[Federal Register Volume 60, Number 178 (Thursday, September 14, 1995)]
[Proposed Rules]
[Pages 47844-47856]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 95-22850]
[[Page 47843]]
_______________________________________________________________________
Part VII
Securities and Exchange Commission
_______________________________________________________________________
17 CFR Part 239 et al.
Personal Investment Activities of Investment Company Personnel and
Codes of Ethics of Investment Companies and Their Investment Advisers
and Principal Underwriters; Proposed Rule
Federal Register / Vol. 60, No. 178 / Thursday, September 14, 1995 /
Proposed Rules
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[[Page 47844]]
SECURITIES AND EXCHANGE COMMISSION
17 CFR Parts 239, 270, 274 and 275
[Release No. 33-7212, IC-21341, IA-1518, File No. S7-25-95]
RIN 3235-AG27
Personal Investment Activities of Investment Company Personnel
and Codes of Ethics of Investment Companies and Their Investment
Advisers and Principal Underwriters
AGENCY: Securities and Exchange Commission.
ACTION: Proposed amendments to rules and forms.
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SUMMARY: The Commission is proposing amendments to the rule under the
Investment Company Act of 1940 that prohibits investment company
personnel from engaging in fraudulent acts in connection with their
personal transactions in securities held or to be acquired by the
investment company, and requires an investment company and its
investment adviser and principal underwriter to adopt codes of ethics
reasonably designed to prevent such acts. The amendments would increase
the oversight role of an investment company's board of directors with
respect to the codes of ethics applicable to the investment company,
improve the manner in which investment company personnel report their
personal securities transactions to their employers, and clarify
certain provisions of the rule (including the scope of its anti-fraud
provision). Related proposed amendments would require an investment
company to provide information about its policies concerning personal
investment activities in its prospectus. The Commission also is
proposing conforming changes to the rule under the Investment Advisers
Act of 1940 that requires an investment adviser to maintain records of
its advisory representatives' personal transactions in securities. The
proposed amendments are intended to enhance board of director oversight
of the policies governing personal transactions in securities by
investment company personnel and to make available to the public
additional information about these policies.
DATES: Comments must be received on or before November 13, 1995.
ADDRESSES: Comments should be submitted in triplicate to Jonathan G.
Katz, Secretary, Securities and Exchange Commission, 450 Fifth Street,
NW., Stop 6-9, Washington, DC 20549. All comment letters should refer
to File No. S7-25-95. All comments received will be available for
public inspection and copying in the Commission's Public Reference
Room, 450 Fifth Street, NW., Washington, DC 20549.
FOR FURTHER INFORMATION CONTACT: David M. Goldenberg, Senior Counsel,
or Kenneth J. Berman, Assistant Director, at (202) 942-0690, Office of
Regulatory Policy, Division of Investment Management, 450 Fifth Street,
NW., Washington, DC 20549.
SUPPLEMENTARY INFORMATION: The Commission today is requesting public
comment on proposed amendments to rule 17j-1 (17 CFR 270.17j-1) under
the Investment Company Act of 1940 (15 U.S.C. 80a-1 et. seq.) (the
``Investment Company Act''), rule 204-2 (17 CFR 275.204-2) under the
Investment Advisers Act of 1940 (15 U.S.C. 80b-1 et. seq.) (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-77aaa) (the ``Securities Act'') and Form N-8B-2
(17 CFR 274.12) under the Investment Company Act.
Table of Contents
Executive Summary
I. Background
A. Section 17(j) and Rule 17j-1
B. Recent Developments Concerning Personal Investment Activities
II. Discussion
A. Role of Fund Boards
1. Initial Reviews and Annual Reports
2. Unit Investment Trusts
3. Alternative Approaches
B. Reports by Access Persons
1. Initial Reports
2. Scope of Reporting Requirements
3. Review of Reports
4. Duplicate Broker Reports
C. Disclosure of Personal Investing Policies
D. Applicability of Rule 17j-1 to Options and Convertible
Securities
E. Other Amendments
1. Money Market Instruments
2. Beneficial Ownership
3. Conforming Amendments to Advisers Act Rules
III. General Request for Comments
IV. Cost/Benefit Analysis
V. Summary of Regulatory Flexibility Analysis
VI. Statutory Authority
Text of Proposed Rule and Form Amendments
Executive Summary
Conflicts of interest between investment company (``fund'')
personnel (such as portfolio managers) and their funds can arise when
these persons buy or sell securities for their own accounts (``personal
investment activities''). These conflicts arise because fund personnel
have the opportunity to profit from information about fund
transactions, often to the detriment of fund investors. Rule 17j-1
under the Investment Company Act addresses these conflicts of interest
by: (i) Prohibiting fraudulent, deceptive or manipulative acts by fund
affiliates and certain other persons in connection with their personal
transactions in securities held or to be acquired by the fund; (ii)
requiring funds and their investment advisers and principal
underwriters (collectively, ``rule 17j-1 organizations'') to adopt
codes of ethics containing provisions reasonably necessary to prevent
their ``access persons'' (generally, those fund personnel involved in
the portfolio management process) from engaging in conduct prohibited
by the rule; and (iii) requiring access persons to report their
personal securities transactions to the appropriate rule 17j-1
organization. The rule also imposes certain recordkeeping requirements.
The Commission's Division of Investment Management (``Division'')
recently completed its first detailed study of fund policies concerning
personal investment activities since rule 17j-1 was adopted in
1980.1 In the report on its study, the Division recommended
several of the amendments to rule 17j-1 that the Commission is
proposing today.
\1\ Division of Investment Management, SEC, Personal Investment
Activities of Investment Company Personnel (1994) (``PIA Report'').
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The proposed amendments are designed to improve the regulation of
personal investment activities in three respects. First, the proposals
would enhance the oversight of personal investment activities by (i)
requiring management of a fund and of its investment adviser and
principal underwriter, at least annually, to provide the fund's board
of directors with a report describing issues arising during the
previous year under the codes of ethics applicable to the fund and (ii)
requiring access persons to provide the appropriate rule 17j-1
organization with information about securities owned by them at the
time they become access persons.
Second, the proposed amendments are designed to provide the public
with additional information about fund policies concerning personal
investment activities. The Commission is proposing to require that a
fund's prospectus disclose whether or not the fund permits its
personnel to invest in securities, including securities that may be
purchased or held by the fund. In
[[Page 47845]]
addition, a fund would have to file with the Commission copies of all
codes of ethics applicable to the fund as exhibits to its registration
statement.
Third, the proposed amendments would tailor rule 17j-1 to make its
scope more consistent with its purpose. The proposed amendments would
(i) clarify that transactions involving certain securities related to
securities in which a fund invests (such as debt securities convertible
into stock in which the fund invests) are subject to the rule's anti-
fraud provision, (ii) specify that money market funds and money market
instruments are not subject to the rule's requirements concerning codes
of ethics and transaction reporting, and (iii) clarify the meaning of
the term ``beneficial ownership'' for purposes of the rule's reporting
requirements for access persons. The Commission also is proposing
certain conforming changes to the recordkeeping provisions applicable
to investment advisers in rule 204-2 under the Advisers Act.
I. Background
When fund personnel buy or sell securities for their personal
accounts, conflicts of interest with fund investors may arise. For
example, in performing their day-to-day responsibilities, fund
personnel may have access to information about impending fund
transactions that they could use for their own benefit. A fund manager
also could profit if the manager causes a fund to purchase or hold
portfolio securities in order to protect or strengthen the manager's
personal investments in these securities.
Beginning in the early 1960s, Congress and the Commission sought to
devise a regulatory scheme to effectively address these potential
conflicts.2 These efforts culminated in the enactment of section
17(j) of the Investment Company Act in 1970 and the adoption by the
Commission of rule 17j-1 under the Investment Company Act in
1980.3
\2\ See, e.g., Report of the Securities and Exchange Commission
on the Public Policy Implications of Investment Company Growth, H.R.
Rep. No. 2337, 89th Cong., 2d Sess. 200 (1966) (``PPI Report''). In
the PPI Report, the Commission expressed its concern about the
``ever present danger'' of conflicts of interest that arises when
fund personnel engage in personal trading. Id. at 195. The
Commission noted a 1963 report that had found ``widespread'' insider
trading of fund portfolio securities by fund personnel. Id. at 196.
\3\ Abusive personal investment activities by fund access
persons are prohibited not only by section 17(j) and rule 17j-1, but
also by other provisions of the federal securities laws. For
example, a fund manager who buys or sells securities for his or her
own account ahead of the fund (``front running'') or makes
investment decisions for the fund with the intent to benefit
personally may violate the anti-fraud provisions of section 17(a) of
the Securities Act and section 10(b) of the Securities Exchange Act
of 1934 (15 U.S.C. 78a et. seq.) (``Exchange Act'') and rule 10b-5
thereunder. The manager also may violate section 17(d) of the
Investment Company Act and rule 17d-1 thereunder if the manager
purchases or sells the same securities as the fund he or she manages
in a joint transaction or arrangement. The manager also could
violate section 206 of the Advisers Act if the manager's personal
trading defrauds or operates as a fraud on the fund.
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A. Section 17(j) and Rule 17j-1
Section 17(j) of the Investment Company Act makes it unlawful for
persons affiliated with a rule 17j-1 organization (i.e., a fund or its
investment adviser or principal underwriter), in connection with the
purchase or sale of securities held or to be acquired by the fund, to
engage in any fraudulent, deceptive or manipulative act or practice in
contravention of rules and regulations adopted by the Commission.
Section 17(j) authorizes the Commission to adopt rules to address the
conflicts of interest presented by personal securities trading by these
persons, including rules requiring the adoption of codes of ethics by
funds and their investment advisers and principal underwriters.
In 1980, the Commission adopted rule 17j-1.4 The rule, which
has not been amended since its adoption, prohibits fraudulent,
deceptive or manipulative acts by persons affiliated with a fund or its
investment adviser or principal underwriter in connection with their
personal transactions in securities held or to be acquired by the
fund.5 The rule also (i) requires rule 17j-1 organizations to
adopt codes of ethics containing provisions reasonably necessary to
prevent ``access persons'' 6 from engaging in such fraudulent,
deceptive or manipulative acts, (ii) requires access persons to report
their personal securities transactions to the rule 17j-1 organizations
of which they are access persons at least quarterly, and (iii) requires
rule 17j-1 organizations to maintain certain records and to make those
records available for inspection by the Commission.
\4\ Prevention of Certain Unlawful Activities With Respect To
Registered Investment Companies, Investment Company Act Release No.
11421 (Oct. 31, 1980), 45 FR 73915 (``Adopting Release'').
\5\ Rule 17j-1(a).
\6\ As defined in rule 17j-1(e), ``access persons'' generally
include officers, directors and any employees who participate in the
selection of a fund's portfolio securities or who have access to
information regarding a fund's impending purchases or sales of
portfolio securities.
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Congress gave the Commission the authority to mandate that codes of
ethics restrict or prohibit certain activities of access persons and
other employees. The Commission recognized when adopting rule 17j-1,
however, that no single set of guidelines would be appropriate for all
funds. The Commission stated in the release adopting the rule that ``as
a matter of policy the Commission believes 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.'' 7 The rule therefore
does not require that codes of ethics contain any specific restrictions
or prohibitions. Additionally, while the rule does require access
persons to report their personal securities transactions, it does not
place restrictions on the timing or nature of those transactions, other
than the general restrictions of the rule's anti-fraud provision.
\7\ Adopting Release, supra note 4, at 73916. The need for
flexibility was explicitly recognized by Congress. The House and
Senate Reports that accompanied section 17(j) noted that:
The ability to deal with (personal securities) transactions by
rule is intended to permit the Commission to draw flexible
guidelines to prohibit persons affiliated with investment companies,
their advisers and principal underwriters, from engaging in
securities transactions for their personal accounts when such
transactions are likely to conflict with the investment programs of
their companies.
H.R. Rep. No. 1382, 91st Cong., 2d Sess. 28 (1970) (``House
Report''); S. Rep. No. 184, 91st Cong., 1st Sess. 29 (1969)
(``Senate Report'').
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B. Recent Developments Concerning Personal Investment Activities
The personal investment activities of fund personnel received
renewed attention early in 1994 after an investment adviser to several
funds dismissed a well-known portfolio manager, alleging that he had
failed to report a number of his personal securities transactions as
required under both the Investment Company Act and the Advisers
Act.8 At about the same time, the media reported that the
country's largest fund complex had amended its rules on personal
investment activities in response to certain trading practices.9
These developments drew further media and congressional attention to
the ethical
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standards in the fund industry.10 In response to the concerns
raised, the Division initiated a study of rule 17j-1 and the personal
investment activities of portfolio managers and other fund employees.
The Division released a report on its study (the ``PIA Report'') in
September 1994.11
\8\ See, e.g., Robert McGough and Sara Calian, Invesco Funds
Fires Kaweske, A Star Manager, Wall St. J., Jan. 6, 1994, at C1;
Chris Wloszczyna, Invesco Funds Fires Portfolio Manager, USA Today,
Jan. 6, 1994, at 2B; Jay Mathews, Invesco Fires Manager Over Trade
Reports, Wash. Post, Jan. 7, 1994, at G2. The Commission instituted
an enforcement action in federal district court against the
portfolio manager in February 1995, alleging, among other things,
violations of rule 17j-1(c) under the Investment Company Act. SEC v.
John J. Kaweske, Civil Action No. 95-N-296 (D. Colo. filed Feb. 6,
1995).
\9\ See, e.g., Brett D. Fromson, Fund Managers' Own Trades
Termed a Potential Conflict; Biggest Mutual Fund Firm Tightens
Rules, Wash. Post, Jan. 11, 1994, at A1.
\10\ See, e.g., Tom Petruno, When It Comes to Fund Industry,
Public Trust Must Be A Mutual Issue, L.A. Times, Jan. 12, 1994, at
D1; Steve Bailey and Aaron Zitner, Mutual Fund Managers Come Under
Scrutiny, Bost. Globe, Jan. 16, 1994, at A1; Susan Antilla, Fund
Managers Testing the Rules, N.Y. Times, Jan. 23, 1994, Sec. 3, at
15; Geoffrey Smith, Mutual Funds: The Rules on Insider Trading,
Please, Bus. Wk., Jan. 31, 1994, at 60. See also Letter from Edward
J. Markey, Chairman, Subcommittee on Telecommunications and Finance
of the House Committee on Energy and Commerce, to Arthur Levitt,
Jr., Chairman, U.S. Securities and Exchange Commission (Jan. 11,
1994).
\11\ See supra note 1. The fund industry also responded to the
concerns. The Investment Company Institute (``ICI''), an association
of funds representing 95% of total fund assets under management in
the United States, organized an Advisory Group on Personal Investing
(``ICI Advisory Group''). The ICI Advisory Group, which consisted of
six industry representatives, conducted a review of practices and
standards governing personal investing by fund personnel. See ICI,
Report of the Advisory Group on Personal Investing (1994) (``ICI
Report''). The ICI Report stated that most codes of ethics reviewed
by the Advisory Group exceeded the requirements of rule 17j-1, but
recommended that funds adopt additional measures regarding conflicts
of interest and personal securities transactions in order to
preserve the confidence of investors. Id. at iii, v. The ICI's board
of governors recommended that all rule 17j-1 organizations adopt the
recommendations contained in the ICI Report.
The ICI subsequently conducted a survey of its members to
determine whether the fund industry had adopted the recommendations
made in the ICI Report. Eighty-five percent of the ICI's member
funds responded to the survey. ICI, Report to the Division of
Investment Management, U.S. Securities and Exchange Commission:
Implementation of the Institute's Recommendations on Personal
Investing (1995) (``ICI Survey''). The ICI Survey indicated that
more than a majority of the funds responding to the survey had
adopted most of the ICI Advisory Group's recommendations, either in
full or as adapted to meet each fund's unique business activities,
structure and operations. As discussed below in Part II.A.3, the
Commission is seeking comment whether to incorporate any of the ICI
Advisory Group's recommendations into rule 17j-1.
The Division studied the personal investment activities of 622 fund
managers employed by thirty companies that, in the aggregate, managed
1,053 mutual funds with total assets of $521 billion. The Division
concluded that the existing regulatory framework governing the personal
investment activities of fund personnel generally has worked well, but
can be improved in certain respects. The Division recommended that the
Commission amend rule 17j-1 to further protect fund shareholders by (i)
enhancing the oversight of personal investment policies by fund boards,
(ii) making it easier for funds to monitor the personal securities
transactions of fund personnel, and (iii) making available to the
public additional information about fund policies on personal
investment. The Commission agrees with the conclusions contained in the
PIA Report and is proposing amendments that will effect these
recommendations.12
\12\ The Division made three additional recommendations in the
PIA Report. First, the Division recommended that the National
Association of Securities Dealers, Inc. (``NASD'') consider adopting
a rule requiring its members (i) to notify a fund or investment
adviser whenever an employee opens an account with the member, and
(ii) upon request, to provide duplicate copies of the employee's
trade confirmations and account statements to the fund or adviser.
Second, the Division recommended that the NASD review the
applicability of its ``free-riding'' rules (which prohibit NASD
members from selling ``hot issue'' securities to their employees) to
fund personnel. Finally, the Division recommended in the PIA Report
that Congress amend section 17(j) to expand the Commission's
rulemaking authority to define and proscribe fraud to include
transactions that involve financial instruments that are not
securities.
The NASD has advised the Division that its Investment Companies
Committee has considered and decided not to act on the Division's
recommendations to the NASD. The Committee concluded that the NASD
does not have a mechanism to ensure compliance with a new rule
requiring a member to notify a fund or investment adviser when an
employee opens an account with the member. The Committee also
concluded that, in the absence of a pattern of abuses involving
personal investment activities, amendments to its ``free-riding''
rules would not be appropriate.
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II. Discussion
A. Role of Fund Boards
1. Initial Reviews and Annual Reports
The board of directors or trustees of a fund has a significant
oversight role with respect to the personal investment activities of
fund personnel.13 The board is responsible for ensuring that the
fund establishes a code of ethics that satisfies the requirements of
rule 17j-1.14 The Commission is proposing two amendments to rule
17j-1 that would facilitate ongoing board oversight of codes of ethics.
First, the proposed amendments would require a fund's board to
affirmatively approve the fund's code and review the codes of any
investment adviser or principal underwriter whose services it seeks to
retain for the fund.15 Second, the proposed amendments would
require management of a fund and of its investment adviser and its
principal underwriter to provide the board, at least annually, with
reports describing issues arising during the previous year under the
codes of ethics applicable to the fund.16
\13\ All references in this Release to boards of directors
include boards of trustees for funds organized as business trusts.
\14\ As part of its oversight role, the board also is
responsible for monitoring the operation of the code, including
making amendments as may be necessary or appropriate in light of any
violations of the code and changing circumstances generally. See PIA
Report, supra note 1, at 34.
\15\ Proposed amendment to rule 17j-1(b). The codes of ethics of
a fund's investment adviser and principal underwriter may be of
greater importance than those of the fund because the investment
adviser and principal underwriter typically employ most of the
personnel involved in fund management.
\16\ Proposed rule 17j-1(b)(2).
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Although rule 17j-1 currently requires every fund to have a code of
ethics, the rule does not explicitly require a fund's board to take any
actions regarding the fund's code or other codes of ethics applicable
to the fund. The Commission believes that the rule should be more
explicit concerning the role of fund boards. The Commission has
refrained from requiring by rule that codes of ethics contain specific
restrictions, prohibitions or other provisions, preferring instead that
each board establish an appropriate code for its fund. Additionally, a
code of ethics that is tailored to the specific characteristics of a
fund is fundamental to assuring that access persons do not engage in
fraudulent or unethical conduct. It therefore is appropriate that the
rule explicitly require a fund's board to have a continuing role in
overseeing the application of these policies.
The standard for the board to apply when approving the fund's code
or reviewing the code of an investment adviser or principal underwriter
would be whether the code contains such provisions as are reasonably
necessary to prevent access persons from violating rule 17j-1's anti-
fraud provision.17 The factors that the board should consider when
making this determination will necessarily vary depending upon the
investment objectives and policies of the fund, as well as the
organization and activities of the fund's investment adviser and
principal underwriter. Thus, the Commission is not proposing to include
in the rule a list of the factors a board should consider in assessing
a code of ethics. The Commission believes, however, that the
consideration of certain basic issues may be particularly important for
all funds.
\17\ Proposed rule 17j-1(b)(1)(ii).
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As an initial matter, the board should consider whether personal
investing by fund personnel is consistent with the interests of fund
shareholders and should be permitted. Additionally, the board should
determine whether the code establishes clear criteria for determining
whether a security is ``being considered for purchase'' by the
fund.18 Such criteria may better enable
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access persons and compliance personnel to determine whether certain
personal securities transactions may violate the fund's code or rule
17j-1.19 These criteria also may serve to remind fund managers of
their duty to avoid taking advantage of investment opportunities that
should be brought to the attention of the fund.20 Finally, a board
should consider the extent to which the code addresses the potential
violations of rule 17j-1 that may occur when a fund access person
purchases or sells securities held by another fund in the same
complex.21
\18\ Paragraph (e)(6) of rule 17j-1 defines ``security held or
to be acquired'' by a fund to mean any security which, within the
most recent 15 days, (i) is or has been held by the fund, or (ii) is
being or has been considered by the fund or its investment adviser
for purchase. When adopting rule 17j-1, the Commission indicated
that ``the mechanics of setting parameters for determining when a
transaction is `being considered' by a particular investment company
can best be resolved by the investment company, investment adviser
or principal underwriter in the codes of ethics required to be
adopted under the Rule.'' Adopting Release, supra note 4, at 73919.
\19\ The board may conclude, for example, that it is appropriate
to notify a fund's access persons that all securities that could be
purchased by the fund are deemed ``being considered'' by the fund.
Alternatively, the board may determine that a security is ``being
considered'' by the fund once a research report relating to that
security is prepared by, or received by, the fund's investment
adviser.
\20\ See, e.g., In the Matter of Kemper Financial Services,
Inc., et. al., Investment Advisers Act Release No. 1494 (June 6,
1995) (investment adviser and portfolio manager found to have
violated rule 17j-1(a)(3) under the Investment Company Act and the
anti-fraud provision of the Advisers Act by diverting investment
opportunities belonging to mutual fund clients to a profit-sharing
plan established for the benefit of the adviser's employees); In the
Matter of Joan Conan, Investment Advisers Act Release No. 1446
(Sept. 30, 1994) (portfolio manager found to have violated the anti-
fraud provision of the Advisers Act by misappropriating an
investment opportunity of clients that were unregistered investment
funds).
\21\ See infra note and accompanying text.
Under the proposed amendments, the board also likely will wish to
determine whether the rule 17j-1 organizations have instituted such
procedures as are reasonably necessary to prevent violations of their
codes. The rule would not mandate any particular compliance procedures
(other than the rule's existing transaction reporting
requirements).22 A fund board, however, should consider the
necessity of procedures based on the circumstances of the fund and the
other rule 17j-1 organizations. A board may want to consider, for
example, whether the code and procedures should include a requirement
that all access persons receive prior approval of their personal
securities transactions (``pre-clearance''). The board may decide that
pre-clearance is a necessary part of the code in order to prevent
persons from violating the code and rule 17j-1's anti-fraud
provision.23 The board also may want to consider whether other
types of reporting requirements, in addition to those required by rule
17j-1, are appropriate for the fund.
\22\ See Part II. B for a description of, and proposed
amendments to, these reporting requirements.
\23\ Although the rule does not require that funds adopt pre-
clearance procedures, the Commission notes that the ICI Advisory
Group recommended that funds adopt these measures. ICI Report, supra
note 11, at 42. The ICI Survey indicated that 69% of the funds
responding to the survey had adopted the ICI Advisory Group's
recommendation, and an additional 14% had modified the
recommendation to reflect their own circumstances. ICI Survey, supra
note 11, at 26.
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The determinations required by the proposed amendments would need
to be made by a majority of the fund's directors, including a majority
of the independent directors (i.e., directors who are not ``interested
persons'' of the fund).24 The role of independent fund directors
in policing conflicts of interest is central to the Investment Company
Act.25 The codes of ethics applicable to a fund, and the manner in
which these codes are implemented, should be designed to address the
fundamental conflict of interest that results when fund access persons
are in a position to take personal advantage of the knowledge and
opportunities presented because of their positions. Thus, it is
appropriate for independent directors to have a primary role in
establishing and overseeing the implementation of the policies that
address this conflict.
\24\ See 15 U.S.C. 80a-2(a)(19) (definition of ``interested
person'' for purposes of the Investment Company Act).
\25\ See, e.g., Division of Investment Management, SEC,
Protecting Investors: A Half Century of Investment Company
Regulation 266 (1992).
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The board's involvement in the personal investment policies
applicable to the fund should not cease after the board's initial
approval or review of a code of ethics. 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.26
The proposed amendments would require the management of each rule 17j-1
organization to provide the board with a report, no less frequently
than annually, describing issues arising during the previous year under
the codes of ethics applicable to the fund. The report would include,
but need not be limited to, details about code violations, sanctions
imposed in response to those violations, procedures initiated or
changed since the last report, and, in the case of the codes of the
investment adviser or principal underwriter, changes to the code
itself.27 The proposed amendments also would require the
management of each rule 17j-1 organization to certify to the fund
board, no less frequently than annually, that the organization has
adopted such procedures as are reasonably necessary to prevent access
persons from violating the organization's code of ethics.28 The
report and certification requirements are designed to give the board an
opportunity to evaluate and ask questions about the codes applicable to
the fund, the manner in which they have been implemented, and their
continued effectiveness.29
\26\ See id. at 255-56; PIA Report supra note 1, at 34.
\27\ Upon receipt and consideration of a report, a fund board
may in some cases determine that it is necessary to amend the fund's
code, or to suggest to an investment adviser or principal
underwriter that it consider amending its code. Reports prepared
for, and submitted to, fund boards would be required to be
maintained with the other records required by rule 17j-1.
\28\ Although the proposed amendments would require a report and
certification to be delivered to the board only annually, more
frequent reports may be warranted in certain instances, such as when
there have been particularly significant violations of a code or
when there have been material changes to a code. In some instances,
it may be determined that a particular violation or change should be
reported to the board at its next meeting.
\29\ In the ICI Report, the ICI Advisory Group made a
recommendation similar to that proposed by the Commission today. ICI
Report, supra note 11, at 47.
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The Commission requests comment on the proposed board review,
annual report and certification requirements. Are there other effective
means of ensuring that boards are giving enough attention to the
personal investment activities of fund personnel? Should the rule
explicitly require board review when there have been material changes
to a code or procedures, or when there have been significant or
frequent violations of a code?
2. Unit Investment Trusts
Like other funds, unit investment trusts (``UITs'') and their
principal underwriters currently are required by rule 17j-1 to adopt
codes of ethics.30 Because UITs do not have boards of directors,
however, it would be difficult for them to comply with the proposed
[[Page 47848]]
amendments in the same manner as other funds. The principal underwriter
or depositor of a UIT typically employs most of the persons having
access to information concerning the UIT's securities. Under the
proposed amendments, the initial approval and review requirement for a
UIT would be fulfilled by either the principal underwriter or depositor
for the UIT. The principal underwriter or the depositor would review
all of the codes of ethics applicable to the UIT (i.e., the codes of
the principal underwriter and the UIT) and determine whether the codes
meet the standards described above.31 Because they do not have
boards of directors, UITs would be exempt from the proposed annual
report and certification requirements. The principal underwriter or
depositor would still be responsible, however, for ensuring that the
codes of ethics applicable to the UIT and the related procedures
contain provisions reasonably necessary to prevent access persons from
violating rule 17j-1 and the codes.
\30\ A UIT is a type of fund that issues redeemable securities
representing an undivided interest in a portfolio of specified
securities. 15 U.S.C. 80a-4(2). Typically, UITs are created by a
sponsor or ``depositor'' that accumulates a portfolio of securities
and deposits them with a trustee under the terms of a trust
indenture. The UIT portfolio is generally unmanaged; thus, UITs do
not have investment advisers. The UIT's operations are subject to
the terms of the trust indenture, which specifies the ongoing
responsibilities of the trustee, the depositor and other third-party
service providers. Thus, a UIT does not have a corporate-type
management structure. See generally Form N-7 for Registration of
Unit Investment Trusts Under the Securities Act of 1933 and
Investment Company Act of 1940, Securities Act Release No. 6580 (May
14, 1985), 50 FR 21282.
\31\ Last sentence of proposed rule 17j-1(b)(1)(ii).
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The Commission recognizes that the absence of board review places
the oversight of the operation of codes applicable to the UIT in the
hands of the very people who may face the conflicts of interest that
the rule is designed to address. The Commission requests comment
whether an independent person or committee within the organization of
the principal underwriter or depositor should review these codes.
Should, for example, the underwriter be required to appoint a committee
of persons who are not access persons to approve or review the codes?
In addition, the Commission requests comment whether there are other
investment companies that, like UITs, should be exempt from the annual
report and certification provisions.
3. Alternative Approaches
As noted above, rule 17j-1 is based on the premise that rule 17j-1
organizations should be primarily responsible for tailoring specific
restrictions and prohibitions on the personal investment activities of
their access persons. The Division's PIA Report concluded that this
premise continues to be correct.32 Nevertheless, comment is
requested whether rule 17j-1 should set more detailed standards for
codes of ethics.
\32\ PIA Report, supra note 1, at 31.
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In its report on personal investment activities, the Investment
Company Institute's Advisory Group on Personal Investing (``ICI
Advisory Group'') suggested that codes of ethics should contain certain
minimum substantive restrictions on the activities of access persons
and other investment personnel. The ICI Advisory Group recommended,
among other things, that codes of ethics prohibit investment personnel
from participating in initial public offerings, receiving short-term
trading profits, receiving gifts from persons with whom the fund has a
business relationship, and purchasing securities during certain
``black-out periods.33 The ICI Advisory Group did not recommend
that the Commission amend rule 17j-1 to incorporate these
recommendations. Should the Commission impose any specific restrictions
on the personal investment policies of rule 17j-1 organizations and
their access persons? 34
\33\ See ICI Report, supra note 11.
\34\ Some commentators have advocated more comprehensive
restrictions, such as banning all personal trading by fund
personnel. See, e.g., Stan Hinden, Avoiding Conflicts--Real and
Perceived, Wash. Post, May 22, 1994, at H3; Mutual Funds Need
Tighter Rules, Bus. Wk., Feb. 14, 1994, at 134; Susan Antilla, Fund
Managers Testing the Rules, N.Y. Times, Jan. 23, 1994, Sec. 3, at
15. In the PIA Report, the Division concluded that a total
prohibition on personal investment activities by fund personnel is
not warranted. PIA Report, supra note 1, at 29.
B. Reports by Access Persons
1. Initial Reports
The Commission is proposing that rule 17j-1 require that every
access person 35 provide a listing (an ``initial report'') of all
securities directly or indirectly beneficially owned by the access
person at the time that he or she becomes an access person.36
Paragraph (c) of the rule currently requires every access person to
report to the appropriate rule 17j-1 organization, at least quarterly,
all transactions in which the access person has, or by reason of the
transaction acquires, any direct or indirect beneficial ownership in
any security (``quarterly reports'').37 A fund, however, may not
be able to monitor effectively the potential conflicts of interest that
arise when an access person invests for his or her own account unless
fund management knows the identity of all securities held by the access
person, including securities acquired before the person became an
access person.38 For example, without knowledge of securities
owned by an access person, the fund cannot adequately monitor if, and
the extent to which, the access person may be making trading decisions
on behalf of the fund regarding securities that the access person holds
in his or her own portfolio.39
\35\ See supra note 6.
\36\ Proposed amendments to rule 17j-1(c)(1). The report would
be required to be filed within 10 days of the event that causes the
employee to become an access person (e.g., hiring, promotion, change
of position). The initial report would list the title of the
security, its CUSIP number (if any), the number of shares held and
the principal amount of the security. The Commission also is
proposing to amend paragraph (c)(2) of the rule to require quarterly
reports to include the CUSIP number (if any) for each security for
which a transaction occurs and the date that the report is submitted
by the access person. These amendments would assist fund compliance
personnel and the Commission's inspections staff in evaluating
compliance with the rule's reporting requirements. See infra note
38.
\37\ See supra note 5. In many cases, an employee of an
investment adviser or principal underwriter may technically be an
access person of both his or her employer and the fund. The staff of
the Division has taken the position that if in such a case the
employer is required by rule 17j-1 to have a code of ethics, the
employee need only be considered an access person of the employer
and not of the fund. See Investment Company Institute (pub. avail.
Mar. 31, 1981).
\38\ See PIA Report, supra note 1, at 34. Not only are the
reports required by rule 17j-1 important to fund management, but
they also are important to the Commission's inspections staff, which
reviews these reports and codes of ethics during inspections of rule
17j-1 organizations.
\39\ Although rule 17j-1 does not explicitly prohibit an access
person from making decisions on behalf of a fund regarding
securities personally owned by the access person, the Commission
would expect that codes of ethics would address this potential
conflict of interest, and that boards of directors would wish to
have the ability to track such decisions by access persons in order
to determine whether these decisions are being inappropriately made.
See PIA Report, supra note 1, at 24 n.74, 35 n.118. See also In re
ML-Lee Acquisition Fund II, L.P., 848 F. Supp. 527 (D. Del. 1994)
(rule 17j-1 may be violated if an access person causes a fund to
purchase or sell securities owned by that person, particularly when
the access person expects to personally benefit by the transaction).
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It appears to be common practice in the fund industry to require
personnel to disclose personal securities holdings upon the
commencement of employment.40 Therefore, the initial report
requirement should not create an additional burden for most rule 17j-1
organizations. To prevent duplicative reporting, the amended rule would
provide that if an access person has previously provided information
equivalent to that which would be in an initial report (whether in a
single report or over time in transactional reports), the access person
would not be required to submit an initial report.41
\40\ The ICI found that 77% of the fund complexes responding to
its survey require some form of reporting similar to that proposed
today. See ICI Survey, supra note 11, at 31.
\41\ Proposed paragraph (c)(3)(v) of rule 17j-1. The proposed
exception is intended to give rule 17j-1 organizations flexibility
with respect to the initial report requirement. To comply with the
exception, the applicable rule 17j-1 organization would have to
retain all of the previously submitted information so that the
organization could reconstruct the access person's securities
holdings on the day that he or she became an access person.
Additionally, all of the information used to reconstruct the access
person's holdings would have to be maintained for five years from
the date that the person becomes an access person, in accordance
with the recordkeeping requirements of paragraph (d) of the rule.
Because the proposed exception could require an organization relying
on the exception to maintain some records for a longer period of
time than it otherwise would, rule 17j-1 organizations may choose to
require new access persons to submit new initial reports rather than
rely on the exception.
[[Page 47849]]
The ICI Advisory Group recommended that access persons file reports
listing all of their securities holdings upon commencement of
employment and thereafter annually.42 The Commission requests
comment whether an annual reporting requirement by access persons would
be helpful to funds. To what extent would such a requirement be an
undue burden on the persons required to file the reports? The
Commission also requests comment whether ten days is the appropriate
amount of time for a new access person to provide an initial report.
Should new access persons be given additional time (e.g., 15 or 20
days) to file these reports?
\42\ See ICI Report, supra note , at 46.
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2. Scope of Reporting Requirements
The proposed amendments would require an access person to list in
an initial report every security (as defined in rule 17j-1)
beneficially owned by the access person, regardless of whether the
security is connected to a security that the fund owns or intends or
proposes to acquire at the time that the access person files the
initial report. This approach departs from an earlier Division
position.43
\43\ See Alterman Investment Fund, Inc. (pub. avail. Sept. 17,
1981); Minbanc Capital Corp. (pub. avail. Sept. 17, 1981); MI Fund,
Inc. (pub. avail. Sept. 17, 1981).
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In response to inquiries made shortly after the adoption of rule
17j-1, the staff of the Division took the position that reports
required to be made pursuant to paragraph (c) of the rule need be made
only with respect to transactions in securities that may be connected
to securities that the fund holds or intends or proposes to
acquire.44 These requests involved specific funds with investment
objectives that permitted them to invest only in limited types of
securities, such as municipal bonds.
\44\ Id.
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The Commission believes that limiting the scope of the rule's
reporting requirement may result in gaps in a rule 17j-1 organization's
oversight of personal investment activities. For example, an employee
of an investment adviser may violate the anti-fraud provision of rule
17j-1 by purchasing a security intended to be acquired by another fund
in the same fund complex, even if the employee was not involved in the
decision to purchase the security on behalf of the fund. If the
employee did not have to report the transaction because the fund of
which the employee was an access person did not own, and was not
intending or proposing to acquire, the security, the transaction would
escape the attention of fund compliance personnel. Comprehensive
reporting requirements for both initial and quarterly reports would
enable fund directors to determine whether access persons are
inappropriately benefitting from their relationship with a fund,
investment adviser or principal underwriter.45 Thus, if the
proposed amendments are adopted, the rule will be interpreted as
requiring quarterly reports to be filed with respect to transactions in
all securities. The Commission seeks comment on the effect that these
reporting requirements would have on access persons and funds.46
\45\ See PIA Report, supra note 1, at 34 n.116. A list of all
securities owned, purchased and sold by an access person also may be
a necessary element of the written policies that a registered
investment adviser must establish, maintain and enforce, in
accordance with section 204A of the Advisers Act, to prevent the
misuse of material, non-public information by the adviser and its
personnel.
\46\ The facts of some recent enforcement actions brought by the
Commission have demonstrated that the opportunity for abusive
practices may exist where a portfolio manager or other fund insider
receives personal investing opportunities in connection with his or
her recommendation that the fund purchase a specific security. See,
e.g., United States v. Ostrander, 999 F.2d 27 (2nd Cir. 1993) aff'g
792 F. Supp. 241 (S.D.N.Y. 1992); SEC v. Talton R. Embry, Litigation
Release No. 13777 (Sept. 9, 1993); SEC v. Benalder Bayse, Jr.,
Litigation Release No. 13145 (Jan. 24, 1992). The Division staff
expressed a similar concern in response to no-action requests
regarding rule 204-2(a)(12) under the Advisers Act of 1940, which
requires records to be kept of the securities transactions of
investment adviser personnel similar to the reports required under
paragraph (c) of rule 17j-1. See American Syndicate Advisors (pub.
avail. Oct. 29, 1986); Financial Independence Advisers, Inc. (pub.
avail. Oct. 28, 1985). The change in the Division's interpretation
would make it easier for fund compliance personnel and the
Commission's inspections staff to identify cases in which fund
insiders receive special opportunities in connection with their
investing on behalf of a fund.
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3. Review of Reports
Rule 17j-1 currently requires that rule 17j-1 organizations inform
access persons of their duty to make quarterly reports and to retain
these reports in their records. The Commission is proposing to amend
rule 17j-1 to specify that the procedures instituted by rule 17j-1
organizations to prevent violations of the code must include procedures
for the review by appropriate managerial or compliance personnel of
reports submitted by access persons.47
\47\ Proposed rule 17j-1(b)(1)(i). The name of the person or
persons responsible for reviewing these reports would be required to
be maintained in an easily accessible place for five years under
proposed amendments to paragraph (d)(4) of the rule.
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The transaction reporting requirements of rule 17j-1 are intended
to keep rule 17j-1 organizations informed of the personal investment
activities of access persons in order for these organizations to detect
potential conflicts of interest and abusive practices. This purpose
will be served only if the reports are reviewed. Procedures that
specify not only that reports will be reviewed but that also assign the
responsibility for review to specified personnel will increase the
likelihood that the purposes of the reporting requirement will be met.
4. Duplicate Broker Reports
It appears to be increasingly common in the fund industry to
require access persons of funds to direct their brokers to provide
their employers with copies of confirmations of their personal
securities transactions and periodic account statements (collectively,
``duplicate broker reports'').48 The Commission believes that
duplicate broker reports can be an appropriate substitute for quarterly
reporting. The proposed amendments would provide that, at the option of
the appropriate rule 17j-1 organization, access persons may provide
duplicate broker reports in lieu of the quarterly reports.49
\48\ The ICI Advisory Group recommended that funds adopt these
measures. ICI Report, supra note 11, at 44. The ICI Survey indicated
that 70% of fund complexes responding to the survey had adopted the
ICI Advisory Group's recommendations, and that an additional 14% of
fund complexes responding to the survey had adapted these
recommendations to their particular circumstances. ICI Survey, supra
note , at 27.
\49\ Proposed rule 17j-1(c)(3)(vi). The duplicate broker report
would be required to contain the same information that would appear
on a quarterly report, and must be received by the rule 17j-1
organization within 10 days after the end of the quarter in which
the transaction takes place. A duplicate broker report that does not
contain all of the information required by paragraph (c)(2) would
satisfy the rule if the missing information were contained in the
records of the appropriate rule 17j-1 organization.
C. Disclosure of Personal Investing Policies
The Commission is proposing that each fund disclose in its
prospectus that the fund and its investment adviser and principal
underwriter have adopted codes of ethics relating to personal
investment activities and whether or not these codes permit fund
personnel to invest in securities (including securities that may be
purchased or held by the
[[Page 47850]]
fund) for their own accounts.50 The fund also would disclose that
these codes are on public file with, and are available from, the
Commission.51
\50\ If a fund is not required to have a code of ethics, the
proposed amendment would not require any prospectus disclosure of
that fact. A fund that invests only in the securities of another
fund (as is the case with ``master/feeder'' funds or variable
annuities structured as unit investment trusts that invest in an
underlying fund) would be required to disclose the requested
information for the fund in which it invests and for such fund's
investment adviser and principal underwriter. See Letter from
Richard C. Breeden, Chairman, SEC, to John D. Dingell, Chairman,
Committee House Committee on Energy and Commerce (Apr. 15, 1992), at
Part III; Letter from Carolyn B. Lewis, Assistant Director, Division
of Investment Management, SEC, to Registrants (Feb. 22, 1993), at
Comment II.H. The new disclosure would be required under proposed
amendments to Item 5 of Form N-1A, Item 9 of Form N-2, Item 6 of
Form N-3, Item 3 of Form N-5 and Item 41 of Form N-8B-2.
\51\ The Commission also is proposing that a fund be required to
file with the Commission all codes of ethics applicable to the fund
as exhibits to the fund's registration statement. See infra text
accompanying note 57.
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As noted in the PIA Report, recent press accounts have suggested
that fund shareholders may not fully understand the potential conflicts
of interest faced by fund managers.52 The ICI Advisory Group, in
recommending prospectus disclosure concerning fund codes of ethics,
stated that the most recent controversy over personal investing is ``in
some significant part a product of insufficient information regarding
current practices and standards.'' 53 There currently is no
requirement that funds publicly disclose any information about their
codes of ethics, and recent media accounts have suggested that it often
is difficult to obtain this information.54 The Commission believes
that disclosure concerning the existence of fund personal investing
policies to investors not only would provide investors with information
they may want when making investment decisions, but also may encourage
fund boards to exercise greater care in considering the contents of
codes of ethics applicable to their funds.
\52\ PIA Report, supra note 1, at 13, 33.
\53\ ICI Report, supra note 11, at 49.
\54\ See, e.g., Christopher Phillips, Keeping Your Fund Manager
Honest, Kiplinger's Pers. Fin. Mag., Apr. 1994, at 57, 58; John
Accola, Only 1 of Top 4 Mutual Fund Firms Reveals Ethics Codes,
Rocky Mountain News, Feb. 6, 1994, at 93A. See also John Accola,
Janus First to Announce Revised Code of Ethics, Rocky Mountain News,
Jan. 15, 1995, at 98A (describing how the fund group provided a
general outline of its code after many investor requests but had
been advised by its attorneys not to release the complete document).
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The Commission believes that the proposed prospectus disclosure can
be brief and clear, and thus it is consistent with the Commission's
efforts to make prospectuses easier to read for investors.55 The
Commission requests comment whether a more detailed description should
be provided in the Statement of Additional Information (``SAI'') or in
the prospectus. If a fund's code of ethics conforms to a generally
accepted industry norm, should a statement to that effect be sufficient
to satisfy this requirement? 56 Commenters should indicate how an
industry norm can be identified, and whether divergences from the norm
that reflect the particular situations of the fund should be disclosed.
\55\ See, e.g., Arthur Levitt, Chairman, SEC, Taking the Mystery
Out of the Marketplace: The SEC's Consumer Education Campaign,
Remarks before the National Press Club (Oct. 13, 1994); Jeffrey M.
Laderman, The Prospectus Tries Plain Speaking, Bus. Wk., Aug. 14,
1995, at 72; Stan Hinden, Investor Protection, Plain and Simple; The
SEC Unveils a New Fund Prospectus Written in Basic, Understandable
Language, Wash. Post, July 30, 1995, at H3; Albert B. Crenshaw, SEC
Ponders How to Make Prospectuses Speak Plainly, Wash. Post, Oct. 16,
1994, at H1, H12.
\56\ The ICI Advisory Group recommended certain minimum
standards for all codes of ethics, such as prohibiting fund
personnel from investing in initial public offerings, receiving
short-term trading profits, and receiving gifts. See ICI Report,
supra note 11. The ICI Survey indicated that a majority of fund
complexes that responded to the survey are in some manner adopting
these standards. See ICI Survey, supra note 11.
The Commission believes that the codes of ethics applicable to a
fund should be available to the public. The Commission therefore is
proposing that each fund file all codes of ethics applicable to it as
an exhibit to its registration statement.57 Making codes of ethics
publicly available will permit the financial press and market
professionals to obtain information about personal investment policies
and to disseminate this information to the public.58 The
Commission requests comment whether funds should be required to send
copies of their codes of ethics to investors upon request.
\57\ If a fund is not required to have a code of ethics because
it is a money market fund or because its investment policies permit
it to invest only in securities that are exempt from the definition
of ``security'' in rule 17j-1(e)(5), the fund would not be required
to file any code, but would indicate on its exhibit list the reason
that no code of ethics is being filed. If the fund invests only in
the securities of another fund (as is the case with ``master/
feeder'' funds), the fund would be required to file the codes of
ethics applicable to the fund in which it invests. The exhibits
would be required under proposed amendments to Item 24 of Forms N-1A
and N-2, Item 28 of Form N-3, the Instructions As To Exhibits of
Form N-5 and Part IX of Form N-8B-2.
\58\ Prior to the adoption of Form N-SAR (17 CFR 249.330,
274.101) in 1985, funds made periodic reports on Form N-1R. Funds
were required to file a copy of any codes of ethics or other written
conflicts policies as exhibits to the form. See, e.g. Prevention of
Unlawful Activities with Respect to Registered Investment Companies,
Investment Company Act Release No. 10162 (Mar. 20, 1978), 43 FR
12721. Form N-SAR does not include a similar requirement.
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D. Applicability of Rule 17j-1 to Options and Convertible Securities
Paragraph (a) of rule 17j-1 prohibits fraudulent, deceptive or
manipulative acts by fund affiliates and certain other fund insiders in
connection with their personal transactions in securities held or to be
acquired by the fund. The Commission is proposing to amend rule 17j-1
to clarify that this anti-fraud provision applies to any purchase or
sale of an option for, or a security that is exchangeable for or
convertible into, a security that is held or to be acquired by a fund
(collectively, ``related securities'').59
\59\ Proposed amendment to rule 17j-1(e)(6).
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Congress contemplated that the Commission's rules ``could apply to
insider trading in the convertible securities, options and warrants of
issuers whose underlying securities are owned by an investment company
with which the insider is affiliated.'' 60 The value of a related
security often is directly affected by the value of the underlying
security. A fund insider who purchases or sells such a related security
could improperly benefit from that transaction to the same extent as an
insider who conducts a similar transaction in the underlying
security.61 The fact that the transaction involves a related
security rather than the underlying security does not diminish its
potential for providing an improper benefit to the insider at the
expense of the fund and its shareholders.
\60\ House Report, supra note 7, at 28; Senate Report, supra
note 7, at 29.
\61\ Similarly, a fund insider who purchases or sells an
underlying security when the fund holds or intends to purchase the
related security could, in some instances, improperly benefit from
that transaction. A security that underlies an option, warrant or
convertible security held by a fund generally would be a security
that is being considered for purchase by the fund.
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The Commission requests comment whether this amendment would
appropriately clarify the scope of the rule. Should paragraph (a) of
rule 17j-1 incorporate other standards to define the types of related
securities that fall within the scope of the rule, such as the standard
used to determine whether an arrangement creates a ``pecuniary
interest'' in an equity security for purposes of section 16 under the
Securities Exchange Act of 1934 (``Exchange Act'') 62
\62\ See rule 16a-1(a)(2) (17 CFR 240.16a-1(a)(2)) under the
Exchange Act, which provides that certain persons are deemed to
beneficially own specified equity securities if they have a ``direct
or indirect pecuniary interest'' in the securities. The rule defines
a pecuniary interest in an equity security as ``the opportunity,
directly or indirectly, to profit or share in any profit derived
from a transaction in the subject securit(y).'' The rule includes
examples of ``indirect pecuniary interests,'' such as a general
partner's proportionate interest in a portfolio of securities held
by the partnership, certain performance-based fee arrangements, and
a person's interest in securities held in a trust. As noted below,
this definition is being incorporated into the rule's reporting
provisions. See infra note 69 and accompanying text.
[[Page 47851]]
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E. Other Amendments
1. Money Market Instruments
Money market instruments and shares of open-end funds would appear
to present little opportunity for the type of improper trading that
rule 17j-1 is intended to cover.63 The Commission therefore
excepted bankers' acceptances, bank certificates of deposit, commercial
paper and shares of open-end funds from the definition of ``security''
for purposes of rule 17j-1.64 Since the adoption of the rule, the
Division has issued several no-action and interpretive letters
generally restating the Commission's position that all money market
instruments (and not only those specified by the rule) are excepted
from the rule's definition of ``security.'' 65 The Commission
proposes to amend the definition of ``security'' in the rule to
specifically provide that, in addition to the money market instruments
currently listed, repurchase agreements and other high quality short-
term debt instruments also are excepted from the definition.66 The
proposed amendments also provide that money market funds are not
required to adopt codes of ethics.67 The Commission requests
comment whether there are other types of securities that, like money
market instruments, would appear to present little opportunity for the
type of improper trading that rule 17j-1 is intended to cover, and thus
should be excepted from the definition of ``security'' for purposes of
the rule.
\63\ See Adopting Release, supra note 4, at 73919.
\64\ Rule 17j-1(e)(5). The rule also excepts ``securities issued
by the Government of the United States'' from the definition. The
proposed amendments would change this 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 rules 204-2(a)(12) and 204-2(a)(13) under the Advisers Act. See
infra part II.E.3. See also, ACM Government Income Fund, Inc. (pub.
avail. Dec. 15, 1988) (Division staff interprets the reference to
government securities in rule 17j-1(e)(5) to refer only to direct
obligations of the United States, and not to obligations of
instrumentalities).
\65\ See, e.g., The Mexico Fund, Inc. (pub. avail. Aug. 23,
1982); The Securities Groups Money Fund, Inc. (pub. avail. May 6,
1982); Institutional Liquid Assets (pub. avail. July 6, 1981).
\66\ Proposed amendment to rule 17j-1(e)(5). The Commission
interprets ``high quality short-term debt instrument'' to mean any
instrument having a maturity at issuance of less than 366 days and
which is rated in one of the highest two rating categories by a
Nationally Recognized Statistical Rating Organization, or which is
unrated but is of comparable quality.
\67\ Proposed amendment to rule 17j-1(b). This is consistent
with an interpretive position taken by the Division staff that funds
that invest only in securities that are excepted from the definition
of ``security'' in rule 17j-1, and their investment advisers and
principal underwriters, are not required to adopt codes of ethics.
Investment Company Institute (pub. avail. Mar. 31, 1981).
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2. Beneficial Ownership
Rule 17j-1 currently provides that, for purposes of the reporting
requirement of paragraph (c) of the rule, beneficial ownership should
be interpreted in a manner that is consistent with the way that term is
interpreted for purposes of section 16 of the Exchange Act. In 1991,
the Commission adopted revised rule 16a-1 under the Exchange Act in
part to clarify the meaning of beneficial ownership for purposes of
section 16.68 Shortly thereafter, the Division issued a letter
stating that the definition of beneficial ownership provided in newly
adopted rule 16a-1(a)(2) under the Exchange Act should be used when
determining beneficial ownership for purposes of paragraph (c) of rule
17j-1.69 The Commission proposes to amend rule 17j-1(c) to
incorporate this interpretation.
\68\ See Ownership Reports and Trading by Officers, Directors
and Principal Security Holders, Securities Exchange Act Release No.
28869 (Feb. 8, 1991), 56 FR 7242. See also supra note 62.
\69\ See Investment Company Institute (pub. avail. July 31,
1991).
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3. Conforming Amendments to Advisers Act Rules
Under paragraphs (a)(12) and (a)(13) of rule 204-2 under the
Advisers Act, every investment adviser is required to keep records of
the personal securities transactions of the adviser and its ``advisory
representatives'' (as defined in the rule). Although the purposes of
these paragraphs are substantially the same as the purposes of
paragraph (c) of rule 17j-1, the two rules except transactions in
different securities from their respective reporting/recordkeeping
requirements. Currently, the rule under the Advisers Act excepts from
its recordkeeping requirements only transactions in government
securities.70 The Commission believes the reporting requirements
for the two rules should cover the same securities. Therefore, the
Commission is proposing to amend rules 204-2(a)(12) and 204-2(a)(13) to
except from the recordkeeping requirement transactions in securities
that are (i) direct obligations of the U.S. Government, (ii) high
quality short-term instruments,71 including but not limited to
bankers' acceptances, bank certificates of deposit, commercial paper
and repurchase agreements, and (iii) shares of registered open-end
investment companies. The Commission also proposes to incorporate the
definition of beneficial ownership in rule 16a-1(a)(2) under the
Exchange Act into rule 204-2.72
\70\ The Division staff has issued several no-action letters
stating that transactions in shares of funds unaffiliated with the
investment adviser are exempt from the recordkeeping requirements of
paragraphs (a)(12) and (a)(13) of rule 204-2. See, e.g.,
Massachusetts Financial Services Co. (pub. avail. Oct. 6, 1992). The
Division staff also currently takes the position that transactions
in shares of affiliated open-end funds are exempt from the
recordkeeping requirements.
\71\ See supra note 66.
\72\ See supra note 69 and accompanying text.
---------------------------------------------------------------------------
III. General Request for Comments
Any interested persons wishing to submit written comments on the
rule and form changes that are the subject of this Release, to suggest
additional changes, or to submit comments on other matters that might
have an effect on the proposals contained in this Release, are
requested to do so.
IV. Cost/Benefit Analysis
Funds and the public would benefit from the proposed amendments
because the amendments would help prevent fraudulent activity, the
costs to the public and shareholders of which could far exceed the cost
of compliance with the proposed amendments.
The proposed amendments would impose certain additional costs on
rule 17j-1 organizations and their access persons to the extent that
these organizations do not currently require their access persons to
file initial reports listing all securities held by the access persons,
and to the extent the currently required quarterly reports do not
include all securities transactions by access persons. Because access
persons already are required by rule 17j-1 to file quarterly reports,
however, the cost to these entities of accommodating initial reports is
estimated to be minimal. The costs to access persons of compiling such
reports also is estimated to be minimal.
Funds would incur additional costs for the proposed initial review
of the codes applicable to the funds, the annual report and
certification from fund management, the additional prospectus
disclosure and the filing of applicable exhibits under the proposed
amendments. However, in certain cases, fund costs would decrease
because the proposed amendments would expand the list of securities
exempt from the recordkeeping requirements.
[[Page 47852]]
V. Summary of Regulatory Flexibility Analysis
The Commission has prepared an Initial Regulatory Flexibility
Analysis in accordance with 5 U.S.C. 603 regarding amendments to rule
17j-1 under the Investment Company Act and rule 204-2 under the
Advisers Act, and amendments to fund registration forms under the
Investment Company Act and the Securities Act. The analysis notes that
the amendments are designed to improve the regulation of personal
investment activities by enhancing the oversight of these activities by
rule 17j-1 organizations, providing the public with additional
information about fund personal investment policies and making the
scope of rule 17j-1 more consistent with its purpose. Cost-benefit
information reflected in the ``Cost/Benefit Analysis'' section of this
Release also is reflected in the analysis. A copy of the Initial
Regulatory Flexibility Analysis may be obtained by contacting David M.
Goldenberg, Securities and Exchange Commission, 450 Fifth Street, NW.,
Mail Stop 10-2, Washington, DC 20549.
VI. Statutory Authority
The Commission is proposing to amend rule 17j-1 pursuant to the
authority set forth in sections 17(j) and 38(a) of the Investment
Company Act (15 U.S.C. 80a-17(j) and 80a-37(a)). The amendments to
registration forms are proposed pursuant to the authority set forth 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 amendments to rule 204-2 under the Advisers Act are proposed
pursuant to the authority set forth 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 Proposed 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 proposed to be amended as follows:
PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940
1. The authority citation for Part 270 continues to read, in part,
as follows:
Authority: 15 U.S.C. 80a-1 et seq., 80a-37, 80a-39 unless
otherwise noted;
* * * * *
2. Section 270.17j-1 is revised to read as follows:
Sec. 270.17j-1 Certain unlawful acts, practices, or courses of
business and requirements relating to codes of ethics with respect to
registered investment companies.
(a) It shall be unlawful for any affiliated person of or principal
underwriter for a registered investment company, or any affiliated
person of an investment adviser of or principal underwriter for a
registered investment company in connection with the purchase or sale,
directly or indirectly, by such person of a security held or to be
acquired, as defined in this section, by such registered investment
company:
(1) To employ any device, scheme or artifice to defraud such
registered investment company;
(2) To make to such registered investment company any untrue
statement of a material fact or omit to state to such registered
investment company a material fact necessary in order to make the
statements made, in light of the circumstances under which they are
made, not misleading;
(3) To engage in any act, practice, or course of business which
operates or would operate as a fraud or deceit upon any such registered
investment company; or
(4) To engage in any manipulative practice with respect to such
registered investment company.
(b)(1)(i) Every registered investment company, other than a money
market fund, and each investment adviser of and principal underwriter
for such investment company, shall have a written code of ethics
containing provisions reasonably necessary to prevent its access
persons from engaging in any act, practice, or course of business
prohibited by paragraph (a) of this section and shall use reasonable
diligence, and institute procedures reasonably necessary, including
procedures by which the reports required by paragraph (c) of this
section are reviewed by appropriate management or compliance personnel,
to prevent violations of such code.
(ii) The board of directors of the investment company shall approve
the code of the investment company. Prior to retaining the services of
an investment adviser or principal underwriter, the board of directors
shall review the codes of ethics adopted pursuant to paragraph
(b)(1)(i) of this section by such investment adviser or principal
underwriter, and shall receive a certification from such investment
adviser or principal underwriter that it has adopted such procedures as
are reasonably necessary to prevent access persons from violating such
code. When approving or reviewing a code of ethics pursuant to this
paragraph (b)(1)(ii), a majority of the directors of the investment
company, including a majority of the directors who are not interested
persons thereof, shall determine whether the code contains such
provisions as are reasonably necessary to prevent access persons from
engaging in any act, practice, or course of business prohibited by
paragraph (a) of this section. In the case of a unit investment trust,
the approval and review required by this paragraph (b)(1)(ii) shall be
conducted by the principal underwriter or depositor of such unit
investment trust.
(2) No less frequently than annually, the management of every
investment company (other than a unit investment trust) and of its
investment adviser and principal underwriter shall furnish to the
directors of the investment company a report:
(i) Describing issues arising under the applicable code of ethics
since the last report to the board, including, but not limited to,
information about violations of the code, sanctions imposed in response
to such violations, changes made to the code or procedures, and any
proposed or recommended changes to the code or procedures; and
(ii) Certifying that the investment company, investment adviser or
principal underwriter, as applicable, has adopted such procedures as
are reasonably necessary to prevent access persons from violating the
code.
(3) The requirements of paragraphs (b)(1) and (b)(2) of this
section shall not apply to any underwriter:
(i) Which is not an affiliated person of the registered investment
company or its investment adviser; and
(ii) None of whose officers, directors or general partners serves
as an officer, director or general partner of such registered
investment company or investment adviser.
(c)(1) Every access person of a registered investment company,
other than a money market fund, or of an investment adviser of or
principal underwriter for such investment company shall report to that
investment company, investment adviser or principal underwriter:
(i) No later than 10 days after the date that such person becomes
an access person, the title, CUSIP number (if any), number of shares
and principal amount with respect to each security in which the access
person had any direct or
[[Page 47853]]
indirect beneficial ownership at the time such person became an access
person; and
(ii) No later than 10 days after the end of a calendar quarter, the
information described in paragraph (c)(2) of this section with respect
to any transactions during that quarter in any security in which the
access person had, or by reason of such transaction acquired, any
direct or indirect beneficial ownership in the security.
(2) Reports required to be made pursuant to paragraph (c)(1)(ii) of
this section shall contain the following information:
(i) The date of the transaction, the title, CUSIP number (if any)
and number of shares, and the principal amount of each security
involved;
(ii) The nature of the transaction (i.e., purchase, sale or any
other type of acquisition or disposition);
(iii) The price at which the transaction was effected;
(iv) The name of the broker, dealer or bank with or through which
the transaction was effected; and
(v) The date that the report is being submitted by the access
person.
(3) Notwithstanding paragraph (c)(1) of this section, no person
shall be required to make a report:
(i) With respect to transactions effected for any account over
which such person does not have any direct or indirect influence or
control;
(ii) If such person is not an ``interested person'' of a registered
investment company within the meaning of section 2(a)(19) of the Act
(15 U.S.C. 80a-2(a)(19)), and would be required to make such a report
solely by reason of being a director of such investment company, except
where such director knew or, in the ordinary course of fulfilling his
official duties as a director of the registered investment company,
should have known that during the 15-day period immediately preceding
or after the date of the transaction in a security by the director such
security is or was purchased or sold by such investment company or such
purchase or sale by such investment company is or was considered by the
investment company or its investment adviser;
(iii) Where the principal underwriter, as to which such person is
an access person:
(A) Is not an affiliated person of the registered investment
company or any investment adviser of such investment company; and
(B) Has no officers, directors or general partners who serve as
officers, directors or general partners of such investment company or
any such investment adviser;
(iv) Where a report made to an investment adviser would duplicate
information recorded pursuant to Secs. 275.204-2(a)(12) or 275.204-
2(a)(13) of this chapter;
(v) Where a report to be made under paragraph (c)(1)(i) of this
section would duplicate information that:
(A) Already has been provided to the investment company, investment
adviser or principal underwriter;
(B) Would enable the investment company, investment adviser or
principal underwriter to reconstruct the person's securities holdings
at the time that the person became an access person; and
(C) Will be maintained in accordance with the requirements of
paragraph (d)(3) of this section from the date that such person becomes
an access person; or
(vi) Where a report to be made under paragraph (c)(1)(ii) of this
section would duplicate information contained in a broker trade
confirmation or account statement received by the investment company,
investment adviser or principal underwriter with respect to such person
in the time period required by that paragraph, provided that all of the
information required by paragraph (c)(2) of this section is contained
in such broker trade confirmation or account statement or is noted in
the records of such investment company, investment adviser or principal
underwriter.
(4) Each registered investment company, investment adviser and
principal underwriter to which reports are required to be made pursuant
to this section shall identify all access persons who are under a duty
to make such reports to it and shall inform such persons of such duty.
(5) Any report required by paragraph (c)(1) of this section may
contain a statement that the report shall not be construed as an
admission by the person making such report that he or she has any
direct or indirect beneficial ownership in the security to which the
report relates. For purposes of this section, beneficial ownership
shall 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.
(d) Each registered investment company, investment adviser and
principal underwriter which is required to adopt a code of ethics or to
which reports are required to be made by access persons shall, at its
principal place of business, maintain records in the manner and to the
extent set forth in this paragraph (d), and make such records available
to the Commission or any representative thereof at any time and from
time to time for reasonable periodic, special or other examination:
(1) A copy of each such code of ethics which is, or at any time
within the past five years has been, in effect shall be preserved in an
easily accessible place.
(2) A record of any violation of such code of ethics, and of any
action taken as a result of such violation, shall be preserved in an
easily accessible place for a period of not less than five years
following the end of the fiscal year in which the violation occurs.
(3) A copy of each report made by an access person pursuant to this
section, including any information provided in lieu of such reports
pursuant to paragraphs (c)(3)(v) and (c)(3)(vi) of this section, shall
be preserved for a period of not less than five years from the end of
the fiscal year in which it is made, the first two years in an easily
accessible place.
(4) A list of all persons who are, or within the past five years
have been, required to make reports pursuant to this section, and a
list of all persons responsible for reviewing such reports, shall be
maintained in an easily accessible place.
(5) A copy of each report required by paragraph (b)(2) of this
section shall be maintained for a period of not less than five years
from the date such report is made, the first two years in an easily
accessible place.
(e) As used in this section:
(1) Access person means:
(i) With respect to a registered investment company or an
investment adviser thereof, any director, officer, general partner, or
advisory person, as defined in this section, of such investment company
or investment adviser.
(ii) With respect to a principal underwriter, any director,
officer, or general partner of such principal underwriter who in the
ordinary course of his business makes, participates in or obtains
information regarding the purchase or sale of securities for the
registered investment company for which the principal underwriter so
acts or whose functions or duties as part of the ordinary course of his
business relate to the making of any recommendation to such investment
company regarding the purchase or sale of securities.
(iii) Notwithstanding the provisions of paragraph (e)(1)(i) of this
section, where the investment adviser is primarily
[[Page 47854]]
engaged in a business or businesses other than advising registered
investment companies or other advisory clients, the term access person
shall mean any director, officer, general partner, or advisory person
of the investment adviser who, with respect to any registered
investment company, makes any recommendation, participates in the
determination of which recommendation shall be made, or whose principal
function or duties relate to the determination of which recommendation
shall be made to any registered investment company; or who, in
connection with his duties, obtains any information concerning
securities recommendations being made by such investment adviser to any
registered investment company.
(iv) An investment adviser is ``primarily engaged in a business or
businesses other than advising registered investment companies or other
advisory clients'' when, for each of its most recent three fiscal years
or for the period of time since its organization, whichever is lesser,
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
such other business or businesses.
(2) Advisory person of a registered investment company or an
investment adviser thereof means:
(i) Any employee of such company or investment adviser (or of any
company in a control relationship to such investment company or
investment adviser) who, in connection with his regular functions or
duties, makes, participates in, or obtains information regarding the
purchase or sale of a security by a registered investment company, or
whose functions relate to the making of any recommendations with
respect to such purchases or sales; and
(ii) Any natural person in a control relationship to such company
or investment adviser who obtains information concerning
recommendations made to such company with regard to the purchase or
sale of a security.
(3) Control shall have the same meaning as that set forth in
section 2(a)(9) of the Act (15 U.S.C. 80a-2(a)(9)).
(4) Purchase or sale of a security includes, inter alia, the
writing of an option to purchase or sell a security.
(5) Security shall have the meaning set forth in section 2(a)(36)
of the Act (15 U.S.C. 80a-2(a)(36)), except that it shall not include:
(i) Direct obligations of the Government of the United States;
(ii) High quality short-term debt instruments, including but not
limited to bankers' acceptances, bank certificates of deposit,
commercial paper and repurchase agreements; and
(iii) Shares of registered open-end investment companies.
(6) Security held or to be acquired by a registered investment
company means:
(i) Any security as defined in this section which, within the most
recent 15 days:
(A) Is or has been held by such company; or
(B) Is being or has been considered by such company or its
investment adviser for purchase by such company; and
(ii) Any option to purchase or sell, and any security convertible
into or exchangeable for, a security described in paragraph (e)(6)(i)
of this section.
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, 77sss, 78c, 78l,
78m, 78n, 78o(d), 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m,
79n, 79q, 79t, 80a-8, 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 5 of Form N-1A (referenced in Secs. 239.15A and 274.11A) is
amended by adding paragraph (h) 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 5. Management of the Fund
* * * * *
(h) A brief statement explaining (i) that the Registrant and its
investment adviser and principal underwriter have adopted codes of
ethics that have been filed with the Commission, (ii) whether or not
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, and (iii) that information about how the
codes can be inspected or copied at the Commission's public
reference rooms or obtained from the Commission's headquarters is
available through the Commission's toll-free telephone number, 1-
800-SEC-0330.
Instruction: A Registrant that is a money market fund or that
otherwise 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.
* * * * *
6. Item 24 of Form N-1A [referenced in Secs. 239.15A and 274.11A]
is amended by redesignating paragraph (b)(17) as paragraph (b)(18) and
adding paragraph (b)(17) and an instruction to read as follows:
Form N-1A
* * * * *
Item 24. Financial Statements and Exhibits
* * * * *
(b) * * *
(17) a copy of all codes of ethics adopted pursuant to 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 why (e.g., that the
Registrant is a money market fund).
Instruction: A Registrant that is a feeder fund must also file a
copy of all codes of ethics applicable to the master fund.
* * * * *
7. Item 9 of Form N-2 (referenced in Secs. 239.14 and 274.11a-1) is
amended by removing the word ``and'' after the semicolon in paragraph
1.f., removing the period in the last line of paragraph 1.g. and
replacing it with ``; and'' and adding paragraph 1.h. 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 9. Management
1. General: * * *
h. Codes of Ethics: a brief statement explaining (i) that the
Registrant and its investment adviser and principal underwriter have
adopted codes of ethics that have been filed with the Commission,
(ii) whether or not 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, and (iii) that information
about how the codes can be inspected or copied at the Commission's
public reference rooms or obtained from the Commission's
headquarters is available through the Commission's toll-free
telephone number, 1-800-SEC-0330.
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.
* * * * *
8. Item 24 of Form N-2 (referenced in Secs. 239.14 and 274.11a-1)
is amended by redesignating paragraph 2.r. as
[[Page 47855]]
paragraph 2.s. and adding paragraph 2.r. to read as follows:
Form N-2
* * * * *
Item 24. Financial Statements and Exhibits
* * * * *
2. * * *
r. a copy of all codes of ethics adopted pursuant to 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 why (e.g., the Registrant
invests only in direct obligations of the United States Government).
* * * * *
9. Item 6 of Form N-3 (referenced in Secs. 239.17a and 274.11b) is
amended by adding paragraph (e) 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 6. Management
* * * * *
(e) A brief statement explaining (i) that the Registrant and its
investment adviser and principal underwriter have adopted codes of
ethics that have been filed with the Commission, (ii) whether or not
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, and (iii) that information about how the
codes can be inspected or copied at the Commission's public
reference rooms or obtained from the Commission's headquarters is
available through the Commission's toll-free telephone number, 1-
800-SEC-0330.
Instruction: A Registrant that is a money market fund or that
otherwise 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.
* * * * *
10. Item 28 of Form N-3 (referenced in Secs. 239.17a and 274.11b)
is amended by redesignating paragraph (b)(17) as paragraph (b)(18) and
adding paragraph (b)(17) to read as follows:
Form N-3
* * * * *
Item 28. Financial Statements and Exhibits
* * * * *
(b) * * *
(17) a copy of all codes of ethics adopted pursuant to Rule 17j-
1 (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 why (e.g., the Registrant is a money market
fund).
* * * * *
11. 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) 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 or not the codes of ethics of the registrant and its
investment adviser and principal underwriter permit personnel
subject to the codes to invest in securities, including securities
that may be purchased or held by the registrant. Also state that the
codes of ethics adopted by the registrant and its investment adviser
and principal underwriter have been filed with the Commission and
that information about how the codes can be inspected or copied at
the Commission's public reference rooms or obtained from the
Commission's headquarters is available through the Commission's
toll-free telephone number, 1-800-SEC-0330.
* * * * *
12. The Instructions As To Exhibits of Form N-5 (referenced in
Secs. 239.24 and 274.5) are amended by redesignating paragraph 13 as
paragraph 14 and adding paragraph 13 to read as follows:
Form N-5
* * * * *
Instructions as to Exhibits
* * * * *
13. A copy of all codes of ethics adopted pursuant to 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).
* * * * *
13. Item 41 of Form N-8B-2 (referenced in Sec. 274.12) is amended
by adding paragraph (d) 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
* * * * *
41. * * *
(d) Provide a brief statement explaining (i) that the trust and
its principal underwriter have adopted codes of ethics that have
been filed with the Commission, (ii) whether or not 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, and (iii) that information about how the codes can be
inspected or copied at the Commission's public reference rooms or
obtained from the Commission's headquarters is available through the
Commission's toll-free telephone number, 1-800-SEC-0330.
* * * * *
14. 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) a copy of all codes of ethics adopted pursuant to Rule 17j-1
under the 1940 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 why (e.g.,
the trust invests only in direct obligations of the United States
Government).
* * * * *
PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940
15. The authority citation for part 275 continues to read, in part,
as follows:
Authority: 15 U.S.C. 80b-3, 80b-4, 80b-6A, 80b-11, unless
otherwise noted.
16. Section 275.204-2 is amended by revising the first sentence of
paragraph (a)(12)(i), redesignating paragraphs (a)(12)(ii) and
(a)(12)(iii) as (a)(12)(iii) and (a)(12)(iv), adding paragraph
(a)(12)(ii), redesignating newly designated paragraph (a)(12)(iii)(B)
as (a)(12)(iii)(C), adding paragraph (a)(12)(iii)(B), revising the
first sentence of paragraph (a)(13)(i), redesignating paragraphs
(a)(13)(ii) and (a)(13)(iii) as paragraphs (a)(13)(iii) and
(a)(13)(iv), adding paragraph (a)(13)(ii), redesignating newly
designated paragraphs (a)(13)(iii)(B) and (a)(13)(iii)(C) as
(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 (other than transactions
described in paragraph (a)(12)(ii) of this section) in a security in
which the investment adviser or any advisory representative (as
hereinafter defined) of such investment adviser has, or by reason of
such transaction acquires, any direct or indirect beneficial
ownership.* * *
(ii) Notwithstanding paragraph (a)(12)(i) of this section, no
record need be kept of any transactions:
[[Page 47856]]
(A) 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; or
(B) In securities which are:
(1) Direct obligations of the Government of the United States;
(2) High quality short-term debt instruments, including but not
limited to bankers' acceptances, bank certificates of deposit,
commercial paper and repurchase agreements; or
(3) Shares of registered open-end investment companies.
(iii) * * *
(B) The term beneficial ownership shall 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.
* * * * *
(13)(i) Notwithstanding the provisions of paragraph (a)(12) of this
section, where the investment adviser is primarily engaged in a
business or businesses other than advising registered investment
companies or other advisory clients, a record must be maintained of
every transaction (other than transactions described in paragraph
(a)(13)(ii) of this section) in a security in which the investment
adviser or any advisory representative (as hereinafter defined) of such
investment adviser has, or by reason of such transaction acquires, any
direct or indirect beneficial ownership.* * *
(ii) Notwithstanding paragraph (a)(13)(i) of this section, no
record need be kept of any transactions:
(A) 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; or
(B) In securities which are:
(1) Direct obligations of the Government of the United States;
(2) High quality short-term debt instruments, including but not
limited to bankers' acceptances, bank certificates of deposit,
commercial paper and repurchase agreements; or
(3) Shares of registered open-end investment companies.
(iii) * * *
(B) The term beneficial ownership shall 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.
* * * * *
Dated: September 8, 1995.
By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 95-22850 Filed 9-13-95; 8:45 am]
BILLING CODE 8010-01-P
