[Federal Register Volume 63, Number 133 (Monday, July 13, 1998)]
[Notices]
[Pages 37606-37608]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-18591]
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SECURITIES AND EXCHANGE COMMISSION
Existing Collection; Comment Request
Upon Written Request, Copies Available From: Securities and Exchange
Commission, Office of Filings and Information Services, 450 5th Street,
N.W., Washington, D.C. 20549
Extension:
Rule 17j-1 [17 CFR 270.17j-1], SEC File No. 270-239, OMB Control
No. 3235-0224
Notice is hereby given that, pursuant to the Paperwork Reduction
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange
Commission (the ``Commission'') is soliciting comments on the
collection of information summarized below. The Commission plans to
submit this existing collection of information to the Office of
Management and Budget (``OMB'') for extension and approval.
Rule 17j-1 under the Investment Company Act of 1940 (15 U.S.C. 80a)
(the ``Investment Company Act'') addresses conflicts of interest
between registered investment company (``fund'') personnel and their
funds that may arise when fund personnel buy or sell securities for
their personal accounts (``personal investment activities''). Rule 17j-
1, which the Commission adopted in 1980,\1\ generally prohibits fund
personnel from engaging in fraud in connection with personal
transactions in securities held or to be acquired by the fund. In order
to prevent fraud, the rule currently: (i) Requires a fund and each
investment adviser and principal underwriter to the fund (collectively,
``rule 17j-1 organizations'') to adopt a code of ethics (``code'')
designed to prevent ``access persons'' \2\ from engaging in fraudulent
securities activities, (ii) requires an access person to report
personal securities transactions to his or her rule 17j-1 organization
at least quarterly, and (iii) requires a rule 17j-1 organization to
maintain certain records.
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\1\ 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)].
\2\ Rule 17j-1 defines ``access person'' to include directors,
officers, general partners, and any employee 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 upcoming purchases or sales of
portfolio securities.
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In 1995, the Commission issued a release proposing amendments to
rule 17j-1 (``Proposing Release'').\3\ The
[[Page 37607]]
proposed amendments would require, among other things, that a majority
of a fund's board, including a majority of independent directors,
approve the fund's code, and review the codes of any investment adviser
or principal underwriter to the fund. The proposed amendments also
would require that the management of a rule 17j-1 organization, at
least once a year, provide the fund's board with an issues and
certification report: (i) Describing issues that arose during the
previous year under the codes of ethics applicable to the rule 17j-1
organization, and (ii) certifying to the fund's board that the rule
17j-1 organization has adopted procedures that are reasonably necessary
to prevent its access persons from violating its code of ethics.
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\3\ 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 Commission's proposal was based on reports prepared by
the Commission's Division of Investment Management and the
Investment Company Institute (``ICI'') Advisory Group on Personal
Investing, which studied the practices and standards governing
personal investment activities of fund personnel. Division of
Investment Management, Personal Investment Activities of Investment
Company Personnel (1994); ICI, Report of the Advisory Group on
Personal Investing (1994). These studies followed press reports and
Congressional inquiries in the early 1990s regarding the personal
investment activities of fund personnel.
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In order to facilitate the identification of all securities held by
access persons, the proposed amendments would require that every access
person provide an initial holdings report to his or her rule 17j-1
organization listing all securities beneficially owned by the access
person at the time that he or she becomes an access person. The
proposed amendments also would expand the types of securities excepted
from the requirements of the rule, thereby increasing the number of
rule 17j-1 organizations and access persons excluded from the rule's
requirements concerning codes of ethics, quarterly transaction reports,
and initial holdings reports.
Funds also currently are not required to disclose to the public any
information about their codes of ethics. In order to provide more
information to the public about a fund's policies concerning personal
investment activities, the proposed amendments to rule 17j-1 would
require a fund to 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 subject to
the codes to invest in securities for their own accounts, and (iii)
that the codes are on public file with, and are available from, the
Commission.\4\ The proposed conforming amendments to rule 204-2 under
the Investment Advisers Act of 1940 (15 U.S.C. 80b) (the ``Advisers
Act'') \5\ would reduce the burden on registered investment advisers by
expanding the types of transactions in securities excepted from the
rule's recordkeeping requirement.
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\4\ The registration forms the Commission is proposing to amend
are: Form N-1A (open-end funds); Form N-2 (closed-end funds); Form
N-3 (separate accounts that offer variable annuity contracts that
are registered under the Investment Company Act); Form N-5 (small
business funds); and Form N-8B-2 (unit investment trusts). Although
the Commission has not proposed amending Form S-6 (unit investment
trusts), the proposed amendments to Form N-8B-2 would affect the
burden of complying with Form S-6 because Form S-6 requires a unit
investment trust to provide information required by Form N-8B-2.
\5\ Rule 204-2(a)(12), (13) [17 CFR 275.204-2(a)(12), (13)].
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The requirement that the management of a 17j-1 organization provide
the fund's board with an annual issues and certification report is
intended to enhance board oversight of personal investment policies
applicable to the fund and the personal investment activities of access
persons. The requirement that every access person provide an initial
holdings report is intended to help fund compliance personnel and the
Commission's examinations staff monitor potential conflicts of interest
and detect potentially abusive activities. The requirement that each
rule 17j-1 organization maintain certain records is intended to assist
rule 17j-1 organizations and the Commission's examinations staff in
determining whether there have been violations of rule 17j-1.
The requirement that a fund make available in its registration
statement information on the fund's policies concerning personal
investment activities is intended to promote the integrity of the fund
industry and provide investors with information they may want when
making investment decisions. Disclosure also may encourage fund boards
to give closer consideration when approving and reviewing the contents
of codes of ethics applicable to their funds.
The conforming amendments to rule 204-2 are intended to reduce the
reporting and recordkeeping burden on advisers and to modify rule 204-
2(a) to except from the recordkeeping requirement transactions in
securities that are excepted from the definition of ``security'' in
rule 17j-1.
The Commission's staff estimates that there are approximately 3,800
registered investment companies that would be required to comply with
the requirements of rule 17j-1. Investment advisers and principal
underwriters of registered investment companies also are required to
comply with certain requirements of rule 17j-1. The staff estimates
that there are approximately 7,500 investment advisers registered with
the Commission, of which the staff estimates 820 are investment
advisers to registered investment companies. The staff also estimates
that there are approximately 425 principal underwriters of registered
investment companies.\6\
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\6\ Funds that are money market funds or that invest only in
securities excluded from the definition of ``security'' in rule 17j-
1, and any investment advisers, principal undewriters, and access
persons to these funds, do not have to comply with the rule's
requirements concerning codes of ethics, quarterly transaction
reports, and initial holdings reports. The estimated number of
respondents reported in this section may therefore overstate the
number of entities actually required to comply with the rule's
requirements.
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The staff estimates that each year 275 new rule 17j-1 organizations
each will expend 8 burden hours to formulate and provide codes of
ethics for a total of 2,200 burden hours. The staff estimates that the
managerment of 5,045 rule 17j-1 organizations \7\ each will annually
expend 3 burden hours to provide the fund board with an annual issues
and certification report for a total of 15,135 burden hours. The staff
estimates that access persons \8\ each will expend .5 burden hours for
the filing of each quarterly transaction report \9\ for a total
[[Page 37608]]
of 42,250 burden hours. The staff estimates that each year new access
persons each will expend 1 burden hour for the filing of an initial
holdings report to be provided by persons who become access persons
\10\ for a total of 4,895 burden hours. Finally, the staff estimates
that 5,045 rule 17j-1 organizations each will expend 2 burden 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 10,090 burden hours.
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\7\ Comprised of an estimated 3,800 registered companies, 820
investment advisers to registered investment companies, and 425
principal underwriters to registered investment companies.
\8\ The Commission estimates that, on average, a rule 17j-1
organization will have 20 access persons. This number may vary
considerably depending on the size of the rule 17j-1 organization.
Under 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. Thus, the Commission staff estimates that the number
of access persons filing quarterly transaction reports is equal to
the average number of access persons for each 17j-1 organization
multiplied by the total number of funds and principal underwriters
of funds (20 x (3800 + 425) = 84,500)).
\9\ 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, proposed
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. Although
a number of access persons may, on average, have transactions to
report during more than one quarter each year, many access persons
also may not have to provide a quarterly transaction report because
their 17j-1 organizations have received the information in a broker
trade confirmation or account statement. Accordingly, the Commission
staff has estimated that each access person, on average, would file
one quarterly transaction report each year.
\10\ Based on conversations with the industry, the Commission
estimates that, on average, rule 17j-1 organizations will have two
new access persons each year. However, proposed rule 17j-1 would not
require an access person to submit an initial holdings report if the
access person has previously provided information equivalent to that
which is required in the initial holdings report. Proposed rule 17j-
1 also contains several other exceptions to filing initial holdings
reports. The Commission therefore estimates after taking into
consideration the number of respondents excluded from this
requirement of the rule, that, on average, there will be 4,895
annual responses to this requirement.
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The total annual burden of the rule's paperwork requirements
therefore is estimated to be 74,570 hours. This estimate represents an
increase of 25,470 hours from the prior estimate of 49,100 hours. The
increase in burden hours is attributable to updated information about
the number of affected portfolios and other entities, and to a more
accurate calculation of the component parts of some information
burdens.
These burden hour estimates are based upon the Commission staff's
experience and discussions with the fund industry. The estimates of
average burden hours are made solely for the purposes of the Paperwork
Reduction Act. These estimates are not derived from a comprehensive or
even a representative survey or study of the costs of Commission rules.
Written comments are invited on: (a) whether the collection of
information is necessary for the proper performance of the functions of
the Commission, including whether the information has practical
utility; (b) the accuracy of the Commission's estimate of the burdens
of the collection of information; (c) ways to enhance the quality,
utility, and clarity of the information collected; and (d) ways to
minimize the burdens of the collection of information on respondents,
including through the use of automated collection techniques or other
forms of information technology. Consideration will be given to
comments and suggestions submitted in writing within 60 days of this
publication.
Please direct your written comments to Michael E. Bartell,
Associate Executive Director, Office of Information Technology,
Securities and Exchange Commission, Mail Stop 0-4, 450 5th Street,
N.W., Washington, DC 20549.
Dated: July 6, 1998.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-18591 Filed 7-10-98; 8:45 am]
BILLING CODE 8010-01-M
