[Federal Register Volume 64, Number 166 (Friday, August 27, 1999)]
[Rules and Regulations]
[Pages 46821-46839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22310]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239, 270, 274 and 275
[Release Nos. 33-7728, IC-23958, IA-1815; File No. S7-25-95]
RIN 3235-AG27
Personal Investment Activities of Investment Company Personnel
AGENCY: Securities and Exchange Commission.
ACTION: Final rule.
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SUMMARY: The Securities and Exchange Commission (``Commission'') is
adopting amendments to the rule under the Investment Company Act that
addresses conflicts of interest that arise from personal trading
activities of investment company personnel. The amendments will
increase the oversight role of an investment company's board of
directors with respect to codes of ethics, improve the manner in which
investment company personnel report their personal securities holdings,
and require prior approval of investments in initial public offerings
and certain limited offerings by certain investment company personnel
(including portfolio managers). Related amendments to disclosure forms
will require investment companies to provide information about their
policies concerning personal investment activities in their
registration statements. The rule amendments are designed to enhance
the board of directors' oversight of the policies governing personal
transactions in securities by investment company personnel, help
compliance personnel and the Commission's examinations staff in
monitoring potential conflicts of interest and detecting potentially
abusive activities, and make information about personal investment
policies available to the public.
DATES: Effective Date: The rule amendments will become effective
October 29, 1999. Compliance Date: Section IV of this release contains
information on compliance dates.
FOR FURTHER INFORMATION CONTACT: Penelope W. Saltzman, Senior Counsel,
or C. Hunter Jones, Assistant Director, Office of Regulatory Policy,
Division of Investment Management, at (202) 942-0690, Securities and
Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-0506.
SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to
rule 17j-1 [17 CFR 270.17j-1] under the Investment Company Act of 1940
[15 U.S.C. 80a] (the ``Investment Company Act'' or the ``Act''), rule
204-2 [17 CFR 275.204-2] under the Investment Advisers Act of 1940 [15
U.S.C. 80b] (the ``Advisers Act''), Forms N-1A [17 CFR 239.15A,
274.11A], N-2 [17 CFR 239.14, 274.11a-1], N-3 [17 CFR 239.17a, 274.11b]
and N-5 [17 CFR 239.24, 274.5] under the Investment Company Act and the
Securities Act of 1933 [15 U.S.C. 77a-77aa] (the ``Securities Act''),
and Form N-8B-2 [17 CFR 274.12] under the Investment Company
Act.1
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\1\ Unless otherwise noted, all references to ``amended rule
17j-1,'' ``rule 17j-1, as amended,'' or any paragraph of the rule
will be to 17 CFR 270.17j-1, as amended by this release, and all
references to ``amended rule 204-2,'' ``rule 204-2, as amended,'' or
any paragraph of the rule will be to 17 CFR 275.204-2, as amended by
this release.
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Table of Contents
I. Executive Summary
II. Background
III. Discussion
A. Codes of Ethics
B. Role of Fund Boards
C. Reports by Access Persons
D. Pre-Approval of Investments in IPOs and Private Placements
E. Disclosure of Policies Concerning Personal Investment
Activities
F. Beneficial Ownership
G. ``Security Held or to be Acquired'' by a Fund
H. Excepted Securities and Funds
[[Page 46822]]
I. Conforming Amendments to Advisers Act Rules
IV. Effective Date; Compliance Dates
A. Effective Date
B. Compliance Dates
V. Cost-Benefit Analysis
VI. Effects on Competition, Efficiency and Capital Formation
VII. Paperwork Reduction Act
VIII. Summary of Final Regulatory Flexibility Analysis
IX. Statutory Authority
Text of Rule and Form Amendments
I. Executive Summary
The Commission is adopting amendments to rule 17j-1 under the
Investment Company Act. Rule 17j-1 addresses conflicts of interest
between registered investment company (``fund'') personnel (such as
portfolio managers) and their funds that may arise when these persons
buy or sell securities for their own accounts (``personal investment
activities'').
Rule 17j-1 prohibits fraudulent, deceptive or manipulative acts by
fund personnel in connection with their personal transactions in
securities held or to be acquired by the fund. The rule also contains
requirements that are designed to prevent fraud, including (i)
requiring funds and their investment advisers and principal
underwriters (collectively, ``rule 17j-1 organizations'') to adopt a
code of ethics (``code'') containing provisions reasonably necessary to
prevent fraudulent, deceptive or manipulative acts and (ii) requiring
certain persons to report their personal securities transactions to
their rule 17j-1 organization.
The amendments to rule 17j-1 are designed to improve the regulation
of personal investment activities in two respects. First, the
amendments enhance fund directors' oversight of personal investment
activities by requiring that a fund's board, including a majority of
independent directors on the board, approve the fund's code and the
code of any investment adviser or principal underwriter of the fund.
Second, the amendments assist the management of rule 17j-1
organizations in monitoring compliance with the rule. The amendments
require initial and annual holdings reports from access persons, as
well as review of reports on personal trading by compliance personnel.
The amendments also require the fund or its investment adviser to
review and pre-approve any investment in an initial public offering
(``IPO'') or a limited offering (such as a private placement) by
personnel who participate in managing the fund's portfolio
(``investment personnel''). In addition, amendments to the disclosure
forms under the Securities Act of 1933 and the Investment Company Act
will make information about a rule 17j-1 organization's policies
concerning personal investment activities available to the public in
the fund's registration statement.
II. Background
Section 17(j) of the Investment Company Act prohibits any
affiliated person of a rule 17j-1 organization from engaging in
fraudulent trading activities that violate rules adopted by the
Commission.2 Section 17(j) authorizes the Commission to
adopt rules to define or prevent fraudulent activities. Under this
authority, the Commission adopted rule 17j-1 in 1980.3 Rule
17j-1 prohibits fund personnel from engaging in fraud in connection
with personal transactions in securities held or to be acquired by the
fund.4 In addition, the rule requires every rule 17j-1
organization to adopt a code of ethics designed to prevent ``access
persons'' 5 from engaging in fraud,6 and requires
that the organization use reasonable diligence and institute procedures
reasonably necessary to prevent violations of its code of
ethics.7 The rule also requires an access person to report
personal securities transactions to his or her rule 17j-1 organization
at least quarterly.8
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\2\ 15 U.S.C. 80a-17(j). An ``affiliated person'' of a rule 17j-
1 organization includes: (i) any officer, director, partner,
copartner, or employee of the rule 17j-1 organization; (ii) any
person directly or indirectly controlling, controlled by, or under
common control with the rule 17j-1 organization; (iii) any person
owning five percent of the rule 17j-1 organization's voting
securities; and (iv) any person in which the rule 17j-1 organization
owns five percent or more of the voting securities. See Investment
Company Act section 2(a)(3) [15 U.S.C. 80a-2(a)(3)].
\3\ Prevention of Certain Unlawful Activities With Respect To
Registered Investment Companies, Investment Company Act Release No.
11421 (Oct. 31, 1980) [45 FR 73915 (Nov. 7, 1980)] (``1980 Adopting
Release'').
\4\ Amended rule 17j-1(b).
\5\ Rule 17j-1 defines ``access person'' to include: (i) any
director, officer, or general partner of a fund or of a fund's
investment adviser, or any employee of a fund or of a fund's
investment adviser who, in connection with his or her regular
functions or duties, participates in the selection of a fund's
portfolio securities or who has access to information regarding a
fund's future purchases or sales of portfolio securities; or (ii)
any director, officer, or general partner of a principal underwriter
who, in the ordinary course of business, makes, participates in or
obtains information regarding, the purchase or sale of securities
for the fund for which the principal underwriter acts, or whose
functions or duties in the ordinary course of business relate to the
making of any recommendation to the fund regarding the purchase or
sale of securities. Amended rule 17j-1(a)(1). The term ``principal
underwriter'' is defined in section 2(a)(29) of the Act [15 U.S.C.
80a-2(a)(29)].
\6\ Amended rule 17j-1(c)(1)(i).
\7\ Amended rule 17j-1(c)(2)(i).
\8\ Amended rule 17j-1(d)(1)(ii). The rule 17j-1 organization
also must keep records of violations of its code of ethics and
certain other records. See amended rule 17j-1(f).
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The Commission issued a release in 1995 proposing amendments to
rule 17j-1 (``Proposing Release'').9 The proposed amendments
were designed to: (i) increase the oversight role of a fund's board of
directors with respect to the codes of ethics adopted by the fund, its
investment adviser, and principal underwriter; (ii) require that rule
17j-1 organizations receive information about the personal securities
holdings of their employees; and (iii) improve disclosure to investors
concerning policies on personal investment activities.
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\9\ Personal Investment Activities of Investment Company
Personnel and Codes of Ethics of Investment Companies and their
Investment Advisers and Principal Underwriters, Investment Company
Act Release No. 21341 (Sept. 8, 1995) [60 FR 47844 (Sept. 14,
1995)]. The Proposing Release was preceded by a Commission staff
study of rule 17j-1 and an industry advisory group report. Division
of Investment Management, SEC, Personal Investment Activities of
Investment Company Personnel (1994) (``PIA Report''); Investment
Company Institute, Report of the Advisory Group on Personal
Investing (1994) (``ICI Advisory Group Report''). The Investment
Company Institute is an association of funds representing
approximately 95 percent of total fund assets under management in
the United States.
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We received fourteen comment letters, which generally expressed
strong support for the proposed amendments to rule 17j-1.10
In addition, one commenter urged us to impose minimum guidelines that
all codes of ethics must contain in order to address conflicts of
interest. Two commenters stated that the current rule should not be
revised. A number of commenters addressed particular issues raised by
the proposals but did not express an overall view on the amendments.
The comment letters have been very helpful to us in formulating the
final rule amendments, which are described below.11
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\10\ The comment letters and a summary of the comments prepared
by Commission staff are available to the public in File No. S7-25-
95. The Commission received additional comments on the rule proposal
after the summary of comments was completed on September 11, 1997.
These comments also are available to the public in File No. S7-25-
95.
\11\ In addition to the amendments described below, the
amendments reorganize and add headings to the text of rule 17j-1 and
replace the term ``security'' with ``covered security'' to make the
rule easier to understand and use. The Commission also has changed
the title of the rule from ``Certain unlawful acts, practices, or
courses of business and requirements relating to codes of ethics
with respect to registered investment companies'' to ``Personal
investment activities of investment company personnel'' to reflect
more clearly the substance of the rule.
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[[Page 46823]]
III. Discussion
A. Codes of Ethics
Codes of ethics are an important part of a rule 17j-1
organization's efforts to prevent fraud resulting from personal trading
in securities by its employees. When the Commission adopted rule 17j-1
in 1980, it stated that the ``introduction and tailoring of ethical
restraints on the behavior of persons associated with an investment
company can best be left in the first instance to the directors of the
investment company.'' 12 Comments on the rule proposals
confirmed that a ``one-size-fits-all'' approach to these codes would
not be more effective in preventing fraudulent personal trading
practices, and would be unnecessarily burdensome, particularly for
smaller rule 17j-1 organizations.
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\12\ See 1980 Adopting Release, supra note 3, at text following
n.2.
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Although rule 17j-1 does not specify the provisions that a code of
ethics must contain, funds can take several steps to anticipate and
avoid problems resulting from conflicts of interest. A 1994 report by
an advisory group of the Investment Company Institute (``ICI Advisory
Group Report'') recommended, among other things, that every code of
ethics: (i) prohibit investment personnel from participating in IPOs;
(ii) prohibit securities transactions during certain ``blackout
periods''; 13 and (iii) prohibit short-term trading
profits.14 A 1994 Commission staff report noted that the
recommendations in the ICI Advisory Committee Report provide important
guidance for a rule 17j-1 organization in preparing its own code of
ethics.15 The Commission believes that a rule 17j-1
organization should review the recommendations in the ICI Advisory
Group Report and determine whether the specific restrictions and
prohibitions recommended by the report are appropriate for inclusion in
its code of ethics.
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\13\ Blackout period restrictions generally prohibit
transactions by fund personnel in a security during a certain period
of time before and after the fund trades in that security.
\14\ ICI Advisory Group Report, supra note 9, at 31-42. The
report also recommended that every code of ethics require prior
approval of any acquisition of securities by investment personnel in
a private placement and prohibit investment personnel from serving
on the boards of publicly traded companies without prior
authorization. Id. In order to implement these restrictions
effectively, the report recommended that fund codes of ethics, among
other things, require all access persons to: (i) ``preclear''
personal securities investments; (ii) direct their brokers to
provide copies of confirmations of all personal securities
transactions and periodic statements of all securities accounts; and
(iii) certify annually that they have read and understand the code
of ethics, and that they have complied with the requirements of the
code. Id. at 42-49.
\15\ See PIA Report, supra note 9, at 31-32.
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B. Role of Fund Boards
1. Approval of Code of Ethics
Rule 17j-1 requires each rule 17j-1 organization to adopt a code of
ethics, but does not currently specify a role for a fund's board of
directors with respect to the codes.16 We proposed that a
majority of a fund's board, including a majority of independent
directors,17 be required to approve the fund's code and
review the codes of any investment adviser or principal underwriter to
the fund.
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\16\ All references in this release to boards of directors
include boards of trustees for funds organized as business trusts.
See Investment Company Act section 2(a)(12) [15 U.S.C. 80a-2(a)(12)]
(definition of ``director'' for purposes of the Investment Company
Act).
\17\ As used in this release, the term ``independent directors''
means directors who are not ``interested persons'' of the fund under
the Investment Company Act. See Investment Company Act section
2(a)(19) [15 U.S.C. 80a-2(a)(19)] (definition of ``interested
person'' for purposes of the Investment Company Act).
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Commenters generally supported increasing board oversight of codes
of ethics, and we are adopting the provision, with certain
modifications.18 As suggested by one commenter, the amended
rule requires that instead of reviewing the code of an investment
adviser and principal underwriter, the board must approve the code and
any material changes.19 In addition, the Commission is
clarifying that the board must approve the code when the fund initially
engages the investment adviser or principal underwriter (rather than
upon each contract renewal). If an investment adviser or principal
underwriter makes a material change to its code of ethics, the board
has six months in which to approve the material change.20
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\18\ Amended rule 17j-1(c)(1)(ii).
\19\ Id. This change should not affect the substance of board
action because, under the proposal, the same analysis would have
been required by the board when it reviewed the code of an
investment adviser or principal underwriter. See Proposing Release,
supra note 9, at n.17 and accompanying text.
\20\ Amended rule 17j-1(c)(1)(ii). Funds in a fund complex often
have different fiscal year periods and, as a result, different
schedules for meetings of their boards. The amendments to rule 17j-1
permit fund boards six months in which to approve material changes
to codes in order to avoid requiring all funds in a fund complex to
approve simultaneously a material change in their investment
adviser's or principal underwriter's code of ethics. Id.
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Under amended rule 17j-1, a fund's board must base its approval of
a code of ethics, or a material change to a code of ethics, upon a
determination that the code contains provisions reasonably necessary to
prevent access persons from violating the anti-fraud provision of the
rule.21 The Commission is not, as suggested by one
commenter, adopting specific detailed standards for board approval of a
code of ethics. We believe that the relevant factors used to approve a
code of ethics will vary from fund to fund. Nevertheless, we continue
to believe that a basic issue for each board of directors is whether
the code should permit personal trading by personnel of a rule 17j-1
organization.22 This issue is relevant for each organization
covered by the rule and is too important for a board to ignore.
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\21\ The codes of ethics of some rule 17j-1 organizations only
recite general principles, and the procedures (rather than the
codes) of these organizations contain the specific restrictions,
prohibitions, or requirements concerning an access person's personal
investment activities. Under amended rule 17j-1, the board must
approve a code based on its determination that the code contains
provisions reasonably necessary to prevent access persons from
violating the anti-fraud provisions of the rule. If a board can make
this determination only if it takes into consideration the
procedures, then the code must incorporate, or the board must
explicitly approve, those procedures, as well as any subsequent
material changes to those procedures.
\22\ See Proposing Release, supra note 9, at text preceding
n.18.
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2. Annual Issues and Certification Report
The board's involvement in the personal investment policies
applicable to the fund should not end after the board's initial
approval of a code. Continued oversight of the personal investment
policies applicable to the fund is in the interest of shareholders
because it subjects these policies to independent, objective analysis
by the ``watchdog'' for fund shareholders.23 Therefore, we
are adopting, as proposed, amendments that require each rule 17j-1
organization to report periodically to the board on issues raised under
its code of ethics. Under the amended rule, the management of a rule
17j-1 organization, at least once a year, must provide the fund's board
a written report 24 that (i) describes issues that arose
during the previous year under the code of ethics or procedures
applicable to the rule 17j-1 organization, including, but not limited
to,
[[Page 46824]]
information about material code or procedure violations and sanctions
imposed in response to those material violations 25 and (ii)
certifies to the fund's board that the rule 17j-1 organization has
adopted procedures reasonably necessary to prevent its access persons
from violating its code of ethics.26
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\23\ See Division of Investment Management, SEC, Protecting
Investors: A Half Century of Investment Company Regulation 253, 255-
56 (1992); PIA Report, supra note 9, at 47.
\24\ The proposed amendments did not specify the method by which
the management of a rule 17j-1 organization should provide the
report to the fund's board. Two commenters questioned whether the
reports could be made orally. The Commission believes that the
issues and certification report is important to board oversight of
personal investment policies and will best serve the board in
written form. We have therefore clarified in the amended rule that
the management of each rule 17j-1 organization must furnish a
written report to the fund board. See amended rule 17j-1(c)(2)(ii).
\25\ Amended rule 17j-1(c)(2)(ii)(A). As suggested by two
commenters, we are limiting the scope of the annual issues and
certification report to material violations or matters.
Nevertheless, even immaterial individual violations (such as late
filings of transaction reports) may collectively suggest material
problems with an organization's compliance systems. We therefore
would expect the report to include any violations that are material
in the aggregate. In addition, the requirement to report on issues
under the code of ethics or procedures means that a report also
should include significant conflicts of interest that arose
involving the personal investment policies of the organization, even
if the conflicts have not resulted in a violation of the code. For
example, a fund would be required to report to the board if a fund
portfolio manager is a director of a company whose securities are
held by the fund.
\26\ Amended rule 17j-1(c)(2)(ii)(B). Although the amendments
require an issues and certification report to be provided to the
board only once a year, more frequent reports by the management of a
rule 17j-1 organization may be appropriate in certain circumstances,
such as when there have been significant violations of a code or
procedures, or significant conflicts of interest arising under the
code or procedures. The report also may be used as an opportunity to
propose changes to the code or to the procedures that must be
approved by the board.
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The issues and certification report is designed to give the board
an opportunity to evaluate the effectiveness of codes of ethics and
procedures and the manner in which they have been implemented. We
expect a fund's board to examine the report carefully, and thus the
amended rule requires that the board ``consider'' the
report.27 Upon receipt and consideration of a report, a fund
board may determine that it is necessary to amend the fund's code or
procedures, or to suggest to an investment adviser or principal
underwriter that it consider amending its code or
procedures.28
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\27\ Amended rule 17j-1(c)(2)(ii). In considering the report,
the board should determine whether any action is required in
response to the report.
\28\ The board also may determine that the fund, investment
adviser or principal underwriter is not appropriately implementing
its code and procedures, as required by rule 17j-1, to prevent
violations of the organization's code of ethics. See amended rule
17j-1(c)(2)(i).
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3. Unit Investment Trusts
Rule 17j-1 currently applies to unit investment trusts (``UITs'')
and requires a UIT and its principal underwriter to adopt codes of
ethics.29 Because UITs do not have boards of directors, the
Commission proposed to require that the principal underwriter or
depositor for a UIT approve the codes of ethics of the UIT and its
principal underwriter or depositor, and be responsible for ensuring
that the code of ethics applicable to the UIT contains procedures
reasonably necessary to prevent an access person from violating rule
17j-1 and the code.30
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\29\ See amended rule 17j-1(a)(5) (defining the term ``Fund'' to
include any registered investment company). Unlike other types of
funds, a UIT typically does not employ an investment adviser or have
a board of directors and has a relatively fixed portfolio of
investments. See Investment Company Act section 4(2) [15 U.S.C. 80a-
4(2)] (definition of ``unit investment trust'').
\30\ See Proposing Release, supra note 9, at nn.30-31 and
accompanying text.
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Commenters generally accepted the proposed changes for UITs, which
the Commission is adopting substantially as proposed.31 If a
UIT has more than one principal underwriter or depositor, the principal
underwriters and depositors may designate a single principal
underwriter or depositor to be responsible for approving the UIT's code
of ethics and any material changes to the code. The designated
principal underwriter or depositor, however, would have to consent in
writing to this arrangement.32
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\31\ Amended rule 17j-1(c)(1)(iii).
\32\ Id.
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C. Reports by Access Persons
1. Initial Holdings Report
Rule 17j-1 currently requires an access person to report personal
securities transactions to his or her rule 17j-1 organization at least
quarterly (``quarterly transaction reports'') but does not require a
complete report of all securities holdings that could create a conflict
of interest with the fund. In the Proposing Release, the Commission
expressed concern that a rule 17j-1 organization may not be able to
monitor effectively potential conflicts of interest unless the rule
17j-1 organization knows the identity of all securities held by the
access person that could present a conflict, including securities
acquired before the person became an access person.33
Without knowledge of all those securities, for example, it would be
difficult for a fund to monitor whether the access person is making
trading decisions for the fund based on the securities that the access
person holds in his or her own portfolio.
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\33\ Proposing Release, supra note 9, at n.38 and accompanying
text.
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To improve the information that a rule 17j-1 organization currently
receives under the rule, the Commission proposed to require that each
access person provide an initial holdings report to its rule 17j-1
organization listing all securities beneficially owned by the access
person no later than 10 days after he or she becomes an access person.
We are adopting this provision substantially as proposed.34
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\34\ Amended rule 17j-1(d)(1)(i). In some cases, persons may
have been reporting their securities holdings and brokerage accounts
to their rule 17j-1 organizations before they become access persons.
In such cases, we believe that an access person would satisfy the
initial holdings report requirement, i.e., would not have to submit
a report, if his or her rule 17j-1 organization maintains a record
of the information required to be disclosed in the initial report
and the access person confirms in writing (which writing may be
electronic) the accuracy of the record within 10 days after becoming
an access person.
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Commenters generally supported the addition of an initial holdings
report requirement, although some urged that it be limited to persons
who participate in fund portfolio management.35 The
Commission has decided not to narrow the initial holdings report
requirement as suggested by these commenters. These reports are not
burdensome to file, and other access persons may be called upon from
time to time to participate in fund investment decision-making that may
give rise to a conflict because of these persons' securities holdings.
The initial holdings report (updated by transaction reports and annual
holdings reports described below) will allow a rule 17j-1 organization
to better monitor and address these conflicts.36
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\35\ These commenters suggested limiting an initial holdings
report to ``investment personnel,'' as defined in the ICI Advisory
Group Report. See infra note 48.
\36\ Persons who currently are or who become access persons
before the effective date of the amendments to rule 17j-1 are not
required to file initial holdings reports. See infra note 98.
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2. Annual Holdings Report
In addition to the initial holdings report and quarterly
transaction reports, the Commission is amending rule 17j-1 to require
each access person to file with his or her rule 17j-1 organization an
annual holdings report.37 In the Proposing Release, the
Commission asked for comment on (but did not propose) an annual
holdings report.38 Commenters differed on the issue. We have
decided to require the additional report because of our concern that,
without the report, neither the Commission's examinations staff nor a
rule 17j-1 organization would be able to understand the full nature of
an access person's current securities holdings without sorting through,
in some cases,
[[Page 46825]]
many years of transaction reports.39 Thus, requiring an
annual holdings report should improve the ability of fund compliance
personnel and Commission examiners to detect illegal trading activity
by fund personnel.
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\37\ Amended rule 17j-1(d)(1)(iii).
\38\ Proposing Release, supra note 9, at n.42 and accompanying
text. The Commission noted that the ICI Advisory Group Report
recommended that access persons file reports listing all of their
securities holdings upon commencement of employment and annually
thereafter. See ICI Advisory Group Report, supra note 9, at 46.
\39\ Using an annual holdings report, a rule 17j-1 organization
should better be able to determine the securities holdings of all
access persons each year and would not need, for example, to keep a
``running count'' of the holdings based on the initial holdings
report and subsequent quarterly transaction reports. If holdings
information were needed, for example, five years after a person
becomes an access person, the Commission's examinations staff or a
rule 17j-1 organization might have to piece together information
from the initial holdings report and as many as 20 quarterly
reports. Some rule 17j-1 organizations do, however, maintain a
``running count'' of their employees' current securities holdings
and brokerage accounts. We believe that access persons at these
organizations would satisfy their annual holdings report requirement
by confirming annually, in writing (which may be electronic), the
accuracy of the organization's record of information required to be
disclosed in the annual holdings report, and recording the date of
the confirmation.
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3. Information Required in Reports
The Commission proposed that an access person be required to report
in an initial holdings report every security (as defined in rule 17j-1)
that the access person beneficially owns, regardless of whether the
fund owns, or intends or proposes to acquire, the
security.40 The proposed amendments also would have required
an initial holdings report to include the title of the security, the
number of shares held, the principal amount of the security and its
CUSIP number, and a quarterly transaction report to include the CUSIP
number for each security for which a transaction occurred and the date
that the access person submitted the report.
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\40\ Proposing Release, supra note 9, at nn.43-46 and
accompanying text. Under current rule 17j-1, the term ``security''
excludes certain securities, such as U.S. government securities and
shares of open-end funds, that do not appear to present the same
opportunities for fraudulent trading activities that rule 17j-1 was
designed to prevent. See current rule 17j-1(e)(5). The amendments to
rule 17j-1 change the term to ``covered security'' and expand the
types of securities excluded from the definition. See amended rule
17j-1(a)(4) (discussed infra in section III.H of this release). The
Commission has revised the term in order to avoid any confusion with
the term ``security'' as defined under the Act. See Investment
Company Act section 2(a)(36) [15 U.S.C. 80a-2(a)(36)].
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We are adopting these requirements with some
modifications.41 The amended rule does not require
disclosure of the security's CUSIP number. Commenters asserted that
CUSIP numbers often are not readily available to access persons, and
that requiring them could present an obstacle to timely filing of
reports. The reports do, however, require disclosure of any securities
account the access person maintains with a broker, dealer or
bank.42 This information will assist the rule 17j-1
organization and the Commission's compliance staff in evaluating
compliance with the rule's reporting requirements.43
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\41\ Amended rule 17j-1(d)(1).
\42\ Amended rule 17j-1(d)(1)(i)(B), (ii)(B) and (iii)(B).
\43\ This requirement is similar to a recommendation of the ICI
Advisory Group Report that the National Association of Securities
Dealers (``NASD'') adopt a rule to require all broker-dealers to
notify a fund when any of the fund's employees open a brokerage
account. ICI Advisory Group Report, supra note 9, at 44-45.
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4. Time for Providing Reports
The Commission proposed that the initial holdings report would be
required to be filed within ten days after the individual becomes an
access person. Some commenters recommended lengthening this period to
twenty or thirty days, arguing that a ten-day period may not allow
sufficient time for access persons to gather and provide the required
information to their rule 17j-1 organization. One commenter suggested
that the ten-day period could be shortened for an initial holdings
report by a portfolio manager.
The Commission notes that quarterly transaction reports under
existing rule 17j-1 are required to be submitted no later than ten days
after the end of the calendar quarter. This time period does not appear
to be unreasonable, and commenters did not argue that it has been
burdensome. We are adopting this provision as proposed.44
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\44\ Amended rule 17j-1(d)(1)(i).
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5. Review of Reports
Rule 17j-1 currently includes no specific requirement that the
quarterly transaction reports required by the rule be reviewed by
anyone in the rule 17j-1 organization. In the Proposing Release, the
Commission explained that the purposes of the rule will be served only
if the reports are reviewed to detect conflicts of interest and abusive
practices.45 The Commission therefore proposed to require
that the procedures instituted by each rule 17j-1 organization include
procedures to review all securities transaction and holdings reports
required by rule 17j-1.
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\45\ Proposing Release, supra note 9, at text following n.47.
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The Commission is amending rule 17j-1 to require the review of all
securities transaction and holdings reports. Under the amended rule,
the procedures instituted by a rule 17j-1 organization to prevent a
violation of a code must include procedures requiring that: (i)
appropriate management or compliance personnel of the rule 17j-1
organization review transaction and holdings reports (both initial and
annual reports) submitted by access persons; and (ii) the rule 17j-1
organization maintain the names of the persons responsible for
reviewing these reports.46
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\46\ Amended rule 17j-1(d)(3) and (f)(1)(D).
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D. Preapproval of Investments in IPOs and Private Placements
As discussed above, the Commission did not propose specific
restrictions on personal investment activities of fund personnel, but
we did ask for comment on the issue.47 We noted that the ICI
Advisory Group Report recommended that all funds prohibit investment
personnel from investing in IPOs, require pre-clearance of investments
in private placements, and restrict certain other trading
practices.48 Many fund complexes have followed this advice
and revised their codes of ethics accordingly.49 Not all
have adopted these ethical restrictions, however, which caused us to
consider procedures that would further assist funds and advisers in
monitoring conflicts of interest that arise from these particular
investment activities.
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\47\ Proposing Release, supra note 9, at nn.32-34 and
accompanying text. Five commenters emphasized that all funds should
be given flexibility to determine their own policies and procedures
governing personal investment activities. One of these commenters,
however, supported specific basic requirements in codes, including
restrictions on trading in IPOs and private placement offerings.
\48\ Id. The report did not define the term ``private
placement.'' See supra notes 13-14 and accompanying text for a
discussion of the additional restrictions recommended in the report.
The report defined ``investment personnel'' to include portfolio
managers and employees who provide information and advice to a
portfolio manager or who help execute a portfolio manager's
decisions, such as securities analysts and traders. ICI Advisory
Group Report, supra note 9, at 29-30.
\49\ ICI, Report to the Division of Investment Management, U.S.
Securities and Exchange Commission: Implementation of the
Institute's Recommendations on Personal Investing 15-18 (1995)
(``ICI Survey''). Approximately 66 percent of the fund complexes
with funds that are ICI members (representing approximately 97
percent of ICI member assets under management) responded to the
survey. Seventy-two percent of those fund complexes adopted the ban
on investment personnel acquiring securities in an IPO. Sixty-nine
percent adopted the ban on purchasing securities in private
placements without prior approval. Fourteen percent of the fund
complexes that responded to the survey adopted recommendations based
on their particular circumstances, which in some cases provided for
more stringent restrictions than those recommended by the ICI
Advisory Group Report. Id.
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Most individuals rarely have a chance to invest in IPOs,
particularly ``hot issue'' IPOs,50 shares of which usually
[[Page 46826]]
are reserved for institutional investors, or wealthy individual
customers with large brokerage accounts.51 As the ICI
Advisory Group Report commented, the opportunity for investment
personnel to purchase IPO shares presents a ``clear potential for
conflict between the interests of the individual and the fund.''
52 The purchase of IPO shares by investment personnel may
raise questions as to whether the investment is an undisclosed reward
for directing fund business to the underwriter or issuer,53
whether the individual is misappropriating an opportunity that should
have been offered to the fund,54 and whether the
individual's future investment decisions for the fund will be based
solely on the best interests of the fund's shareholders.55
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\50\ A ``hot issue'' IPO typically means an IPO in which the
securities trade in the aftermarket at a premium over the offering
price. See Rule IM-2110-1(a)(1) of the NASD Conduct Rules, NASD
Manual (CCH) 4112 (1999) (introduction to rules on ``free-riding''
and ``withholding'').
\51\ See Kathleen Weiss Hanley, William J. Wilhelm, Jr.,
Evidence on the Strategic Allocation of Initial Public Offerings, 37
Journal of Financial Economics 239 (1995) (suggesting that
approximately 67 percent of shares in IPOs are allocated to
institutional investors). See also Michael Siconolfi, Underwriters
Set Aside IPO Stock for Officials of Potential Customers, Wall St.
J., Nov. 12, 1997, at A1 (``It is no news that underwriters make
most of the shares in hot IPOs available not to the little-guy
investor but to institutions, such as mutual fund companies and
pension funds that provide a lot of trading commissions and other
business.'').
\52\ ICI Advisory Group Report, supra note 9, at 32.
\53\ See, e.g., U.S. v. Ostrander, 999 F.2d 27 (2d Cir. 1993)
(affirming conviction of portfolio manager, who purchased privately
offered warrants of company whose securities she acquired for the
fund, for accepting unlawful compensation for fund's purchase of
property in violation of the Investment Company Act).
\54\ See, e.g., In the Matter of Ronald V. Speaker and Janus
Capital Corporation, Investment Company Act Release No. 22461 (Jan.
13, 1997) (investment adviser made $16,000 profit on same day
purchase and sale of debentures in which fund could have invested,
and failed to disclose transactions to the fund or obtain prior
consent of the fund (or a disinterested employee authorized to waive
the opportunity on the fund's behalf)).
\55\ See ICI Advisory Group Report, supra note 9, at 32.
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Purchases by investment personnel of securities in private
placements or other limited offerings (``private placements'') may
raise similar conflicts because the opportunity to invest in the
private placement may be a reward for past business deals.56
In some cases, the conflict may occur later when the issuer of the
privately placed security is considering making a public
offering.57
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\56\ See Ostrander, supra note 53.
\57\ A fund portfolio manager who has invested in the private
placement may have an opportunity to increase the value of his or
her investment by causing the fund to invest in the public offering
and contribute to its success. See ICI Advisory Group Report, supra
note 9, at 33-34 (citing John Accola, Firms, Fund Exec Ties
``Normal,'' Rocky Mountain News, Jan. 18, 1994, at 38A).
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To ensure that the potential conflicts associated with these
investments can be addressed before they arise, the amendments we are
adopting require that investment personnel obtain approval from their
fund or adviser before directly or indirectly acquiring any beneficial
ownership in securities in an IPO or private placement.58
The amendments do not prohibit these investments because we recognize
that there may be situations in which investment in these offerings
does not raise the types of conflicts that the rule is designed to
address. In some circumstances, an investment opportunity clearly may
be available to investment personnel for reasons other than the
individual's position with the fund. The fund or adviser therefore
could determine that, based on the particular nature of the offering
59 or the particular facts of the purchase,60 the
investment would create no material conflict. In other circumstances,
the investment may raise only potential conflicts from which the fund
and its investors can be protected.61 Because the portfolio
manager's fund or investment adviser is in the best position to
evaluate whether an investment in an IPO or limited offering creates or
may create a conflict of interest, the amendments permit that
organization to protect the fund by determining whether to approve the
proposed investment.
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\58\ Amended rule 17j-1(e). The rule is not limited to purchases
of ``covered securities'' sold in an IPO or limited offering, but
rather applies to purchases of all securities sold in an IPO or
limited offering. See 15 U.S.C. 80a-2(a)(36) (definition of
``security''). The rule generally defines an IPO to include an
offering of securities registered with the Commission, the issuer of
which, immediately before the registration, was not required to file
reports with the Commission. Rule 17j-1(a)(6). This is the same
definition used in section 12(f)(1)(G)(i) of the Securities Exchange
Act of 1934 (the ``Securities Exchange Act'') [15 U.S.C.
78l(f)(G)(i)]. The definition of ``limited offering'' under the rule
includes private placement offerings that are exempt from
registration under section 4(6) of the Securities Act [15 U.S.C.
77d(6)] or under Regulation D [17 CFR 230.501-508], as well as
offerings that are not public under section 4(2) of the Securities
Act [15 U.S.C. 77d(2)]. Amended rule 17j-1(a)(8).
\59\ A portfolio manager, for example, may have an opportunity
to invest in an IPO of the fund adviser as a result of his or her
service as an employee of the adviser, in an IPO of a mutual
insurance company as a result of his or her ownership of a life
insurance policy, or in an IPO of a spinoff company as a result of
his or her ownership of stock in the company that spins off the
issuer. In each case (and other similar cases), a fund or adviser
could determine that the portfolio manager's access to the IPO did
not result from his or her position with the fund.
\60\ For example, a portfolio manager's purchase of privately
offered securities issued by a small family business that is
unlikely to make a public offering in the future would likely not
raise a material conflict if the portfolio manager's fund is
prohibited from investing in private placements. Similarly, an
investment in an IPO in which all shares are allocated to investors
on a non-discriminatory basis may not raise a material conflict. See
Elizabeth Cochran, Taking a Seat at the IPO Table, Wash. Post, Jan.
7, 1999, at E1 (some online firms allocate IPO shares on a ``first-
come, first-served'' basis or on a pro-rata basis to all interested
investors); Lisa Bransten and Nick Wingfield, New Company Aims to
Shift IPO Playing Field, Wall St. J., Feb. 8, 1999, at C1 (one
online firm selling IPO shares will use a ``Dutch auction'' process
to set the offering price and to allocate IPO stock to the highest
bidding investors).
\61\ For example, if a portfolio manager sought approval to
invest in a private placement of securities of a business that might
make a public offering in the future, the fund or adviser could
decide to approve the investment subject to conditions designed to
protect investors from potential conflicts. These conditions might
require that the portfolio manager disclose his or her investment if
the fund subsequently considers investing in the business, and that
other investment personnel who have no personal interest in the
issuer review any decision the portfolio manager may make regarding
the fund's investment in the business. See ICI Advisory Group
Report, supra note 9, at 33.
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The Commission expects that a fund or investment adviser, in
fulfilling its pre-clearance responsibilities, will assign appropriate
compliance personnel to carefully review each request for
approval.62 We also expect that the fund or adviser will use
its judgment to distinguish between serious conflicts that must be
avoided and those less serious conflicts that the organization can
monitor and manage consistent with the protection of the fund and its
investors.63 In addition, in order to further encourage
careful monitoring of potential conflicts, amended rule 17j-1 requires
funds and advisers to retain a record of the approval of, and rationale
supporting, any direct or indirect acquisition by investment personnel
of a beneficial interest in securities in an IPO or private
placement.64 These records also should assist compliance
personnel and Commission staff in detecting illegal trading activities
by fund personnel.
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\62\ We expect that funds and advisers will review these
proposed investments on a case-by-case basis, except for those
circumstances in which advance general approval may be appropriate
because it is clear that conflicts are very unlikely to arise due to
the nature of the opportunity for investing in the IPO or private
placement. See supra text accompanying notes 59-60. The fund's
inability to invest in the securities would not be a basis for
concluding generally that the conflicts are unlikely to arise. See
text accompanying note 53 supra.
\63\ Some conflicts of interest must be reported to the fund's
board of directors under rule 17j-1. See supra note 25; amended rule
17j-1(c)(2)(ii) (annual issues and certification report
requirement).
\64\ Amended rule 17j-1(f)(2).
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The application of the pre-clearance provision is limited to
certain ``investment personnel.'' 65 The term is
[[Page 46827]]
defined in rule 17j-1 to include portfolio managers and other employees
of the fund or its investment adviser who participate in making
investment recommendations to the fund, and persons in a control
relationship to the fund who obtain information about investment
recommendations made to the fund.66 These persons are
involved in investment decisions for the fund and thus have significant
opportunities to influence fund decisions that may benefit them
personally.
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\65\ In deciding whether to approve securities transactions by
investment personnel, the adviser should consider all conflicts that
may cause the adviser and its investment personnel to violate their
fiduciary obligations to the fund, other funds advised by the
adviser, and other clients of the adviser. In the case of a proposed
transaction in a security of limited availability, the adviser
should consider whether the fund or other clients can invest in the
security before approving the transaction. See Speaker, supra note
54; In the Matter of Kemper Financial Services, Inc. et al.,
Investment Advisers Act Release No. 1494 (June 6, 1995); In the
Matter of Joan Conan, Investment Advisers Act Release No. 1446
(Sept. 30, 1994).
\66\ Amended rule 17j-1(a)(7) defines ``investment personnel''
as: (i) any employee of a fund or its investment adviser (or any
company in a control relationship with either) who, in connection
with his or her regular functions or duties, makes or participates
in making any recommendations regarding the purchase or sale of
securities by the fund and (ii) any natural person in a control
relationship to the fund or its investment adviser who obtains
information concerning recommendations made to the fund regarding
the purchase or sale of securities by the fund.
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E. Disclosure of Policies Concerning Personal Investment Activities
Rule 17j-1 currently does not require funds to disclose publicly
any information about their codes of ethics. The Commission proposed to
require that a fund disclose in its registration statement (i) that the
fund and its investment adviser and principal underwriter have adopted
codes of ethics, (ii) whether these codes permit personnel to invest in
securities for their own accounts, and (iii) that the codes are on
public file with, and are available from, the Commission.67
We also proposed to require a fund to file with the Commission all
codes of ethics applicable to the fund as an exhibit to its
registration statement. Commenters generally did not raise significant
objections to these proposals, although some commenters questioned
whether the proposed disclosure would be meaningful to
investors.68
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\67\ See Proposing Release, supra note 9, at nn.50-51 and
accompanying text.
\68\ Two commenters opposed the requirement that a fund disclose
whether fund personnel may invest in ``securities, including
securities that may be purchased or held by the fund'' and noted
that this phrase could imply that investment by fund personnel in
these securities is inherently suspect. We believe this information
is important for investors, and, as discussed below, we are adopting
this requirement as proposed. Funds are free to provide additional
disclosure that personal trading by fund personnel is not inherently
unlawful.
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The Commission is adopting the disclosure requirements
substantially as proposed, except that the disclosure may be in the
Statement of Additional Information (``SAI'') rather than in the
prospectus.69 This approach is more consistent with other
disclosure rules that govern the type of information that appears in
the SAI.70 We also are requiring that the codes of ethics be
filed through the Commission's Electronic Data Gathering, Analysis and
Retrieval (``EDGAR'') system as an exhibit to the fund's registration
statement.71 Electronic filing will facilitate public access
to the codes and permit investors, market professionals and the
financial media to obtain information about a fund's policies
concerning personal investment activities.
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\69\ The SAI is the second part of Form N-1A, the form used to
register open-end funds, of Form N-2, the form used to register
closed-end funds, and of Form N-3, the form used to register
separate accounts offering variable annuity contracts. The recent
amendments to Form N-1A require a fund to send an SAI to requesting
investors within three business days of a request. See Registration
Form Used by Open-End Management Investment Companies, Investment
Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23,
1998)], at text accompanying n.189 (``Amendments to Form N-1A'');
Form N-1A [17 CFR 274.11A], Instruction 3 to Item 1(b)(1).
\70\ See Amendments to Form N-1A, supra note 69, at text
accompanying n.23 (stating that prospectus disclosure requirements
are designed to include ``essential information'' about the
fundamental characteristics and risks of investing in a fund, and to
be limited to information ``necessary for an average or typical
investor to make an investment decision'').
\71\ Information in the EDGAR system is available through our
Internet web site at http://www.sec.gov>. Registration statements
also can be reviewed and copied at the Commission's Public Reference
Room in Washington, D.C.
A fund that is not required to have a code of ethics because,
for example, it does not invest in covered securities as defined in
amended rule 17j-1(a)(4), would not be required to file any code as
an exhibit to its registration statement, but should indicate on its
exhibit list the reason that it is not filing a code of ethics. See
Form N-1A, Item 23(p). A fund that invests only in the securities of
one other fund (such as a feeder fund in a ``master/feeder'' fund
arrangement) would be required to file the codes of ethics
applicable to the fund in which it invests because the feeder fund
is a vehicle for investment in the underlying fund. Id. A management
investment company that invests in the securities of other funds and
exercises discretion regarding the funds in which it invests (such
as a ``fund of funds'') would not, however, be required to file the
codes of ethics of those other funds.
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F. Beneficial Ownership
Rule 17j-1 currently states that, for purposes of the rule 17j-1
reporting requirement, beneficial ownership should be interpreted in a
manner that is consistent with section 16 of the Exchange
Act.72 In 1991, the Commission adopted revised rule 16a-1
under the Exchange Act, which clarified the meaning of beneficial
ownership for purposes of section 16.73 The Commission is
amending rule 17j-1 to incorporate this interpretation.74
The Commission is making a parallel amendment to rule 204-2 under the
Advisers Act to incorporate this interpretation.75
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\72\ Current rule 17j-1(c)(1); 15 U.S.C. 78p.
\73\ 17 CFR 240.16a-1(a)(2). See Ownership Reports and Trading
by Officers, Directors and Principal Security Holders, Securities
Exchange Act Release No. 28869 (Feb. 8, 1991) [56 FR 7242 (Feb. 21,
1991)]. The rule provides that, for purposes of determining whether
a person is the beneficial owner of more than 10 percent of a
registered class of equity securities under section 16 of the
Securities Exchange Act [15 U.S.C. 78p], ownership should be
calculated according to standards of beneficial ownership outlined
under section 13(d) of the Securities Exchange Act [15 U.S.C.
78m(d)] and the rules under section 13(d), subject to certain
exclusions. 17 CFR 240.16a-1(a)(1). For all other purposes under
section 16, beneficial ownership should be based on whether the
person has a pecuniary interest in the equity security. 17 CFR
240.16a-1(a)(2).
\74\ Amended rule 17j-1(d)(5). The amended rule also clarifies
that the definition of beneficial ownership applies to any ``covered
security'' the access person owns or acquires. Id. To the extent
that the clarification differs from any previous guidance that the
staff has given, that guidance is withdrawn. See MI Fund, Inc., SEC
No-Action Letter (Aug. 18, 1981).
\75\ Amended rule 204-2(a)(12)(iii)(B), (13)(iii)(B).
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G. ``Security Held or To Be Acquired'' by a Fund
Rule 17j-1 prohibits fraud by certain fund personnel 76
in connection with their purchase or sale of a ``security held or to be
acquired'' by the fund.77 The Commission proposed to amend
the definition of a ``security held or to be
[[Page 46828]]
acquired'' by a fund, to clarify that the securities that are subject
to the rule's anti-fraud provision include any option to purchase or
sell, and any security that is exchangeable for or convertible into,
any security that is held or to be acquired by a fund. As explained in
the Proposing Release, a fund insider who purchases or sells an option
or convertible security could improperly benefit from that transaction
to the same extent as a fund insider who purchases or sells the
underlying security.78 The only two commenters on this issue
supported the proposed clarification, and we are adopting it as
proposed.79
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\76\ These personnel are ``affiliated persons'' of a fund or of
its investment adviser or principal underwriter. An ``affiliated
person'' of an organization includes any officer, director, partner,
copartner, or employee of the organization. See supra note 2.
\77\ Amended rule 17j-1(b); see also section 17(j) [15 U.S.C.
80a-17(j)] (prohibiting violation of Commission rules in connection
with purchase or sale of a ``security held or to be acquired'' by a
fund). Under rule 17j-1, a ``security held or to be acquired'' by a
fund includes a security that (i) is held or is being considered for
purchase by the fund or its investment adviser for the fund at the
time of the transaction, or (ii) was held or was considered for
purchase by the fund or its investment adviser for the fund at any
time during the 15 days before the transaction. Amended rule 17j-
1(a)(10). The effect of this provision is to include a transaction
in such a security within the scope of the rule's anti-fraud
provision. Rule 17j-1 does not prohibit fund personnel from
purchasing or selling these securities unless the transaction would
defraud the fund (although codes of ethics may prohibit or limit
such transactions). In addition, rule 17j-1 does not limit a fund's
ability to purchase or sell a security as a result of transactions
by fund personnel. While a transaction by fund personnel in a
security that is outside the scope of the rule will not violate
section 17(j) or rule 17j-1, such a transaction may nonetheless
violate other anti-fraud provisions of the federal securities laws.
See, e.g., section 17(a) of the Securities Act [15 U.S.C. 77q(a)],
section 10(b) of the Securities Exchange Act [15 U.S.C. 78j(b)],
rule 10b-5 [17 CFR 240.10b-5] thereunder, and section 206 of the
Advisers Act [15 U.S.C. 80b-6].
\78\ Proposing Release, supra note 9, at nn.59-61 and
accompanying text.
\79\ Amended rule 17j-1(a)(10). A security that is exchangeable
for or convertible into a security that is held or to be acquired by
a fund would include warrants to purchase or sell the security.
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H. Excepted Securities and Funds
Because certain types of securities do not present the opportunity
for the type of improper trading activities that rule 17j-1 is designed
to prevent, the rule has excepted from its coverage transactions in
certain money market fund instruments, certain U.S. Government
securities,80 and securities issued by mutual funds. The
Commission proposed to expand the exceptions to cover a broader array
of money market instruments, and to exclude from the rule's coverage
all money market funds (which are generally limited to investing in
money market instruments), as well as their investment advisers and
principal underwriters. Commenters supported the amendments, which the
Commission is adopting as proposed.81
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\80\ Rule 17j-1 currently excepts ``securities issued by the
Government of the United States'' from the definition. The
Commission is not changing the securities subject to this exception,
but is amending the exception to read ``direct obligations of the
Government of the United States'' in order to conform the exception
to the exception for these securities listed in rule 204-2(a)(12)
and 204-2(a)(13) under the Advisers Act. Amended rule 17j-
1(a)(4)(i).
\81\ Amended rule 17j-1(a)(4)(ii). As amended, rule 17j-1
excludes from the definition of ``covered security'' ``bankers'
acceptances, bank certificates of deposit, commercial paper, and
high quality short-term debt instruments, including repurchase
agreements.'' Id. We interpret ``high quality short-term debt
instrument'' to mean any instrument that has a maturity at issuance
of less than 366 days and that is rated in one of the two highest
rating categories by a Nationally Recognized Statistical Rating
Organization.
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As a result of these exceptions, all funds that are money market
funds, or that limit their investments to certain money market
instruments, certain U.S. Government securities and securities of other
mutual funds, do not need to adopt codes of ethics under rule 17j-
1.82 Access persons of these organizations also would not be
required to make holdings or transaction reports to their
organization.83 In addition, access persons of rule 17j-1
organizations that are required to adopt codes of ethics under the rule
do not have to file transaction reports concerning transactions in
these instruments or report them in their initial or annual holdings
reports.84
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\82\ See amended rule 17j-1(c)(1)(i). Similarly, investment
advisers and principal underwriters to these funds would not have to
adopt codes of ethics unless the investment adviser or principal
underwriter also provides services to a fund that must adopt a code
of ethics under rule 17j-1. See also supra note 71.
\83\ See amended rule 17j-1(d)(1). If, however, an access person
is an access person of another organization that is covered by rule
17j-1, the access person would have to provide holdings and
transaction reports to that organization.
\84\ See amended rule 17j-1(d)(1)(i), (ii)(A) and (iii)(A)
(reports limited to covered securities). The Proposing Release
requested comment whether there are other types of securities that
should be excepted from the scope of the rule. Commenters
recommended several other types of securities that should be
excepted, such as options and futures on broad-based market indices.
The Commission does not believe that those recommended types of
securities are insulated from the risks of market manipulation and
the potential conflicts of interest that rule 17j-1 is intended to
cover. The Commission therefore is not amending the rule's
definition of ``covered security'' to exclude those securities.
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I. Conforming Amendments to Advisers Act Rules
Rule 204-2(a) under the Advisers Act requires each investment
adviser to keep records of the personal securities transactions of the
adviser and its ``advisory representatives.'' 85 Although
the purpose of this requirement is substantially the same as the
quarterly transaction reporting requirements of rule 17j-1, the two
rules except transactions in different securities from their respective
reporting and recordkeeping requirements.86 The Commission
is revising rule 204-2(a), as proposed, to conform its exceptions to
those of rule 17j-1.87 The Commission also is adding an
exception to the recordkeeping requirements under rule 204-2(a) to
permit an investment adviser not to make certain records under the rule
if the information required under rule 204-2(a) would duplicate
information contained in a broker trade confirmation or account
statement received and kept by the investment adviser.88
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\85\ Amended rule 204-2(a)(12), (13).
\86\ Rule 17j-1 currently excepts transactions in securities
issued by the Government of the United States, bankers' acceptances,
bank certificates of deposit, commercial paper and shares of
registered open-end investment companies from its reporting
requirements. Rule 204-2(a) currently excepts from its recordkeeping
requirements only transactions in securities that are direct
obligations of the United States.
\87\ For a discussion of these exceptions, see supra section
III.H of this release.
\88\ Amended rule 204-2(a)(12), (13).
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IV. Effective Date; Compliance Dates
A. Effective Date
The rule amendments the Commission is adopting today will become
effective October 29, 1999.
B. Compliance Dates
To permit the individuals and entities that are subject to rule
17j-1 sufficient time to comply with the new provisions adopted today
and to avoid conflicts with plans to address Y2K issues, the Commission
is providing transition time for certain new requirements.
1. March 1, 2000
No later than March 1, 2000, rule 17j-1 organizations (i.e., funds
and their investment advisers and principal underwriters) and their
personnel must meet the following requirements: 89
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\89\ Rule 17j-1 organizations that already are in compliance
with these requirements do not have to satisfy the requirements of
the rule again to meet these compliance dates. Thus, a rule 17j-1
organization that currently requires quarterly transaction, initial
holdings and annual holdings reports containing the information
required under amended rule 17j-1 and that already has identified
and notified its access persons of those reporting obligations would
not need to identify and notify the individuals again.
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(i) Each rule 17j-1 organization must have identified access
persons and notified them of their reporting obligations; 90
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\90\ See amended rule 17j-1(d)(4).
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(ii) Each rule 17j-1 organization must have adopted procedures for
management or compliance personnel to review transaction and holdings
reports; and 91
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\91\ See amended rule 17j-1(d)(3).
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(iii) Each rule 17j-1 organization must have established a record
of access persons who are required to make transaction and holdings
reports, and of persons who are responsible for reviewing those
reports.92
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\92\ See amended rule 17j-1(f)(4).
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2. September 1, 2000
No later than September 1, 2000:
(i) Each fund's board of directors must have approved codes of
ethics of the fund, its investment advisers and principal underwriters
(which codes may have been revised in response to the rule amendments
adopted in this release); 93
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\93\ See amended rule 17j-1(c)(1)(iii).
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(ii) Each rule 17j-1 organization must have provided the fund's
board of
[[Page 46829]]
directors with the first of its annual issues and certification
reports; 94 and
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\94\ See amended rule 17j-1(c)(2).
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(iii) Each access person must have provided the first of his or her
annual holdings reports to his or her rule 17j-1
organization.95
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\95\ See amended rule 17j-1(d)(1)(iii).
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3. April 10, 2000
Each quarterly transaction report filed for the calendar quarter
ending March 31, 2000 (due April 10, 2000), and for subsequent quarters
must include all information required under amended rule 17j-
1(d)(1)(ii).96
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\96\ The additional information required under this amendment
is: (i) the date that the quarterly transaction report is filed;
(ii) the name of any covered securities account established by the
access person during that quarter; and (iii) the date the account
was established. Amended rule 17j-1(d)(1)(ii)(A)(5), (B). Note that
access persons need not file a quarterly transaction report if the
information would duplicate information that their rule 17j-1
organization has received in a broker's confirmation or account
statement. See amended rule 17j-1(d)(2)(v).
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4. Other Compliance Dates
(i) After March 1, 2000, investment personnel may not directly or
indirectly acquire any beneficial interest in securities in an IPO or
in a private placement without prior approval from the fund or the
fund's investment adviser, and the fund and adviser must retain records
of the approval and reasons for granting the approval; 97
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\97\ See amended rule 17j-1(e), (f)(2).
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(ii) Each person who becomes an access person on or after March 1,
2000 must file his or her initial holdings report with his or her rule
17j-1 organization within 10 days after becoming an access person;
98 and
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\98\ See amended rule 17j-1(d)(1)(i). Any person who has become
an access person before March 1, 2000 need not file an initial
holdings report, but must file the first of his or her annual
holdings reports no later than the date specified above.
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(iii) In the next post-effective amendment filed by a fund after
March 1, 2000, the fund must file copies of codes of ethics of the rule
17j-1 organizations as an exhibit to the registration statement, and
disclose certain information about those codes.99
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\99\ See Amended Forms N-1A, N-2, N-3, N-5 and N-8B-2. A post-
effective amendment made for the purpose of complying with these
amendments may be made pursuant to rules 485(b) or 486(b) under the
Securities Act [17 CFR 230.485(b), .486(b)], provided the post-
effective amendment otherwise meets the conditions for immediate
effectiveness under those rules.
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V. Cost-Benefit Analysis
A. Summary
The Commission is sensitive to the costs and benefits that result
from its rules, and understands that complying with the requirements of
rule 17j-1 may impose costs on rule 17j-1 organizations and their
personnel. The Commission requested data on the costs and benefits of
rule 17j-1 in the Proposing Release, but none of the comment letters on
the Proposing Release provided specific estimates of any costs or
benefits of amending the rule. Nevertheless, as discussed below, the
Commission believes that the amendments to rule 17j-1 will improve the
regulation of personal investment activities and that the benefits to
investors justify the costs of compliance with the rule. Investors also
should benefit from the additional disclosure of information about
policies of rule 17j-1 organizations concerning personal investment
activities.
The amendments to rule 17j-1 require: (i) a fund's board, including
a majority of independent directors on the board, to approve the fund's
code and the code of any investment adviser or principal underwriter of
the fund as well as any material changes to those codes; (ii) the
management of a 17j-1 organization to provide the fund's board an
annual report describing issues that arose under the code during the
previous year; (iii) each access person to file with his or her rule
17j-1 organization an initial and annual holdings report; and (iv) all
investment personnel to obtain approval from the fund or investment
adviser before investing in an IPO or private placement. The amendments
also clarify certain provisions of rule 17j-1. Amendments to disclosure
forms under the Securities Act and the Investment Company Act require
funds to make available to the public information about the policies of
rule 17j-1 organizations regarding personal investment activities.
B. Benefits
The Commission believes that the rule amendments adopted today will
yield important benefits for investors. The amendments to rule 17j-1
are designed to improve the oversight and monitoring of personal
trading activities. In addition, the amendments to disclosure forms
under the Securities Act and Investment Company Act will allow the
public, including the financial media and market professionals, to
obtain information on rule 17j-1 organizations' policies regarding
personal investment activities.
These regulations will allow rule 17j-1 organizations more quickly
to detect conflicts of interest that may arise from personal trading
activities and help prevent subsequent conduct that could defraud the
fund. Specifically, the rule's requirement that each fund board approve
the codes of ethics of the fund and its investment advisers and
principal underwriters will allow fund directors to better oversee the
personal investment activities of fund personnel. The requirement that
management of a rule 17j-1 organization annually provide a written
report to the board on issues raised under its code of ethics will give
the board the opportunity to evaluate the effectiveness of the codes
and procedures and the manner in which they have been implemented.
The requirement that each access person provide an initial and
annual holdings report to his or her rule 17j-1 organization will allow
the organization to better monitor the conflicts of interest that may
arise when an access person participates in investment decisions for
the fund that involve securities the access person holds in his or her
portfolio. The annual holdings report requirement also will enable rule
17j-1 organizations to monitor whether access persons are filing
accurate quarterly transaction reports. In addition, the annual report
will allow the rule 17j-1 organization and the Commission's examination
staff to view the full scope of an access person's current securities
holdings without having to sort through multiple years of transaction
reports. Finally, the requirement that investment personnel pre-clear
their investments in IPOs and private placements will allow funds and
advisers to review carefully the personal investment activities that
create the greatest opportunities for fraud and to address any
potential conflicts of interest that could result from these
investments before they arise.
C. Costs
Several commenters who addressed the proposed amendments to rule
17j-1 suggested that the Commission modify the rule to simplify its
application and reduce compliance burdens, in order to reduce costs for
rule 17j-1 organizations. We have evaluated these comments and
determined that it is appropriate to adopt the amendments to rule 17j-1
with a number of changes that simplify the rule for rule 17j-1
organizations. The adopted amendments, for example, simplify the
compliance requirements of rule 17j-1 organizations by extending the
exception from the requirement to have a code of ethics to cover any
fund that does not invest in covered securities as defined in the rule.
We estimate that approximately 5,226 rule 17j-1 organizations would
be required to comply with rule 17j-1. Those organizations include
approximately: (i) 3,900 active
[[Page 46830]]
registered investment companies; (ii) 901 investment advisers to funds;
and (iii) 425 principal underwriters of funds.100 The number
of rule 17j-1 organizations is based on staff estimates of the number
of entities that must comply with rule 17j-1 and data available for
1998.101 Other estimates are based on the staff's experience
and discussions with mutual fund organizations.
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\100\ The estimated number of respondents may overstate the
number of entities actually required to comply with the rule's
requirements because money market funds, funds that invest only in
securities excluded from the definition of ``covered security'' in
rule 17j-1, and some investment advisers, principal underwriters,
and access persons to those funds, do not have to comply with the
rule's requirements concerning codes of ethics and transactions and
holdings reports. See amended rule 17j-1(c)(1); 17j-1(d)(2)(i).
\101\ Although the Proposing Release requested it, none of the
comment letters provided data pertaining to the cost of complying
with rule 17j-1.
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Rule 17j-1 Organizations. Funds may incur additional expenses in
the first year after the amendments become effective because the board
of directors will have to approve the codes of the fund, its investment
adviser and principal underwriter.102 The Commission
believes these expenses will be minimal because all rule 17j-1
organizations already are required to have adopted codes of
ethics.103 In addition, we have allowed fund boards one year
in which to comply with this requirement, which will allow boards to
consider the codes during one of their regularly scheduled
meetings.104 After initial approval, fund boards will be
required to approve only material changes to the codes.105
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\102\ Because the amendments to rule 17j-1 expand the types of
funds that are exempt from rule 17j-1, in certain cases a rule 17j-1
organization's costs could decrease under the amended rule.
\103\ See current rule 17j-1(b)(1).
\104\ We understand that fund directors generally receive
compensation on the basis of the number of meetings that they
attend. Therefore, no additional payment would be required for work
performed during a regularly scheduled meeting.
\105\ See amended rule 17j-1(c)(1)(ii).
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Under the amendments, a rule 17j-1 organization also could incur
additional costs in producing and filing the annual issues and
certification report for the fund's board. We estimate that the report
would take each rule 17j-1 organization approximately 3 hours to
prepare, for an annual cost to the organization of approximately $315
and a total annual cost to the industry of approximately
$1,646,190.106
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\106\ The cost estimate is based on our estimate that the report
would take 2 hours of professional time (at $150 per hour) and 1
hour of support staff time (at $15 per hour) to prepare.
The amendments also require the procedures instituted by rule
17j-1 organizations to require review of transaction and holdings
reports. The Commission believes that most funds already have review
procedures in place and the cost of implementing additional
procedures to review transaction and holdings reports would not be
significant.
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The amendments also require the fund to disclose that the fund, its
investment adviser and principal underwriter have adopted codes of
ethics, and require each fund to file a copy of the applicable codes
with the Commission. We estimate that the cost to funds of these
requirements in the first year after the amendments are adopted would
be $1,263,600.107 Funds would be required to file codes in
subsequent years only to the extent that the codes had been materially
amended.
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\107\ The cost of including this disclosure in a post-effective
amendment and filing the codes of ethics would be minimal for funds
that submit their own filings through EDGAR. Funds that use outside
contractors to submit EDGAR filings would incur some additional cost
in filing the codes as exhibits. We estimate that approximately 40
percent of funds submit their own EDGAR filings. Thus, approximately
2,340 funds use outside contractors. We estimate that funds using
outside contractors would file an average of 36 pages of exhibits at
an average cost of $15 per page, for a total cost to funds of
$1,263,600 (2,340 x 36 x $15 = $1,263,600) in the first year
after the amendments to rule 17j-1 become effective.
---------------------------------------------------------------------------
Finally, funds and advisers will have to maintain a written record
of any approvals permitting investment personnel to purchase securities
in an IPO or private placement. Many funds and advisers currently
prohibit investment personnel from IPO investments and require pre-
clearance of investments in private placement offerings.108
For those funds and advisers that would have to begin maintaining
approval records, we estimate the review and documentation process
would cost approximately $750 per organization each year, for a total
annual cost to the industry of $900,000.109
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\108\ See infra note 118.
\109\ This estimate assumes that each fund and adviser will
receive, on average, 10 applications for review each year, each of
which will take, on average, approximately 0.5 hours of professional
time (at $150 per hour) to review (and, if necessary, document), for
an annual cost of $750 per organization (5 x $150 = $750). These
numbers may vary considerably depending on the fund or adviser and
its personnel. The estimated annual cost of review and documentation
is equal to the number of funds and advisers that must begin review
multiplied by the number of hours per organization to review
multiplied by the cost per hour to review, for a total of $900,000
(1,200 x 5 x $150 = $900,000).
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Access Persons. Rule 17j-1 currently requires access persons to
file quarterly transaction reports. The amendments to the rule require
access persons to file initial holdings reports when they become access
persons and annual holdings reports thereafter.110
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\110\ We have assumed that a new access person who files an
initial holdings report would not have to file an annual holdings
report in the same year. An access person may, however, have to file
an initial and annual holdings report in the same year if the rule
17j-1 organization requires all access persons to file reports by
the same date each year.
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These amendments will impose additional costs on access persons
only to the extent that their rule 17j-1 organization currently does
not impose similar reporting requirements. A 1995 survey of members by
the ICI found that a majority of fund complexes already require some
form of reporting similar to that adopted in the
amendments.111 Based on the ICI Survey, we estimate that the
rule amendments would require approximately 67,518 access persons at
approximately 4,703 rule 17j-1 organizations to begin filing annual
holdings reports.112 We further estimate
[[Page 46831]]
that it would take an access person, on average, 0.5 hours of
professional time to complete an annual report, for an estimated total
annual cost to the industry of $5,063,850.113
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\111\ Sixty-six percent of member fund complexes responded to
the ICI Survey. ICI Survey, supra note 49, at 1. The Survey
indicated that 66 percent of the fund complexes responding adopted
the ICI Advisory Group Report recommendation that investment
personnel disclose all personal securities holdings when they begin
employment and annually thereafter. Id. at 30-31. An additional 11
percent of the responding fund complexes stated that they had
adapted the disclosure requirements to their circumstances. Some of
these adaptations have imposed more frequent reporting requirements
or extended reporting requirements to all access persons. Id.
\112\ We estimate that 275 of the 5,226 rule 17j-1 organizations
are new this year. Access persons at those organizations would file
an initial holdings report in the first year rather than an annual
holdings report. Of the remaining 4,951 existing rule 17j-1
organizations, we estimate that 66 percent already have implemented
initial and annual holdings report requirements for investment
personnel, see supra note 111, and that investment personnel
represent half of the access persons at these organizations.
Therefore, the amendments would impose new reporting requirements on
only half of the access persons at 66 percent of existing
organizations. Based on the ICI Survey, we estimate that 5 percent
of existing organizations currently require all access persons to
submit initial and annual holdings reports. Therefore, the
amendments would not impose new reporting requirements on any of the
access persons at those organizations. (We do not know the precise
percentage of funds that impose reporting requirements on all access
persons, see supra note 111, so we have estimated 5 percent as the
approximate midpoint of the 11 percent range of funds that adapted
the reporting recommendations of the ICI Advisory Group Report.) We
estimate that the remaining 29 percent of organizations (100 - (66 +
5) = 29) currently do not require any access persons to make
personal holdings disclosures comparable to those required by the
amendments to rule 17j-1. Therefore, the amendments would impose new
reporting requirements on all the access persons at those
organizations.
We estimate that, on average, a rule 17j-1 organization will
have approximately 24 access persons (22 of whom would file an
annual holdings report, and 2 of whom are new and would file an
initial holdings report). Therefore, we estimate that the number of
access persons who would have to begin filing annual reports as a
result of the amendments to rule 17j-1 equals the sum of: all
continuing access persons at 29 percent of 4,951 existing rule 17j-1
organizations (22 x 1,435 = 31,570) plus half of continuing access
persons at 66 percent of existing rule 17j-1 organizations (11 x
3,268 = 35,948); or a total of 67,518 access persons.
\113\ The estimated cost to the industry resulting from the
rule's annual holdings report requirement equals the number of
continuing access persons multiplied by the number of hours required
to complete the report multiplied by the hourly cost of completing
the report (67,518 x 0.5 x $150 = $5,063,850). The estimated
cost of professional time ($150) is an average and could be
significantly higher or lower for individual rule 17j-1
organizations and their access persons.
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Initial reports are required to be provided only by persons who
become access persons after the effective date of the
amendments.114 The Commission estimates that the amendments
to rule 17j-1 will result in approximately 10,218 new access persons
having to file initial holdings reports each year.115
Assuming the initial holdings report will take approximately 1 hour of
professional time to prepare, we estimate an annual total cost to the
industry of $1,532,700.116
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\114\ See supra note 98.
\115\ The estimated number of new access persons who would file
initial holdings reports as a result of the amendments to rule 17j-1
equals the number of new access persons each year at existing rule
17j-1 organizations that do not have an initial holdings report
requirement plus the number of new access persons at new
organizations that do not have an initial holdings report
requirement. Based on the ICI Survey, see supra note 112, we
estimate the number of access persons each year who would have to
submit an initial holdings report as a result of amendments to rule
17j-1 equals the sum of: all new access persons at 29 percent of
4,951 existing rule 17j-1 organizations (2 x 1,435); all access
persons at 29 percent of 275 new rule 17j-1 organizations (24 x 79
= 1,896); half of new access persons at 66 percent of 4,951 existing
rule 17j-1 organizations (1 x 3,268 = 3,268); and half of access
persons at 66 percent of 275 new rule 17j-1 organizations (12 x
182); for a total of 10,218 access persons.
\116\ The estimated cost to the industry of filing initial
holdings reports equals the number of access persons required to
file reports multiplied by the number of hours required to complete
the report multiplied by the hourly cost to complete the report
(10,218 x 1 x $150 = $1,532,700).
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Investment Personnel. The requirement that investment personnel
obtain approval before investing in an IPO or private placement should
impose minimal costs on those individuals for at least three reasons.
First, the requirement may result in restrictions on their purchases of
two types of offerings, but the provision does not restrict them from
participating in the vast majority of investment opportunities. Second,
as discussed above, few individuals have access to IPOs and private
placements unless they have substantial accounts with a broker or may
be in a position to direct business to the broker or
issuer.117 Therefore, few investment personnel appear likely
to be given an opportunity to purchase securities in an IPO or private
placement that does not raise a serious conflict with the fund. Third,
most fund complexes already prohibit these activities.118
Although the Commission cannot quantify the costs to investment
personnel associated with the pre-clearance provision because we cannot
verify the number of investment personnel who invest in IPOs and
private placements, we believe that any costs of the provision to
investment personnel will be minimal and will be greatly outweighed by
the benefits to investors of restricting these potentially fraudulent
opportunities.
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\117\ See supra note 51 and accompanying text.
\118\ According to the ICI Survey, 72 percent of fund complexes
that responded to the Survey prohibit investment personnel from
acquiring any securities in an IPO. In addition, approximately 14
percent of responding fund complexes have adapted the prohibition to
their circumstances, in some cases adopting broader prohibitions,
such as prohibiting purchases of securities in secondary market
transactions or extending the prohibition to all access persons or
all employees. ICI Survey, supra note 49, at 15-16. Approximately 69
percent of fund complexes responding to the Survey stated that they
require prior approval before investment personnel may purchase
securities in a private placement. An additional 14 percent of
responding fund complexes stated that they have adapted this
requirement to their situations, in some cases making the
restrictions broader, such as by applying it to all access persons
or employees in certain cases. Id. at 17-18. We estimate that after
the amendments to rule 17j-1 become effective, investment personnel
in approximately 25 percent of fund complexes will be subject to the
restrictions on purchases of IPOs and private placements for the
first time.
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Issuers. We also believe that the pre-approval provision will
result in minimal, if any, costs to issuers selling securities in IPOs
or private placements. These offerings are often oversubscribed, and we
expect that other purchasers will replace investment personnel who
might otherwise invest in the offerings.119
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\119\ See supra note 51 of this release. We are unable to
quantify the number of investment persons who purchase securities in
IPOs and private placements or the frequency of those purchases. The
number may vary significantly among individual funds or advisers.
---------------------------------------------------------------------------
Based on the estimates discussed above, we estimate that in the
first year after the effective date, the costs of complying with the
amendments to rule 17j-1 will be $10,406,340. In later years we
anticipate these costs will decrease because funds will have to file
codes again with the Commission only if the codes have been materially
amended.
VI. Effects on Competition, Efficiency and Capital Formation
As discussed above, we anticipate that the amendments to rule 17j-1
will not result in a major increase in costs to funds or fund
investors. We also have considered, in addition to the protection of
investors, whether the provisions adopted today will promote
efficiency, competition, or capital formation.
VII. Paperwork Reduction Act
Certain provisions of the amendments to rule 17j-1 and the
conforming amendments to rule 204-2 under the Advisers Act contain
``collection of information'' requirements within the meaning of the
Paperwork Reduction Act (``PRA'').120 Because the Proposing
Release was published in 1995, prior to the effective date of the 1995
amendments to the PRA, the Proposing Release did not contain a separate
section requesting comment on the collection of information burdens
imposed by the proposed amendments, as required by the
PRA.121 The Proposing Release did, however, request comment
regarding the specific reporting and recordkeeping requirements
contained in the proposed amendments to rule 17j-1.
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\120\ 44 U.S.C. 3501-3520.
\121\ Prior to the revisions to the PRA in 1995, requiring
disclosure of information to third parties was not a ``collection of
information'' under the PRA. See 44 U.S.C. 3502(3)(A) (definition of
``collection of information'').
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The collection of information requirements contained in the
amendments were submitted to the Office of Management and Budget
(``OMB'') for review pursuant to section 3507(d) of the PRA. OMB
approved the PRA submission with respect to these amendments and
assigned OMB control numbers with respect to the rules and forms
amended by this release.122 We received an extension of the
OMB approval of the collection of information for rule 17j-1 last
year.123 The collection of information requirements are in
accordance with section 3507 of the PRA. An agency may not conduct or
sponsor, and a person is not required to respond to, a collection of
information unless the agency displays a valid OMB control number.
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\122\ OMB control numbers are as follows: rule 17j-1 (3235-0224,
expires Oct. 31, 2001); rule 204-2 (3235-0278, expires Apr. 30,
2000); Form N-1A (3235-0307, expires May 31, 2000); Form N-2 (3235-
0026, expires Oct. 31, 2001); Form N-3 (3235-0316, expires Mar. 31,
2000); Form N-5 (3235-0169, expires Oct. 31, 2001); Form N-8B-2
(3235-0186, expires Oct. 31, 2001); and Form S-6 (3235-0184, expires
Mar. 31, 2002).
\123\ As required under any request for extension of approval,
the Commission sought comment on the collection of information. See
Existing Collection; Comment Request, OMB Control No. 3235-0224 [63
FR 37606 (July 13, 1998)]; and Submission for OMB Review; Comment
Request, OMB Control No. 3235-0224 [63 FR 50608 (Sept. 22, 1998)].
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As described in more detail above and in the Proposing Release, the
collections of information under the rule and form amendments are
necessary for funds to monitor potential conflicts of interest, to
[[Page 46832]]
facilitate the effective oversight of personal investment activities by
a fund and our examinations staff, to provide the fund and the
Commission with information regarding compliance with rule 17j-1, and
to disclose information to investors about a fund's policies concerning
personal investment activities. If the records required to be kept
pursuant to the rule are requested by Commission examiners, they will
be kept confidential to the extent permitted by relevant statutory and
regulatory provisions. Information required by Form N-1A, Form N-2,
Form N-3, Form N-5, Form N-8B-2, and Form S-6 and disclosed in a
registration statement, is public, and we do not keep it confidential.
The amendments to rule 17j-1 as adopted contain two collection of
information requirements in addition to those in the proposed
amendments. The adopted amendments require each access person to
provide an annual holdings report listing all covered securities the
access person beneficially owned at the end of the previous calendar
year and all accounts in which securities are held for the benefit of
the access person.124 The annual holdings report requirement
imposes an additional paperwork burden on rule 17j-1 organizations and
their access persons only to the extent that these organizations do not
currently require their access persons to file this
information.125 If an access person already submits
equivalent information to his or her rule 17j-1 organization, the
access person will simply have to confirm in writing the accuracy of
that information to satisfy the annual holdings report requirement
under rule 17j-1.126
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\124\ The Proposing Release requested comment on an annual
holdings report and whether an annual holdings report would impose
an undue burden on persons required to file the report. See
Proposing Release, supra note 9, at n.42 and accompanying text.
\125\ See supra notes 111-12 and accompanying text.
\126\ The amendments also require access persons to disclose two
new items of information in their quarterly transaction and initial
holdings reports: the name of any broker, dealer or bank with whom
they maintain a securities account, and the date the report is
filed. Amended rule 17j-1(d)(1)(i)(B), (ii)(B). We believe this
information will take little additional time to disclose.
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The amendments to rule 17j-1 also require funds and their advisers
to retain a written record of any decision to permit investment
personnel to purchase securities in an IPO or private placement and the
reasons supporting the approval.127 This requirement imposes
additional burdens on funds and advisers only to the extent the fund or
adviser does not currently prohibit investments in IPOs or require pre-
clearance of investments in private placements.128
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\127\ The Proposing Release sought comment regarding specific
restrictions on personal investment activities, including
prohibition on the purchase of securities in an IPO. See supra note
47.
\128\ See supra note 118. Because this requirement and the
requirement for access persons to provide an annual holdings report
affect the paperwork burden estimate, the Commission has filed a
``Paperwork Reduction Act Change Worksheet'' with OMB to reflect the
changes in the annual reporting burden.
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We estimate that each year 275 new rule 17j-1 organizations each
will expend 8 hours to formulate and provide codes of ethics for an
annual total of 275 responses and 2,200 burden hours (275 x 8 =
2,200). We also estimate that the managements of 5,226 rule 17j-1
organizations 129 each will expend 3 hours annually to
provide the fund board with an annual issues and certification report
for a total of 5,226 responses and 15,678 burden hours (5,226 x 3 =
15,678). We estimate that in the first year after the amendments to
rule 17j-1 become effective, each fund will require 0.25 hours to
prepare the required disclosure regarding the appropriate codes of
ethics, for a total of 3,900 responses and 975 burden hours (3,900 x
0.25 = 975).130
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\129\ See supra note 100 and accompanying text for a discussion
of the estimated number of funds, and investment advisers and
principal underwriters to funds.
\130\ As noted above, funds should have to prepare disclosures
regarding codes of ethics after the initial disclosure only to the
extent the codes are materially amended.
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We estimate that 103,800 access persons 131 each will
spend 0.5 hours filing one quarterly transaction report per year, for a
total of 103,800 responses and 51,900 burden hours (103,800 x 0.5 =
51,900).132 We estimate that each year 16,502 new access
persons each will expend 1 hour to file an initial holdings report for
a total of 16,502 responses and 16,502 burden hours 133 and
each of 108,922 existing access persons will expend 0.5 hours to file
an annual holdings report, for a total of 108,922 responses and 54,461
burden hours (108,922 x 0.5 = 54,461).134
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\131\ See supra note 112 for an estimate of the average number
of access persons at each 17j-1 organization. Under amended rule
17j-1, access persons of investment advisers to funds are exempt
from filing quarterly transaction reports if the reports would
duplicate information provided under rule 204-2 of the Advisers Act.
Amended rule 17j-1(d)(2)(v). Thus, we estimate that the number of
access persons filing quarterly transaction reports is equal to the
average number of access persons for each rule 17j-1 organization
multiplied by the total number of funds and principal underwriters
of funds (24 x (3900 + 425) = 103,800).
\132\ The number of access persons who are required to file
quarterly transaction reports will vary depending on the personal
investment activities of each access person. In addition, amended
rule 17j-1 contains several exceptions to filing quarterly
transaction reports, including an exception if the report would
duplicate information contained in broker trade confirmations or
account statements received by the rule 17j-1 organization. Amended
rule 17j-1(d)(2)(v). Although a number of access persons may, on
average, have transactions to report during more than one quarter
each year, many access persons may not have to provide a quarterly
transaction report because their rule 17j-1 organizations have
received the information in a broker trade confirmation or account
statement. Accordingly, we estimate that each access person, on
average, would file one quarterly transaction report each year.
Estimates concerning quarterly transaction reports are not included
in the cost-benefit analysis because access persons currently are
required to file quarterly transaction reports under rule 17j-1. See
current rule 17j-1(c)(1), (2).
\133\ We estimate that the number of access persons who would
have to file initial holdings reports each year equals the average
number of access persons at each new rule 17j-1 organization (275
x 24 = 6,600) plus the average number of new access persons at
existing rule 17j-1 organizations (4,951 x 2 = 9,902), for a total
of 16,502 (6,600 + 9,902 = 16,502). See supra note 112 and
accompanying text.
\134\ The number of access persons filing an annual report would
not include new access persons. See supra note 110. Thus, we
estimate that the number of access persons filing an annual report
each year equals the number of existing rule 17j-1 organizations
(5,226 - 275 = 4,951) multiplied by the average number of continuing
access persons per organization (24 - 2 = 22), for a total of
108,922 (4,951 x 22 = 108,922).
---------------------------------------------------------------------------
The Commission estimates that 5,226 rule 17j-1 organizations each
will expend 2 hours to maintain records of codes of ethics, records of
violations of codes of ethics, reports by access persons, and issues
and certification reports, for a total of 5,226 responses and 10,452
burden hours (5,226 x 2 = 10,452). We also estimate that each of the
approximately 1,200 funds and advisers that currently do not prohibit
investment personnel from purchasing securities in an IPO would take,
on average, approximately 0.25 hours to complete each of 3 responses
each year to document approvals of IPO purchases, for a total of 3,600
responses and 900 burden hours (1,200 x 0.25 x 3 =
900).135 Finally, we estimate that 4,801 funds and advisers
would make, on average, 3 responses each year to document approvals of
investment in private placement offerings, for a total of 14,403
responses and 3,601 burden hours (4,801 x 0.25 x 3 = 3,601).
---------------------------------------------------------------------------
\135\ This estimate assumes that 75 percent of funds and
advisers currently prohibit investment personnel from investing in
IPOs. See supra note 118.
---------------------------------------------------------------------------
The Commission therefore estimates the total number of annual
responses required by the rule is 261,854, and the total annual burden
of the collection of information requirements in the first year is
156,669 hours. This estimate represents an increase of 82,099 hours
from the current estimate of 74,570
[[Page 46833]]
burden hours. The increase is attributable primarily to the annual
holdings report requirement, the documentation of approvals for
investments in IPOs and private placements, and adjustments due to an
increase in rule 17j-1 organizations reflected in the updated number of
organizations.136
---------------------------------------------------------------------------
\136\ We also did not adopt a proposed exception to the initial
holdings report requirement. The proposed amendments would have
excepted access persons from filing initial holdings reports if the
information would duplicate information already maintained by the
person's rule 17j-1 organization. Under the amended rule, all new
access persons must file an initial holdings report. As discussed in
note 34 supra, however, an access person may satisfy the requirement
by simply confirming information required to be in the report that
is maintained by the person's rule 17j-1 organization. This change
from the proposed amendments accounts for the remainder of the
increase in burden hours.
---------------------------------------------------------------------------
In addition to the annual hour burden, we estimate that some funds
will incur costs to file the codes of the fund and its investment
adviser and principal underwriter. As discussed above, a fund that
submits its own EDGAR filings will incur costs associated with the
annual hourly burden. Funds that use an outside contractor to submit
filings will incur costs for that service. We have estimated that the
cost of filing codes for firms that use outside contractors would be
approximately $1,263,600 in the first year after the amendments become
effective.137 Thereafter, the annual cost would decrease
significantly because funds would only have to refile a code if the
code had been materially amended.
---------------------------------------------------------------------------
\137\ See supra note 107.
---------------------------------------------------------------------------
VIII. Summary of Final Regulatory Flexibility Analysis
A summary of the Initial Regulatory Flexibility Analysis (``IRFA'')
regarding the proposed amendments, which was prepared in accordance
with 5 U.S.C. 603, was published in the Proposing Release. No comments
were received on the IRFA. We have prepared a Final Regulatory
Flexibility Analysis (``FRFA'') in accordance with 5 U.S.C. 604
relating to the adopted amendments.
The FRFA discusses the need for, and objectives of, the amendments
to rule 17j-1. The FRFA states that rule 17j-1 currently prohibits
fraud by fund affiliates and certain other persons in connection with
their personal transactions in securities held or to be acquired by the
fund, requires funds and their investment advisers and principal
underwriters to adopt codes of ethics containing provisions reasonably
necessary to prevent fund personnel from engaging in conduct prohibited
by the rule, and requires fund personnel to report their personal
securities transactions to their employers. The FRFA further states
that the amendments are designed to enhance the board of directors'
oversight of the policies governing personal transactions in securities
by investment company personnel, help fund compliance personnel and the
Commission's examinations staff in monitoring potential conflicts of
interest and detecting potentially abusive activities, and make
available to the public additional information about these policies.
The FRFA estimates that out of approximately 3,900 funds registered
with the Commission, a total of approximately 732 would be considered
small entities.138 The FRFA also states that investment
advisers and principal underwriters of registered funds would be
required to comply with certain amendments to rule 17j-1. The FRFA
estimates that (i) out of approximately 901 investment advisers
registered with the Commission that advise funds, a total of
approximately 265 would be considered small entities 139 and
(ii) out of approximately 425 principal underwriters to funds, a total
of approximately 272 would be considered small entities.140
The FRFA indicates that the amendments to rule 17j-1 would affect small
entities in the same manner as other entities subject to the rule.
---------------------------------------------------------------------------
\138\ As defined in rules adopted under the Investment Company
Act for purposes of the Regulatory Flexibility Act, a small entity
is an investment company with net assets of $50 million or less as
of the end of its most recent fiscal year. 17 CFR 270.0-10 (1997).
The Commission amended its definition of small entity under the
Investment Company Act for purposes of the Regulatory Flexibility
Act in 1998. See Definitions of ``Small Business'' or ``Small
Organization'' Under the Investment Company Act of 1940, the
Investment Advisers Act of 1940, the Securities Exchange Act of 1934
and the Securities Act of 1933, Securities Act Release No. 7548
(June 24, 1998), [63 FR 35508 (June 30, 1998)]. Because the IRFA for
this proposal relied on the earlier definition (which was broader),
the FRFA also relies on the earlier definition.
\139\ As defined in rules adopted under the Investment Advisers
Act for purposes of the Regulatory Flexibility Act, a small entity
is an investment adviser that manages assets with a total value of
$50 million or less, in discretionary or nondiscretionary accounts,
as of the end of its most recent fiscal year and does not render
other advisory services. 17 CFR 275.0-7 (1997). The FRFA relies on
the definition of ``small entity'' under the Investment Advisers Act
before it was amended in June 1998. See supra note 138.
\140\ As defined in rules under the Securities Exchange Act for
purposes of the Regulatory Flexibility Act, a small entity is a
broker or dealer that had total capital of less than $500,000 on the
date of its prior fiscal year. 17 CFR 240.0-10 (1997). The FRFA
relies on the definition of ``small entity'' under the Securities
Exchange Act before it was amended in June 1998. See supra note 138.
---------------------------------------------------------------------------
Finally, the FRFA states that in adopting the amendments to rule
17j-1, the Commission considered (a) the establishment of differing
rule requirements that take into account the resources available to
small entities; (b) the clarification, consolidation, or simplification
of the rule's requirements for small entities; (c) the use of
performance rather than design standards; and (d) an exemption from the
rule for small entities. The FRFA states that the Commission concluded
that different requirements for small entities would be inconsistent
with investor protection. In addition, the amendments to rule 17j-1
incorporate performance standards rather than design standards.
The FRFA is available for public inspection in File No. S7-25-95. A
copy may be obtained by contacting Penelope Saltzman, Senior Counsel,
Office of Regulatory Policy, Division of Investment Management, at
(202) 942-0690, Securities and Exchange Commission, 450 5th Street,
N.W., Washington, D.C. 20549-0506.
IX. Statutory Authority
The Commission is amending rule 17j-1 pursuant to the authority set
out in sections 17(j) and 38(a) of the Investment Company Act [15
U.S.C. 80a-17(j) and 80a-37(a)] and sections 206(4) and 211(a) of the
Advisers Act [15 U.S.C. 80b-6(4) and 80b-11(a)]. The amendments to
registration forms are adopted pursuant to the authority set out in
sections 6, 7(a), 10 and 19(a) of the Securities Act [15 U.S.C. 77f,
77g(a), 77j, 77s(a)], and sections 8(b), 24(a) and 38(a) of the
Investment Company Act [15 U.S.C. 80a-8(b), 80a-24(a) and 80a-37(a)].
The Commission is adopting amendments to rule 204-2 under the Advisers
Act pursuant to the authority set out in sections 204, 206(4) and
211(a) of the Advisers Act [15 U.S.C. 80b-4, 80b-6(4) and 80b-11(a).]
Text of Rule and Form Amendments
List of Subjects in 17 CFR Parts 239, 270, 274 and 275
Investment companies, Reporting and recordkeeping requirements,
Securities.
For the reasons set out in the preamble, Title 17, Chapter II of
the Code of Federal Regulations is amended as follows:
[[Page 46834]]
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for Part 270 is amended by adding the
following citation to read as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39,
unless otherwise noted;
* * * * *
Section 270.17j-1 is also issued under secs. 206(4) and 211(a),
Investment Advisers Act (15 U.S.C. 80b-6(4) and 80b-11(a));
* * * * *
2. Section 270.17j-1 is revised to read as follows:
Sec. 270.17j-1 Personal investment activities of investment company
personnel.
(a) Definitions. For purposes of this section:
(1) Access Person means:
(i) Any director, officer, general partner or Advisory Person of a
Fund or of a Fund's investment adviser.
(A) If an investment adviser is primarily engaged in a business or
businesses other than advising Funds or other advisory clients, the
term Access Person means any director, officer, general partner or
Advisory Person of the investment adviser who, with respect to any
Fund, makes any recommendation, participates in the determination of
which recommendation will be made, or whose principal function or
duties relate to the determination of which recommendation will be
made, or who, in connection with his or her duties, obtains any
information concerning recommendations on Covered Securities being made
by the investment adviser to any Fund.
(B) An investment adviser is ``primarily engaged in a business or
businesses other than advising Funds or other advisory clients'' if,
for each of its most recent three fiscal years or for the period of
time since its organization, whichever is less, the investment adviser
derived, on an unconsolidated basis, more than 50 percent of its total
sales and revenues and more than 50 percent of its income (or loss),
before income taxes and extraordinary items, from the other business or
businesses.
(ii) Any director, officer or general partner of a principal
underwriter who, in the ordinary course of business, makes,
participates in or obtains information regarding, the purchase or sale
of Covered Securities by the Fund for which the principal underwriter
acts, or whose functions or duties in the ordinary course of business
relate to the making of any recommendation to the Fund regarding the
purchase or sale of Covered Securities.
(2) Advisory Person of a Fund or of a Fund's investment adviser
means:
(i) Any employee of the Fund or investment adviser (or of any
company in a control relationship to the Fund or investment adviser)
who, in connection with his or her regular functions or duties, makes,
participates in, or obtains information regarding the purchase or sale
of Covered Securities by a Fund, or whose functions relate to the
making of any recommendations with respect to the purchases or sales;
and
(ii) Any natural person in a control relationship to the Fund or
investment adviser who obtains information concerning recommendations
made to the Fund with regard to the purchase or sale of Covered
Securities by the Fund.
(3) Control has the same meaning as in section 2(a)(9) of the Act
[15 U.S.C. 80a-2(a)(9)].
(4) Covered Security means a security as defined in section
2(a)(36) of the Act [15 U.S.C. 80a-2(a)(36)], except that it does not
include:
(i) Direct obligations of the Government of the United States;
(ii) Bankers' acceptances, bank certificates of deposit, commercial
paper and high quality short-term debt instruments, including
repurchase agreements; and
(iii) Shares issued by open-end Funds.
(5) Fund means an investment company registered under the
Investment Company Act.
(6) An Initial Public Offering means an offering of securities
registered under the Securities Act of 1933 [15 U.S.C. 77a], the issuer
of which, immediately before the registration, was not subject to the
reporting requirements of sections 13 or 15(d) of the Securities
Exchange Act of 1934 [15 U.S.C. 78m or 78o(d)].
(7) Investment Personnel of a Fund or of a Fund's investment
adviser means:
(i) Any employee of the Fund or investment adviser (or of any
company in a control relationship to the Fund or investment adviser)
who, in connection with his or her regular functions or duties, makes
or participates in making recommendations regarding the purchase or
sale of securities by the Fund.
(ii) Any natural person who controls the Fund or investment adviser
and who obtains information concerning recommendations made to the Fund
regarding the purchase or sale of securities by the Fund.
(8) A Limited Offering means an offering that is exempt from
registration under the Securities Act of 1933 pursuant to section 4(2)
or section 4(6) [15 U.S.C. 77d(2) or 77d(6)] or pursuant to rule 504,
rule 505, or rule 506 [17 CFR 230.504, 230.505, or 230.506] under the
Securities Act of 1933.
(9) Purchase or sale of a Covered Security includes, among other
things, the writing of an option to purchase or sell a Covered
Security.
(10) Security Held or to be Acquired by a Fund means:
(i) Any Covered Security which, within the most recent 15 days:
(A) Is or has been held by the Fund; or
(B) Is being or has been considered by the Fund or its investment
adviser for purchase by the Fund; and
(ii) Any option to purchase or sell, and any security convertible
into or exchangeable for, a Covered Security described in paragraph
(a)(10)(i) of this section.
(b) Unlawful Actions. It is unlawful for any affiliated person of
or principal underwriter for a Fund, or any affiliated person of an
investment adviser of or principal underwriter for a Fund, in
connection with the purchase or sale, directly or indirectly, by the
person of a Security Held or to be Acquired by the Fund:
(1) To employ any device, scheme or artifice to defraud the Fund;
(2) To make any untrue statement of a material fact to the Fund or
omit to state a material fact necessary in order to make the statements
made to the Fund, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice or course of business that
operates or would operate as a fraud or deceit on the Fund; or
(4) To engage in any manipulative practice with respect to the
Fund.
(c) Code of Ethics.
(1) Adoption and Approval of Code of Ethics.
(i) Every Fund (other than a money market fund or a Fund that does
not invest in Covered Securities) and each investment adviser of and
principal underwriter for the Fund, must adopt a written code of ethics
containing provisions reasonably necessary to prevent its Access
Persons from engaging in any conduct prohibited by paragraph (b) of
this section.
(ii) The board of directors of a Fund, including a majority of
directors who are not interested persons, must approve the code of
ethics of the Fund, the code of ethics of each investment adviser and
principal underwriter of the Fund, and any material changes to these
codes. The board must base its approval of a code and any material
changes to the code on a determination that the code
[[Page 46835]]
contains provisions reasonably necessary to prevent Access Persons from
engaging in any conduct prohibited by paragraph (b) of this section.
Before approving a code of a Fund, investment adviser or principal
underwriter or any amendment to the code, the board of directors must
receive a certification from the Fund, investment adviser or principal
underwriter that it has adopted procedures reasonably necessary to
prevent Access Persons from violating the investment adviser's or
principal underwriter's code of ethics. The Fund's board must approve
the code of an investment adviser or principal underwriter before
initially retaining the services of the investment adviser or principal
underwriter. The Fund's board must approve a material change to a code
no later than six months after adoption of the material change.
(iii) If a Fund is a unit investment trust, the Fund's principal
underwriter or depositor must approve the Fund's code of ethics, as
required by paragraph (c)(1)(ii) of this section. If the Fund has more
than one principal underwriter or depositor, the principal underwriters
and depositors may designate, in writing, which principal underwriter
or depositor must conduct the approval required by paragraph (c)(1)(ii)
of this section, if they obtain written consent from the designated
principal underwriter or depositor.
(2) Administration of Code of Ethics.
(i) The Fund, investment adviser and principal underwriter must use
reasonable diligence and institute procedures reasonably necessary to
prevent violations of its code of ethics.
(ii) No less frequently than annually, every Fund (other than a
unit investment trust) and its investment advisers and principal
underwriters must furnish to the Fund's board of directors, and the
board of directors must consider, a written report that:
(A) Describes any issues arising under the code of ethics or
procedures since the last report to the board of directors, including,
but not limited to, information about material violations of the code
or procedures and sanctions imposed in response to the material
violations; and
(B) Certifies that the Fund, investment adviser or principal
underwriter, as applicable, has adopted procedures reasonably necessary
to prevent Access Persons from violating the code.
(3) Exception for Principal Underwriters. The requirements of
paragraphs (c)(1) and (c)(2) of this section do not apply to any
principal underwriter unless:
(i) The principal underwriter is an affiliated person of the Fund
or of the Fund's investment adviser; or
(ii) An officer, director or general partner of the principal
underwriter serves as an officer, director or general partner of the
Fund or of the Fund's investment adviser.
(d) Reporting Requirements of Access Persons.
(1) Reports Required. Unless excepted by paragraph (d)(2) of this
section, every Access Person of a Fund (other than a money market fund
or a Fund that does not invest in Covered Securities) and every Access
Person of an investment adviser of or principal underwriter for the
Fund, must report to that Fund, investment adviser or principal
underwriter:
(i) Initial Holdings Reports. No later than 10 days after the
person becomes an Access Person, the following information:
(A) The title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership when the person became an Access Person;
(B) The name of any broker, dealer or bank with whom the Access
Person maintained an account in which any securities were held for the
direct or indirect benefit of the Access Person as of the date the
person became an Access Person; and
(C) The date that the report is submitted by the Access Person.
(ii) Quarterly Transaction Reports. No later than 10 days after the
end of a calendar quarter, the following information:
(A) With respect to any transaction during the quarter in a Covered
Security in which the Access Person had any direct or indirect
beneficial ownership:
(1) The date of the transaction, the title, the interest rate and
maturity date (if applicable), the number of shares and the principal
amount of each Covered Security involved;
(2) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(3) The price of the Covered Security at which the transaction was
effected;
(4) The name of the broker, dealer or bank with or through which
the transaction was effected; and
(5) The date that the report is submitted by the Access Person.
(B) With respect to any account established by the Access Person in
which any securities were held during the quarter for the direct or
indirect benefit of the Access Person:
(1) The name of the broker, dealer or bank with whom the Access
Person established the account;
(2) The date the account was established; and
(3) The date that the report is submitted by the Access Person.
(iii) Annual Holdings Reports. Annually, the following information
(which information must be current as of a date no more than 30 days
before the report is submitted):
(A) The title, number of shares and principal amount of each
Covered Security in which the Access Person had any direct or indirect
beneficial ownership;
(B) The name of any broker, dealer or bank with whom the Access
Person maintains an account in which any securities are held for the
direct or indirect benefit of the Access Person; and
(C) The date that the report is submitted by the Access Person.
(2) Exceptions from Reporting Requirements.
(i) A person need not make a report under paragraph (d)(1) of this
section with respect to transactions effected for, and Covered
Securities held in, any account over which the person has no direct or
indirect influence or control.
(ii) A director of a Fund who is not an ``interested person'' of
the Fund within the meaning of section 2(a)(19) of the Act [15 U.S.C.
80a-2(a)(19)], and who would be required to make a report solely by
reason of being a Fund director, need not make:
(A) An initial holdings report under paragraph (d)(1)(i) of this
section and an annual holdings report under paragraph (d)(1)(iii) of
this section; and
(B) A quarterly transaction report under paragraph (d)(1)(ii) of
this section, unless the director knew or, in the ordinary course of
fulfilling his or her official duties as a Fund director, should have
known that during the 15-day period immediately before or after the
director's transaction in a Covered Security, the Fund purchased or
sold the Covered Security, or the Fund or its investment adviser
considered purchasing or selling the Covered Security.
(iii) An Access Person to a Fund's principal underwriter need not
make a report to the principal underwriter under paragraph (d)(1) of
this section if:
(A) The principal underwriter is not an affiliated person of the
Fund (unless the Fund is a unit investment trust) or any investment
adviser of the Fund; and
(B) The principal underwriter has no officer, director or general
partner who serves as an officer, director or general partner of the
Fund or of any investment adviser of the Fund.
(iv) An Access Person to an investment adviser need not make a
[[Page 46836]]
quarterly transaction report to the investment adviser under paragraph
(d)(1)(ii) of this section if all the information in the report would
duplicate information required to be recorded under Secs. 275.204-
2(a)(12) or 275.204-2(a)(13) of this chapter.
(v) An Access Person need not make a quarterly transaction report
under paragraph (d)(1)(ii) of this section if the report would
duplicate information contained in broker trade confirmations or
account statements received by the Fund, investment adviser or
principal underwriter with respect to the Access Person in the time
period required by paragraph (d)(1)(ii), if all of the information
required by that paragraph is contained in the broker trade
confirmations or account statements, or in the records of the Fund,
investment adviser or principal underwriter.
(3) Review of Reports. Each Fund, investment adviser and principal
underwriter to which reports are required to be made by paragraph
(d)(1) of this section must institute procedures by which appropriate
management or compliance personnel review these reports.
(4) Notification of Reporting Obligation. Each Fund, investment
adviser and principal underwriter to which reports are required to be
made by paragraph (d)(1) of this section must identify all Access
Persons who are required to make these reports and must inform those
Access Persons of their reporting obligation.
(5) Beneficial Ownership. For purposes of this section, beneficial
ownership is interpreted in the same manner as it would be under
Sec. 240.16a-1(a)(2) of this chapter in determining whether a person is
the beneficial owner of a security for purposes of section 16 of the
Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules and
regulations thereunder. Any report required by paragraph (d) of this
section may contain a statement that the report will not be construed
as an admission that the person making the report has any direct or
indirect beneficial ownership in the Covered Security to which the
report relates.
(e) Pre-approval of Investments in IPOs and Limited Offerings.
Investment Personnel of a Fund or its investment adviser must obtain
approval from the Fund or the Fund's investment adviser before directly
or indirectly acquiring beneficial ownership in any securities in an
Initial Public Offering or in a Limited Offering.
(f) Recordkeeping Requirements.
(1) Each Fund, investment adviser and principal underwriter that is
required to adopt a code of ethics or to which reports are required to
be made by Access Persons must, at its principal place of business,
maintain records in the manner and to the extent set out in this
paragraph (f), and must make these records available to the Commission
or any representative of the Commission at any time and from time to
time for reasonable periodic, special or other examination:
(A) A copy of each code of ethics for the organization that is in
effect, or at any time within the past five years was in effect, must
be maintained in an easily accessible place;
(B) A record of any violation of the code of ethics, and of any
action taken as a result of the violation, must be maintained in an
easily accessible place for at least five years after the end of the
fiscal year in which the violation occurs;
(C) A copy of each report made by an Access Person as required by
this section, including any information provided in lieu of the reports
under paragraph (d)(2)(v) of this section, must be maintained for at
least five years after the end of the fiscal year in which the report
is made or the information is provided, the first two years in an
easily accessible place;
(D) A record of all persons, currently or within the past five
years, who are or were required to make reports under paragraph (d) of
this section, or who are or were responsible for reviewing these
reports, must be maintained in an easily accessible place; and
(E) A copy of each report required by paragraph (c)(2)(ii) of this
section must be maintained for at least five years after the end of the
fiscal year in which it is made, the first two years in an easily
accessible place.
(2) A Fund or investment adviser must maintain a record of any
decision, and the reasons supporting the decision, to approve the
acquisition by investment personnel of securities under paragraph (e),
for at least five years after the end of the fiscal year in which the
approval is granted.
PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933
PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940
3. The authority citation for Part 239 continues to read, in part,
as follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c,
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j,
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37,
unless otherwise noted.
* * * * *
4. The authority citation for Part 274 continues to read as
follows:
Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m,
78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.
5. Item 1 of Form N-1A [referenced in Secs. 239.15A and 274.11A] is
amended by revising paragraph (b)(3) to read as follows:
Form N-1A
* * * * *
Item 1. Front and Back Cover Pages
* * * * *
(b) * * *
(3) A statement that information about the Fund (including the SAI)
can be reviewed and copied at the Commission's Public Reference Room in
Washington, D.C., and that information on the operation of the Public
Reference Room may be obtained by calling the Commission at 1-202-942-
8090. State that reports and other information about the Fund are
available on the EDGAR Database on the Commission's Internet site at
http://www.sec.gov, and that copies of this information may be
obtained, after paying a duplicating fee, by electronic request at the
following E-mail address: publicinfo@sec.gov, or by writing the
Commission's Public Reference Section, Washington, D.C. 20549-0102.
* * * * *
6. Item 13 of Form N-1A [referenced in Secs. 239.15A and 274.11A]
is amended by adding paragraph (f) and an instruction to read as
follows:
Note: The text of Form N-1A does not, and the amendments to the
form will not, appear in the Code of Federal Regulations.
Form N-1A
* * * * *
Item 13. Management of the Fund
* * * * *
(f) Codes of Ethics. Provide a brief statement disclosing whether
the Fund and its investment adviser and principal underwriter have
adopted codes of ethics under rule 17j-1 of the Investment Company Act
[17 CFR 270.17j-1] and whether these codes of ethics permit personnel
subject to the codes to invest in securities, including securities that
may be purchased or held by the Fund.
Instruction: A Fund that is not required to adopt a code of ethics
under rule 17j-1 of the Investment Company Act is not required to
respond to this item.
* * * * *
7. Item 23 of Form N-1A [referenced in Secs. 239.15A and 274.11A]
is amended
[[Page 46837]]
by adding paragraph (p) and an Instruction to read as follows:
Form N-1A
* * * * *
Item 23. Exhibits
* * * * *
(p) Codes of Ethics. Any codes of ethics adopted under rule 17j-1
of the Investment Company Act [17 CFR 270.17j-1] and currently
applicable to the Fund (i.e., the codes of the Fund and its investment
advisers and principal underwriters). If there are no codes of ethics
applicable to the Fund, state the reason (e.g., that the Fund is a
Money Market Fund).
Instruction: A Fund that is a feeder fund also must file a copy of
all codes of ethics applicable to the master fund.
* * * * *
8. Item 18 of Form N-2 [referenced in Secs. 239.14 and 274.11a-1]
is amended by adding paragraph 5 and an instruction to read as follows:
Note: The text of Form N-2 does not, and the amendments to the
form will not, appear in the Code of Federal Regulations.
Form N-2
* * * * *
Item 18. Management
* * * * *
5. Codes of Ethics: Provide a brief statement disclosing whether
the Registrant and its investment adviser and principal underwriter
have adopted codes of ethics under Rule 17j-1 of the 1940 Act [17 CFR
270.17j-1] and whether these codes of ethics permit personnel subject
to the codes to invest in securities, including securities that may be
purchased or held by the Registrant. Also explain in the statement that
these codes of ethics can be reviewed and copied at the Commission's
Public Reference Room in Washington, D.C., that information on the
operation of the Public Reference Room may be obtained by calling the
Commission at 1-202-942-8090, that these codes of ethics are available
on the EDGAR Database on the Commission's Internet site at http://
www.sec.gov, and that copies of these codes of ethics may be obtained,
after paying a duplicating fee, by electronic request at the following
E-mail address: publicinfo@sec.gov, or by writing the Commission's
Public Reference Section, Washington, D.C. 20549-0102.
Instruction
A Registrant that is not required to adopt a code of ethics under
Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] is not required to
respond to this item.
* * * * *
9. Item 24 of Form N-2 [referenced in Secs. 239.14 and 274.11a-1]
is amended by adding new paragraph 2.r. to read as follows:
Form N-2
* * * * *
Item 24. Financial Statements and Exhibits
* * * * *
2. * * *
r. copies of any codes of ethics adopted under Rule 17j-1 under the
1940 Act [17 CFR 270.17j-1] and currently applicable to the Registrant
(i.e., the codes of the Registrant and its investment advisers and
principal underwriters). If there are no codes of ethics applicable to
the Registrant, state the reason (e.g., the Registrant is a Money
Market Fund).
* * * * *
10. Item 20 of Form N-3 [referenced in Secs. 239.17a and 274.11b]
is amended by adding paragraph (d) and an Instruction to read as
follows:
Note: The text of Form N-3 does not, and the amendments to the
form will not, appear in the Code of Federal Regulations.
Form N-3
* * * * *
Item 20. Management
* * * * *
(d) Provide a brief statement disclosing whether the Registrant and
its investment adviser and principal underwriter have adopted codes of
ethics under Rule 17j-1 of the 1940 Act [17 CFR 270.17j-1] and whether
these codes of ethics permit personnel subject to the codes to invest
in securities, including securities that may be purchased or held by
the Registrant. Also explain in the statement that these codes of
ethics can be reviewed and copied at the Commission's Public Reference
Room in Washington, D.C., that information on the operation of the
Public Reference Room may be obtained by calling the Commission at 1-
202-942-8090, that these codes of ethics are available on the EDGAR
Database on the Commission's Internet site at http://www.sec.gov, and
that copies of these codes of ethics may be obtained, after paying a
duplicating fee, by electronic request at the following E-mail address:
publicinfo@sec.gov, or by writing the Commission's Public Reference
Section, Washington, D.C. 20549-0102.
Instruction: A Registrant that is not required to adopt a code of
ethics under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] is not
required to respond to this item.
* * * * *
11. Item 28 of Form N-3 [referenced in Secs. 239.17a and 274.11b]
is amended by removing the word ``and'' at the end of paragraph
(b)(14), removing the period at the end of paragraph (b)(15) and in its
place adding a semicolon, removing the period at the end of paragraph
(b)(16) and in its place adding ``; and'', and adding new paragraph
(b)(17) to read as follows:
Form N-3
* * * * *
Item 28. Financial Statements and Exhibits
* * * * *
(b) * * *
(17) copies of any codes of ethics adopted under Rule 17j-1 under
the 1940 Act [17 CFR 270.17j-1] and currently applicable to the
Registrant (i.e., the codes of the Registrant and its investment
advisers and principal underwriters). If there are no codes of ethics
applicable to the Registrant, state the reason (e.g., the Registrant is
a Money Market Fund).
* * * * *
12. Item 3 of Form N-5 [referenced in Secs. 239.24 and 274.5] is
amended by removing the word ``investment'' both times that it appears
in the introductory text and adding paragraph (i) and an Instruction
after the Instruction to read as follows:
Note: The text of Form N-5 does not, and the amendments to the
form will not, appear in the Code of Federal Regulations.
Form N-5
* * * * *
Item 3. Policies with Respect to Security Investments
* * * * *
(i) Whether the registrant and its investment adviser and principal
underwriter have adopted codes of ethics under Rule 17j-1 of the
Investment Company Act of 1940 [17 CFR 270.17j-1] and whether these
codes of ethics permit personnel subject to the codes to invest in
securities, including securities that may be purchased or held by the
registrant. Also explain that these codes of ethics can be reviewed and
copied at the Commission's Public Reference Room in Washington, D.C.,
that information on the operation of the Public Reference Room may be
obtained by calling the Commission at 1-202-942-8090, that these codes
of ethics are available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov, and that copies of these
[[Page 46838]]
codes of ethics may be obtained, after paying a duplicating fee, by
electronic request at the following E-mail address: publicinfo@sec.gov,
or by writing the Commission's Public Reference Section, Washington,
D.C. 20549-0102.
Instruction: A registrant that is not required to adopt a code of
ethics under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] is not
required to respond to this item.
* * * * *
13. The Instructions As To Exhibits of Form N-5 [referenced in
Secs. 239.24 and 274.5] are amended by adding paragraph 13 to read as
follows:
Form N-5
* * * * *
Instructions as to Exhibits
* * * * *
13. Copies of any codes of ethics adopted under Rule 17j-1 under
the Investment Company Act of 1940 [17 CFR 270.17j-1] and currently
applicable to the registrant (i.e., the codes of the registrant and its
investment advisers and principal underwriters). If there are no codes
of ethics applicable to the registrant, state the reason (e.g., the
registrant is a Money Market Fund).
* * * * *
14. Item 52 of Form N-8B-2 [referenced in Sec. 274.12] is amended
by adding paragraph (e) and an Instruction to read as follows:
Note: The text of Form N-8B-2 does not, and the amendments to
the form will not, appear in the Code of Federal Regulations.
Form N-8B-2
* * * * *
Policy of Registrant
52. * * *
(e) Provide a brief statement disclosing whether the trust and its
principal underwriter have adopted codes of ethics under rule 17j-1 of
the Act [17 CFR 270.17j-1] and whether these codes of ethics permit
personnel subject to the codes to invest in securities, including
securities that may be purchased or held by the trust. Also explain
that these codes of ethics can be reviewed and copied at the
Commission's Public Reference Room in Washington, D.C., that
information on the operation of the Public Reference Room may be
obtained by calling the Commission at 1-202-942-8090, that these codes
of ethics are available on the EDGAR Database on the Commission's
Internet site at http://www.sec.gov, and that copies of these codes of
ethics may be obtained, after paying a duplicating fee, by electronic
request at the following E-mail address: publicinfo@sec.gov, or by
writing the Commission's Public Reference Section, Washington, D.C.
20549-0102.
Instruction: A trust that is not required to adopt a code of ethics
under Rule 17j-1 under the Act [17 CFR 270.17j-1] is not required to
respond to this item.
* * * * *
15. Part IX of Form N-8B-2 [referenced in Sec. 274.12] is amended
by adding paragraph A.(11) to read as follows:
Form N-8B-2
* * * * *
IX--Exhibits
A. * * *
(11) Copies of any codes of ethics adopted under rule 17j-1 under
the Act [17 CFR 270.17j-1] and currently applicable to the trust (i.e.,
the codes of the trust and its principal underwriters). If there are no
codes of ethics applicable to the trust, state the reason (e.g., the
trust invests only in direct obligations of the United States
Government).
* * * * *
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
16. The authority citation for Part 275 continues to read in part
as follows:
Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6a, 80b-11, unless otherwise noted.
* * * * *
17. Section 275.204-2 is amended by revising paragraph (a)(12)(i),
redesignating paragraphs (a)(12)(ii) and (a)(12)(iii) as paragraphs
(a)(12)(iii) and (a)(12)(iv), adding new paragraph (a)(12)(ii),
redesignating newly designated paragraph (a)(12)(iii)(B) as paragraph
(a)(12)(iii)(C), adding new paragraph (a)(12)(iii)(B), revising
paragraph (a)(13)(i), redesignating paragraphs (a)(13)(ii) and
(a)(13)(iii) as paragraphs (a)(13)(iii) and (a)(13)(iv), adding new
paragraph (a)(13)(ii), redesignating newly designated paragraphs
(a)(13)(iii)(B) and (a)(13)(iii)(C) as paragraphs (a)(13)(iii)(C) and
(a)(13)(iii)(D), and adding new paragraph (a)(13)(iii)(B) to read as
follows:
Sec. 275.204-2 Books and records to be maintained by investment
advisers.
(a) * * *
(12)(i) A record of every transaction in a security in which the
investment adviser or any advisory representative (as defined in
paragraph (a)(12)(iii)(A) of this section) of the investment adviser
has, or by reason of the transaction acquires, any direct or indirect
beneficial ownership, except:
(A) Transactions effected in any account over which neither the
investment adviser nor any advisory representative of the investment
adviser has any direct or indirect influence or control; and
(B) Transactions in securities that are: direct obligations of the
Government of the United States; bankers' acceptances, bank
certificates of deposit, commercial paper, and high quality short-term
debt instruments, including repurchase agreements; or shares issued by
registered open-end investment companies.
(ii) The record required by paragraph (a)(12)(i) of this section
must state the title and amount of the security involved; the date and
nature of the transaction (i.e., purchase, sale or other acquisition or
disposition); the price at which it was effected; and the name of the
broker, dealer, or bank with or through whom the transaction was
effected. Any record required by paragraph (a)(12)(i) of this section
also may contain a statement declaring that the record of the
transaction will not be construed as an admission that the investment
adviser or advisory representative has any direct or indirect
beneficial ownership in the security. A transaction must be recorded no
later than 10 days after the end of the calendar quarter in which the
transaction was effected. An investment adviser will be considered to
have made a record required by paragraph (a)(12)(i) of this section if:
(A) The investment adviser receives a broker trade confirmation or
account statement in the time period required by this paragraph
(a)(12)(ii);
(B) The broker trade confirmation, account statement or other
records of the investment adviser contains all the information required
by this paragraph (a)(12)(ii);
(C) The investment adviser keeps the broker trade confirmation,
account statement, and other records containing the information
required by this paragraph (a)(12)(ii); and
(D) All broker trade confirmations and account statements that are
printed on paper and kept under paragraph (a)(12)(ii)(C) of this
section are organized in a manner that allows easy access to and
retrieval of any particular confirmation or statement.
(iii) * * *
(B) Beneficial ownership will be interpreted in the same manner as
it would be under Sec. 240.16a-1(a)(2) of this chapter in determining
whether a person has beneficial ownership of a security for purposes of
section 16 of the
[[Page 46839]]
Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules and
regulations thereunder.
* * * * *
(13)(i) Notwithstanding the provisions of paragraph (a)(12) of this
section, an investment adviser that is primarily engaged in a business
or businesses other than advising registered investment companies or
other advisory clients, must maintain a record of every transaction in
a security in which the investment adviser or any advisory
representative (as defined in paragraph (a)(13)(iii)(A) of this
section) of the investment adviser has, or by reason of the transaction
acquires, any direct or indirect beneficial ownership, except:
(A) Transactions effected in any account over which neither the
investment adviser nor any advisory representative of the investment
adviser has any direct or indirect influence or control; and
(B) Transactions in securities that are: direct obligations of the
Government of the United States; bankers' acceptances, bank
certificates of deposit, commercial paper, and high quality short-term
debt instruments, including repurchase agreements; or shares issued by
registered open-end investment companies.
(ii) The record required by paragraph (a)(13)(i) of this section
must state the title and amount of the security involved; the date and
nature of the transaction (i.e., purchase, sale or other acquisition or
disposition); the price at which it was effected; and the name of the
broker, dealer or bank with or through whom the transaction was
effected. Any record required by paragraph (a)(13)(i) of this section
also may contain a statement declaring that the record of the
transaction will not be construed as an admission that the investment
adviser or advisory representative has any direct or indirect
beneficial ownership in the security. A transaction must be recorded no
later than 10 days after the end of the calendar quarter in which the
transaction was effected. An investment adviser will be considered to
have made a record required by paragraph (a)(13)(i) of this section if:
(A) The investment adviser receives a broker trade confirmation or
account statement in the time period required by this paragraph
(a)(13)(ii);
(B) The broker trade confirmation, account statement or other
records of the investment adviser contains all the information required
by this paragraph (a)(13)(ii);
(C) The investment adviser keeps the broker trade confirmation,
account statement, and other records containing the information
required by this paragraph (a)(13)(ii); and
(D) All broker trade confirmations and account statements that are
printed on paper and kept under paragraph (a)(13)(ii)(C) of this
section are organized in a manner that allows easy access to and
retrieval of any particular confirmation or statement.
(iii) * * *
(B) Beneficial ownership will be interpreted in the same manner as
it would be under Sec. 240.16a-1(a)(2) of this chapter in determining
whether a person has beneficial ownership of a security for purposes of
section 16 of the Securities Exchange Act of 1934 [15 U.S.C. 78p] and
the rules and regulations thereunder.
* * * * *
By the Commission.
Dated: August 20, 1999.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-22310 Filed 8-26-99; 8:45 am]
BILLING CODE 8010-01-P
