[Federal Register Volume 63, Number 103 (Friday, May 29, 1998)]
[Rules and Regulations]
[Pages 29345-29346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14187]
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SECURITIES AND EXCHANGE COMMISSION
17 CFR Part 270
[Release Nos. IC-23201; IS-1136; File No. S7-23-95]
RIN 3235-AE98
Custody of Investment Company Assets Outside the United States
AGENCY: Securities and Exchange Commission.
ACTION: Final rule; extension of compliance date.
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SUMMARY: The Commission is extending the compliance date for certain
amendments to the rule that governs the custody of investment company
assets outside the United States.
DATES: The effective date of the rule amendments published on May 16,
1997 (62 FR 26923) remains June 16, 1997. As of May 29, 1998, the
compliance date for the rule amendments, except for the amended
definition of an ``eligible foreign custodian,'' is extended to
February 1, 1999. The compliance date for the amended definition of an
eligible foreign custodian remains June 16, 1998.
FOR FURTHER INFORMATION CONTACT: Thomas M. J. Kerwin, Senior Counsel,
or C. Hunter Jones, Assistant Director, Office of Regulatory Policy, at
(202) 942-0690, in the Division of Investment Management, Mail Stop 5-
6, Securities and Exchange Commission, 450 5th Street, NW, Washington,
DC 20549.
SUPPLEMENTARY INFORMATION: The Commission is extending the compliance
date for certain amendments to rule 17f-5 [17 CFR 270.17f-5] under the
Investment Company Act of 1940 [15 U.S.C. 80a] that the Commission
adopted in 1997 (the ``1997 Amendments'').\1\ The release that adopted
the 1997 Amendments (the ``1997 Release'') provided that the amendments
would become effective on June 16, 1997.\2\ The 1997 Release further
provided that registered management investment companies (``funds'')
must bring their foreign custody arrangements into compliance with the
amended rule by June 16, 1998 (i.e., the fund's board must make the
findings required by the amended rule or appoint a delegate to do so by
that date).
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\1\ See Custody of Investment Company Assets Outside the United
States, Investment Company Act Release No. 22658 (May 12, 1997) [62
FR 26923 (May 16, 1997)].
\2\ Id., 62 FR at 26931.
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After the Commission adopted the 1997 Amendments, representatives
of mutual funds and ten U.S. bank custodians asked the Commission's
Division of Investment Management to clarify whether the 1997
Amendments permit a fund board to delegate authority to a foreign
custody manager to select a securities depository that a fund must use
if it maintains assets in a particular country (a ``compulsory
depository''). In a letter dated February 19, 1998, the Division of
Investment Management answered that, in its view, under the rule, fund
boards can delegate this authority.\3\
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\3\ Letter to Dorothy M. Donohue, Associate Counsel, Investment
Company Institute, and Daniel L. Goelzer, Baker & McKenzie, from
Robert E. Plaze, Associate Director, Division of Investment
Management (Feb. 19, 1998) (the 1997 Amendments do not exclude
compulsory depositories from rule 17f-5's selection process, and do
not preclude fund boards from delegating to a foreign custody
manager the selection of a compulsory depository).
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In a letter dated March 24, 1998, mutual fund representatives
stated that certain requirements of the 1997 Amendments may present
unanticipated problems when a foreign custody arrangement involves the
selection of a compulsory depository.\4\ They asserted that, because
most depositories are governmental or quasi-governmental organizations,
it may not be possible for funds (or their foreign custody managers) to
obtain necessary information to make the findings contemplated by the
rule, to negotiate terms or conditions in custody agreements, or to
assure U.S. jurisdiction over foreign custodians. The fund
representatives stated that they and representatives of custodian banks
will soon submit to the Commission proposed revisions to the 1997
Amendments that would address these problems. In the interim, the fund
representatives requested that the Commission suspend the compliance
date for the 1997 Amendments to facilitate consideration of this
submission.
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\4\ See Letter to Barry P. Barbash, Director, Division of
Investment Management, from Dorothy M. Donohue, Associate Counsel,
Investment Company Institute (Mar. 24, 1998) (placed in File No. S7-
23-95).
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The fund representatives state that a suspension is necessary
because many funds have been unable to establish new custodial
arrangements under the 1997 Amendments.\5\ Fund representatives also
state that funds did not become fully aware of potential difficulties
in applying the 1997 Amendments to compulsory depositories until
recently, when they began to revise their foreign custody arrangements
to attempt to comply with the amendments. Because of the difficulties
in applying the rule, the fund representatives assert that many funds
may not be prepared to comply with the 1997 Amendments as of June 16,
1998. Some fund groups reportedly have considered withdrawing their
assets from foreign custodians altogether, despite the burdens of
alternative holding arrangements.\6\
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\5\ Id.
\6\ See Custody of Investment Company Assets Outside the United
States, Investment Company Act Release No. 21259 (July 27, 1995) [60
FR 39592 (Aug. 2, 1995)] at n.3 (a fund may incur significant costs
in maintaining securities outside the primary market for the
securities).
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The Commission is extending until February 1, 1999, the compliance
date for the 1997 Amendments, except for the amended definition of an
``eligible foreign custodian,'' the compliance date for which will
remain June 16, 1998.\7\
[[Page 29346]]
The extension of the compliance date for the other amendments will give
the Commission time to review the proposal to be submitted by
representatives of funds and banks, and to evaluate whether refinements
to the 1997 Amendments are needed.\8\
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\7\ See rule 17f-5(a)(1) [17 CFR 270.17f-5(a)(1)]. This
provision of the amended rule generally expands the class of
eligible foreign custodians that may hold custody of fund assets.
The amended definition of eligible foreign custodian also includes
the definitions of ``qualified foreign bank'' and ``U.S. bank,''
which also will remain subject to the June 16, 1998 compliance date.
See rule 17f-5(a)(4) and (7) [17 CFR 270.17f-5(a)(4) and (7)].
Retaining the original compliance date for this definition will
enable funds to rely upon a provision of the 1997 Amendments that
appears not to have presented difficulties, and avoid the necessity
of seeking exemptive relief from the Commission to permit the use of
a custodian that would qualify as an eligible foreign custodian
under the amended definition.
\8\ The extension of the compliance date is effective upon
publication of this release in the Federal Register because the
extension ``grants or recognizes an exemption or relieves a
restriction.'' 5 U.S.C. 553(d)(1).
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Until February 1, 1999, a fund may maintain its foreign custody
arrangements under either of two regulatory frameworks. First, the fund
may continue to comply with rule 17f-5 as it existed prior to the 1997
Amendments (``old rule 17f-5''). Because the compliance date for the
amended definition of eligible foreign custodian will remain June 16,
1998, a fund may comply with old rule 17f-5 while also selecting a
custodian that is an eligible foreign custodian under the amended
definition. Second, in the alternative, a fund may comply entirely with
rule 17f-5 as amended by the 1997 Amendments (the ``amended rule'').
The fund may apply either of these alternative frameworks
separately to each foreign custodian it uses. The fund's arrangement
with a particular foreign custodian or subcustodian, however, should
comply in its entirety either with old rule 17f-5 (subject to the
amended definition of eligible foreign custodian), or with the amended
rule.\9\
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\9\ A fund may not seek to comply with the rule by meeting
certain requirements of the old rule and certain requirements of the
amended rule (other than the amended definition of eligible foreign
custodian).
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The Commission for good cause finds that, based on the reasons
cited above, notice and solicitation of comment regarding the extension
of the compliance date for certain of the 1997 Amendments is
impracticable, unnecessary, and contrary to the public interest.\10\
The Commission notes that the original compliance date is imminent,
that many funds reportedly are not in a position to comply with the
1997 Amendments, that funds need prompt guidance concerning the
regulatory requirements that will apply to their foreign custody
arrangements, and that a limited extension will aid funds, bank
custodians, and the Commission in considering whether additional
amendments are necessary. Fund representatives have stated that,
without a suspension of the compliance date, some funds may withdraw
assets from foreign custodians, which could increase costs for
investors or otherwise harm investors.\11\ The Commission also notes
that the 1997 Amendments were themselves submitted for public notice
and comment, and that any amendments that may be considered in the
future will be submitted for notice and comment.\12\
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\10\ See section 553(b)(3)(B) of the Administrative Procedure
Act [5 U.S.C. 553(b)(3)(B)] (an agency may dispense with prior
notice and comment when it finds, for good cause, that notice and
comment are ``impracticable, unnecessary, or contrary to the public
interest'').
\11\ See supra note .
\12\ The extension generally preserves the status quo that has
existed since the adoption of the 1997 Amendments. Funds have been
permitted to comply with either the old rule or the amended rule
since June 16, 1997, the effective date of the 1997 Amendments.
Retaining the original compliance date for the amended definition of
eligible foreign custodian will allow funds to rely on a provision
of the amended rule that appears not to have presented difficulties.
In analyzing the costs and benefits of this action, the Commission
believes that the extension of the compliance date for certain of the
1997 Amendments will not impose costs on funds, but will enable funds
to avoid the costs of attempting to comply with provisions of the rule
that they assert may be unworkable for some funds. The Commission
believes that the extension will produce potential benefits for funds
by allowing funds the option to comply with the amended rule or the old
rule, and by permitting funds and bank custodians to present a proposal
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to refine the 1997 Amendments.
Dated: May 21, 1998.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14187 Filed 5-28-98; 8:45 am]
BILLING CODE 8010-01-P
