + (267 x $15/hour) = $70,505). |
257 | As discussed above, the ICI Mutual Insurance Company ("ICI Mutual"), which insures funds representing approximately 70 percent of all open-end fund assets, recently announced that it is making available to funds a standard policy endorsement that permits independent directors to recover defense costs, settlements, and judgments in "insured vs. insured" claims otherwise covered under the policy. See supra note 111. According to an ICI Mutual representative, that company is not charging funds any additional premiums for this coverage. It is possible, however, that other insurance providers will charge funds additional premiums for providing this type of coverage. |
258 | These conditions are designed to enable the Commission staff to monitor the duties and responsibilities of an independent audit committee formed by a fund relying on the exemption. |
259 | This estimate is based on statistics compiled by Commission staff from January 1, 1997 through December 31, 1998. |
260 | This estimate is based on a review of the estimated hour burdens currently associated with other rules under the Act that impose similar collection of information requirements. |
261 | To calculate this one-time cost, the Commission staff used $500 per hour as the average cost of directors' time and $125 per hour as an average hourly wage for professionals ((2 hours x 524 funds x $500/hour) + (2 hours x 524 funds x $125/hour) = $655,000). |
262 | This estimate is based on a review of the estimated hour burdens associated with other rules under the Act that impose similar collection of information requirements. |
263 | To calculate the total annual cost of the proposed rule, the Commission staff assumed that one-third of the total annual hour burden (35 hours) would be incurred by professionals with an hourly wage rate of $125 per hour, and two-thirds of that annual hour burden (70 hours) would be incurred by clerical staff with an hourly wage rate of $15 per hour ((35 x $125/hour) + (70 x $15/hour) = $5,425) . |
264 | In some cases, funds pay these additional committee fees only if the committee meeting is held on a day when a board meeting is not scheduled. |
265 | We also have no basis for determining how many funds would choose to avoid those fees by scheduling audit committee meetings for the same day as a board meeting. |
266 | This estimate is based on Commission staff assessment of the different types of information currently required to be disclosed in proxy statements. |
267 | This estimate is based upon a Commission
staff assessment of the proposed amendments in light of the current hour burden
and current reporting requirements.
As stated above, the additional hours are based on the additional time funds would devote to determining what information needs to be disclosed and preparing the disclosure documents. |
268 | The estimated number of proxy statements is based on the approximate number of proxy statements filed with the Commission in calendar year 1998. The total industry cost of the proposed amendments to the proxy statement is calculated by multiplying the annual number of proxy statements (1,000) by the additional hour burden imposed by the proposed amendments (10 hours) by the hourly wage rate ($125). The hourly wage rate is based upon consultations with a sample of filers and represents the Commission's estimate for an appropriate wage rate for the legal, financial, and accounting skills commonly used in preparation of registration statements, shareholder reports, and proxy statements. |
269 | Our estimated hour burden may significantly overstate the burden for those portfolios that are part of a fund complex in which multiple registered investment companies have the same board of directors because the burden of collecting and disclosing information about the common board would be spread over a larger number of portfolios. |
270 | Although funds would only have to update
the information about current directors and add information about new directors,
we anticipate that funds would incur some burden hours in regularly collecting
information from directors, determining what information needs to be disclosed,
and preparing the updated disclosure.
The hour burden for the first post-effective amendment to a registration statement filed by an existing fund after the rules take effect generally would be higher than for subsequent post-effective amendments because the fund would need to compile and disclose the required information for the first time. |
271 | These estimates are based on filings received in calendar year 1998. |
272 | The total annual industry cost is calculated by multiplying the total annual industry hour burden ((280 portfolios x 24 hours) + (7,875 portfolios x 4 hours)) by the hourly wage rate of $125. |
273 | Although funds would only have to update
the information about current directors and add information about new directors,
we anticipate that funds would incur some burden hours in regularly collecting
information from directors, determining what information needs to be disclosed,
and preparing the updated disclosure.
The hour burden for the first post-effective amendment to a registration statement filed by an existing fund after the rules take effect generally would be higher than for subsequent post-effective amendments because the fund would need to compile and disclose the required information for the first time. |
274 | These estimates are based on filings received in calendar year 1998. |
275 | The total annual industry cost is calculated by multiplying the total annual industry hour burden ((110 funds x 42 hours) + (20 funds x 7 hours)) by the hourly wage rate of $125. |
276 | Although funds would only have to update
the information about current directors and add information about new directors,
we anticipate that funds would incur some burden hours in regularly collecting
information from directors, determining what information needs to be disclosed,
and preparing the updated disclosure.
The hour burden for the first post-effective amendment to a registration statement filed by an existing fund after the rules take effect generally would be higher than for subsequent post-effective amendments because the fund would need to compile and disclose the required information for the first time. |
277 | These estimates are based on filings received in calendar year 1998. |
278 | The total annual industry cost is calculated by multiplying the total annual industry hour burden ((20 portfolios x 10.5 hours) + (40 portfolios x 1.75 hours)) by the hourly wage rate of $125. |
279 | This estimate is based on statistics compiled by Commission staff from January 1, 1997 through December 31, 1998. |
280 | The industry cost of the proposed annual shareholder reporting requirements is calculated by multiplying the total annual hour burden for the industry (0.5 hours x 3,490 registered management investment companies) by the hourly wage rate of $125. |
281 | Commission staff surveyed representatives of several funds to determine the current burden hour estimate for rule 31a-2. |
282 | This estimate is based on statistics compiled by Commission staff from January 1, 1997 through December 31, 1998. |
283 | This estimate is based on a Commission staff assessment of the hour burden that would be imposed by the proposed amendment in light of the estimated hour burden currently imposed by the requirements of the rule. |
284 | In calculating the total annual industry cost of the proposed amendment, the Commission staff assumed that one-third of the total annual industry hour burden (233 hours) would be incurred by professionals with an average hourly wage rate of $125 per hour, and two-thirds of that annual hour burden (465 hours) would be incurred by clerical staff with an average hourly wage rate of $15 per hour ((233 x $125/hour) + (465 x $15/hour) = $36,100). |
285 | Because we are proposing to redesignate rule 30d-1 as rule 30e-1, we refer to the newly designated rule 30e-1 in this section. |
286 | The term "control person" is defined as any person (other than a registered investment company) directly or indirectly controlling, controlled by, or under common control with a fund's investment adviser, principal underwriter, or administrator. |
287 | Among other things, the proposed amendments to the Exemptive Rules would require that, for funds relying on those rules, any legal counsel for the independent directors of the fund be an independent legal counsel. |
288 | See supra note 253. |
289 | See supra note 254. |
290 | See supra note 255 for the basis of this estimate. |
291 | The estimated number of proxy statements filed is based on the approximate number of proxy statements filed with the Commission in calendar year 1998. The current approved Paperwork Reduction Act ("PRA") hour burden for rule 20a-1 is 96.2 hours. |
292 | This estimate is based upon a Commission
staff assessment of the proposed amendments in light of the current hour burden
and current reporting requirements.
As stated above, the additional hours are based on the additional time funds would devote to determining what information needs to be disclosed and preparing the disclosure documents. |
293 | These estimates are based on filings received in calendar year 1998. The current approved PRA hour burden per portfolio for an initial Form N-1A is 800 hours. |
294 | These estimates are based on filings received in calendar year 1998. The current approved PRA hour burden per portfolio for post-effective amendments to Form N-1A is 100 hours. |
295 | See supra notes 269 and 270 and
accompanying text. As stated above, the additional hours are based on the
additional time funds would devote to determining what information needs to be
disclosed and preparing the disclosure documents.
For post-effective amendments, although funds would only have to update the information about current directors and add information about new directors, we anticipate that funds would incur some burden hours in regularly collecting information from directors, determining what information needs to be disclosed, and preparing the updated disclosure. The hour burden for the first post-effective amendment to a registration statement filed by an existing fund after the rules take effect generally would be higher than for subsequent post-effective amendments because the fund would need to compile and disclose the required information for the first time. |
296 | This total annual hour burden is calculated by adding the hour burden for initial registration statements and the hour burden for post-effective amendments, based on the proposed amendments. The annual hour burden per portfolio for an initial filing would be 824 hours (800 plus 24), for 280 portfolios, for a total of 230,720 hours. The annual hour burden per portfolio for a post-effective amendment would be 104 hours (100 plus 4), for 7,875 portfolios, for a total of 819,000 hours. The total annual hour burden for all funds for preparing and filing of initial registration statements and post-effective amendments on Form N-1A would be 1,049,720 hours (230,720 plus 819,000). |
297 | These estimates are based on filings received in calendar year 1998. The current approved PRA hour burden per initial Form N-2 is 500 hours. |
298 | These estimates are based on filings received in calendar year 1998. The current approved PRA hour burden per post-effective amendment to Form N-2 is 100 hours. |
299 | See supra Section III.F. As stated
above, the additional hours are based on the additional time funds would devote
to determining what information needs to be disclosed and preparing the
disclosure documents.
For post-effective amendments, although funds would only have to update the information about current directors and add information about new directors, we anticipate that funds would incur some burden hours in regularly collecting information from directors, determining what information needs to be disclosed, and preparing the updated disclosure. The hour burden for the first post-effective amendment to a registration statement filed by an existing fund after the rules take effect generally would be higher than for subsequent post-effective amendments because the fund would need to compile and disclose the required information for the first time. |
300 | This total annual hour burden is calculated by adding the hour burden for initial registration statements and the hour burden for post-effective amendments, based on the proposed amendments. The annual hour burden per initial registration statement would be 542 hours (500 plus 42), for 110 filings, for a total of 59,620 hours. The annual hour burden per post-effective amendment would be 107 hours (100 plus 7), for 20 post-effective amendments, for a total of 2,140 hours. The total annual hour burden for all funds for preparing and filing of initial registration statements and post-effective amendments on Form N-2 would be 61,760 hours (59,620 plus 2,140). |
301 | These estimates are based on filings received in calendar year 1998. The previous Paperwork Reduction Act submission for Form N-3 did not differentiate the hour burden between initial filings and post-effective amendments. The approved hour burden at that time was 518.8 hours per filing based on 53 filings. Based upon experience with Form N-3, we have reevaluated the hour burden for Form N-3 and estimated that exclusive of the proposed amendments, the hour burden for initial filings is 900 hours. |
302 | These estimates are based on filings received in calendar year 1998. The previous Paperwork Reduction Act submission for Form N-3 did not differentiate the hour burden between initial filings and post-effective amendments. The approved hour burden at that time was 518.8 hours per filing based on 53 filings. Based upon experience with Form N-3, we have reevaluated the hour burden for Form N-3 and estimated that exclusive of the proposed amendments, the hour burden for post-effective amendments is 150 hours. |
303 | See supra Section III.F. As stated
above, the additional hours are based on the additional time funds would devote
to determining what information needs to be disclosed and preparing the
disclosure documents.
For post-effective amendments, although funds would only have to update the information about current directors and add information about new directors, we anticipate that funds would incur some burden hours in regularly collecting information from directors, determining what information needs to be disclosed, and preparing the updated disclosure. The hour burden for the first post-effective amendment to a registration statement filed by an existing fund after the rules take effect generally would be higher than for subsequent post-effective amendments because the fund would need to compile and disclose the required information for the first time. |
304 | This total annual hour burden is calculated by adding the hour burden for initial registration statements and the hour burden for post-effective amendments, based on the proposed amendments. The annual hour burden per portfolio for an initial filing would be 910.5 hours (900 plus 10.5), for 20 portfolios, for a total of 18,210 hours. The annual hour burden per portfolio for a post-effective amendment would be 151.75 hours (150 plus 1.75), for 40 portfolios, for a total of 6,070 hours. The total annual hour burden for all funds for preparing and filing of initial registration statements and post-effective amendments on Form N-3 would be 24,280 hours (18,210 plus 6,070). |
305 | Because we are proposing to redesignate rule 30d-1 as rule 30e-1, we refer to the newly designated rule 30e-1 in this section. |
306 | The proposed amendments are to Forms N-1A, N-2, and N-3. Rule 30e-1 requires funds to include in the shareholder reports the information that is required by the fund's registration statement form. |
307 | This estimate is based on statistics compiled by Commission staff from January 1, 1997 through December 31, 1998. |
308 | The current approved PRA hour burden for rule 30e-1 is 202 hours per investment company. |
309 | See supra section III.F. |
310 | The burdens associated with the rule's requirements that investment advisers, underwriters, brokers, dealers, and depositors preserve certain records have been addressed separately in connection with rules adopted under section 204 of the Investment Advisers Act [15 U.S.C. 80b-4] and section 17 of the Exchange Act [15 U.S.C. 78q]. |
311 | The Commission staff surveyed representatives of several funds to determine the current burden hour estimate for rule 31a-2. |
312 | See supra note 283 for the basis of this estimate. |
313 | See supra note 260 for the basis of this estimate. |
314 | See supra note 262 for the basis of this estimate. |
315 | Because we are proposing to redesignate rule 30d-1 as rule 30e-1, and rule 30d-2 as 30e-2, we refer to the newly designated rules 30e-1 and 30e-2 in this section. |
316 | These proposals would require that, for funds relying on those exemptive rules, (i) independent directors constitute either a majority or a super-majority (two-thirds) of the fund's board of directors; (ii) independent directors select and nominate other independent directors; and (iii) any legal counsel for the independent directors be an independent legal counsel. In connection with these proposals, we also are proposing to amend rule 0-1 under the Act to add definitions of the terms "independent legal counsel" and "administrator." |
317 | 17 CFR 270.0-10. |
318 | See supra note 255 for the basis of this estimate. |
319 | See supra notes 260 and 262 for the basis of these estimates. |
320 | See supra note 283 for the basis of this estimate. |
321 | The hour burden for the first post-effective amendment to a registration statement filed by an existing fund after the rules take effect generally would be higher than for subsequent post-effective amendments because the fund would need to compile and disclose the required information for the first time. |
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