[Federal Register Volume 64, Number 78 (Friday, April 23, 1999)]
[Notices]
[Pages 20029-20030]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-10195]
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SECURITIES AND EXCHANGE COMMISSION
Submission for OMB Review; Comment Request
Upon Written Request, Copies Available From: Securities and Exchange
Commission, Office of Filings and Information Services, 450 5th Street,
NW, Washington, DC 20549
Extension:
Rule 10f-3 [17 CFR 270.10f-3], SEC File No. 270-237, OMB Control
No. 3235-0226
Notice is hereby given that, pursuant to the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange
Commission (``Commission'') has submitted to the Office of Management
and Budget (``OMB'') a request for extension and approval of the
collections of information discussed below.
Section 10(f) of the Investment Company Act of 1940 [15 U.S.C. 80a-
10(f)] (the ``Act'' or ``Investment Company Act'') prohibits a
registered investment company (``fund'') from purchasing any security
during an underwriting or selling syndicate if the fund has certain
relationships with a principal underwriter \1\ for the security
(``affiliated underwriter'').\2\ Congress enacted this provision in
1940 to protect funds and their investors by preventing underwriters
from ``dumping'' unmarketable securities on affiliated funds.\3\
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\1\ Principal underwriter is defined to mean (in relevant part)
an underwriter that, in connection with a primary distribution of
securities, (A) is in privity of contract with the issuer or an
affiliated person of the issuer, (B) acting alone or in concert with
one or more other persons, initiates or directs the formation of an
underwriting syndicate, or (C) is allowed a rate of gross
commission, spread, or other profit greater than the rate allowed
another underwriter participating in the distribution. 15 U.S.C.
80a-2(a)(29).
\2\ Section 10(f) prohibits the purchase if a principal
underwriter of the security is an officer, director, member of an
advisory board, investment adviser, or employee of the fund, or if
any officer, director, member of an advisory board, investment
adviser, or employee of the fund is affiliated with the principal
underwriter. 15 U.S.C. 80a-10(f).
\3\ See Investment Trusts and Investment Companies: Hearings on
S. 3580 Before a Subcomm. of the Senate Comm. on Banking and
Currency, 76th Cong., 3d Sess. 35 (1940) (statement of Commissioner
Healy).
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Under rulemaking authority under section 10(f), the Commission
adopted rule 10f-3 in 1958 and last amended the rule in 1997. Rule 10f-
3 currently permits a fund to purchase securities in a transaction that
otherwise would violate section 10(f) if, among other things:
(1) The securities either are registered under the Securities
Act of 1933, are municipal securities with certain credit ratings,
or are offered in certain private or foreign offerings;
(2) The offering involves a ``firm commitment'' underwriting;
(3) The fund (together with other funds advised by the same
investment adviser) purchases no more than 25 percent of the
offering;
(4) The fund purchases the securities from a member of the
syndicate other than the affiliated underwriter;
(5) If the securities are municipal securities, the purchase is
not a group sale; and
(6) The fund's directors have approved procedures for purchases
made in reliance on the rule and regularly review fund purchases to
determine whether they comply with these procedures.
These limitations are designed to ensure that the purchases are not
likely to raise the concerns that section 10(f) was enacted to address
and are consistent with the protection of investors.\4\
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\4\ See Exemption for the Acquisition of Securities During the
Existence of An Underwriting or Selling Syndicate, Investment
Company Act Release No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7,
1997)] (``1997 Adopting Release'').
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Among other conditions to the exemption, rule 10f-3 requires a
fund's board of directors to approve procedures that would ensure
compliance with the conditions of the rule and to approve changes to
these procedures as necessary. The board also must review rule 10-f
transactions on a quarterly basis. The rule requires funds to report,
on Form N-SAR, any transactions effected under the rule and to attach
to the report a written record of each transaction. The written record
must state (i) from whom the securities were acquired, (ii) the
identity of the underwriting syndicate's members, (iii) the terms of
the transactions, and (iv) the information or materials on which the
fund's board of directors has determined that the purchases were made
in compliance with procedures established by the board. In addition, a
fund must retain written records of the rule 10f-3 transactions and of
the quarterly transactional information reviewed by the board for six
years. These requirements are important not only because they provide a
built-in mechanism for fund boards to monitor compliance with the rule,
but also because they permit the Commission to review these materials
during fund inspections, monitor developments under the rule, and
consider whether to take enforcement action in appropriate cases.
These estimates of average coats are made solely for the purposes
of the Paperwork Reduction Act. The estimate is not derived from a
comprehensive or even a representative survey or study of the costs of
Commission rules.
The collection of information requirements (as well as other
requirements) of rule 10f-3 are designed to assure that appropriate
arrangements are in place to confirm the enforceability of the Act
against the fund. The records required to be maintained are reviewed by
the Commission in the course of its compliance and examination program,
and are used by fund directors to evaluate procedures and transactions
executed pursuant to the rule. The rule does not impose any separate
recordkeeping costs on funds because the records required to be
maintained already are required by section 31(a) of the Act and rules
31a-1 and 31a-2.
From our review of Form N-SAR filings, we estimate that 300 funds
rely on rule 10f-3 annually. We estimate that the board of directors of
each of those funds makes, on average, 1 response each year when it
approves procedures required by the rule. We estimate further that the
approval of such procedures would take on average, 1 hour of director
time (at $500 per hour) and 0.5 hours of professional time (at $150 per
hour) for 70 funds that do not purchase foreign or municipal
securities, and 1.5 hours of director time and 0.5 hours of
professional time for 230 funds that invest in these securities. Thus,
Commission staff estimates that the total annual reporting burden of
the rule's paperwork requirement is 565 hours, at a total annual cost
of $230,000.\5\
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\5\ This estimate is equal to the number of funds that do not
purchase foreign or municipal securities (70) multiplied by the
estimated annual cost of adopting or reviewing procedures for each
fund ((1 x $500 + (0.5 x $150) = $575) plus the number of funds that
invest in foreign or municipal securities (230) multiplied by the
estimated annual cost of adopting or reviewing procedures for each
fund ((1.5 x $500) + (0.5 x $150) = $825), for a total of $230,000
((70 x $575) + (230 x $825) = $230,000).
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The estimated burden hours are a decrease from the current
allocation of 670 hours. The decrease of 105 hours reflects a decrease
in the number of funds that have reported the purchase of securities in
reliance on rule 10f-3. The 1996 proposal to eliminate the
[[Page 20030]]
requirements that funds report information about rule 10f-3
transactions on Form N-SAR would not have led to a decrease in the
burden hours reportable for rule 10f-3 because the hours associated
with the reporting requirement are included in the burden hours
reported for Form N-SAR.
These estimates of average burden hours are made solely for the
purposes of the Paperwork Reduction Act. The estimate is not derived
from a comprehensive or even a representative survey or study of
Commission rules.
Commission staff estimates that there is no cost burden for rule
10f-3 other than the $230,000 in annual costs associated with the
respondent reporting burden. The procedures to be developed and revised
as necessary require no start-up or capital costs. Additionally, the
development of and occasional review of procedures would be part of
customary and usual business practice to ensure compliance with
applicable laws and regulations.
These estimates of average costs are made solely for the purposes
of the Paperwork Reduction Act. The estimate is not derived from a
comprehensive or even a representative survey or study of the costs of
Commission rules.
It is mandatory that funds provide the information required by rule
10f-3 to obtain the benefit of the exemption provided by the rule.
The information required by rule 10f-3 that is reported on Form N-
SAR is public and therefore not confidential. The written record of the
rule 10f-3 transactions, the quarterly transactional information
reviewed by the board, and the written procedures that ensure
compliance with the rule, and any modifications, are non-public and
therefore confidential.
An agency may not conduct or sponsor, and a person is not required
to respond to, a collection of information unless it displays a
currently valid OMB control number.
Please direct general comments regarding the above information to
the following persons: (i) Desk Officer for the Securities and Exchange
Commission, Office of Information and Regulatory Affairs, Office of
Management and Budget, Room 10102, New Executive Office Building,
Washington, DC 20503; and (ii) Michael E. Bartell, Associate Executive
Director, Office of Information Technology, Securities and Exchange
Commission, Mail Stop 0-4, 450 5th Street, NW, Washington, DC 20549.
Comments must be submitted to OMB within 30 days of this notice.
Dated: April 19, 1999.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-10195 Filed 4-22-99; 8:45 am]
BILLING CODE 8010-01-M
