Appendix D - Securities Law Excerpts

General Information

A. Glass-Steagall Act As Modified By Gramm-Leach-Bliley Act

Historical Perspective

The Banking Act of 1933 (Act), in particular Sections 16, 20, 21, and 32, are often called the Glass-Steagall Act, was enacted to address questionable banking industry practices during the 1920's and 1930's. The primary purpose of the Act is to separate commercial banking from investment banking. This separation was designed to promote the financial stability of commercial banks, create public confidence in the banking system, and prevent conflicts of interest which might develop from the performance of both commercial and investment banking.

Sections 16, 20, 21, and 32 of the Act established certain restrictions regarding commercial banks engaging in securities related activities. In general, these Sections prohibited banks from underwriting or making a market in stocks and municipal revenue debt instruments. They also prohibited banks from maintaining financial or personnel ties with investment banks. Specifically, Section 32 of the Banking Act of 1933 prohibited any employee of a member bank from concurrently being employed by any firm engaged in the issuance of securities. In the case of a State nonmember bank, this would result in a conflict of interest situation and would, if proper safeguards were not taken, result in a deficiency in the bank's operation and action by the Corporation to remedy the situation.

Gramm-Leach-Bliley Act (GLBA): Enacted November 12, 1999

The GLBA repealed Sections 20 and 32 of the Banking Act of 1933 [Section 101 of GLBA]. The GLBA also modified several other securities laws which are applicable to banks and bank securities activities. Those issues are discussed in the following sub-section.

Section 20 Repealed
Prior to GLBA, Section 20 had prohibited bank affiliations with organizations dealing in the issuance of securities. It prohibited a bank from affiliation with any corporation, association, business trust, or other similar organization engaged principally in the issuance, flotation, underwriting, public sale, or distribution, whether through wholesale or retail channels or through participation in a syndicate, of stocks, bonds, debentures, notes, or other securities.

With the repeal of Section 20, banks have more flexibility to engage in securities underwriting and dealer activities. These activities will need to be conducted through a Financial Holding Company or financial subsidiary (at the bank level). This will be of particular interest to banks with proprietary mutual funds, as they are now allowed to underwrite and distribute both proprietary and third-party mutual funds.

Section 32 Repealed
Prior to GLBA, Section 32 had prohibited interlocking management between entities that issue securities and banks. The language describing these entities was similar to that noted above.

With the repeal of Section 32, banks can have common officers, directors, and employees with registered investment companies (mutual funds). This allows interlocks and poses a new conflict of interest situation. Though the interlock is limited to some degree by the Investment Company Act of 1940, it still exists. Examiners should be mindful of the potentially abusive situations this interlock may present.

Section 10(c) of the Investment Company Act of 1940 prohibits a majority of the directors of a mutual fund from being officers, directors, or employees of any one bank. The GLBA expanded this prohibition to affiliates and subsidiaries of the bank. Basically, a mutual fund may not have a majority of its directorate comprised of individuals of a single bank and its associated affiliates and subsidiaries.

In addition, the SEC strengthened its general rules for director independence of investment companies by amending certain exemptive rules under the Investment Company Act of 1940. For investment companies that rely on these rules: independent directors must constitute a majority of their board of directors; independent directors must select and nominate other independent directors; and any legal counsel for the independent directors must be an independent legal counsel. [Section 10 of Investment Company Act of 1940 and SEC Release Nos. 33-7932 & 34-43786 Final Rule: Role of Independent Directors of Investment Companies; effective May 12, 2001.]

B. Applicability of Federal Securities Laws to Banks and Bank Sponsored Securities Activities

The Gramm-Leach-Bliley Act (GLBA) modified aspects of certain Federal securities laws that are applicable to banks and bank sponsored securities activities. The GLBA was enacted November 12, 1999. GLBA provisions were phased-in during an eighteen month period after November 12, 1999. The following discussion of rules and exemptions are post-GLBA.

Registration of Bank Securities

Securities Act of 1933: To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

The Act exempts any security issued or guaranteed by a bank from all Sections except Section 17 fraud provisions. (§ 3(a)(2)).

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Bank securities must be registered with the appropriate bank regulatory agency which administers and enforces §§ 12, 13, 14(a), (c), (d), (f), and 16 in a manner substantially similar to the SEC (§ 12(i)).

Bank as Broker

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

§3(a)(4): The GLBA Section 201, Definition of Broker, amended §3(a)(4) of the Securities Exchange Act of 1934.

There is an exemption for banks engaging in traditional trust and fiduciary activity, provided a few key points are followed. These include how compensation is received, how the activity is marketed, and how transactions are directed. A further explanation of these concepts is found in subsections (B)(ii) and (C). Fiduciary activity is defined in subsection (D).

An exemption has also been afforded to certain stock purchase plans (subsection B(iv)) and safekeeping and custodial activity (subsection B(viii). Again, these are subject to how transactions are directed. There is also a "catch-all" de minimis exemption for isolated transactions that fall outside of the items specifically exempted (subsection B(xi)). It is expected that this will help with incidental transactions.

There is no specific recordkeeping requirement set-forth in this section; however, management will need sufficient records to demonstrate that the institution qualifies for the exemption. If an activity does not meet any of the exemptions detailed below the bank must register with the SEC. Either the SEC or the NASD will provide regulatory oversight. Management may decide to move the activity to a subsidiary or affiliate. In that case, the subsidiary or affiliate must register with the SEC.

On October 3, 2007, the Federal Reserve and SEC published Regulation R, "Definitions of Terms and Exemptions Relating to the 'Broker' Exceptions for Banks and Exemptions for Banks Under Section 3(a)(5) of The Securities Exchange Act and Related Rules; Final Rule," which sets forth requirements for satisfying the conditions for the Trust & Fiduciary exceptions, the Custody & Safekeeping exemptions, as well as the Networking exception and other exemptions for banks from the definition of "Broker." See SEC Release No. 34-56501: File No. S7-22-0 (353KB PDF file - PDF Help). Also refer to Section 10.F for a detailed discussion of Regulation R.

The revised definition of a broker in Section §3(a)(4) states, in part,

Broker:

In General - The term `broker' means any person engaged in the business of effecting transactions in securities for the account of others.
Exception for certain bank activities - A bank shall not be considered to be a broker because the bank engages in any one or more of the following activities under the conditions described:

Third party brokerage arrangements - "text not included"
Trust Activities - The bank effects transactions in a trustee capacity, or effects transactions in a fiduciary capacity in its trust department or other department that is regularly examined by bank examiners for compliance with fiduciary principles and standards, and

is chiefly compensated for such transactions, consistent with fiduciary principles and standards, on the basis of an administration or annual fee (payable on a monthly, quarterly, or other basis), a percentage of assets under management, or a flat or capped per order processing fee equal to not more than the cost incurred by the bank in connection with executing securities transactions for trustee and fiduciary customers, or any combination of such fees; and
does not publicly solicit brokerage business, other than by advertising that it effects transactions in securities in conjunction with advertising its other trust activities.

Permissible Securities Transactions - "text not included"
Certain Stock Purchase Plans

Employee Benefit Plans - The bank effects transactions, as part of its transfer agency activities, in the securities of an issuer as part of any pension, retirement, profit-sharing, bonus, thrift, savings, incentive, or other similar benefit plan for the employees of that issuer or its affiliates (as defined in Section 2 of the Bank Holding Company Act of 1956), if the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connection with the plan.
Dividend Reinvestment Plans - The bank effects transactions, as part of its transfer agency activities, in the securities of an issuer as part of that issuer's dividend reinvestment plan, if

the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connection with the plan; and
the bank does not net shareholders' buy and sell orders, other than for programs for odd-lot holders or plans registered with the Commission.

Issuer Plans - The bank effects transactions, as part of its transfer agency activities, in the securities of an issuer as part of a plan or program for the purchase or sale of that issuer's shares, if

the bank does not solicit transactions or provide investment advice with respect to the purchase or sale of securities in connection with the plan or program; and
the bank does not net shareholders' buy and sell orders, other than for programs for odd-lot holders or plans registered with the Commission.

Permissible Delivery of Materials - The exception to being considered a broker for a bank engaged in activities described in sub clauses (I), (II), and (III) will not be affected by delivery of written or electronic plan materials by a bank to employees of the issuer, shareholders of the issuer, or members of affinity groups of the issuer, so long as such materials are

comparable in scope or nature to that permitted by the Commission as of the date of the enactment of the Gramm-Leach-Bliley Act; or
otherwise permitted by the Commission.

Sweep Accounts - The bank effects transactions as part of a program for the investment or reinvestment of deposit funds into any no-load, open-end management investment company registered under the Investment Company Act of 1940 that holds out as a money market fund.
Affiliate Transactions - "text not included"
Private Securities Offerings - "text not included"
Safekeeping and Custody Activities

In General - The bank, as part of customary banking activities

provides safekeeping or custody services with respect to securities, including the exercise of warrants and other rights on behalf of customers;
facilitates the transfer of funds or securities, as a custodian or a clearing agency, in connection with the clearance and settlement of its customers' transactions in securities;
effects securities lending or borrowing transactions with or on behalf of customers as part of services provided to customers pursuant to division (a) or (b) or invests cash collateral pledged in connection with such transactions;
holds securities pledged by a customer to another person or securities subject to purchase or resale agreements involving a customer, or facilitates the pledging or transfer of such securities by book entry or as otherwise provided under applicable law, if the bank maintains records separately identifying the securities and the customer; or
serves as a custodian or provider of other related administrative services to any individual retirement account, pension, retirement, profit sharing, bonus, thrift savings, incentive, or other similar benefit plan.

Exception for Carrying Broker Activities - "text not included"

Identified Banking Products - The bank effects transactions in identified banking products as defined in Section 206 of the Gramm-Leach-Bliley Act.
Municipal Securities - The bank effects transactions in municipal securities.
De Minimis Exception - The bank effects, other than in transactions referred to in clauses (i) through (x), not more than 500 transactions in securities in any calendar year, and such transactions are not effected by an employee of the bank who is also an employee of a broker or dealer.

Exection by Broker or Dealer - The exception to being considered a broker for a bank engaged in activities described in clauses (ii), (iv), and (viii) of subparagraph (B) shall not apply if the activities described in such provisions result in the trade in the United States of any security that is a publicly traded security in the United States, unless

the bank directs such trade to a registered broker or dealer for execution;
the trade is a cross trade or other substantially similar trade of a security that

is made by the bank or between the bank and an affiliated fiduciary; and
is not in contravention of fiduciary principles established under applicable Federal or State law; or

the trade is conducted in some other manner permitted under rules, regulations, or orders as the Commission may prescribe or issue.

Fiduciary Capacity - For purposes of subparagraph (B)(ii), the term 'fiduciary capacity' means

in the capacity as trustee, executor, administrator, registrar of stocks and bonds, transfer agent, guardian, assignee, receiver, or custodian under a uniform gift to minor act, or as an investment adviser if the bank receives a fee for its investment advice;
in any capacity in which the bank possesses investment discretion on behalf of another; or
in any other similar capacity.

Exception for Entities Subject to Section 15(e) - "text not included"

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA in Section 215, Definition of Broker Under the Investment Company Act of 1940, amended Section 2(a)(6) of the Investment Company Act of 1940.

The term `broker' has the same meaning as given in Section 3 of the Securities Exchange Act of 1934, except that such term does not include any person solely by reason of the fact that such person is an underwriter for one or more investment companies.

Investment Advisers Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA in Section 218, Definition of Broker Under the Investment Advisers Act of 1940 amended Section 202(a)(3).

The term `broker' has the same meaning as given in Section 3 of the Securities Exchange Act of 1934.

Bank as Dealer

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

§3 (a)(5): The GLBA Section 202, Definition of Dealer, amended Section 3(a)(5) of the Securities Exchange Act of 1934.

There is an exception for trustee and fiduciary transactions and asset-backed activity. However, the Securities Exchange Act of 1934 does not define what is considered a trustee or fiduciary as it pertains to dealer activity. It does define fiduciary activity in the revised Section 3(a)(4)(D).

The revised definition of a dealer in Section 3(a)(5) states, in part,

Dealer:

In General - The term `dealer' means any person engaged in the business of buying and selling securities for such person's own account through a broker or otherwise.
Exception for person not engaged in the business of Dealing - "text not included"
Exception for Certain Bank Activities - A bank shall not be considered to be a dealer because the bank engages in any of the following activities under the conditions described:

Permissible Securities Transactions - "text not included"
Investment, Trustee, and Fiduciary Transactions - The bank buys or sells securities for investment purposes

for the bank; or
for accounts for which the bank acts as a trustee or fiduciary.

Asset-Backed Transactions - The bank engages in the issuance or sale to qualified investors, through a grantor trust or other separate entity, of securities backed by or representing an interest in notes, drafts, acceptances, loans, leases, receivables, other obligations (other than securities of which the bank is not the issuer), or pools of any such obligations predominantly originated by

the bank;
an affiliate of any such bank other than a broker or dealer; or
a syndicate of banks of which the bank is a member, if the obligations or pool of obligations consists of mortgage obligations or consumer-related receivables.

Identified Banking Products - The bank buys or sells identified banking products, as defined in Section 206 of the Gramm-Leach-Bliley Act.

Furthermore, the SEC issued a Final Rule (below) and separate Staff Commentary in 2003 to clarify the requirements for bank exemptions for broker and dealer rules. The new guidance finalizes dealer rules, but separate broker rules are to be issued separately at a later date. Broker rules definitions had not been issued as of this printing. The revised sections of the Securities Exchange Act of 1934 are quoted below. For preamble and endnotes to the SEC's final rule, refer to either SEC Release No. 34-47364 or 68 Federal Register 8686.

SEC Final Rule: Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of the Securities Exchange Act of 1934 Securities and Exchange Commission 17 CFR Part 240 [Release No. 34-47364; File No. S7-41-02]

Excerpt:
Summary: The Securities and Exchange Commission is adopting amendments to its rule granting an exemption to banks from dealer registration for a de minimis number of riskless principal transactions, and to its rule that defines terms used in the bank exception to dealer registration for asset-backed transactions. The Commission also is adopting a new exemption for banks to the definition of broker and dealer under the Securities Exchange Act of 1934 for certain securities lending transactions. In addition, the Commission is extending the exemption from rescission liability under Exchange Act Section 29 to contracts entered into by banks acting in a dealer capacity before March 31, 2005. These rules address certain of the exceptions for banks from the definitions of "broker" and "dealer" that were added to the Securities Exchange Act of 1934 by the Gramm-Leach-Bliley Act.

Compliance Date: September 30, 2003.

Section 240.3a5-1 is revised to read as follows:

§ 240.3a5-1 Exemption from the definition of "dealer" for a bank engaged in riskless principal transactions.
(a) A bank is exempt from the definition of the term "dealer" to the extent that it engages in or effects riskless principal transactions if the number of such riskless principal transactions during a calendar year combined with transactions in which the bank is acting as an agent for a customer pursuant to Section 3(a)(4)(B)(xi) of the Act (15 U.S.C. 78c(a)(4)(B)(xi)) during that same year does not exceed 500.

(b) For purposes of this section, the term riskless principal transaction means a transaction in which, after having received an order to buy from a customer, the bank purchased the security from another person to offset a contemporaneous sale to such customer or, after having received an order to sell from a customer, the bank sold the security to another person to offset a contemporaneous purchase from such customer.

Section 240.3b-18 is revised to read as follows:

§ 240.3b-18 Definitions of terms used in Section 3(a)(5) of the Act.
For the purposes of Section 3(a)(5)(C) of the Act (15 U.S.C. 78c(a)(5)(C):

(a) The term affiliate means any company that controls, is controlled by, or is under common control with another company.

(b) The term consumer-related receivablemeans any obligation incurred by any natural person to pay money arising out of a transaction in which the money, property, insurance, or services (being purchased) are primarily for personal, family, or household purposes.

(c) The term member as it relates to the term "syndicate of banks" means a bank that is a participant in a syndicate of banks and together with its affiliates, other than its broker or dealer affiliates, originates no less than 10% of the value of the obligations in a pool of obligations used to back the securities issued through a grantor trust or other separate entity.

(d) The term obligation means any note, draft, acceptance, loan, lease, receivable, or other evidence of indebtedness that is not a security issued by a person other than the bank.

(e) The term originatedmeans:

(1) Funding an obligation at the time that the obligation is created; or

(2) Initially approving and underwriting the obligation, or initially agreeing to purchase the obligation, provided that:

(i) The obligation conforms to the underwriting standards or is evidenced by the loan documents of the bank or its affiliates, other than its broker or dealer affiliates; and

(ii) The bank or its affiliates, other than its broker or dealer affiliates, fund the obligation in a timely manner, not to exceed six months after the obligation is created.

(f) The term pool means more than one obligation or type of obligation grouped together to provide collateral for a securities offering.

(g) The term predominantly originated means that no less than 85% of the value of the obligations in any pool were originated by:

(1) The bank or its affiliates, other than its broker or dealer affiliates; or

(2) Banks that are members of a syndicate of banks and affiliates of such banks, other than their broker or dealer affiliates, if the obligations or pool of obligations consist of mortgage obligations or consumer-related receivables.

(3) For this purpose, the bank and its affiliates include any financial institution with which the bank or its affiliates have merged but does not include the purchase of a pool of obligations or the purchase of a line of business.

(h) The term syndicate of banks means a group of banks that acts jointly, on a temporary basis, to issue through a grantor trust or other separate entity, securities backed by obligations originated by each of the individual banks or their affiliates, other than their broker or dealer affiliates.

Section 240.15a-8 is revised to read as follows:

§ 240.15a-8 Exemption for banks from Section 29 liability.
(a) No contract entered into before January 1, 2003 shall be void or considered voidable by reason of Section 29 of the Act (15 U.S.C. 78cc) because any bank that is a party to the contract violated the registration requirements of Section 15(a) of the Act (15 U.S.C. 78o(a)) or any applicable provision of the Act (15 U.S.C. 78a et seq.) and the rules and regulations thereunder based solely on the bank's status as a broker or dealer when the contract was created.

(b) No contract entered into before March 31, 2005, shall be void or considered voidable by reason of Section 29 of the Act (15 U.S.C. 78cc) because any bank that is a party to the contract violated the registration requirements of Section 15(a) of the Act (15 U.S.C. 78o(a)) or any applicable provision of the Act (15 U.S.C. 78a et seq.) and the rules and regulations thereunder based solely on the bank's status as a dealer when the contract was created.

Section 240.15a-11 is added to read as follows:

§ 240.15a-11 Exemption from the definitions of "broker" and "dealer" for banks engaging in securities lending transactions.
(a) A bank is exempt from the definitions of the terms "broker" and "dealer" under Sections 3(a)(4) and 3(a)(5) of the Act (15 U.S.C. 78c(a)(4) and (a)(5)), to the extent that, as a conduit lender, or as an agent, it engages in or effects securities lending transactions, and any securities lending services in connection with such transactions, with or on behalf of a person the bank reasonably believes to be:

(1) A qualified investor as defined in Section 3(a)(54)(A) of the Act (15 U.S.C. 78c(a)(54)(A)); or

(2) Any employee benefit plan that owns and invests on a discretionary basis, not less than $25,000,000 in investments.

(b) Securities lending transaction means a transaction in which the owner of a security lends the security temporarily to another party pursuant to a written securities lending agreement under which the lender retains the economic interests of an owner of such securities, and has the right to terminate the transaction and to recall the loaned securities on terms agreed by the parties.

(c) Securities lending services means:

(1) Selecting and negotiating with a borrower and executing, or directing the execution of the loan with the borrower;

(2) Receiving, delivering, or directing the receipt or delivery of loaned securities;

(3) Receiving, delivering, or directing the receipt or delivery of collateral;

(4) Providing mark-to-market, corporate action, recordkeeping or other

services incidental to the administration of the securities lending transaction;

(5) Investing, or directing the investment of, cash collateral; or

(6) Indemnifying the lender of securities with respect to various matters.

(d) For the purposes of this section, the term conduit lender means a bank that borrows or loans securities, as principal, for its own account, and contemporaneously loans or borrows the same securities, as principal, for its own account. A bank that qualifies under this definition as a conduit lender at the commencement of a transaction will continue to qualify, notwithstanding whether:

(1) The lending or borrowing transaction terminates and so long as the transaction is replaced within one business day by another lending or borrowing transaction involving the same securities; and

(2) Any substitutions of collateral occur.

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA in Section 216, Definition of Dealer Under the Investment Company Act of 1940, amended Section 2(a)(11) of the Investment Company Act of 1940 to read as follows.

The term `dealer' has the same meaning as given in the Securities Exchange Act of 1934, but does not include an insurance company or investment company.

Investment Advisers Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA in Section 219, Definition of Dealer Under the Investment Advisers Act of 1940 amended Section 202(a)(7) to read as follows.

The term `dealer' has the same meaning as given in Section 3 of the Securities Exchange Act of 1934, but does not include an insurance company or investment company.

Bank as Underwriter

Securities Act of 1933: To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

No exemption from definition of "underwriter" (§ 2(11)). The provisions of the Act are applicable to banks.

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Not exempt from definition (§ 3(a)(20)). The provisions of the act are applicable to banks.

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Not exempt from definition of "underwriter" (§ 2(a)(40)). The provisions of the act are applicable to banks.

Bank as Principal Underwriter

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

No exemption from definition (§ 2(a)(29)).

Bank as a Municipal Bond Underwriter

The GLBA amends the corporate powers of National banks. They now have the authority to underwrite municipal revenue bonds. This activity may be performed within the bank. State banks may also engage in this activity to the extent permitted by the respective State's laws. This activity may be at the holding company, the bank, or the bank subsidiary level.

Section 151 of the GLBA amends the paragraph designating the Seventh of Section 5136 of the Revised Statutes of the United States (12 U.S.C. 24(7)). It adds the following sentence.

In addition to the provisions in this paragraph for dealing in, underwriting, or purchasing securities, the limitations and restrictions contained in this paragraph as to dealing in, underwriting, and purchasing investment securities for the national bank's own account shall not apply to obligations (including limited obligation bonds, revenue bonds, and obligations that satisfy the requirements of Section 142(b)(1) of the Internal Revenue Code of 1986) issued by or on behalf of any State or political subdivision of a State, including any municipal corporate instrumentality of 1 or more States, or any public agency or authority of any State or political subdivision of a State, if the national bank is well capitalized (as defined in Section 38 of the Federal Deposit Insurance Act).

Bank as Clearing Agency

No exemption from definition (§ 3(a)(23)(A); however, a bank is not to be deemed a clearing agency if it only performs customary bank functions or acts as agent for a clearing agency or participant in a clearing agency (§ 3(a)(23)(B)).

Bank as Municipal Securities Dealer

No exemption from "municipal securities dealer" definition for banks (§ 3(a)(30)); however, § 3(a)(30)(B) allows a separately identifiable department or division and not the bank itself to register as a municipal securities dealer

Bank as Municipal Securities Broker

Exempts banks from definition of broker (§3(a)(4)(B)(ix))

Bank as Investment Adviser

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Incorporates Investment Advisers, as defined in the Investment Advisers Act of 1940. (§3(a)(20))

Investment Advisers Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Banks, bank holding companies, or their SIDDs (separately identifiable department or division) are required to register and comply with the Investment Advisers Act of 1940 if the bank, bank holding company, or SIDD serves or acts as an investment adviser to a registered investment company. A registered investment company is defined in the Investment Company Act of 1940 Section 3(a)(1) and includes mutual funds and other similar issuers.

An "investment adviser" under the Investment Advisers Act of 1940 is subject to SEC jurisdiction, recordkeeping requirements, advertising and solicitation rules, rules on receipt of performance fees, and limits on use of nonpublic information.

If the bank or bank holding company does not advise a registered investment company - the bank or bank holding company is exempt from the Act. This is explained below in an excerpt from Section 202(a)(11).

(§202(a)(11)): "Investment adviser" means any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities; but does not include (A) a bank, or any bank holding company as defined in the Bank Holding Company Act of 1956, which is not an investment company, except that the term "investment adviser" includes any bank or bank holding company to the extent that such bank or bank holding company serves or acts as an investment adviser to a registered investment company, but if, in the case of a bank, such services or actions are performed through a separately identifiable department or division, the department or division, and not the bank itself, shall be deemed to be the investment adviser. "

If management elects to provide investment advice to a registered investment company, they will need to register the bank with the SEC or establish a "separately identifiable department or division" (SIDD) that will provide the advisory service. The SIDD must meet the provisions of 202(a)(26) below and register with the SEC.

(§202(a)(26)): "The term "separately identifiable department or division" of a bank means a unit-
(A) that is under the direct supervision of an officer or officers designated by the board of directors of the bank as responsible for the day-to-day conduct of the bank's investment adviser activities for one or more investment companies, including the supervision of all bank employees engaged in the performance of such activities; and
(B) for which all of the records relating to its investment adviser activities are separately maintained in or extractable from such unit's own facilities or the facilities of the bank, and such records are so maintained or otherwise accessible as to permit independent examination and enforcement by the Commission of this Act or the Investment Company Act of 1940 and rules and regulations promulgated under this Act or the Investment Company Act of 1940. "

(§210(A) Consultation): This section of the Investment Advisors Act was added in 1999 through the GLBA. It allows for the sharing of information, between the SEC and the appropriate federal banking agency, regarding the investment advisory activities of any bank, bank holding company, or SIDD that is registered under Section 203 of the Act.

Banks as Investment Company

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Incorporates Investment Company Act definition of "investment company". (§ 3(a)(19)).

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Banks are exempt from definition of investment company for the Act (§ 3(c)(3)).

Investment Advisers Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Incorporates Investment Company Act definition of investment company (§ 202(a)(12)).

Collective Trust Fund Treatment

Securities Act of 1933: To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

Exempts any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term 'investment company' under Section 3(c)(3) of the Investment Company Act of 1940 from all except fraud provisions under Section 17 of the Securities Act of 1933. (§ 3(a)(2)).

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Exempts any interest or participation in any common trust fund or similar fund that is excluded from the definition of the term `investment company' under Section 3(c)(3) of the Investment Company Act of 1940. (§ 3(a)(12))

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

The GLBA codified the SEC's position on common trust funds and collective pooled investment funds. An exemption under Section 3(c)(3) of the Investment Company Act of 1940 is available for common trust fund or similar fund if:

such fund is employed by the bank solely as an aid to the administration of trusts, estates, or other accounts created and maintained for a fiduciary purpose;

except in connection with the ordinary advertising of the bank's fiduciary services, interests in such fund are not-

advertised; or

offered for sale to the general public; and

fees and expenses charged by such fund are not in contravention of fiduciary principles established under applicable Federal or State law. (§ 3(c)(3)).

Single and Collective Trust Fund for IRC § 401 "Qualified" Retirement Plans Which Do Not Contain Voluntary Employment Contributions

Securities Act of 1933: To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

Exempts interests or participations in a single or collective trust fund maintained by a bank . . . issued in connection with (a) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954" from all except fraud provisions (§ 3(a)(2)).

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Includes in definition of exempted security "interests or participations in a collective trust fund maintained by a bank . . . issued in connection with (A) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954" (§ 3(a)(12)). Exempts from registration "interests or participations in any collective trust fund maintained by a bank . . . issued in connection with (i) a stock-bonus, pension, or profit-sharing plan which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954" (§ 12(g)(2)(H)).

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Exempts from definition of investment company "employees, stock bonus, pension, or profit-sharing trust which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954; or any collective trust fund maintained by a bank consisting solely of assets of such trusts" (§ 3(c)(11)).

Single and Collective Trust Fund for IRC § 401 "Qualified" Retirement Plans Which Contain Voluntary Employee Contributions

Securities Act of 1933: To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

Contains no exemption for interests or participants in a single or collective trust fund maintained by a bank if "an amount in excess of the employer's contribution is allocated to the purchase of securities (other than interests or participants in the trust or separate account itself) issued by the employer or by any company indirectly or indirectly controlling, controlling by or under common control with the employer" (§ 3(a)(2)).

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Includes in definition of exempted security "interests or participations in a collective trust fund maintained by a bank . . . issued connection with . . . a stock bonus, pension, or profit-sharing plan which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954" from all but fraud provisions (§ 3(a)(12)). Exempts from registration "interests or participations in any collective trust fund maintained by a bank . . . (which) are issued connection with . . . a stock-bonus, pension, or profit-sharing plan which meets the requirements for qualification under Section 401 of the Internal Revenue Code of 1954" (§ 12(g)(2)(H)).

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Exempts from definition of investment company "employees' stock bonus, pension, or profit-sharing trust which meet the requirements for qualification under Section 401 of the Internal Revenue Code of 1954; or any collective trust fund consisting solely of assets of such trusts": (§ 3(c)(11)).

Single and Collective Trust Fund for H.R. 10 or Keogh Plans

Securities Act of 1933: To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

Contains no exemption since only interests or participations in single or collective trust funds maintained by a bank which cover employees some or all of whom are employees within the meaning of Section 401 of Internal Revenue Code of 1954 are exempted (§ 3(a)(2)).

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

Contains no exemption because the definition of exempted security expressly excludes "interests or participations in collective trust funds maintained by a bank . . . which cover employees some or all of whom are employees within the meaning of Section 401(c)(1) of the Internal Revenue Code of 1954" (§ 3(a)(12)). However, interests in Keogh Plans are exempt from registration under (§ 12(g)(2)(H)) which exempts "any interest or participation in any collective trust funds maintained by a bank . . . (which) is issued in connection with (i) a stock bonus, pension, or profit-sharing plan which meets the requirements for qualifications under Section 401 of the Internal Revenue Code of 1954" (§ 12(g)(2)(H)).

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Exempts from definition of investment company "employees' stock bonus, pension, or profit-sharing trusts which meet the requirements for qualification under Section 401 of the Internal Revenue Code of 1954; or any collective trust fund consisting solely of assets of such trusts": (§ 3(c)(11)).

Collective Trust Funds, Including "Commingled Agency Accounts"

Securities Act of 1933: To provide full and fair disclosure of the character of securities sold in interstate and foreign commerce and through the mails, and to prevent frauds in the sale thereof, and for other purposes.

No exemption.

Securities Exchange Act of 1934: To provide for the regulation of securities exchanges and of over-the-counter markets operating in interstate and foreign commerce and through the mails, to prevent inequitable and unfair practices on such exchanges and markets, and for other purposes.

No exemption.

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

No general exemption; however, there is a limited exemption excepting from the definition of investment company "any common trust fund, or similar fund, established before the effective date of the Revenue Act of 1936 (June 22, 1936) by a corporation which is supervised or examined by State or Federal authority having supervision over banks, if a majority of the units of beneficial ownership in such fund, other than units owned by charitable or educational institutions, are held under instruments providing for payment of income to one or more persons and of principal to another or others" (§ 3(c)(3)).

Securities and Exchange Commission

A. Dealer Statutory Exceptions and Rules (SEC Staff Compliance Guide to Banks)

Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules
September 16, 2003

Division of Market Regulation
This Staff Compliance Guide to Banks on Dealer Statutory Exceptions and Rules was prepared by and represents the views of the staff of the Division of Market Regulation and does not constitute rules, regulations, or statements of the Securities and Exchange Commission ("Commission"). The Commission has neither approved nor disapproved its contents.

Beginning October 1, 2003, banks that buy and sell securities need to consider whether they are "dealers" under the federal securities laws.

Dealer activity is not interpreted the same way under securities law and banking law.
Banks need to be aware that "dealer" activity under the federal securities laws is not necessarily the same thing as "dealer" activity under banking law. For example, so-called "riskless principal" transactions are dealer activity for securities law purposes, even though they are agency activity for banking law purposes. Similarly, repurchase agreement transactions are treated as purchases and sales of securities for securities law purposes. Generally, these transactions would also be characterized for securities law purposes as transactions in the underlying security.

Although this Staff Compliance Guide highlights some of the significant provisions of the Securities Exchange Act of 1934 ("Exchange Act") and the Commission's rules, it is not comprehensive. We urge banks that need more information about particular exceptions and exemptions to consult the applicable law, including Section 3(a)(5) of the Exchange Act and the rules cited below. Banks can also obtain additional information by reading Exchange Act Release No. 47364 (February 14, 2003) (which can be found at https://www.sec.gov/rule-release/34-47364) and Exchange Act Release No. 44291 (May 11, 2001) (which can be found at https://www.sec.gov/rule-release/34-44291).

Banks that have additional questions may contact SEC staff for guidance at 202-942-0069 or at marketreg@sec.gov. Banks may also wish to consult with private counsel.
What is a "dealer" under the federal securities laws?
Section 3(a)(5) of the Exchange Act generally defines a "dealer" as "any person engaged in the business of buying and selling securities for his own account, through a broker or otherwise." All transactions that go through a bank's own accounting books are potential dealer transactions.
The securities laws and rules, however, distinguish "dealers" (which buy and sell securities as part of a regular business) from "traders" (which buy and sell securities for investment and not as part of a regular business). For additional information on distinguishing "dealers" from "traders," see https://www.sec.gov/rule-release/34-46745 and https://www.sec.gov/rule-release/34-47364 at "Dealer Activities and the Dealer/Trader Distinction."

Typical dealer functions include:

Providing two-sided quotations, or otherwise indicating an ongoing willingness to buy and sell particular securities; or

Issuing or originating securities that the person also buys and sells.

If you are trying to determine whether a particular bank is acting as a dealer, you might want to consider the following questions:

Does the bank hold itself out as being in the business of buying and selling securities?

Does the bank engage in transactions with the public?

Does the bank make a market in, or quote prices for both purchases and sales of, one or more securities?

Does the bank participate in a "selling group" or otherwise underwrite securities?

Does the bank hold a dealer inventory or does it trade with an affiliate that is a dealer?

A "yes" answer to any of these questions indicates that the bank may be a dealer.
Special Rules for Banks and FDIC-Insured Savings Associations
If a bank - or an FDIC-insured savings association or savings bank (which we will refer to as "savings banks") - is engaging in dealer activity, it does not necessarily have to register as a dealer with the Commission. Rather, Section 3(a)(5) of the Exchange Act and certain Commission rules provide transaction-specific exceptions and exemptions from the definition of "dealer" for banks and savings banks. These exceptions and exemptions are outlined below.
Exceptions From the Definition of "Dealer" Under Exchange Act Section 3(a)(5)
The Exchange Act provides four exceptions from the definition of "dealer." While the statute only makes these exceptions available to "banks" as defined in Section 3(a)(6) of the Exchange Act, the Commission has extended the scope of these exceptions to include savings banks. The four exceptions cover permissible securities transactions, investment transactions, asset-backed transactions, and identified banking products.

Permissible securities transactions. This exception permits banks to buy and sell commercial paper, bankers acceptances or commercial bills, certain Canadian government obligations, Brady bonds, and "exempted securities." "Exempted securities" include government securities, municipal securities, and interests or participations in common or collective trust funds.

Note: Banks that deal in municipal securities, government securities, and Canadian government obligations have other registration requirements under the Exchange Act. These requirements are discussed below in the question and answer section of this guide.

Investment transactions. This exception permits banks to buy and sell securities for investment purposes. It applies to transactions both for the bank itself and for its trustee and fiduciary accounts. It does not apply to transactions between the bank and its customers. This exception is analogous to the "trader" distinction discussed above.

Asset-backed transactions. This exception permits banks - through a grantor trust or other separate entity - to issue and sell certain asset-backed securities to "qualified investors." These securities must represent obligations predominantly (85% or more) originated by the bank, or an affiliate of the bank other than a broker-dealer. If the underlying assets are mortgage obligations or consumer-related receivables, a syndicate of banks that includes the bank issuing and selling the securities must have originated 85% or more of the obligations, and the bank issuing and selling the securities must have originated at least 10% of the value of the pool of obligations backing the securities. The term "qualified investor" is defined in Exchange Act Section 3(a)(54) to include other banks, broker-dealers, savings associations, and other parties that meet specified criteria. The exception is limited to the original placement of securities. It does not permit a bank to repurchase and re-sell securities in the secondary market. For additional information, see Exchange Act Rule 3b-18, which defines terms used in the asset-backed transaction exception.

Identified banking products. This exception permits banks to buy and sell certain "identified banking products," which include deposit accounts, savings accounts, certificates of deposit, other deposit instruments issued by a bank, banker's acceptances, bank issued letters of credit, bank loans, and debit accounts. "Identified banking products" also include loan participations if they are sold to "qualified investors," or to other persons who have the opportunity to review and assess any material information. In addition, "identified banking products" include (i) credit swaps and (ii) equity swaps that are sold directly to "qualified investors." (As noted above, "qualified investors" include other banks, broker-dealers, savings associations, and other parties that meet specified criteria.)

Exemptions from the Definition of "Dealer"
In addition to the four exceptions from the definition of "dealer" outlined above, banks and savings banks should also consider two exemptions adopted by the Commission by rule. These exemptions pertain to riskless principal transactions and securities lending transactions.

Riskless principal transactions. [17 CFR 240.3a5-1.] This exemption, under Exchange Act Rule 3a5-1, permits banks to engage in a limited number (up to 500) of "riskless principal" transactions per calendar year without registering with the Commission as dealers. A "riskless principal" transaction is one in which, after having received an order to buy from a customer, a bank purchases the security from another person to offset that contemporaneous sale. Alternatively, a riskless principal transaction is one in which after having received an order to sell from a customer, a bank sells the security to another person to offset that contemporaneous purchase.

How to count transactions for purposes of this exemption: Transactions with two customers where the bank acts as a riskless principal between them count as one transaction. However, if a bank acts as a riskless principal between one counterparty and multiple counterparties by arranging multiple transactions, each of the transactions on the side that involves the largest number of transactions would count as separate transactions against the annual transaction-limit.

How counting will be affected by banks' brokerage activities: The Exchange Act also permits banks to engage in certain "broker" activities without registering with the Commission. At the time the "dealer" provisions become effective, however, the "broker" provisions still will be subject to a Commission order delaying their effectiveness. See Exchange Act Release No. 47649 (April 8, 2003) (which can be found at https://www.sec.gov/rule-release/34-47649).

One of the "broker" exceptions - known as the de minimis exception - permits banks to engage in no more than 500 brokerage transactions per year that are not otherwise exempt without registering with the Commission. When banks utilize this exception after the compliance date is set for the broker rules, banks' riskless principal transactions and brokerage transactions effected under the de minimis exception will count toward the same 500-transaction limit. In other words, banks may be able to engage in any combination of brokerage transactions under the de minimis exception and riskless principal transactions under Rule 3a5-1, so long as the total number of these transactions does not exceed 500 per year. Until the broker rules are effective, however, banks may use the entire 500-transaction limit for riskless principal transactions.

A final note about this interim period: Banks will have additional flexibility initially, during the period when the dealer exceptions are effective but the broker rules are not. Until the broker rules become effective, banks may also choose to accommodate customers by executing securities transactions as agent for a commission, rather than assuming the role of a principal without risk.

Securities lending transactions. [17 CFR 240.15a-11.] This exemption, under Rule 15a-11, permits banks to engage in, or effect, securities lending transactions with certain counterparties. A "securities lending transaction" is a transaction in which the owner of a security lends the security temporarily to another party under a written securities lending agreement. Through this agreement, the lender retains the economic interests of an owner of the securities. Subject to any terms agreed upon by the parties, including an agreement to loan the securities for a fixed term, the lender also has the right to terminate the transaction and to recall the loaned securities.

Who can be a counterparty under this exemption? The counterparty to these securities lending transactions must be either a person the bank reasonably believes is a "qualified investor," or any employee benefit plan that owns and invests on a discretionary basis, at least $25,000,000 in investments. (As noted above, "qualified investors" include other banks, broker-dealers, savings associations, and other parties that that meet specified criteria.) See Exchange Act Section 3(a)(54).

In what capacities may a bank act under this exemption? A bank may act as a conduit lender, or as an agent. A bank is a "conduit lender" if, as principal for its own account, it borrows or loans securities, and contemporaneously loans or borrows the same securities. A bank that qualifies as a conduit lender at the commencement of a transaction will continue to qualify if the lending or borrowing transaction terminates so long as it is replaced within one business day by another lending or borrowing transaction involving the same securities. It will also continue to qualify if substitutions of collateral occur.

Securities lending services are included within this exemption. Banks may also provide securities lending services in connection with securities lending transactions. "Securities lending services" encompass (1) selecting and negotiating with a borrower, and executing, or directing the execution of the loan with the borrower; (2) receiving, delivering, or directing the receipt or delivery of loaned securities; (3) receiving, delivering, or directing the receipt or delivery of collateral; (4) providing mark-to-market, corporate action, recordkeeping or other services incidental to the administration of the securities lending transaction; (5) investing, or directing the investment of, cash collateral; and (6) indemnifying the lender of securities with respect to various matters.

A final note about safekeeping and custody activities: Banks also have a conditional exception under Section 3(a)(4)(B)(viii) from the Exchange Act definition of "broker" for safekeeping and custody activities. Under that exception, banks may engage in securities lending services for custody customers without meeting the requirements of this exemption. For example, the safekeeping and custody exception permits a bank to engage in securities lending transactions for custody customers that are not "qualified investors." Of course, because the custody exception is only an exception from the definition of "broker," it does not cover "dealer" transactions.

Reminder: If your bank is doing, or may do, any of the activities of a dealer, you should find out if the bank needs to register with the SEC or stop engaging in dealer transactions. We want to underscore that similar topics may be analyzed differently under the securities laws and interpretations than under banking law and interpretations. If you are not certain, you may want to review SEC laws, rules, interpretations, consult with private counsel, or ask for Commission staff advice.

Frequently Asked Questions

Question #1: May a bank holding company, subsidiary of a bank, or affiliate of a bank use the bank exceptions in the Exchange Act?

Answer #1: No. The exceptions in the Exchange Act only exclude banks' securities activities from broker-dealer regulation, and then only in certain specified circumstances. Only the bank itself may claim an exception or exemption. The exceptions and exemptions are not available to a subsidiary or affiliate of a bank (unless the subsidiary or affiliate is itself a bank).

Question #2: May a bank conduct securities transactions with its subsidiaries or affiliates without registering as a broker-dealer?

Answer #2: Each of a bank's securities transactions with a subsidiary or affiliate of the bank must qualify for an exception or exemption.

Question #3: May a bank use more than one exception or exemption?

Answer #3: Yes, if the bank meets all of the conditions of any exception or exemption on which it is relying. For example, a bank may engage in securities lending transactions in accordance with Exchange Act Rule 15a-1, or if the security lent is an exempted security, in accordance with Exchange Act Section 3(a)(5)(C)(i)(II).

Question #4: What can a bank do if it needs additional time to bring its activities into conformity with the bank dealer exceptions and exemptions?

Answer #4: As the Commission noted in adopting the final dealer rules, individual banks may have specific transactions in progress for which they may need an extension of the implementation date of these rules. Banks in this situation should contact SEC's staff to determine if specific relief may be available to them. Each bank's situation will be considered on a case-by-case basis for specified transactions for which a demonstrated burden could be avoided or alleviated through a reasonably short extension of the compliance date, or during any period when additional specific exemption requests are being considered.

Question #5: What kinds of issues will the Commission staff address by telephone?

Answer #5: The Commission staff is available to discuss any legal issue under the federal securities laws. However, banks should understand that this guidance is highly informal and, while intended to be helpful to the persons making the inquiries, not binding on the Commission. A bank seeking more formal assurance with respect to particular proposed activities should submit a written request to the Office of Chief Counsel of the Division of Market Regulation.

Question #6: If my bank has a program where it sweeps deposit accounts into government securities subject to repurchase agreements, will the bank have to change or end that program when the bank "broker" and "dealer" rules go into effect?

Answer #6: As explained above, repurchase agreement transactions ("repos") are treated as purchases and sales of securities for securities law purposes. Generally, these transactions would also be characterized for securities law purposes as transactions in the underlying security. Therefore, the bank would need to consider whether it is acting as a broker (that is, if the bank forwards the money to another entity which enters into the repo as principal) or as a dealer (that is, if the bank itself enters into the repo as principal). Under the bank exception to the definition of broker, banks are permitted to effect transactions in "exempted securities." Under the bank exception to the definition of dealer, banks are permitted to buy and sell exempted securities as defined in Section 3(a)(12) of the Exchange Act. Exempted securities include government securities. Thus, a bank has an exception from the definition of broker for transactions in government securities and an exception from the definition of dealer for buying and selling government securities. Banks must also, however, comply with the requirements of the Government Securities Act of 1986 and the related regulations. An analysis of those requirements is beyond the scope of this guide.

Question #7: If my bank was doing riskless principal transactions as a service to our customers when banks had a complete exemption from broker-dealer registration under the federal securities laws, how many riskless principal transactions may the bank engage in from October 1, 2003 until December 31, 2003, after the more limited exemption takes effect?

Answer #7: During the period before the broker rules become effective, a bank is exempt from the definition of "dealer" for 500 riskless principal transactions during a calendar year. To make it easy for banks to comply during this calendar year, a bank may utilize the entire 500 transactions between October 1, 2003 and December 31, 2003. The Commission extended the blanket bank broker exemption until November 12, 2004. During calendar year 2004, the bank also may use the entire 500 transactions for riskless principal transactions. Once the revised broker rules become effective, the bank will have to combine its riskless principal transactions with the transactions in which the bank is acting as an agent for a customer under the statutory exception for de minimis transactions during each calendar year. The combined number of transactions may not exceed 500 per calendar year. [17 CFR 240.3a5-1.] The calculation for combining the de minimis broker transactions with the riskless principal transactions will be more fully addressed when the broker rules become effective.

Question #8: If my bank wants to act as a riskless principal to fill a securities order as a service to a customer, how does the bank count the order when the bank transacts with several broker-dealers to get best execution?

Answer #8: The bank would count the order as one transaction, assuming the customer only placed one order with the bank. In other words, multiple transactions with broker-dealers to fill a single customer order would only count as one transaction for the purpose of this exemption. Moreover, if the bank routes an order to a single broker-dealer, and the broker-dealer splits the order among several of its customers, the bank would still count the transaction as one transaction. In contrast, if the bank acts as an intermediary between one customer and multiple customers by arranging multiple transactions, the bank must count each of the transactions on the side of the intermediation that involves the largest number of transactions against the annual 500-transaction limit.

Question #9: What does it mean for a bank to act as a fiduciary for purposes of Exchange Act Section 3(a)(5)(C)(ii)?

Answer #9: The exception for trustee and fiduciary transactions applies when the bank buys or sells securities for investment purposes for accounts for which the bank acts as a trustee or fiduciary. In giving meaning to the term "fiduciary" in Section 3(a)(5)(C)(ii), we look to the legislative history, which states that Exchange Act Section 3(a)(5) "excepts a bank from the definition of 'dealer' when it buys and sells securities for investment purposes for the bank or for accounts for which the bank acts as trustee or fiduciary. This mirrors existing law distinguishing between investors and dealers, and is limited to the portfolio trading of the bank and accounts for which it makes investment decisions." H.R. Rep. No. 106-74, pt. 3, at 170-71(1999).

Question #11: What does it mean to underwrite securities?

Answer #11: Confusion about what it means to be a dealer sometimes is caused by the belief that dealers only underwrite securities, although in general the determination of broker or dealer status under the Exchange Act primarily depends on the broader definitions of 'purchase' and 'sale.' See Exchange Act Section 3(a)(13) and 3(a)(14) [15 USC 78c(a)(13) and 78c(a)(14)]. As the Commission stated in footnote 21 of Exchange Act Release No 47364 (February 14, 2003): "The term 'underwriter' is defined in Section 2(a)(11) of the Securities Act of 1933 [15 USC 77b(a)(11)]. In determining whether a bank is acting as an underwriter when it undertakes particular securities activities, the Commission is not expressing any views on whether those activities would constitute 'underwriting' for purposes of Section 16 of the Glass-Steagall Act. The Commission wishes to emphasize that the determination of dealer status with respect to securities transactions, including those that do not involve a public offering, must be made by reference to the federal securities laws. It is the Commission's view, however, that the fact that an offering is exempt from registration under the Securities Act of 1933 ("Securities Act") [15 USC 77a, et seq.] does not necessarily affect the status of a participant in that offering as an 'underwriter' as defined in Securities Act Section 2(a)(11)." [68 FR 8686 at 8688, note 21.]

Question #12: May a bank register itself as a broker-dealer?

Answer #12: While this is possible as a theoretical matter, it may not be practical for most banks (except in the case of banks that do not make loans). As the Commission noted in Exchange Act Release No. 44291 (May 11, 2001) https://www.sec.gov/rule-release/34-44291 at note 266 and the sources cited therein, banks have traditionally had varying reasons for choosing to conduct securities activities through a separate entity.

Question #13: Why is the definition of "dealer" for purposes of broker-dealer registration different from the analysis under the Commission's net capital rule of when a registered broker-dealer must maintain the required minimum capital as a "dealer"?

Answer #13: The analysis is different because the purpose of the analysis is different. All registered broker-dealers, including any bank that registered with the Commission, are subject to the net capital rule. The net capital rule sets forth appropriate capital levels to comply with the financial responsibility requirements for a registered broker-dealer based on its business model. Exchange Act Rule 15c3-1(a)(2)(iii)(B) establishes minimum net capital requirements for broker-dealers that are designated as "dealers" because they engage in a certain level of proprietary trading. Under that rule, a "dealer" includes "any broker or dealer that effects more than ten transactions in any one calendar year for its own investment account." In contrast, determining when a person meets the initial threshold that requires registration as a broker-dealer is subject to the analysis of the factors set forth at the beginning of this special notice as well as the broker factors set forth in the Compliance Guide to the Registration and Regulation of Brokers and Dealers.

Question #14: If a bank acts only as a municipal securities dealer, must it register as a broker-dealer?

Answer #14: No, it has an exception from broker-dealer registration. It, or its separately identified department or division, must, however, register as a municipal securities dealer under Exchange Act Section 15B. A bank should use Form MSD to register with the Commission. The bank, or its separately identified department or division, must follow the rules governing municipal securities dealers, including the rules of the Municipal Securities Rulemaking Board ("MSRB").

Question #15: If a bank is registered as a municipal securities dealer, must it also register as a municipal securities broker?

Answer #15: No, there is no separate registration for municipal securities brokers. However, if a bank has a separately identified department or division registered as a municipal securities dealer, the bank must conduct its municipal brokerage business in that separately identifiable department or division. For additional information on this subject, see MSRB Rule G-1, which defines the separately identifiable department or division of a bank.

Question #16: Do a bank's transactions in municipal fund securities have to comply with Commission and MSRB rules?

Answer #16: Banks must register as municipal securities dealers to deal in municipal securities that States issue to provide tax-favored vehicles for educational savings, such as 529 plans. All those banks' municipal securities activities - including municipal fund securities transactions in which the bank acts solely as an agent - must conform with MSRB rules and all Commission rules that apply to municipal securities dealers. On the other hand, if a bank does not act as a dealer in municipal securities, then the bank may engage in agency transactions involving municipal fund securities without registering with the Commission and registering with the MSRB.

Question #17: If a bank acts as a dealer of U.S. government or Canadian government securities, must it register as a broker-dealer?

Answer #17: No, because banks are exempted from broker-dealer registration for "permissible securities transactions." Permissible securities transactions include "exempt securities," which include government securities and Canadian securities and are defined in Exchange Act Section 3(a)(12). Banks, however, must also comply with the requirements of the Government Securities Act of 1986 [15 USC § 78o-5] as well as the legal requirements of the implementing regulations promulgated by Treasury, 17 C.F.R. Parts 400 to 450 when they effect transactions in or buy or sell government securities and Canadian securities. For hold-in-custody repurchase transactions, 17 C.F.R. § 450 also is applicable. Banks that are dealing in government securities also should review the Federal Financial Institutions Examination Council ("FFIEC") Modification of Policy Statement, 63 F.R. 6935 (February 11, 1998).

Question #18: If a bank may deal only with "qualified investors" to meet the terms of an exemption or exception, who can be its customers or counterparties?

Answer #18: The term "qualified investor" is defined in Exchange Act Section 3(a)(54). [15 USC 78c(a)(54).] Qualified investors include investment companies, banks, small business investment companies, any State sponsored employee benefit plan, institutional trusts, market intermediaries, and individuals, corporations or partnerships that own and invest on a discretionary basis more than $25,000,000.

How to Contact Us
For general questions regarding broker-dealer registration and regulation:

Office of Interpretation and Guidance
Division of Market Regulation
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549
(202) 942-0069
E-mail address: marketreg@sec.gov

Where to Get Further Information
For copies of SEC forms and recent SEC releases:

Publications Section
U.S. Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, D.C. 20549-0011
(202) 942-4046

Other useful telephone numbers, and Web sites:

SEC's website: https://www.sec.gov

National Association of Securities Dealers' website: https://www.sec.gov/rules/sro/nasd

National Association of Securities Dealers' telephone number: (800) 289-9999 or (301) 590-6500

References:
Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of Exchange Act Release No. 34-47364, 68 FR 8686 (February 24, 2003).

Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of Exchange Act Release No. 34-46745, 67 FR 67495 (November 5, 2002).

Definition of Terms in and Specific Exemptions for Banks, Savings Associations, and Savings Banks Under Sections 3(a)(4) and 3(a)(5) of Exchange Act Release No. 34-44291, 66 FR 27760 (May 18, 2001).

Division of Market Regulation: Compliance Guide to the Registration and Regulation of Brokers and Dealers;

https://www.sec.gov/about/reports-publications/investor-publications/guide-broker-dealer-registration
https://www.sec.gov/divisions/marketreg/bankdealerguide.htm

B. Section 28(e) and Soft Dollars (Release No. 34-23170)

Securities Exchange Act of 1934 Release No. 34-23170 Section 28(e) and Soft Dollars

17 CFR Part 241
April 23, 1986

Agency: Securities and Exchange Commission.

Action: Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 and Related Matters.

Summary: The Commission today announced the issuance of an interpretive release under Section 28(e) of the Securities Exchange Act of 1934 ("Act") which provides a safe harbor for persons who exercise investment discretion over beneficiaries' or clients' accounts to pay for research and brokerage services with commission dollars generated by account transactions. In the release, the Commission has clarified its interpretation of the phrase "brokerage and research services" in Section 28(e)(3) and has reiterated the disclosure obligations of money managers under the federal securities laws concerning brokerage allocation practices and the use of commission dollars. The Commission has also expressed its views regarding best execution obligations of fiduciaries for their clients' transactions and its views and those of the United States Department of Labor regarding directed brokerage practices by sponsors of employee benefit plans. The Commission believes that the release will provide useful guidance to money managers and other persons in the securities industry.

For Further Information Contact: Mary Chamberlin, Chief Counsel, or Kerry F. Hemond, Esq. ((202) 272-2848), Office of Chief Counsel, Division of Market Regulation, Securities and Exchange Commission, 450 5th Street, NW, Washington, DC 20549. For further information regarding the obligations imposed under the Investment Advisers Act of 1940 and the Investment Company Act of 1940, contact Thomas P. Lemke, Chief Counsel, Stephanie M. Monaco, Esq., or Gerald T. Lins, Esq. ((202) 272-2030), Office Chief Counsel, Division of Investment Management, Securities and Exchange Commission.

Supplementary Information:

I. Background
Section 28(e) provides a safe harbor to money managers who use the commission dollars of the advised accounts to obtain investment research and brokerage services, provided that all of the conditions in the section are met. The section states that a person who exercises investment discretion with respect to an account shall not be deemed to have acted unlawfully or to have breached a fiduciary duty under state or federal law solely by reason of his having caused an account to pay more than the lowest available commission if that person determines in good faith that the amount of the commission is reasonable in relation to the value of the brokerage and research services provided. Conduct outside of the safe harbor of Section 28(e) may constitute a breach of fiduciary duty as well as a violation of specific provisions of the federal securities laws, particularly under the Investment Advisers Act of 1940 ("Advisers Act") and the Investment Company Act of 1940 ("Company Act") and of the Employee Retirement Income Security Act of 1974 ("ERISA"). In addition, the section only excuses paying more than the lowest available commission and does not shield a person who exercises investment discretion from charges of violations of the antifraud provisions of the federal securities laws or from allegations, for example, that he churned an account, failed to seek the best price, or failed to make required disclosures.
In connection with the abolition of fixed commission rates on May 1, 1975, money managers and broker-dealers expressed concern that, if money managers were to pay more than the lowest commission rate available to a broker-dealer in return for services other than execution, such as research, they would be exposed to charges that they had breached a fiduciary duty. This concern was based on the traditional fiduciary principle that a fiduciary cannot use trust assets to benefit himself. The purchase of research with the commission dollars of a beneficiary or a client, even if used for the benefit of the beneficiary or the client, could be viewed as also benefiting the money manager in that he was being relieved of the obligation to produce the research himself or to purchase it with his own money. This concern stemmed in part from litigation during the 1960's and 1970's over whether advisers of investment companies had a duty to recapture commission dollars for the benefit of the investment company. The Congress added Section 28(e) of the Act to make clear that money managers could consider the provision of research, as well as execution services, in evaluating the cost of brokerage services without violating their fiduciary responsibility. In adopting Section 28(e), the Congress acknowledged the important service broker-dealers provide by producing and distributing investment research to money managers and created a safe harbor to permit money managers, in certain circumstances, to continue to use commission dollars paid by managed accounts to acquire research as well as execution services. These arrangements have come to be referred to as "soft dollar" arrangements.

In 1976, the Commission issued an interpretive release concerning the scope of Section 28(e). The Commission stated in the release that the safe harbor did not protect "products and services which are readily and customarily available and offered to the general public on a commercial basis." The Commission issued the release as a result of a number of practices which it did not believe were within the safe harbor. Since that time, the commission has issued a report pursuant to Section 21(a) of the Act reiterating this standard. The staff has generally declined, as a matter of policy, to express definitive views as to whether a money manager's receipt of any particular product or service would by protected by Section 28(e), although it has provided general comments on research services through the no-action letter process.

Prompted by an increased industry focus on soft dollar practices, over the past eighteen months the staff of the Commission's Divisions of Market Regulation and Investment Management, and the staff of the Commission's regional offices, have been engaged in an examination of such practices generally and in particular in a re-evaluation of the 1976 standard as to-the meaning of the phrase "brokerage and research services" in the context of Section 28(e). Based on the staff's analyses and recommendations, the Commission has concluded that the 1976 standard is difficult to apply and unduly restrictive in some circumstances, and that uncertainty about the standard may have impeded money managers from obtaining, for commission dollars, goods and services they believe are important to the making of investment decisions. Accordingly, the Commission is withdrawing the 1976 standard and adopting revised standard, as discussed below. At the same time, however, the Commission emphasizes that money managers, particularly investment advisers registered under the Advisers Act, have important fiduciary and disclosure obligations concerning soft dollar practices, as well as a duty to obtain best execution of their clients' transactions. Finally, the Commission expresses its views on the practice of many employee benefit plan sponsors of directing their money managers to execute transactions through specified broker-dealers who have agreed to rebate to the plan a portion of the commissions paid in the form of cash, goods or services.
II. Definition of Brokerage and Research Services

A. In General
Subparagraph (3) of Section 28(e) defines the brokerage and research services that are protected. The statute states that a person provides brokerage and research services insofar as he -

(A)     furnishes advice, either direct or through publications or writings, as to the value of securities, the advisability of investing in, purchasing, or selling securities, and the availability of securities or purchasers or sellers of securities;

(B)     furnishes analyses and reports concerning issuers, industries, securities, economic factors and trends, portfolio strategy, and the performance of accounts; or

(C)     effects securities transactions and performs functions incidental thereto (such as clearance, settlement, and custody) or required in connection therewith by rules of the Commission or a self-regulatory organization of which such person is a member or person associated with a member or in which such person is a participant.

The legislative history of Section 28(e) indicates that: the definition of brokerage and research services is intended to comprehend the subject matter in the broadest terms, subject always to the good faith standard in subsection (e)(1). Thus, for example, the reference to economic factors and trends would subsume political factors which may have economic implications which may in turn have implications in terms of the securities markets as a whole or in terms of the past, present, or future values of individual securities or groups of securities. Similarly, computer analyses of securities portfolios would also be covered. Thus, the touchstone for determining when a service is within or without the definition in Section 28(e)(3) is whether it provides lawful and appropriate assistance to the money manager in the carrying out of his responsibilities.

The Commission relied on this legislative history in adopting the 1976 guidelines, but expressed its view that in order to rely on the Section 28(e) safe harbor, the product or service must not be readily and customarily available and offered to the general public on a commercial basis. While application of this standard has in some cases been clear, in other cases it has caused substantial uncertainty and confusion on the part of money managers and others, particularly as the types of research products and their methods of delivery have proliferated and become more complex. For example, participants in the securities industry have repeatedly requested clarification as to whether the application of this standard would disqualify a product that is available for hard dollars, what is meant by "the general public," the extent to which economic, financial and statistical information conveyed through computer facilities to a money manager may be considered to be research, and whether the computer facilities themselves can constitute research. The Commission is concerned that this lack of clarity has impeded the use by fiduciaries of appropriate research material and has acted as a disincentive to competition among broker-dealers.

B. Revised Standard
The Commission believes that, subject to the process discussed below of allocating payment for products or services that serve both a research and a non-research function, the controlling principle to be used to determine whether something is research is whether it provides lawful and appropriate assistance to the money manager in the performance of his investment decision-making responsibilities. In making this determination, the fact that a product or service is readily and customarily available and offered to the general public on a commercial basis does not dictate the conclusion that the product or service is not research, as was the case under the 1976 standard. Rather, the focus should be on whether the product or service provides lawful and appropriate assistance to the money manager's investment decision-making process. What constitutes lawful and appropriate assistance in any particular case will depend on the nature of the relationships between the various parties involved and is not susceptible to hard and fast rules. Of course, Section 28(e) continues to require the money manager to make a good faith determination that the value of research and brokerage services is reasonable in relation to the amount of commissions paid. The legislative history of Section 28(e) makes clear that the burden of proof in demonstrating this determination rests on the money manager.

In many cases, a product or service termed "research" may serve other functions that are not related to the making of investment decisions. For example, management information systems may integrate such diverse functions as trading, execution, accounting, recordkeeping and other administrative matters, such as measuring the performance of accounts. Where a product obtained with soft dollars has a mixed use, a money manager faces a conflict of interest in obtaining that product by causing his clients to pay more than competitive brokerage commission rates. Therefore, the Commission believes that where a product has a mixed use, a money manager should make a reasonable allocation of the cost of the product according to its use. The percentage of the service or specific component that provides assistance to a money manager in the investment decision-making process may be paid for in commission dollars, while those services that provide administrative or other non-research assistance to the money manager are outside the Section 28(e) safe harbor and must be paid for by the money manager using his own funds. The money manager must keep adequate books and records concerning allocations so as to be able to make the required good faith showing. [Emphasis added]

Computer hardware is another example of a product which may have a mixed use. If the hardware is dedicated exclusively to software that is used for research for a client's benefit, it may be paid for in commission dollars. On the other hand, if the computer will be used in assisting the money manager in a non-research capacity (e.g., bookkeeping or other administrative functions), that portion of the cost of the computer would not be within the safe harbor. The acquisition of quotation equipment should be analyzed similarly. Such equipment generally serves a legitimate research function of pricing securities for investment and keeping a manager informed of market developments. The equipment may also be used for a non-research purpose (e.g., client reporting). Finally, where a money manager is invited to attend a research seminar or similar program, the cost of that seminar may be paid for with commission dollars. Non-research aspects of the trip, however, such as travel costs, hotel, meal and entertainment expenses, are not within the safe harbor.

The Commission recognizes that the task of properly allocating the research and non-research properties of certain goods and services provided to fiduciaries may be complex. The Commission believes the standard will be satisfied where a fiduciary can demonstrate a good faith attempt, under all the circumstances, to allocate the anticipated uses of a product.

III. Third Party Research
Another issue raised under Section 28(e) is whether research may be produced or provided by someone other than the executing broker-dealer, or so-called "third party" research. Prior to the elimination of fixed commission rates, a variety of techniques were employed that permitted money managers to purchase third party research with brokerage commissions. Although the legislative history of Section 28(e) includes a strong statement that commission dollars may be paid only to the broker-dealer that "provides" both the execution and research services and that the section does not authorize the resumption of "give-ups, "it seems unlikely that Congress intended to forbid certain common practices that were then considered permissible and whose elimination would be anti-competitive.
In the 1976 release, the Commission indicated that Section 28(e) might, under appropriate circumstances, apply to situations in which research produced by third parties is provided to a money manager by a broker. The Commission suggested that payment of a part of the commission to another broker who is a "normal and legitimate correspondent" of the executing or clearing broker would not necessarily be a give-up outside the protection of Section 28(e).

In Release 16679, a report pursuant to Section 21(a) of the Act, the Commission found that the brokers involved in the arrangement did not provide the money managers with any significant research services. They merely executed the transactions and paid 50% of the commissions to Investors Information, Inc. ("III"), who represented various research originators. All arrangements for acquiring the services were made by the money managers and the vendors of the services. III simply held the money for the money managers and paid the bills as requested. The money managers were obligated to pay the vendors for the services and the brokers generally were not aware of the specific services which the managers acquired.

The Commission acknowledged that it is not necessary that a broker produce the research services "in-house" in order for the money manager to obtain the protection of Section 28(e). The Commission emphasized, however, that the research services must be "provided by" the broker. The Commission stated that while a broker may under appropriate circumstances arrange to have research materials or services produced by a third party, it is not "providing" such research services when it pays obligations incurred by the money manager to the third party.

In approving the "Papilsky" rules, the Commission clarified that research provided in third-party arrangements falls within Section 28(e) even if the money manager participates in selecting the research services or products to be provided to it by the broker-dealer. The Commission also stated that third-party research does not have to be shipped through the broker, but may instead be delivered directly by the third party to the manager in circumstances that otherwise qualified for the safe harbor. The Commission stated:

a broker-dealer may be deemed to have provided third party research when it has incurred a direct legal obligation to a third party producer to pay for the research (regardless of whether the research is then sent directly to the broker's fiduciary customer by the third party or instead is sent to the broker who then sends it to his customer). The Commission does not believe, however, that Section 28(e) would apply where the broker was merely used as an alternative means of paying obligations incurred by the fiduciary in its direct dealings with the third party . . . [citation omitted]. In that regard, a broker-dealer may be deemed to have provided third party research that it is legally obligated to pay for even if its fiduciary customer participates in the selection of the research services or products to be provided to it by the broker-dealer.

The staff also has expressed the opinion that Section 28(e) was not intended to exclude from its coverage the payment of commissions made in good faith to an introducing broker for execution and clearing services performed in whole or in part by the introducing broker's normal and legitimate correspondent. The staff added that the protection of Section 28(e) would not be lost merely because the fiduciary by-passed the order desk of the introducing broker and called its orders directly into the clearing broker. More recently, the staff has stated that its views concerning correspondent relationships contemplate that the "introducing broker would be engaged in securities activities of a more extensive nature than merely the receipt of commissions paid to it by other broker-dealers for 'research services' provided to money managers."

IV. Disclosure and Order Obligations Under the Investment Advisers Act of 1940 and the Investment Company Act of 1940 Applicable to Money Managers Engaging in Soft Dollar Arrangements
Money managers engaging in soft dollar arrangements must comply with all applicable disclosure requirements under the federal securities laws, and registered investment advisers and others should pay particular attention to the disclosure and books and records requirements under the Advisers Act and the Company Act. Disclosure is required even if an arrangement is within the safe harbor provided by Section 28(e). In addition, money managers must comply with any other laws imposing fiduciary or other obligations with respect to their participation in such arrangements. Set forth below is a discussion of the principal provisions of the Advisers Act and Company Act and rules and forms thereunder which, depending on the facts and circumstances involved, impose disclosure and other obligations on money managers and related persons.

A. Advisers Act

1. Form ADV
Fundamental to the Advisers Act is the concept that an investment adviser has a fiduciary obligation to act in the best interests of clients. As a fiduciary, an adviser has a duty to disclose to clients all material information which is intended "to eliminate, or at least expose," all potential or actual conflicts of interest "which might incline an investment adviser consciously or unconsciously - to render advice which was not disinterested. "Due to the potential conflict of interest when an adviser receives research as a result of allocating brokerage on behalf of clients' accounts, the Commission has long maintained that an adviser must disclose soft dollar arrangements to clients. The Commission had adopted mandatory disclosure standards for advisers involved in such arrangements, as discussed below.
Pursuant to its authority in Section 28(e)(2) to adopt rules governing a money manager's disclosure of brokerage policies and practices, the Commission proposed disclosure rules in 1976, but later determined to "incorporate more comprehensive brokerage placement practice disclosure requirements" within the registration process for investment advisers under the Advisers Act. One of these provisions is the so-called "brochure rule," which was adopted in 1979 and is set forth in Rule 204-3 under the Advisers Act. This rule requires generally that an adviser furnish each advisory client and each prospective advisory client with a written disclosure statement containing certain information regarding the adviser's business background and practices. The disclosure statement may be either a copy of Part II of the adviser's Form ADV, the registration form for investment advisers, or a written document containing at least the information required by Part II of the Form ADV.

Item 12 of Part II of Form ADV requires disclosure to clients regarding investment or brokerage discretion. The purpose of this disclosure is to provide clients with material information about the adviser's brokerage allocation policies and practices which may be important to them in deciding to hire an adviser or continue a contract with an adviser and which will permit them to evaluate any conflicts of interest inherent in the adviser's arrangements for allocating brokerage. Because brokerage policies and practices vary greatly, the disclosure made in response to Item 12 should provide sufficient information to enable a client or potential client to understand such policies and practices. This item requires disclosure regarding (1) whether the adviser or a related person has authority to determine, without specific client consent, the broker-dealer to be used in any securities transaction or the commission rate to be paid, or (2) whether the adviser or a related person suggests broker-dealers to clients. If the adviser engages in either of these practices, whether or not pursuant to a written agreement, it must describe the factors considered in selecting broker-dealers and in determining the reasonableness of commissions charged. If the value of products, research, and services given to the adviser or a related person is a factor in those decisions, the adviser must describe the following:

The products, research, and services;

Whether clients may pay commissions higher than those obtainable from other brokers in return for those products and services;

Whether research is used to service all of the adviser's accounts or just those accounts paying for it; and

Any procedures the adviser used during the last fiscal year to direct client transactions to a particular broker in return for products and research services received.

In its release discussing the concurrent adoption of Form ADV disclosure requirements and the brochure rule, the Commission pointed out that:

the amended rule and forms represent mandatory disclosure standards. More detailed or additional information and explanatory material could and should be provided where necessary, because of circumstances in particular cases, to ensure that all material information regarding brokerage placement practices and policies will be disclosed to investors.

An investment adviser should be particularly aware of the fact that the Advisers Act disclosure requirements apply to all soft dollar arrangements, whether or not they are within the safe harbor of Section 28(e). Moreover, compliance with Advisers Act disclosure requirements does not relieve an adviser from other disclosure obligations under federal or state law.

2. Section 204
Section 204 of the Advisers Act authorizes the Commission to adopt rules prescribing the book and records a registered adviser must maintain. Pursuant to this authority, the Commission has adopted Rule 204-2, which requires an adviser to keep true, accurate, and current books and records relating to its advisory business. In the case of securities transactions, particularly those which may involve soft dollars, the adviser's books and records should contain sufficient details relating to each participant in a particular transaction.

3. Best Execution
The Commission's staff has stated that an adviser, as a fiduciary, owes its clients a duty of obtaining the best execution on securities transactions. For further discussion of best execution, see Section V of this release.

B. Company Act
The Company Act and rules and forms thereunder impose various disclosure and other obligations on registered investment companies, investment advisers of registered investment companies, and related persons in connection with soft dollar arrangements.

1. Form N-1A
Form N-1A is the integrated registration form used by most open-end management investment companies to register under the Company Act and to register their securities under the Securities Act of 1933. Its disclosure requirements form the basis of the two-part prospectus used by these investment companies. Part B of the form, termed the "Statement of Additional Information," requires disclosure about the company's brokerage allocation practices. Specifically, Item 17 requires a description of how transactions in portfolio securities are effected, including a general statement about brokerage commissions. Investment companies also must describe how broker-dealers will be selected to effect securities transactions and how the overall reasonableness of commissions paid will be evaluated, including the factors considered in connection with these determinations. The instructions to this item further require that:

If the receipt of products or services other than brokerage or research is a factor in selecting brokers, the products and services should be described;

if the receipt of research services is a factor in selecting brokers, the nature of such research services should be described;

The registrant must state if persons acting on its behalf are authorized to pay a commission in excess of that which another broker might have charged for the same transaction in recognition of brokerage or research services provided by the broker;

If applicable, the registrant should explain that research services provided by brokers may be used by the adviser in servicing all of its accounts or described other practices applicable to the registrant regarding allocation of research services provided by brokers; and

The registrant must state the amount of transactions and related commissions paid as a result of directing the registrant's brokerage transactions to a broker because of research services provided pursuant to an agreement or understanding with a broker or otherwise through an internal allocation procedure.

2. Section 20(a)
Section 20(a) of the Company Act makes it unlawful for any person to solicit proxies regarding the securities of any registered investment company in contravention of Commission rules. Pursuant to this provision, the commission has adopted two rules that may be relevant to soft dollar arrangements. First, where a proxy solicitation is made on behalf of the management of the investment company, Rule 20a-1(b) requires the adviser of the investment company to furnish promptly to management, upon request, all information necessary for management to comply with the proxy rules, including information about soft dollar arrangements.

In addition to this general obligation, Rule 20a-2 requires disclosure of specific information about the adviser and its investment advisory contract in certain proxy solicitations, including information about brokerage placement practices. specifically, paragraph (b)(7) of the rule requires disclosure of, among other things, the following:

A description of how brokers are selected to effect securities transactions for the company and how the reasonableness of overall brokerage commissions paid will be evaluated, including the factors considered in these determinations;

If the receipt of products or services other than research or brokerage is a factor in selecting brokers, a description of these products or services;

If the receipt of research services is a factor in selecting brokers, the nature of such services;

Whether persons acting on behalf of the company are authorized to pay a broker a commission in excess of that which another broker might have charged for the same transaction in recognition of brokerage or research services provided by the broker;

If applicable, an explanation that research services furnished by the company's brokers may be used by the adviser in servicing all of its accounts and that not all such services may be used by the adviser in connection with the company, or an explanation of other policies or practices applicable to the company regarding the allocation of research services provided by brokers; and

The amount of transactions and related commissions directed to a broker or brokers pursuant to an agreement or understanding or otherwise through an internal allocation procedure.

3. Section 15(c)
Section 15(c) makes it unlawful for any investment company to enter into or renew any investment advisory contract unless it is approved by a majority of the company's disinterested directors. In approving such a contract, this provision imposes on directors a duty to request and evaluate such information as may reasonably be necessary for the directors to evaluate the terms of the contract. This provision also imposes on the company's adviser a duty to furnish such information to the directors.

The Supreme Court has defined the Congressional purpose in enacting Section 15(c) and related provisions of the Company Act as placing "the unaffiliated directors in the role of 'independent watchdogs' "entrusted with" the primary responsibility for looking after the interest of the funds' shareholders. "Disinterested directors are required to "exercise informed discretion, and the responsibility for keeping the independent directors informed lies with management, i.e., the investment adviser and interested directors. "Depending on the facts involved, the responsibility of the disinterested directors may include monitoring of the adviser's soft dollar arrangements.

4. Section 31
Section 31 of the Company Act authorizes the Commission to adopt rules prescribing the books and records to be maintained by a registered investment company or by others, on its behalf, including investment advisers. Pursuant to this authority, the Commission adopted Rule 31a-1. Paragraph (b)(9) of that rule requires an investment company to maintain a record for each fiscal quarter describing in detail the basis or bases upon which it allocated orders for the purchase or sale of portfolio securities and divided brokerage commissions or other compensation on such orders. The record also must indicate the consideration given to services or benefits supplied by broker-dealers to the investment company or adviser and show the nature of such services or benefits made available.
5. Section 36(b)
Under Section 36(b) of the Company Act, an investment adviser to a registered investment company has a fiduciary duty with respect to the receipt of compensation for services, or of payments of a material nature, from the investment company or its shareholders. However, with respect to any such amount received by an adviser, no violation of Section 36(b) could occur for a soft dollar arrangement falling within the safe harbor of Section 28(e). Where an adviser received amounts outside of the safe harbor of Section 28(e) such amounts would have to be analyzed under Section 36(b) to determine if they were consistent with that provision.

6. Section 17(e)(1)
As relevant here, Section 17(e)(1) of the Company Act makes it unlawful for an affiliated person of a registered investment company to receive any compensation for the purchase or sale of any property to or for the investment company when that person is acting as an agent for the company other than in the course of that person's business as a broker-dealer. The Court of Appeals for the Second Circuit has held that the objective of Section 17(e)(1) is to prevent affiliated persons [of investment companies] from having their judgment and fidelity impaired by conflicts of interest "in situations where the benefit of a reciprocal relationship between the affiliated person and another person is diverted to the affiliated person while the burden of that relationship is borne by the investment company.

It is important to emphasize that receipt by an investment adviser of any compensation pursuant to a soft dollar arrangement in connection with the purchase or sale of any property, including securities, to or for the investment company arguably would violate Section 17(e)(1). To the extent that compensation is received by an affiliated person of a fund pursuant to a soft dollar arrangement within the safe harbor of Section 28(e), however, the prohibition of Section 17(e)(1) would not apply.

Finally, it is not necessary to show that the person receiving compensation prohibited by Section 17(e)(1) influenced the action of the investment company, nor must economic injury to the investment company be shown. Rather, the essence of a violation of Section 17(e)(1) is the mere receipt of compensation in connection with the purchase or sale of property to or from the investment company.

V. Best Execution Obligations
As a fiduciary, a money manager has an obligation to obtain "best execution" of clients' transactions under the circumstances of the particular transaction. The money manager must:

execute securities transactions for clients in such a manner that the client's total cost or proceeds in each transaction is the most favorable under the circumstances.

A money manager should consider the full range and quality of a broker's services in placing brokerage including, among other things, the value of research provided as well as execution capability, commission rate, financial responsibility, and responsiveness to the money manager. The Commission wishes to remind money managers that the determinative factor is not the lowest possible commission cost but whether the transaction represents the best qualitative execution for the managed account. In this connection, money managers should periodically and systematically evaluate the execution performance of broker-dealers executing their transactions.

VI. Employee Benefit Plans and Plan Sponsor Directed Brokerage
During the past year the practice of plan sponsor directed brokerage has drawn considerable attention. This phrase refers to an arrangement whereby an employee benefit plan sponsor requests its money manager, subject to the manager's satisfaction that it is receiving best execution, to direct commission business to a particular broker-dealer who has agreed to provide services, pay obligations or make cash rebates to the plan.

At the outset, the Commission wishes to emphasize that directed brokerage transactions clearly do not fall within the safe harbor of Section 28(e). The safe harbor is available only to persons who are exercising investment discretion, as that term is defined in Section 3(a)(35) of the Act. A pension plan sponsor that has retained a money manager to make investment decisions, as is the case in directed brokerage arrangements, is not exercising investment discretion. Accordingly, neither the plan sponsor, the money manager, nor the broker-dealer participating in the transactions can rely on Section 28(e).

Section 28(e), however, cannot by its terms be violated. Thus, the fact that sponsor directed brokerage transactions are outside its protections does not necessarily mean that such transactions are illegal. Nevertheless, each participant in the transaction may be exposed to liability unless certain aspects of the transaction are carefully handled. The Commission does not administer ERISA, but sponsor directed brokerage in connection with plans covered by ERISA may involve violations of that Act and may violate the antifraud provisions of the federal securities laws.

The Department of Labor has indicated that if the cash rebate, goods or services provided by the broker to the plan is not for a purpose that exclusively benefits the plan, the transaction would constitute a per se violation of ERISA. The Commission understands that many money managers and brokers who are engaging in directed brokerage transactions have required the pension plan to represent in writing at the initiation of such transactions that the rebate will be used for the exclusive benefit of the plan and its beneficiaries.

A second concern arises regarding the broker's obligation to accurately confirm transactions with customers pursuant to Rule 10b-10 under the Securities Exchange Act and to maintain books and records pursuant to Rule 17a-3. Rule 10b-10(a)(7)(ii) requires a broker to disclose the amount of remuneration received or to be received by him from a customer in connection with an agency transaction. In sponsor directed brokerage arrangements the broker-dealer has agreed to charge specified commissions but at the same time has agreed to rebate a portion of the commissions. At least in the case of a cash rebate, the confirmation is false if it does not at a minimum provide disclosure that a portion of the commission was returned to the plan. The Commission has emphasized in the past improper nature of this rebating practice without disclosure. Rule 17a-3(a)(8) requires the broker to keep copies of confirmation of all purchases and sales of securities and copies of notices of all other debits and credits for securities, cash and other items for the account of customers. This provision would require that the broker document any rebating arrangements that it had entered into with plan sponsors.

Third, Section 28(e) allows a money manager in making his good faith determination as to the reasonableness of commissions paid to consider not only the benefit to be derived by the account paying the commissions, but also the benefits derived by other accounts. Since sponsor directed brokerage transactions are outside of the safe harbor, this additional element of protection is unavailable. Stated differently, the Commission believes this it is illegal, from a securities law fraud perspective, for a money manager or a broker-dealer to use one client's commissions to fund an undisclosed rebate to another client. This problem is particularly acute where a money manager aggregates orders for managed accounts. In this connection, the Commission believes that serious concerns are raised under the antifraud provisions of the securities laws where a money manager or broker-dealer aggregates directed and non-directed orders unless the money manager or broker-dealer can demonstrate that it has not disadvantaged one client's account in order to fund a rebate to another client. This means that the money manager and the broker-dealer must have a system of controls and a system of records to assure that this commingling does not occur.

VII. Conclusion
The Commission believes that this release will provide useful guidance to money managers and other persons in the securities industry. It believes that the new standard comports fully with congressional intent in the enactment of the section, while at the same time is responsive to concerns raised in response to a changing array of research products and the impact of new technology on brokerage practices. The Commission believes that the issue is ultimately one of good faith on the part of the money manager and that the disclosure obligations will allow clients to satisfy themselves that their money manager is in fact acting in their best interest.

List of Subjects in 17 CFR Part 241

Reporting and recordkeeping requirements, Securities.

Part 241 - (Amended)

Part 241 of Title 17 of the Code of Federal Regulations is amended by adding this Interpretive Release Concerning the Scope of Section 28(e) of the Securities Exchange Act of 1934 (Release No. 34-23170) to the list of Interpretive Releases.

By the Commission.

Section 28(e) of the Act states in pertinent part:

No person using the mails, or any means or instrumentality of interstate commerce, in the exercise of investment discretion with respect to an account shall be deemed to have acted unlawfully or to have breached a fiduciary duty under State or Federal law unless expressly provided to the contrary by a law enacted by the Congress or any State subsequent to June 4, 1975, solely by reason of his having caused the account to pay a member of an exchange, broker, or dealer an amount of commission for effecting a securities transaction in excess of the amount of commission another member of an exchange, broker, or dealer would have charged for effecting that transaction, if such person determined in good faith that such amount of commission was reasonable in relation to the value of the brokerage and research services provided by such member, broker, or dealer, viewed in terms of either that particular transaction or his overall responsibilities with respect to the accounts as to which he exercises investment discretion. . . .

The term "investment discretion" is defined in Section 3(a)(35) of the Act.

This practice is commonly known as "paying up" for research.

See Tannenbaum v. Zeller, 552 F.2d 402 (2d Cir. 1977); Arthur Lipper Corp. v. Securities & Exchange Commission, 547 F.2d 171 (2d Cir 1976); Fogel v. Chestnutt, 533 F.2d 731 (2d Cir 1975), cert. denied, 429 U.S. 824 (1976); Moses v. Burgin, 445 F.2d 369 (1st Cir), cert. denied, 404 U.S. 994 (1971).

Securities Acts Amendments of 1975, Pub. L. No. 94-29, 89 Stat. 97 (1975).

Securities Exchange Act Rel. No. 12251 (Mar. 24, 1976).

Report of Investigation in the Matter of Investors Information, Inc., Securities Exchange Act Rel. No. 16679 (Mar. 19, 1980) [hereinafter cited as Release 16679].

See, e.g., The Bank of New Jersey (1976-77 Transfer Binder) Fed. Sec. L. Rep. (CCH) p 80,662 (June 15, 1976); Hugh Johnson & Co., (1976-77 Transfer Binder) Fed. Sec. L. Rep. (CCH) p 80,520 (Mar. 24, 1976).

Securities Acts Amendments of 1975, Report of the Comm. on Banking, Housing and Urban Affairs, S. Rep. No. 75, 94th Cong., 1st Sess. 71 (1975).

Nevertheless, obvious overhead expenses such as office space, typewriters, furniture and clerical assistance would not constitute research.

The fact that a product is available for hard dollars or is otherwise available and used by the general public is relevant to the determination of the value of the research.

See House Comm. on Interstate and Foreign Commerce, H.R. Rep. No. 123, 94th Cong., 1st Sess. 95 (1975). The Report states that:

"It is, of course, expected that money managers paying brokers an amount (of commissions) which is based upon the quality and reliability of the broker's services including the availability and value of research, would stand ready and be required to demonstrate that such expenditures were bona fide."

The allocation determination itself poses a conflict of interest for the money manager that should be disclosed to the client.

Securities Acts Amendments of 1975, Conference Report to Accompany S. 249, Joint Explanatory Statement of the Comm. of Conference, H.R. Rep. No. 220, 99th Cong., 1st Sess. 108 (1975).

See supra note 7.

Securities Exchange Act Rel. No. 17371 (Dec. 12, 1980).

Id. at 24, note 54.

Becker Securities Corp. [1976 Transfer Binder) Fed. Sec. L. Rep. (CCH) p 80,641 (May 28, 1976).

Data Exchange Securities, [1981-82 Transfer Binder) Fed. Sec. L. Rep. (CCH) p 77,016 (Apr. 20, 1981). See also SEI Financial Services (pub. avail. Dec. 14, 1983), in which the staff reviewed a specific broker correspondent relationship focusing on the services provided and concluded the nature of the relationship did not preclude reliance on Section 28(e).

As the Commission stated in a 1979 release adopting rule and form amendments designed to require registered investment companies to provide investors with disclosure about brokerage placement practices and policies, "[t]hese disclosure requirements reflect a longstanding policy of the Commission that brokerage placement practices of investment managers may take into consideration research and brokerage services, provided, however, that such practices are disclosed to investors." Securities Act Rel. No. 6019 (Jan. 30, 1979) (emphasis added) (hereinafter cited as Release 6019). See "Applicability of the Commission's Policy Statement on the Future Structure of the Securities Markets To Selections of Brokers and Payments of Commissions By Institutional Managers," Securities Act Rel. No. 5250 (May 9, 1972) [hereinafter cited as Release 5250].

Securities and Exchange Commission v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191-92 (1963); See also Section 206 of the Advisers Act; Rule 264-8 under the Advisers Act.

E.g., Release 6019, supra note 20.

Securities Act Rel. No. 5772 (Nov. 30, 1976).

Investment Advisers Act Rel. No. 664 (Jan. 30, 1979).

The specific delivery requirements applicable to the brochure are set forth in paragraphs (b) and (c) of Rule 204-3.

Recently the Commission adopted a new, uniform Form ADV, the uniform Application form for advisers registered with the Commission and the forty states that require advisers to register. Investment Advisers Act Rel. No. 981 (Oct. 15, 1965). The form was developed jointly by the Commission and the North American Securities Administrators Association.

New Form ADV retains the two part format for the earlier form. Part I requires disclosure primarily for use by regulatory agencies. Part II of the form, which serves as the basis for the brochure rule, requires disclosure primarily for use by clients.

See Rule 204-3(a).

A general discussion of the background, purpose, and effect of the disclosure required in what is now Item 12 of Form ADV may be found in Release 6019, supra note 20.

An adviser need not list individually each product, item of research, or service received, but rather can state the types of products, research, or services obtained with enough specificity so that clients can understand what is being obtained. Disclosure to the effect that various research reports and products are obtained would not provide the specificity required.

The adviser should disclose any practices, including informal ones and whether or not they involve "paying up," to allocate brokerage to particular brokers in recognition of research products and services received. In this connection, the Commission notes that a money manager that obligated itself formally to generate a specified amount of commissions would be faced with a heavy burden of demonstrating that he was consistently obtaining best execution.

Item 12 of the new uniform Form ADV mirrors Item 11 of the superseded form and has remained substantively the same since its adoption in 1979.

Release 6019, supra note 20, 14 SEC Docket 839. In addition to the disclosure required by Item 12 of Part II of Form ADV, Item 13 of Part II requires disclosure that may be relevant to soft dollar arrangements. That item requires an adviser to describe any oral or written arrangements where it or any related person receives some economic benefit from a non-client, including a benefit in the form of non-research services, in connection with giving advice to clients.

See, e.g., Release 18679, supra note 7; Release 6019, supra note 20.

E.g., Rule 204-2(a)(1), (a)(2), and (a)(3).

E.g., Interfinancial Corp. (pub. avail, 1985). See also Release 5250, supra note 20 (in selecting a broker-dealer, a money manager "is not required to seek the service which carries the lowest cost so long as the difference in cost is reasonably justified by the quality of the service offered"); Securities Exchange Act Rel. No. 12251 (Mar. 24, 1976).

Registered investment companies must make the Statement of Additional Information available free of charge to shareholders and potential investors upon request.

Where an investment manager, in return for research services, pays an affiliated broker-dealer more than normal charges for execution of brokerage transactions, the manager "would be under a heavy burden to show that such payments were appropriate." Release 6019, supra note 20, 16 SEC Docket 844.

Disclosure about brokerage allocation practices also is required by other registration and reporting forms used by investment companies. E.g., Form N-2 (Item 9); Form N-3 (Item 22); and Form N-SAR (Item 26).

The requirements of Rule 20a-2 are applicable to any solicitation made by or on behalf of management or the adviser involving action with respect to the election of directors of the investment company. See Rule 20a-2(a).

In addition to paragraph (c) of Section 15, paragraph (a)(1) of that provision may be applicable to a soft dollar arrangement. This provision makes it unlawful for any person to serve as an investment adviser of a registered investment company except pursuant to a written contract which has been approved by a majority vote of shareholders and which "precisely describes all compensation" to be paid under that contract. As to what constitutes "compensation," see infra note 46.

Burks v. Lasker, 441 U.S. 471, 484 (1979), citing Tannenbaum v. Zeller, supra note 4.

Burks, supra note 41, at 485.

Tannenbaum, supra note 4, at 417-18.

See Rule 31a-3.

Rule 31a-1(b)(g) requires this record to be completed within ten days after the end of the quarter.

The term "compensation" under Section 36(b) and other provisions of the Company Act has been broadly construed to include any economic benefit paid directly or indirectly to an adviser. E.g., Steadman Securities Corporation. Securities Exchange Act Rel. No. 13695 at 12 SEC Docket 1042, 1052 (June 29, 1977) revld on other grounds sub. nom. Steadman v. Securities and Exchange Commission, 603 F.2d 1126 (5th Cir. 1979), affld, 450 U.S. 91 (1981). In re Investor Research Corporation, et al., 12 SEC Docket 102 (1978), affld in part and vacated in part, Investors Research Corporation and Stoners v. Securities and Exchange Commission, 628 F.2d 168 (D.C. Cir. 1980), cert. denied, 449 U.S. 919 (1981) (hereinafter cited as Investors Research). Investors Research Corporation. Investment Advisers Act Rel. No. 627 (May 1, 1978), affld in part and vacated in part 628 F.2d 168 (D.C. Cir. 1980), cert. denied 449 U.S. 919 (1981); Imperial Financial Services, 42 SEC 717 (1965); Release 5250, supra note 20; Accord Investment Advisers Act Rel. No. 770 (Aug. 13, 1981) (the element of "compensation" in the definition of an investment adviser in Section 202(a)(11) of the Advisers Act "is satisfied by the receipt of any economic benefit."

Securities Acts Amendments of 1975, Conference Report to Accompany S. 249, Joint Explanatory Statement of the Comm. of Conference, H.R. Rep. No. 229, 94th Cong., 1st Sess. 108 (1975). Although both the Senate and House versions of the Section 28(e) legislation contained provisions protecting money managers against breach of fiduciary duty claims, the Conference Report makes clear that the Senate version was selected for the final legislation because it "more clearly preempted both statutory and common law." Id.

The phrase "affiliated person" of an investment company to defined in Section 2(a)(3)(E) of the Company Act and includes, among others, an investment adviser to an investment company. The proscription of Section 17(e)(1) also applies to any affiliated person of an affiliated person of the investment company.

See supra note 46.

As the Second Circuit stated in United States v. Deutsch, 451 F.2d 98, 111 (2d Cir. 1971), cert. denied, 404 U.S. 1019 (1972), an affiliated person of an investment company is acting as an "agent" in connection with the purchase or sale of property for purposes of Section 17(e)(1) "in all cases when he is not acting as broker for the investment company." See Provident Management Corp., 44 SEC 442, 448 (1970) [hereinafter cited as Provident].

Where an adviser is acting as "broker" in connection with the purchase or sale of securities to or for an investment company, its activities would be governed by Section 17(e)(2) of the Company Act.

Deutsch, supra note 50, at 109.

See Investors Research, supra note 45, at 173.

See supra note 46, and accompanying text.

The fact that a soft dollar arrangement outside of Section 28(e) is disclosed would not cure a violation of Section 17(e)(1) because that provision reflects the Congressional determination that disclosure alone is not adequate protection in the investment company field. Investors Research, supra note 46.

Deutsch, supra note 53, at 100.

Id. "No showing of actual impairment need be made. This is a prophylactic statute. Its aim is not to redress harm but to prevent it." Investors Research, supra note 46, at 1023. See also Provident, supra note 50.

Securities Exchange Act Rel. Act No. 9598 (1971-72 Transfer Binder) Fed. Sec. L. Rep. (CCH) p 78,776 (1972); Kidder, Peabody & Co., Inc., Investment Advisers Act Rel. No. 232 (Oct. 16, 1968).

Section 3(a)(35) provides that a person exercises "investment discretion" with respect to an account if, directly or indirectly, such person -

is authorized to determine what securities or other property shall be purchased or sold to or for the account,

makes decisions as to what securities or other property shall be purchased or sold by or for the account even though some other person may have responsibility for such investment decisions, or

otherwise exercises such influence with respect to the purchase and sale of securities or other property by or for the account as the Commission, by rule, determines, in the public interest or for the protection of investors, should be subject to the operation of the provisions of this title and the rules and regulations thereunder.

See Foley & Lardner (1976-77 Transfer Binder) Fed. Sec. L. Rep. (CCH) p 80,925 (Dec. 3, 1976); Capital Institutional Services, Inc. [Current) Fed. Sec. L. Rep. (CCH) p 78,107 (May 1, 1985).

See Securities Exchange Act Rel. No. 16679, supra note 7; Securities Exchange Act Rel. No. 11629 (Sept. 3, 1975).

Office of Chief Counsel
Division of Investment Management
Securities and Exchange Commission
WASHINGTON, D.C. 20549

C. Waiver of 12b-1 Fees for ERISA Plans (SEC No-Action Letter)

SEC No-Action Letter Regarding Waiver of 12b-1 Fees for ERISA Plans

Southeastern Growth Fund, Inc.
Ref. No. 86-37-CC File No. 811-4228

Response of the Office of Chief Counsel
April 22, 1986

In your letter of January 29, 1986, you request our assurance that we would not recommend any enforcement action to the Commission under the Investment Company Act of 1940 ("Act") if, as described in your letter, Southeastern Growth Fund, Inc. (the "Fund") amends its Distribution Plan, adopted pursuant to rule 12b-1 under the Act, to exempt an employee benefit plan from payment of its pro rata portion of the Fund's expenses incurred under that plan.

Given that rule 12b-1(e) permits a 12b-1 plan to be adopted or continued only if the directors conclude, in the exercise of reasonable business judgment and in light of their fiduciary duties, that there is a reasonable likelihood that the plan will benefit the company and its shareholders, the staff will not provide interpretive responses to requests regarding the merits of a particular 12b-1 plan. See American Pension Investors Trust (pub. avail. Nov. 27, 1985). As a general matter, however, we believe that any waiver or rebate of an investor's pro rata portion of the expenses incurred under a 12b-1 plan would raise serious concerns under both Section 36 of the Act and general fiduciary principles. We also question strongly whether a board of directors could conclude, as required by paragraph (e) of rule 12b-1, that there is a reasonable likelihood that a 12b-1 plan which provides for such disparate treatment of shareholders will benefit the company and its shareholders.

See, e.g., Section 1(b)(3) of the Act, which declares, in part, that the public interest and the interest of investors are adversely affected "when investment companies issue securities containing inequitable or discriminatory provisions ... ."

Gerald T. Lins
Attorney

Mcguire, Woods & Battle
One James Center
Richmond, VA 23219
Telephone (804) 644-4131
January 29, 1986

Division of Investment Management
Securities and Exchange Commission
450 Fifth Street, NW
Washington, D.C. 20549

Attn: Chief Counsel

Re: Southeastern Growth Fund, Inc.
Investment Company Act of 1940, Regulation @ 270.12b-1
Employee Retirement Income Security Act of 1974,
Section 406: Prohibited Transaction Exemption 77-3

Dear Sirs:

We are writing to request the advice of the Division that it would not recommend to the Commission that it take action if Southeastern Growth Fund, Inc. (the "Fund") amends its 12b-1 distribution plan to provide that a distribution fee will not be paid with regard to that portion of the Fund's assets attributable to an investment in the Fund by any employee benefit plan whose investment in the Fund would otherwise violate Section 406 of the Employee Retirement Income Security Act of 1974 (ERISA).

The Fund is a diversified, open-end investment company which was incorporated under the laws of Virginia on January 7, 1985. It is registered under the Investment Company Act of 1940, as amended (the "1940 Act"). The Fund seeks long-term capital growth by investing in a diversified portfolio of securities, primarily common stocks of companies that are domiciled or whose principal business is located in the Southeastern United States.

Wheat First Securities, Inc. ("Wheat") acts as distributor of the Fund's shares. Wheat Investment Advisors, Inc. ("WIA") serves as investment adviser and administrator of the Fund. Both Wheat and WIA are wholly-owned subsidiaries of WFS Financial Corporation ("WFS").

The Fund does not charge sales commissions (i.e., the Fund is a "no-load" fund). However, Wheat receives a fee for its services under the Fund's "Plan of Distribution Pursuant to Rule 12b-1" (the "Distribution Plan"). Wheat receives a distribution fee which is accrued daily and paid monthly at a rate of 1% per year of the Fund's average daily net assets.

WFS maintains for its employees an Employee Benefit Plan (the "Plan") under ERISA and would like to have the flexibility to invest a portion of the Plan's assets in the Fund. However, an investment by the Plan in the Fund may violate Section 406 of ERISA unless Wheat complies with Prohibited Transaction Exemption 77-3, 42 F.R. 18734 (PTE 77-3) by waiving the distribution fee for the portion of the Fund's assets attributable to the Plan.

Section 406 of ERISA provides in pertinent part:

(a)(1) A fiduciary with respect to a plan shall not cause the plan to engage in a transaction, if he knows or should know that such transaction constitutes a direct or indirect ... (D) transfer to, or use by or for the benefit of, a party in interest, of any assets of the plan ...

Wheat is a "party in interest", as defined by ERISA Section 3(14), with respect to the Plan. Since the Plan's investment in the Fund arguably would benefit Wheat through the Distribution Plan, ERISA counsel to the Plan advised that the transaction may be found to violate the prohibited transaction rule of ERISA Section 406(a)(1) unless Wheat complies with PTE 77-3.

PTE 77-3 allows a mutual fund "in-house" plan to invest the assets of its employee benefit plan in its own mutual fund provided it complies with the following four conditions:

(a) The plan does not pay any investment management, investment advisory or similar fee to such investment adviser, principal underwriter or affiliated person. This condition does not preclude the payment of investment advisory fees by the investment company under the terms of its investment advisory agreement adopted in accordance with Section 15 of the Investment Company Act of 1940.

(b) The plan does not pay a redemption fee in connection with the sale by the plan to the investment company of such shares unless (1) such redemption fee is paid only to the investment company, and (2) the existence of such redemption fee is disclosed in the investment company prospectus in effect both at the time of the acquisition of such shares and at the time of such sale.

(c) In the case of transactions occurring more than 60 days after the granting of this exemption, the plan does not pay a sales commission in connection with such acquisition or sale.

(d) All other dealings between the plan and the investment company, the investment adviser or principal underwriter, are on a basis no less favorable to the plan than such dealings are with other shareholders of the investment company.

While the other conditions are met, condition (c) that the Plan does not pay a sales commission in connection with its investment in the Fund may not be met since the distribution fee paid to Wheat is utilized in part to compensate sales brokers for their efforts in selling shares of the Fund. Indeed, Rule 12b-1 of the 1940 Act explicitly contemplates use of the distribution fee to pay brokers' sales commissions. Rule 12b-1 provides that a company is a distributor "if it engages directly or indirectly in financing any activity which is primarily intended to result in the sale of shares issued by such company including ... compensation of underwriters, dealers and sales personnel." Thus, this sales aspect of the distribution fee seems to preclude the Fund's compliance with PTE 77-3, even though payment of the fee to Wheat is not directly related to sales and the fee would not be a sales commission or sales load within the meaning of the 1940 Act.

If there is no available exemption from ERISA Section 406, the Plan cannot invest in the Fund, even though the Distribution Plan complies in all respects with Rule 12b-1 of the 1940 Act. Counsel to the Plan has advised that the relief provided by PTE 77-3 would be available with respect to an investment by the Plan in the Fund if the distribution fee is waived with respect to the Plan's interest in the Fund. The Fund will eliminate any suggestion under PTE 77-3 that there may be a sales aspect inherent in the distribution fee by negotiating an agreement with Wheat to waive the fee as to that portion of the assets of the Fund attributable to an investment by the Plan. This is a simple calculation and will create no administrative burden. The Fund proposes the following procedure. Wheat will pay to the Plan the portion of the distribution fee that Wheat receives on account of the Plan's investment. The Fund will then credit that amount to the Plan's account. Alternatively, the distribution fee will be reduced ex ante by an amount representing the Plan's investment in the Fund.

The Fund's proposal is consistent with other rules under the 1940 Act which allow scheduled variation in the sales terms among classes of investors when certain conditions are met. The Fund represents that the following will be undertaken:

(a) The Fund will apply the variation in payment of the Distribution Fee uniformly to all purchases which are employee benefit plans for which a payment under the Distribution Plan would otherwise violate ERISA Section 406;

(b) The Fund will furnish to existing shareholders and prospective investors adequate information concerning the variation in payment of the Distribution Fee where its payment would violate ERISA Section 406; and

(c) Before making the variation in payment of the Distribution Fee available to purchasers of the Plan's shares, the Plan will revise its prospectus and statement of additional information to describe that new variation.

The Fund will comply with the requirements of Section 12b-1 of the 1940 Act to amend the Distribution Plan. The amendment will be submitted for approval by a vote of the board of directors of the Fund, as well as a vote of the directors who are not interested persons of the fund and who have no direct or indirect financial interest in the operation of the Distribution Plan or in any agreements related to the Distribution Plan. The votes on the amendment will be cast in person at a meeting of the board of directors called for the purpose of voting on the amendment to the Distribution Plan. Reg. @ 270 12b-1(b)(4).

In addition to amending its prospectus and registration statement as discussed above and submitting the proposed change to the board of directors as required by Rule 12b-1, the Fund will submit the amended Distribution Plan to the shareholders for approval even though this is not required under the regulations. From the shareholders viewpoint, the Fund would receive the same net investment from an investment by the Plan as from any other investor, with the portion of the distribution fee attributable to the Plan being refunded to the Plan rather than being paid to Wheat. Thus, Wheat would receive a lesser Distribution Fee than it would if the investment were made by someone else, but the same fee it would receive if the Plan were not to invest. Shareholder approval is anticipated because an investment by the Plan will allow the Fund to make more investments and achieve greater diversity of investment with no adverse effect on the shareholders.

The Fund requests that the staff confirm that it will not recommend enforcement action to the Commission if, under these circumstances, the Fund amends its Distribution Plan to provide that a distribution fee will not be paid with regard to that portion of the Fund's assets attributable to an investment in the Fund by any employee benefit plan whose investment in the Fund would otherwise violate Section 406 of ERISA.

If you require any further information, please contact the undersigned at (804) 644-4131.

Please date-stamp the enclosed copy of this letter to indicate receipt of this filing and return the stamped copy to the messenger making the filing.

Thank you.

Very truly yours,

William L. Taylor

D. Status of Investment Advisory Programs (ICA of 1940 Release IC-22579)

The Investment Company Act of 1940 Release No. IC-22579; IA-1623; S7-24-95 - Status of Investment Advisory Programs

17 CFR Parts 270 and 274

March 31, 1997

Agency: Securities and Exchange Commission.

Action: Final rule.

Summary: The Commission is adopting rule 3a-4 under the Investment Company Act of 1940 to provide a nonexclusive safe harbor from the definition of investment company for certain programs under which investment advisory services are provided on a discretionary basis to a large number of advisory clients having relatively small amounts to invest. An investment advisory program that is organized and operated in accordance with the rule's provisions is not required to register as an investment company under the Investment Company Act of 1940, or to comply with the Act's requirements. In addition, such a program is not subject to the registration requirement under Section 5 of the Securities Act of 1933.

Effective Date: March 31, 1997.

For Further Information Contact: Rochelle Kauffman Plesset, Senior Counsel, (202) 942-0660, Office of Chief Counsel, Division of Investment Management, 450 Fifth Street, N.W., Washington, D.C. 20549.

Supplementary Information: The Securities and Exchange Commission ("Commission") is adopting rule 3a-4 under the Investment Company Act of 1940 [15 USC 80a-1, et seq.] ("Investment Company Act"). Rule 3a-4 provides a nonexclusive safe harbor from the definition of investment company for certain programs under which investment advisory services are provided to advisory clients ("investment advisory programs").

Executive Summary

The Commission is adopting rule 3a-4 under the Investment Company Act to provide a nonexclusive safe harbor from the definition of investment company for certain investment advisory programs. These programs typically are designed by investment advisers or other money managers seeking to provide the same or similar professional portfolio management services on a discretionary basis to a large number of advisory clients having relatively small amounts to invest. Under rule 3a-4, any investment advisory program organized and operated in accordance with the rule's provisions is deemed not to be an investment company within the meaning of the Investment Company Act. In addition, a preliminary note to rule 3a-4 states that there is no registration requirement under Section 5 of the Securities Act of 1933 ("Securities Act") with respect to investment advisory programs that are organized and operated in compliance with the provisions of the rule.

The rule provides that: (i) each client's account must be managed on the basis of the client's financial situation and investment objectives, and in accordance with any reasonable restrictions imposed by the client on the management of the account; (ii) the sponsor of the program must obtain sufficient information from each client to be able to provide individualized investment advice to the client; (iii) the sponsor and portfolio manager must be reasonably available to consult with each client; (iv) each client must have the ability to impose reasonable restrictions on the management of the client's account; (v) each client must be provided with a quarterly account statement containing a description of all activity in the client's account; and (vi) each client must retain certain indicia of ownership of all securities and funds in the account. The rule is intended to be a nonexclusive safe harbor; a program that is not organized and operated in a manner consistent with the rule does not necessarily meet the Investment Company Act's definition of investment company. The rule, as adopted, does not include provisions regarding written policies and procedures, the maintenance of records, or the filing of a form with the Commission that were proposed for comment in 1995. [Emphasis added]

I. Background
In recent years, the number of investment advisory programs that are designed to provide professional portfolio management services on a discretionary basis to a large number of clients has increased greatly. These programs historically have been offered typically to clients who are investing amounts of money less than the minimum investments for individual accounts otherwise required by participating investment advisers, but significantly more than the minimum account sizes of most mutual funds.

These investment advisory programs typically are organized and administered by a sponsor, which provides, or arranges for the provision of, asset allocation advice and administrative services. In some programs, the sponsor or its employees also provide portfolio management services, including the selection of particular securities, to the program's clients. In other programs, the sponsor selects, or provides advice to clients regarding the selection of, another investment adviser (which may or may not be affiliated with the sponsor) to act as the client's portfolio manager. In these programs, the sponsor generally is responsible for the ongoing monitoring of the management of the account by the manager or managers selected. The sponsor, rather than the portfolio manager, often serves as the primary contact for the client in connection with the program. Sponsors and portfolio managers usually meet the definition of "investment adviser" under the Investment Advisers Act of 1940 ("Advisers Act"), and may be required to register under that Act. Included among investment advisory programs developed in the recent past are those commonly referred to as "wrap fee programs." In a wrap fee program, the client typically is provided with portfolio management, execution of transactions, asset allocation, and administrative services for a single fee based on the size of the account. At year-end 1995, assets in wrap fee programs totaled approximately $101.6 billion, an increase of over 30 percent in one year.

Under wrap fee and other investment advisory programs, a client's account typically is managed on a discretionary basis in accordance with pre-selected investment objectives. Clients with similar investment objectives often receive the same investment advice and may hold the same or substantially the same securities in their accounts. In light of this similarity of management, some of these investment advisory programs may meet the definition of investment company under the Investment Company Act, and may be issuing securities for purposes of the Securities Act.

In 1980, the Commission sought to address certain issues presented by investment advisory programs by proposing rule 3a-4 under the Investment Company Act, which would have provided a safe harbor from the definition of investment company for investment advisory programs operating in the manner described in the rule. Commenters generally opposed the proposed rule, and it was never adopted. After this proposal, however, the Commission's Division of Investment Management ("Division") received numerous requests for assurance that it would not recommend enforcement action with respect to investment advisory programs if they operated without registering under the Investment Company Act. In response to these requests, the staff issued a series of no-action letters describing investment advisory programs that would not be deemed investment companies for purposes of the Investment Company Act. Many, if not most, of the programs described in the no-action letters met the terms specified in the proposed rule.

On July 27, 1995, the Commission proposed for comment a revised version of rule 3a-4 ("revised proposed rule 3a-4" or "revised proposed rule," proposed for comment in the "July Release"). The objective of the revised proposed rule was to clarify the Commission's views regarding the status of investment advisory programs under the federal securities laws by describing certain basic attributes of an investment advisory program that differ from those of an investment company that is required to register under the Investment Company Act. The revised proposed rule was based largely on the provisions of the rule as originally proposed, as modified and explained in the subsequent no-action letters, but also required the creation and maintenance of certain documents and records. Like the original proposal, revised proposed rule 3a-4 would have provided a nonexclusive safe harbor from the definition of investment company for investment advisory programs that are organized and operated in the manner described in the rule.

The Commission received comments on the revised proposed rule from 28 commenters, including three law firms, eight professional and trade associations, and 17 financial firms (i.e., brokers, banks, investment advisers and others). Commenters generally expressed support for the Commission's goal of providing a nonexclusive safe harbor from the definition of investment company for certain investment advisory programs. A number of commenters, however, raised concerns about particular aspects of the rule. Many of these comments are discussed in more detail below. [comments have been excluded}

II. Discussion
The Commission is adopting rule 3a-4 under the Investment Company Act. Like the proposed and revised proposed rules, rule 3a-4 provides a nonexclusive safe harbor from the definition of investment company for investment advisory programs that are organized and operated in the manner described in the rule. The rule's provisions have the effect of ensuring that clients in a program relying on the rule receive individualized treatment, including the opportunity to place investment restrictions on the management of their accounts and the right to receive disclosure documents in connection with securities held in their accounts. Moreover, if an advisory program were operated by an investment adviser registered under the Advisers Act, clients of the program would receive the protections of that Act. The safe harbor thus is designed to provide an exemption for certain investment advisory programs without undermining the protection of investors who participate in those programs.

A. Preliminary Matters
The Commission noted in the July Release that the adoption of rule 3a-4 would not affect the status of no-action letters previously issued by the Division with respect to investment advisory programs. Therefore, investment advisory programs operated in a manner consistent with those letters would continue not to be required to register under the Investment Company Act, and interests in the programs would not be required to be registered as securities under the Securities Act. The Commission also stated in the July Release that the Division, as a general matter, would not consider requests for no-action or exemptive relief with respect to programs that do not rely on the rule. In making this statement, the Commission sought to indicate that in the future, the staff ordinarily will not respond to no-action requests or support applications for exemptive relief regarding investment advisory programs that are similar to those programs that have been the subject of the no-action letters issued by the Division, but that are not operated in accordance with all the provisions of rule 3a-4. The staff, however, will in the future consider requests raising interpretive issues under rule 3a-4, and will continue to entertain no-action requests with respect to programs that raise unique or novel issues.

B. Definitions

1. The Sponsor
A number of the terms of the revised proposed rule provided that the "sponsor" of a program or another person designated by the sponsor must perform the duties and responsibilities set forth in the rule. Under paragraph (b) of revised proposed rule 3a-4, "sponsor" would have been defined as any person who receives compensation for sponsoring, organizing or administering the program, or for selecting, or providing advice to clients regarding the selection of, persons responsible for managing the client's account in the program. Revised proposed rule 3a-4 would have provided that, if a program had more than one sponsor, one person would need to be designated as the principal sponsor, and that person would be responsible for carrying out the sponsor's duties and responsibilities under the rule. The July Release noted that this definition and approach was the same as that used in paragraph (f) of rule 204-3 under the Advisers Act, which sets forth a separate brochure requirement for sponsors of wrap fee programs.
The Commission notes that the structure of programs may vary widely, and that the broad definition of the term sponsor is intended to anticipate such variations and to provide persons involved in a program with the flexibility to designate the person in the best position to fulfill the rule's provisions. The Commission thus has determined to adopt the definition as proposed in order to preserve this flexibility.

2. Investment Advisory Program
The safe harbor described in revised proposed rule 3a-4 would have been available to a "program under which investment advisory services are provided to clients." The revised proposed rule, however, did not specifically define the term "program." The Commission notes that the use of the term "program" in the rule is intended to describe the types of advisory services that potentially could be subject to the Investment Company Act and the Securities Act. The Commission does not believe that it is necessary or advisable to include a definition of program in the rule, because such a definition could result inadvertently in the exclusion from the scope of the rule of an entity that otherwise would be entitled to rely on it.

C. Provisions Designed To Ensure That Each Client Receives Individualized Treatment
Revised proposed rule 3a-4 contained four provisions relating to the individualized treatment received by clients in investment advisory programs covered by the rule. The July Release stated that these provisions were based on the terms of rule 3a-4 as originally proposed, as those provisions were applied in the no-action letters. The rule as adopted includes these four provisions, with certain modifications discussed below.

1. Individualized Management of Client Accounts
Paragraph (a)(1) of the revised proposed rule provided that a client's account must be managed on the basis of the client's financial situation, investment objectives and instructions. The July Release noted that this provision was designed to delineate a key difference between clients of investment advisers and investors in investment companies. A client of an investment adviser typically is provided with individualized advice that is based on the client's financial situation and investment objectives. In contrast, the investment adviser of an investment company need not consider the individual needs of the company's shareholders when making investment decisions, and thus has no obligation to ensure that each security purchased for the company's portfolio is an appropriate investment for each shareholder. The Commission is adopting paragraph (a)(1) without substantive modification.

In the July Release, the Commission noted that clients of an investment advisory program with similar investment objectives may hold substantially the same securities in their accounts in accordance with a portfolio manager's model, and that this does not necessarily indicate that clients in the program have not received individualized treatment for purposes of the rule. The Commission is reaffirming this position in connection with the adopted rule.

The Commission also stated in the July Release that it would not be necessary under the rule for a portfolio manager to make separate determinations regarding the appropriateness of each transaction for each client prior to effecting the transaction.

Investment advisers under the Advisers Act owe their clients the duty to provide only suitable investment advice, whether or not the advice is provided to clients through an investment advisory program. To fulfill this suitability obligation, an investment adviser must make a reasonable determination that the investment advice provided is suitable for the client based on the client's financial situation and investment objectives. The adviser's use of a model to manage client accounts would not alter this obligation in any way.

2. Initial and Ongoing Client Contact
Paragraph (a)(2) of revised proposed rule 3a-4 reflects the view that providing individualized investment advice contemplates an adviser having sufficient contact with a client to elicit the information necessary to provide the advice. In particular, under paragraph (a)(2), a program relying on the rule must provide that the sponsor or a person designated by the sponsor ("designated person") contact and solicit information from the client. Such a program also must provide for the sponsor and the portfolio manager to be reasonably available to consult with the client concerning the management of the client's account.

Under paragraph (a)(2) of the revised proposed rule, an advisory program intended to qualify for the safe harbor set out in the rule would have needed to require that the sponsor or a designated person: (1) obtain information from the client concerning the client's financial situation and investment objectives (including any restrictions that the client may wish to impose regarding the management of the account) at the time the client opens the account; (2) contact the client at least annually to determine whether there have been any changes in the client's financial situation or investment objectives, or whether the client wishes to impose any reasonable restrictions on the management of the account or modify an existing restriction in a reasonable manner; and (3) notify the client in writing at least quarterly that the sponsor or designated person should be contacted if there have been any changes in the client's financial situation or investment objectives, or if the client wishes to impose or modify any restrictions on the management of the account. The Commission is adopting these three provisions as proposed, with minor modifications to clarify their meaning.

In the July Release, the Commission noted that the provision regarding annual client contact was designed to ensure that sponsors have current information about clients in the program, which, in the Commission's view, is critical to the provision of individually tailored advice. Like the revised proposed rule, the rule as adopted does not dictate the manner in which a sponsor contacts its clients annually. Contact can be made, for example, in person, by telephone, or by letter or electronic mail that includes a questionnaire requesting the client to provide or update relevant information.

The rule, as adopted, provides that the sponsor or a designated person seeking to rely on the rule must notify the client in writing at least quarterly that the sponsor or designated person should be contacted if there have been any changes in the client's financial situation or investment objectives, or if the client wishes to impose or modify restrictions concerning the management of the account. This provision contemplates only that notice will be given to an investor, while the annual contact provision described above contemplates that the sponsor (or the designated person) will actively attempt to contact the client to obtain information in order to be covered by the rule.

In the July Release, the Commission noted that, if the sponsor did not provide the portfolio manager with information obtained from the client, the manager might be unable to manage the client's account on the basis of the client's financial situation and investment objectives and in accordance with any reasonable restrictions imposed by the client. The Commission requested comment whether the rule should state explicitly that the sponsor or designated person must convey to the portfolio manager the information obtained from the client. Some commenters stated that the rule should contain an explicit provision to that effect, while others suggested that such a provision was unnecessary. It would appear unlikely that the provision of paragraph (a)(1) providing that the account be managed based on the client's financial situation and investment objectives and in accordance with reasonable restrictions imposed by the client could be satisfied if the sponsor failed to transmit the client's financial information to the portfolio manager. The Commission therefore has determined not to include in rule 3a-4 an explicit requirement that the information must be provided to the portfolio manager.

Paragraph (a)(2) of the revised proposed rule would have provided that the sponsor and persons authorized to make investment decisions for the client's account be reasonably available to consult with the client concerning the management of the account. In the July Release, the Commission indicated that this provision contemplated a client's having reasonable access to the sponsor and the portfolio manager to ask questions or to seek additional information about the investment advisory program or the client's account. The Commission recognizes that a program's sponsor may serve as the primary contact for clients in the program, and that direct client contact with the portfolio manager may not occur until after the sponsor and others have attempted to address the client's questions or concerns. Nonetheless, in the Commission's view, a program seeking to rely on the rule must provide a procedure by which each client has reasonable access to personnel of the manager who are knowledgeable about the management of the client's account, as necessary to respond to the client's inquiry. Therefore, the Commission is adopting this provision of the revised proposed rule with the modification discussed below.

Several commenters suggested that the rule should permit delegation of the client consultation responsibilities to an employee of the advisory firm managing the client's account who is knowledgeable about investment and other matters relevant to the account. The rule has been revised to state that "the sponsor and personnel of the manager of the client's account who are knowledgeable about the account and its management" must be reasonably available to the client for consultation. In accordance with this provision, the contact person need not be the individual primarily responsible for managing the account, but must be sufficiently knowledgeable to discuss and explain investment decisions that were made.

3. Reasonable Management Restrictions
The Commission stated in the July Release that the ability of a client in an investment advisory program to place reasonable restrictions on the management of his or her account is a critical factor in determining whether individualized treatment is provided under the program. Paragraph (a)(3) of the revised proposed rule, therefore, would have provided that a program relying on the rule must include a requirement that each client have the ability to impose reasonable restrictions on the management of his or her account. Such restrictions were described to include, for example, prohibitions with respect to the purchase of particular securities or types of securities. This provision of the rule is being adopted as reproposed, except that language has been added to the provision to clarify that a program relying on rule 3a-4 need not provide clients with the right to direct the manager to purchase specific securities or types of securities.

Some of the commenters addressing this aspect of the proposal asked the Commission to provide additional guidance as to what constitutes a reasonable management restriction. As noted in the July Release, whether a particular restriction would be reasonable depends on an analysis of the relevant facts and circumstances. In general, a restriction would be unreasonable if it is clearly inconsistent with the portfolio manager's stated investment strategy or philosophy or the client's stated investment objective, or is fundamentally inconsistent with the nature or operation of the program. Other factors that bear on whether a particular restriction is reasonable are the difficulty in complying with the restriction, the specificity of the restriction and the number of other restrictions imposed by the client. A restriction would not be unreasonable, however, simply because it placed administrative burdens on the manager, or could affect the performance of the account.

The Commission stated in the July Release that if the sponsor or portfolio manager of a program concluded that a particular restriction sought to be imposed by a client was unreasonable, the client should be notified and given an opportunity to restate the restriction more reasonably. The Commission also noted that if a client was unable or unwilling to modify an unreasonable restriction, then the client could be removed from the program without jeopardizing reliance on the safe harbor. The Commission is also of the view that if a sponsor or portfolio manager is informed in advance that a client wants to impose a restriction the sponsor or portfolio manager deems unreasonable, and the client refuses to modify the restriction, then the sponsor or portfolio manager may refuse to accept the client. The Commission, however, does not agree with the suggestion of some commenters that a sponsor or portfolio manager should be permitted to refuse to accept a client without giving the client an opportunity to modify or withdraw the restriction.

4. Quarterly Account Statements
Paragraph (a)(4) of the revised proposed rule stated that each client in a program covered by the rule must be provided quarterly with a statement describing all activity in the client's account during the preceding quarter, including all transactions made on behalf of the account, all contributions and withdrawals made by the client, and all fees and expenses charged to the account. The statement also would have included the value of the account at both the beginning and end of the quarter. Some commenters asserted that the rule should not specify the contents of quarterly statements. The Commission is not persuaded by this argument. This provision, which is consistent with several no-action letters that had specified the contents of the quarterly reports, reflects the view that a key element of individualized advisory services is an individualized report about a client's account. The Commission therefore is adopting this provision substantially as proposed, with one modification clarifying that statements may be sent more often than quarterly.

5. Minimum Account Size
The revised proposed rule would not have specified a minimum size for client accounts in a program. While the Commission acknowledged in the July Release that providing individualized advice to a large number of relatively small accounts may be so costly and time-consuming as to render individualized treatment impracticable, it noted that the provisions of the revised proposed rule should be sufficient to ensure individualized treatment, and that innovations in computer technology may allow portfolio managers to render individualized treatment to relatively small accounts on a cost- effective basis. Nonetheless, the Commission requested comment whether the rule should include a provision specifying a minimum account size.

All but one of the commenters responding to the request for comment opposed the inclusion of a minimum account size provision in rule 3a-4. These commenters asserted that the sponsor and the portfolio manager are in the best position to determine the appropriate minimum account size for a program based upon the nature of the program. The Commission has concluded that a particular account size is not a necessary element to ensure that clients are provided with individualized investment management services. The Commission recognizes, however, that the smaller the minimum account size of an investment advisory program, the more likely that clients would not have the ability to demand and receive individualized treatment in the program. In assessing the status under the Investment Company Act of a program that does not qualify for the safe harbor under rule 3a-4, therefore, the Commission will consider a relatively large minimum account size as evidence that individualized treatment is being provided to clients of the program.

D. Client Retention of Ownership of Securities
Under paragraph (a)(5) of the revised proposed rule, a program covered by the rule would have been characterized by each client retaining certain specified indicia of ownership of all securities and funds in that client's account. The Commission stated in the July Release that the indicia of ownership specified in revised proposed rule 3a-4 are those that provide clients with the ability to act as owners of the securities in their accounts.

Paragraph (a)(5) of rule 3a-4 contemplates only that the program does not impose additional restrictions or limitations on client ownership of securities held in program accounts, and that a client's participation in the program will not alter his or her ability to exercise the ownership rights enumerated in the rule. The language of the rule has been modified to clarify this standard.

1. Ability to Withdraw and Pledge Securities
The revised proposed rule would have provided that clients be able to withdraw securities or cash from their accounts. In addition, revised proposed rule 3a-4 also would have specified that clients be able to pledge the securities in their accounts. The July Release stated that investment advisory programs relying on the safe harbor could require a client to withdraw securities from his or her account before using them as collateral.

A number of commenters maintained that the retention by clients of the right to pledge securities should be eliminated from the final rule. One of these commenters asserted that, because clients may be forced to withdraw their securities before pledging them, the provision of the revised proposed rule regarding the right to pledge securities is unnecessary if the client has the right to withdraw them. The Commission agrees, and has modified the rule text to remove this provision.

2. Right to Vote Securities and Receive Certain Documents as Securityholders
The revised proposed rule would have provided that the client have the right to vote the securities in his or her account. This provision would have permitted clients to delegate the authority to vote securities to another person, such as the portfolio manager or other fiduciary, so long as the client retained the right to revoke the delegation at any time. The Commission indicated that the right to vote proxies implied that the client would receive proxy materials in sufficient time to permit the client to consider how to vote and to submit the proxies. The Commission is clarifying that, if a client delegates voting rights to another person, the proxies, proxy materials, and, if applicable, annual reports, need be furnished only to the party exercising the delegated voting authority.

Revised proposed rule 3a-4 contemplated that the client (or the client's agent) would be provided with documents that the client (or agent) would have received had the same securities been owned by the client outside the program. These documents may include prospectuses, periodic shareholder reports, proxy materials, and any other information and disclosure required by applicable laws or regulations.

Some commenters suggested that clients be permitted to waive receipt of the documents generally required to be provided to securityholders, as they could have waived receipt of immediate confirmations under the revised proposed rule. Rule 3a-4 does not limit a client's right to waive receipt of these documents. Nor does rule 3a-4 prohibit a client from making an informed designation of another person, including a financial planner or registered broker-dealer, to receive such documents on the client's behalf. Whether a client in an investment advisory program may waive receipt of documents or designate another person to receive documents depends upon whether the client would have been able to do so under applicable federal or state law if the securities were owned directly.

3. Right to Receive Trade Confirmations
The revised proposed rule contained a provision under which a client would have the right to receive in a timely manner confirmations of securities transactions of the type required by rule 10b-10 under the Securities Exchange Act of 1934. Two commenters objected to the provision of the rule that the confirmations be "of the type required by rule 10b-10." These commenters asserted that this provision was burdensome, particularly with respect to banks and trust companies that are not subject to rule 10b-10. The Commission has decided that the confirmation provision, like the other indicia of ownership specified in the rule, should apply only to the extent that the client would have a right to receive confirmations from the person executing the transaction if he or she traded the securities through that person outside the program. Therefore, the Commission has revised the provision of the rule addressing confirmations to delete the reference to rule 10b-10. As revised, this provision would state that a client in an investment advisory program must receive confirmations that the person executing the transaction is required to send under the laws regulating that person's activities. This provision of the rule also provides that the confirmations must include the information specified by the applicable law governing such content.

As discussed in the July Release, rule 10b-10 permits customers of registered broker-dealers to waive receipt of individual confirmations in certain circumstances. A client in an investment advisory program whose transactions are executed by a registered broker-dealer effectively has the option to receive either individual confirmations for each transaction or periodic statements, delivered no less frequently than quarterly, that include the information required by rule 10b-10 with respect to all transactions that occurred within the period covered by the statement. As discussed above, the confirmation provision in rule 3a-4 applies only to the extent that the client would have a right to receive confirmations if he or she traded the securities outside the program. A client's ability to waive receipt of confirmations will not be altered because securities are held in a program account. Whether a client whose transactions are not executed by a registered broker-dealer may waive receipt of confirmations or other transaction notifications must be determined by reference to the laws that govern the relationship.

4. Legal Rights as Securityholders
Revised proposed rule 3a-4 would have provided that the client retain the right to proceed directly against an issuer of securities in a client's account without joining any other person involved in the program. The July Release indicated that underlying this provision (which was based on representations made in several no-action letters) was the view that a key element of providing individualized advisory services is that a client have the same rights as a person holding the securities outside an investment advisory program.

Certain commenters suggested that this provision of the revised proposed rule may be problematic with respect to client securities that are held in nominee or street name, or by a trustee. These commenters stated that the nominee or trustee might be considered an indispensable party in any action against the issuer, and that nominal joinder of the nominee or trustee might be required. These comments have been addressed by the revision discussed above regarding restrictions on the exercise of ownership rights that are external to the program. Otherwise, the Commission is adopting this provision as proposed.

E. Policies and Procedures and Form N-3a4
Paragraph (a)(6) of revised proposed rule 3a-4 contemplated the establishment by a program's sponsor of written procedures and agreements governing the operation of the program, and the maintenance of records relating to the program. Paragraph (a)(6) would have provided that the sponsor must: (1) Establish and effect written policies and procedures that are reasonably designed to ensure that each of the provisions of the rule are implemented; (2) maintain and preserve all written policies, procedures and certain other documents relating to the program for specified periods of time; (3) enter into written agreements with other persons that the sponsor designates to retain records pertaining to the program; and (4) furnish to the Commission upon demand copies of the policies, procedures and other documents created pursuant to these policies and procedures. Paragraph (a)(7) of the revised proposed rule would have provided that the sponsor of an investment advisory program intending to rely on the safe harbor file Form N-3a4 with the Commission.

In the July Release, the Commission specifically requested comment whether any of the provisions under paragraph (a)(6) of the rule could be "eliminated, consolidated, or otherwise made less burdensome without compromising investor protection. "The Commission has reevaluated these provisions and determined not to adopt them for a number of reasons. First, the Commission agrees that compliance with these types of formal procedural provisions generally should not be determinative of an entity's status under the Investment Company Act. As one commenter noted, none of the other rules under the Investment Company Act exempting certain entities from investment company regulation contain similar procedural provisions.

Second, with respect to programs sponsored by registered investment advisers, the recordkeeping requirements under the Advisers Act and the Commission's authority to examine registered investment advisers should be sufficient to enable the Commission to detect violations of the Investment Company Act. Most, if not all, of the records that would have been covered by the revised proposed rule currently are required to be maintained under rule 204-2 under the Advisers Act.

With respect to those investment advisory programs sponsored by banks that are not subject to the Advisers Act, the Commission staff intends to consult and work closely with the relevant banking agencies so that these programs will be subject to oversight designed to determine whether the programs are being operated as unregistered investment companies. Further, to the extent these programs include registered investment companies as investment vehicles for their clients, or that registered investment advisers serve as subadvisers in a program sponsored by a bank, the Commission will have access to certain records relating to the programs through its authority to examine such registered entities.

Despite its determination not to include in rule 3a-4 a provision pertaining to written policies and procedures, the Commission continues to believe that it is important for the sponsor of an investment advisory program to monitor the program's compliance with the rule. Each person relying on rule 3a-4 is responsible for demonstrating its compliance with the rule's provisions. A sponsor that establishes and implements written policies and procedures designed to ensure adherence to the provisions of rule 3a-4 would greatly reduce the chance that the program will fail to operate in the manner specified in the rule. Moreover, the implementation of such procedures by an investment adviser may serve to protect the adviser in certain instances from liability for violating, or aiding and abetting violations of, the Investment Company Act and/or the Securities Act, or failing to supervise a person under the adviser's supervision who violates those Acts. The Commission, therefore, strongly recommends that a sponsor of an advisory program seeking to rely on rule 3a-4 establish and implement written policies and procedures, and a system for applying such procedures, that are reasonably designed to ensure that the program operates in the manner contemplated by the rule.

The Commission also believes that it would be advisable for a person seeking to rely on rule 3a-4 to maintain the records necessary to evidence compliance with the rule, even if the person is not subject to rule 204-2 under the Advisers Act or certain of the records are not required by that rule. As noted above, a person seeking to rely on rule 3a-4 must be able to establish compliance with each of the rule's provisions. Compliance with many of these provisions, including those relating to client contact, the delivery of documents to clients, and the opportunity of clients to place reasonable restrictions on the management of their accounts, would be difficult, if not impossible, to demonstrate without contemporaneous recordkeeping.

F. Investment Advisers Act Issues Raised by Investment Advisory Programs
The Commission noted in the July Release that wrap fee and other investment advisory programs raise, in addition to the Investment Company Act issues addressed in the release, a number of issues under the Advisers Act. The Commission requested comment on certain of these issues and indicated the possible publication of an interpretive release that would address them. The Commission received few comments in response to this request, and the comments that were received suggested that investment advisory programs did not raise unique issues under the Advisers Act, but simply presented issues under the Act in a specific factual context. The Commission, therefore, has decided not to publish an interpretive release at this time. The staff of the Division will entertain requests for no-action or interpretive guidance with respect to the application of the Advisers Act in the context of investment advisory programs.

III. Cost/Benefit Analysis
Rule 3a-4 under the Investment Company Act provides a nonexclusive safe harbor from the definition of investment company for investment advisory programs. Programs that are organized and operated in the manner described in the rule are not required to register under the Investment Company Act or to comply with the Act's substantive provisions. The rule is intended to provide guidance to persons operating investment advisory programs regarding the status of these programs under the Investment Company Act, and help to ensure that such programs do not operate as investment companies without clients of the programs benefiting from the Act's protections.

The Commission anticipates that the cost of compliance with rule 3a-4 will be small. In addition, the Commission does not believe that compliance with any of the provisions will be unduly burdensome. Furthermore, because the rule is based principally on long-standing staff positions, the Commission believes that it will not substantially alter current industry practice or the costs associated therewith.

Section 2(c) of the Investment Company Act provides that whenever the Commission is engaged in rulemaking under the Investment Company Act and is required to consider or determine whether an action is consistent with the public interest, the Commission also must consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. The Commission has considered rule 3a-4 in light of these standards and believes that, by removing uncertainty with respect to the status of certain investment advisory programs under the Investment Company Act, the rule is consistent with the public interest, and will promote efficiency and the competition among sponsors of such programs. In addition, the rule will have no adverse effect on capital formation, nor be unduly burdensome to those sponsors wishing to comply with the rule.

IV. Paperwork Reduction Act
Information omitted.

V. Final Regulatory Flexibility Analysis
Information omitted.

VI. Effective Date
Rule 3a-4 is effective upon publication in the Federal Register. Pursuant to 5 USC 553(d)(1), immediate effectiveness is appropriate because rule 3a-4 is purely exemptive in nature. It provides a nonexclusive safe harbor from the definition of investment company for certain programs under which investment advisory services are provided to advisory clients. Under the rule, programs that are organized and operated in the manner described in the rule are not required to register under the Investment Company Act or to comply with the Act's requirements. The benefits of the rule should be available at the earliest possible time.

VII. Statutory Authority
The Commission is adopting rule 3a-4 pursuant to the authority set forth in Sections 6(c) and 38(a) of the Investment Company Act [15 USC 80a-6(c), - 37(a)].

Text of Rule

List of Subjects in 17 CFR Parts 270 and 274

Investment companies, Reporting and recordkeeping requirements, Securities.

For the reasons set out in the preamble, title 17, chapter II of the Code of Federal Regulations is amended as follows:

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 USC 80a-1 et seq., 80a-37, 80a-39 unless otherwise noted;

2. By adding Section 270.3a-4 to read as follows:

270.3a-4 Status of investment advisory programs.

Note: This section is a nonexclusive safe harbor from the definition of investment company for programs that provide discretionary investment advisory services to clients. There is no registration requirement under Section 5 of the Securities Act of 1933 [15 USC 77e] with respect to programs that are organized and operated in the manner described in Section 270.3a-4. The section is not intended, however, to create any presumption about a program that is not organized and operated in the manner contemplated by the section.

(a) Any program under which discretionary investment advisory services are provided to clients that has the following characteristics will not be deemed to be an investment company within the meaning of the Act [15 USC 80a, et seq.]:

Each client's account in the program is managed on the basis of the client's financial situation and investment objectives and in accordance with any reasonable restrictions imposed by the client on the management of the account.

At the opening of the account, the sponsor or another person designated by the sponsor obtains information from the client regarding the client's financial situation and investment objectives, and gives the client the opportunity to impose reasonable restrictions on the management of the account;

At least annually, the sponsor or another person designated by the sponsor contacts the client to determine whether there have been any changes in the client's financial situation or investment objectives, and whether the client wishes to impose any reasonable restrictions on the management of the account or reasonably modify existing restrictions;

At least quarterly, the sponsor or another person designated by the sponsor notifies the client in writing to contact the sponsor or such other person if there have been any changes in the client's financial situation or investment objectives, or if the client wishes to impose any reasonable restrictions on the management of the client's account or reasonably modify existing restrictions, and provides the client with a means through which such contact may be made; and

The sponsor and personnel of the manager of the client's account who are knowledgeable about the account and its management are reasonably available to the client for consultation.

Each client has the ability to impose reasonable restrictions on the management of the client's account, including the designation of particular securities or types of securities that should not be purchased for the account, or that should be sold if held in the account; Provided, however, that nothing in this section requires that a client have the ability to require that particular securities or types of securities be purchased for the account.

The sponsor or person designated by the sponsor provides each client with a statement, at least quarterly, containing a description of all activity in the client's account during the preceding period, including all transactions made on behalf of the account, all contributions and withdrawals made by the client, all fees and expenses charged to the account, and the value of the account at the beginning and end of the period.

Each client retains, with respect to all securities and funds in the account, to the same extent as if the client held the securities and funds outside the program, the right to:

Withdraw securities or cash;

Vote securities, or delegate the authority to vote securities to another person;

Be provided in a timely manner with a written confirmation or other notification of each securities transaction, and all other documents required by law to be provided to security holders; and

Proceed directly as a security holder against the issuer of any security in the client's account and not be obligated to join any person involved in the operation of the program, or any other client of the program, as a condition precedent to initiating such proceeding.

(b) As used in this section, the term sponsor refers to any person who receives compensation for sponsoring, organizing or administering the program, or for selecting, or providing advice to clients regarding the selection of, persons responsible for managing the client's account in the program. If a program has more than one sponsor, one person shall be designated the principal sponsor, and such person shall be considered the sponsor of the program under this section.

By the Commission.

Dated: March 24, 1997.

Margaret H. McFarland, Deputy Secretary.

Footnotes:

15 USC 77a, et seq.

The sponsor often is a money management firm, a broker-dealer, a mutual fund adviser or, in some instances, a bank. See, e.g., Wall Street Preferred Money Managers, Inc. (pub. avail. Apr. 10, 1992) (broker-dealer); United Missouri Bank of Kansas City, n.a. (pub. avail. May 11, 1990, as modified Jan. 23, 1995) (bank); Strategic Advisers Inc. (pub. avail. Dec. 13, 1988) (mutual fund adviser). The sponsor or one of its affiliates also may execute some or all of the transactions for client accounts.

More than one portfolio manager may manage the client's assets, depending on the program, the client's investment objectives, and the size of the client's account. See, e.g., Rauscher Pierce Refsnes, Inc. (pub. avail. Apr. 10, 1992); Wall Street Preferred Money Managers, Inc., supra note 2; Westfield Consultants Group (pub. avail. Dec. 13, 1991).

Some investment advisory programs, however, are marketed by the sponsor through unaffiliated investment advisers, such as financial planners. In some of these programs, the unaffiliated investment adviser, rather than the sponsor, may serve as the primary contact for its clients that participate in the program. See, e.g., Westfield Consultants Group, supra note 3.

15 USC 80b-1, et seq. Section 202(a)(11) of the Advisers Act (15 USC 80b-2(a)(11)) defines "investment adviser" as "any person who, for compensation, engages in the business of advising others, either directly or through publications or writings, as to the value of securities or as to the advisability of investing in, purchasing, or selling securities, or who, for compensation and as part of a regular business, issues or promulgates analyses or reports concerning securities * * *." A bank generally is excepted from the definition of investment adviser under Section 202(a)(11)(A) of the Advisers Act. A broker-dealer that sponsors an investment advisory program generally cannot rely on the broker-dealer exception from the definition of investment adviser in Section 202(a)(11)(C) of the Advisers Act. See, e.g., Status of Investment Advisory Programs under the Investment Company Act, Investment Company Act Release No. 21260 (July 27, 1995), 60 FR 39574 (Aug. 2, 1995) ("July Release"); National Regulatory Services, Inc. (pub. avail. Dec. 2, 1992).

The National Securities Markets Improvement Act of 1996 (Pub. L. No. 104- 290) amended the Advisers Act to provide that certain investment advisers will be subject primarily to the supervision of the Commission, while other advisers will be subject primarily to state regulation. Effective April 9, 1997, if an investment adviser is regulated or required to be regulated as an investment adviser in the state in which it maintains its principal office and place of business, it may not register with the Commission unless (1) it has assets under management of $25 million or more, or (2) it advises a registered investment company. Proposed rules published for comment by the Commission would reallocate regulatory responsibilities for investment advisers between the Commission and the states. Rules Implementing Amendments to the Investment Advisers Act of 1940, Investment Advisers Act Release No. 1601 (Dec. 18, 1996), 61 FR 68480 (Dec. 27, 1996).

See paragraph (g)(4) of rule 204-3 under the Advisers Act (17 CFR 275.204-3(g)(4)) (defining wrap fee program for purposes of wrap fee brochure requirement).

Cerulli Associates, Inc. and Lipper Analytical Services, Inc., The Cerulli-Lipper Analytical Report: State of the Wrap Account Industry 5 (1996). These figures include assets in mutual fund wrap programs, also called mutual fund asset allocation programs. Unlike traditional wrap fee programs, mutual fund wrap programs contemplate that a client's assets are allocated only among specified mutual funds. Assets in mutual fund wrap programs represented 19% of total assets in wrap fee programs at year-end 1995. Id. at 7.

For a detailed discussion of why an investment advisory program may meet the definition of investment company and may be deemed to be issuing securities, see July Release, supra note 5, at Section I. See also In the Matter of Clarke Lanzen Skalla Investment Firm, Inc., Investment Company Act Release No. 21140 (June 16, 1995); SEC v. First National City Bank, Litigation Release No. 4534 [1969-1970 Transfer Binder] Fed. Sec. L. Rep. (CCH) 92,592 (Feb. 6, 1970).

Individualized Investment Management Services, Investment Company Act Release No. 11391 (Oct. 10, 1980), 45 FR 69479 (Oct. 21, 1980) ("1980 Release"). The 1980 Release also stated that the Commission's Division of Corporation Finance had indicated that if rule 3a-4 were adopted, that Division would not recommend that the Commission take enforcement action if interests in an investment advisory program operated in accordance with the proposed rule's requirements were not registered under the Securities Act. Id. at n.15.

See July Release, supra note 5, at n.20 and accompanying text.

See, e.g., Benson White & Company (pub. avail. June 14, 1995); Wall Street Preferred Money Managers, Inc., supra note 2; Rauscher Pierce Refsnes, Inc., supra note 3; Westfield Consultants Group, supra note 3; WestAmerican Investment Company (pub. avail. Nov. 26, 1991); Rushmore Investment Advisers, Ltd. (pub. avail. Feb. 1, 1991); Qualivest Capital Management, Inc. (pub. avail. July 30, 1990); United Missouri Bank of Kansas City, n.a., supra note 2; Manning & Napier Advisors, Inc. (pub. avail. Apr. 24, 1990); Jeffries & Company (pub. avail. June 16, 1989); Strategic Advisers, Inc., supra note 2; Scudder Fund Management Service (pub. avail. Aug. 17, 1988); Shearson/American Express, Inc. (pub. avail. July 13, 1983); Paley & Ganz, Inc. (pub. avail. Dec. 6, 1982).

July Release, supra note 5.

July Release, supra note 5, at Section I.

The Note to the revised proposed rule stated that interests in investment advisory programs organized and operated in compliance with the rule would not be required to be registered under the Securities Act. See July Release, supra note 5, at n.26 and accompanying text; Note to revised proposed rule 3a-4.

The comment letters and a summary of the comments prepared by the Commission staff are included in File No. S7-24-95.

See infra Section II.E.

Whether a program is nondiscretionary is inherently a factual determination. A program designated as "nondiscretionary" in which the client follows each and every recommendation of the adviser may raise a question whether the program in fact is nondiscretionary.

In the July Release, the Commission noted that an investment advisory program could be considered to be an issuer because the client accounts in the program, taken together, could be considered to be an organized group of persons. See July Release, supra note 5, at nn.11-15 and accompanying text; see also Advisory Committee on Investment Management Services for Individual Investors: Small Account Investment Management Services at 23 (Jan. 1973). ("An investment service which is operated on a discretionary basis and does not afford investors individual attention would appear to be offering an investment contract or security, if substantially the same investment advice is given to all clients or to discernible groups of clients. * * *")

In letters issued by the Division of Investment Management granting no- action assurances to investment advisory programs, the Division of Corporation Finance also gave assurances that it would not recommend enforcement action to the Commission if the requestor relied on an opinion of counsel stating that interests in the investment advisory program were not "securities" within the meaning of the Securities Act. See, e.g., Morgan Keegan & Company, Inc., supra note 12; Westfield Consultants Group, supra note 3; Rauscher Pierce Refsnes, Inc., supra note 3.

The Note to rule 3a-4 states, in part, that there is no registration requirement under Section 5 of the Securities Act with respect to programs that are organized and operated in the manner described in the rule.

July Release, supra note 5, at n.27.

The staff previously has indicated that it will no longer entertain requests for no-action relief regarding investment advisory programs unless they present novel or unusual issues. See, e.g., Wall Street Preferred Money Managers, Inc., supra note 2.

July Release, supra note 5, at Section II.A.1.

The sponsor of an investment advisory program usually is an investment adviser under Section 202(a)(11) of the Advisers Act, and may be required to register under the Act. See July Release, supra note 5, at nn.5-8 and accompanying text and note 6 of this Release. Nonetheless, the rule is available to any investment advisory program, regardless of whether the sponsor is excepted from the definition of investment adviser (e.g., a bank), or is required to be registered under the Act.

Paragraph (b) of rule 3a-4, as adopted.

July Release, supra note 5, at Section II.A.2.

July Release, supra note 5, at Section II.A.2.i.

As noted above, paragraph (a)(1) of the revised proposed rule provided that a client's account must be managed on the basis of the client's financial situation, investment objectives and instructions (emphasis added). The Commission has determined that individualized treatment does not require that the client be entitled to give instructions to the adviser with respect to the management of the account other than those reasonable restrictions referenced in paragraph (a)(3). Therefore, the Commission has clarified the rule text by replacing the word "instructions" with the word "restrictions." Nonetheless, the rule contemplates that a client's investment objective will be formulated with appropriate input from the client regarding the client's financial goals and risk tolerance.

July Release, supra note 5, at n.34 and accompanying text.

As indicated in the July Release, this position is consistent with no- action letters issued concerning programs that allocate client assets in accordance with computerized investment models. July Release, supra note 5, at n.34 and accompanying text; see, e.g., Qualivest Capital Management Inc., supra note 12 (sponsor proposed to use computerized investment allocation model to allocate client assets among money managers).

See Suitability of Investment Advice Provided by Investment Advisers: Custodial Account Statements for Certain Advisory Clients, Investment Advisers Act Release No. 1406 (Mar. 16, 1994), 59 FR 13464 (Mar. 22, 1994) at nn.2-5 and accompanying text ("Investment advisers are fiduciaries who owe their clients a series of duties, one of which is the duty to provide only suitable investment advice. This duty is enforceable under the antifraud provisions of the Advisers Act, Section 206, and the Commission has sanctioned advisers for violating this duty.").

A sponsor or designated person seeking to rely on the rule as adopted could obtain this information through interviews (either in person or by telephone) and/or through questionnaires that clients must complete and return prior to the opening of the account. This position is consistent with no-action letters previously issued by the staff. See, e.g., Rauscher Pierce Refsnes, Inc., supra note 3 (prospective client will be interviewed over the telephone); Manning & Napier Advisors, Inc., supra note 12 (prospective client initially submits written questionnaire and later is interviewed by telephone).

Paragraphs (a)(2)(i), (a)(2)(ii) and (a)(2)(iii) of rule 3a-4, as adopted.

July Release, supra note 5, at Section II.A.2.ii.

Paragraph (a)(2)(ii) of rule 3a-4, as adopted. One commenter asked whether the rule permits a sponsor or designated person to contact a client by electronic mail. Under appropriate circumstances, an electronic mail message requesting information from clients in the program would constitute annual client contact within the meaning of rule 3a-4. See Use of Electronic Media by Broker-Dealers, Transfer Agents, and Investment Advisers for Delivery of Information; Additional Examples under the Securities Act of 1933, Securities Exchange Act of 1934, and Investment Company Act of 1940, Securities Exchange Act Release No. 37182 (May 9, 1996), 61 FR 24644 (May 15, 1996) (interpretive release in which the Commission, among other things, provided general guidance to investment advisers that contemplate using electronic media to fulfill their disclosure obligations under the Advisers Act).

This provision of the rule contemplates a reasonable attempt by the sponsor or designated person to reach and obtain information from the client. A sponsor or designated person that is unable to obtain information from a client after pursuing all reasonable means to contact the client would not be precluded from relying on the safe harbor.

Paragraph (a)(2)(iii) of rule 3a-4, as adopted. This notice could be included as part of or with another mailing sent to the client. For example, the notification could be included as part of the quarterly account statement described in paragraph (a)(4) of the rule. For a discussion of the provisions of rule 3a-4 stating that quarterly account statements must be sent to investment advisory clients, see infra Section II.C.4.

For this reason, the Commission disagrees with those commenters who asserted that the annual contact and quarterly notification provisions are duplicative.

July Release, supra note 5, at Section II.A.2.ii.

Id.

This view is reflected in staff no-action letters. See, e.g., Rauscher Pierce Refsnes, Inc., supra note 3 (the portfolio manager, when necessary, will be available to discuss more complex questions regarding the client's account); Westfield Consultants Group, supra note 3 (client will be furnished the name and direct telephone number of manager, who will be reasonably available during business hours). In one no-action request, a representation was made that the client would be able to contact his or her financial planner or the portfolio manager to obtain information or assistance during normal business hours, but the client might be charged hourly fees whenever the client requested that certain investment officers of the portfolio manager answer specific questions regarding investment strategies with respect to the client's account. Manning & Napier Advisors, Inc., supra note 12. Rule 3a-4 does not preclude a sponsor from charging reasonable fees for this or other services. However, such fees must be adequately disclosed to the client. See Item 7(f) of Schedule H of Form ADV (requiring disclosure of any fees in addition to the wrap fee that a client in a wrap fee program may pay).

Paragraph (a)(2)(iv) of rule 3a-4, as adopted.

July Release, supra note 5, at Section II.A.2.iii.

Paragraph (a)(3) of rule 3a-4, as adopted.

July Release, supra note 5, at Section II.A.2.iii.

July Release, supra note 5, at Section II.A.2.iii. The exclusion of individual stocks or stocks from a particular country, for example, would appear to be a reasonable restriction under ordinary facts and circumstances. A general restriction on the purchase of the securities of foreign issuers may be unreasonable, however, if the manager's investment strategy is to invest exclusively or primarily in foreign securities. Under those circumstances, it may be necessary for the client and the sponsor to reassess the choice of manager or the client's investment objective or strategy.

July Release, supra note 5, at Section II.A.2.iii. While rule 3a-4 generally contemplates that clients in mutual fund asset allocation programs should have the ability to exclude specific funds from their accounts, under some circumstances a restriction on the purchase of a fund included in the program may be inconsistent with the operation of the program. This could be the case, for example, when there is only a single fund with a specified investment objective available in the program, and that fund plays a necessary role in the overall investment strategy determined to be appropriate for the client. See Benson White & Company, supra note 12 (program under which client assets are allocated among four mutual funds based upon the client's age need not give clients the opportunity to place restrictions on the purchase of any of the funds).

In the context of a mutual fund asset allocation program, for example, compliance with restrictions based on the securities held by a fund in which program assets are invested (i.e., a restriction that would require a manager to monitor the fund's portfolio securities) may be so burdensome as to be unreasonable.

The restrictions that a client seeks to impose on his or her account could be unreasonable when considered in the aggregate, even though each restriction may be reasonable when considered separately, or if the client alters them or imposes new restrictions with excessive frequency. Paragraph (a)(2)(iii) of the rule, which contemplates that a sponsor notify each client at least quarterly to contact the sponsor if the client wishes to modify restrictions concerning the management of the account, is not intended to imply that it necessarily would be reasonable for a client to change his or her investment restrictions on a quarterly basis.

July Release, supra note 5, at Section II.A.2.iii.

See Westfield Consultants Group, supra note 3 (quarterly statements will contain a review and analysis of client account); Strategic Advisers, Inc., supra note 2 (quarterly statements will contain a description of investments).

Paragraph (a)(4) of rule 3a-4, as adopted.

The Division has granted no-action relief to investment advisory programs with varying minimum account sizes. See, e.g., Qualivest Capital Management, Inc., supra note 12 ($5 million); Wall Street Preferred Money Managers, Inc., supra note 2 ($100,000); Strategic Advisers, Inc., supra note 2 ($50,000).

July Release, supra note 5, at Section II.A.2.v.

Rule 3a-4, as originally proposed, would have provided that clients maintain to the extent reasonably practicable all indicia of ownership of the funds in their accounts, and specified certain requisite attributes of ownership. 1980 Release, supra note 10; paragraph (c) of rule 3a-4 as originally proposed.

Like the revised proposed rule, rule 3a-4 as adopted does not provide that the client be the record owner of the securities held in its account. The Division has taken the position that an investment advisory program would not be deemed to be an investment company solely because securities of clients participating in the program are held in nominee or street name. United Missouri Bank of Kansas City, n.a., supra note 2 (investment company securities held in nominee name). See, e.g., Manning & Napier Advisors, Inc., supra note 12 (non-investment company securities held in nominee name).

This commenter suggested that providing the right to pledge securities in the account of a retirement plan could cause the plan to lose its status as a qualified plan under the Internal Revenue Code. In general, a qualified plan must provide that benefits under the plan may not be anticipated, assigned, alienated, or subject to attachment, garnishment, levy, execution, or other legal process. See Internal Revenue Code ("IRC") Section 401(a)(13) [26 USC 401(a)(13)]; Treas. Reg. Section 1.401(a)-13 (as amended by T.D. 8219, 53 FR 31837 (Aug. 22, 1988)). In addition, the IRC imposes an additional tax of 10% on early distributions from a qualified retirement plan. See IRC Section 72(t)(1) [26 USC 72(t)(1)].

Similarly, paragraph (a)(5) would not prohibit a client from being charged reasonable fees for services in connection with the ownership of securities held in the program, provided such fees could be charged if the client held the securities outside the program. Of course, all fees must be permissible under applicable state and federal law and must be adequately disclosed. See Item 7 of Schedule H of Form ADV.

Paragraph (a)(5) of rule 3a-4, as adopted. The rule's text also has been changed to clarify that the rule provides for the retention of only the rights of ownership specified in the rule. Of course, nothing in the rule is intended to prevent clients from retaining other rights of ownership, if permitted by the program.

July Release, supra note 5, at Section II.A.3.i.

The Commission regards a client's ability to pledge securities in his or her account directly without first withdrawing them as an additional attribute of the client's ownership of the securities. While the absence of a right to pledge would not cause a program to fall outside of rule 3a-4, a client's right to pledge securities may be relevant to determining whether a program that is not relying on the safe harbor would be considered to be an investment company.

July Release, supra note 5, at Section II.A.3.ii.

See infra Section II.D.3. Rule 3a-4, as adopted, is in no way intended to indicate the instances under which a client's right to vote proxies may be delegated to another person. Whether the right can be delegated depends on applicable state and federal law. An employee benefit plan subject to the Employee Retirement Income Security Act of 1974 ("ERISA"), for example, may provide that the plan's named fiduciary may delegate asset management, including the authority to vote proxies, to an "investment manager" for the plan, as that term is defined in Section 3(38) of ERISA. See, e.g., Sections 402-405 of ERISA [29 USC 1102-1105]; Letter from Alan D. Lebowitz, Deputy Assistant Secretary for Program Operations, U.S. Department of Labor, to Robert A.G. Monks, Institutional Shareholder Services, Inc. (Jan. 23, 1990), 1990 ERISA LEXIS 66. Certain provisions of the federal securities laws also contemplate that clients can delegate their right to vote proxies. Under the Commission's proxy rules, the term "beneficial owner," the person who must receive proxy materials, includes an investment adviser that has the power to vote, or to direct the voting of, a security pursuant to an agreement with the client. See Securities Exchange Act Rule 14b-2(a)(2) [17 CFR 240.14b-2]. Rules adopted by the New York Stock Exchange ("NYSE"), the National Association of Securities Dealers, Inc. ("NASD") and the American Stock Exchange, Inc. ("AMEX") permit a securityholder to designate a registered [investment adviser who has discretion over the management of the client's account to receive and vote proxies on his or her behalf. See NYSE Guide, Rules of Board, Rules 450, 451, 452 and 465; NASD Conduct Rules, Rule 2260; AMEX Rules 575, 576, 577 and 585.

See infra Section II.D.3.

In the revised proposed rule, the paragraph regarding receipt of documents specifically referred to receipt by the client's agent. Paragraph (a)(5)(iv) of revised proposed rule 3a-4; July Release, supra note 5, at Section II.A.3.iii. In connection with modifying the rule text to effect the changes discussed above, supra Section II.D, the reference to the client's agent has been deleted as a conforming change. These changes in the rule text are not intended to indicate that a client in an investment advisory program may not designate another person to receive documents that must be provided to securityholders by law.

17 CFR 240.10b-10.

Paragraph (a)(6) of rule 3a-4, as adopted. Banks that execute securities transactions for customers generally are subject to confirmation requirements under the banking laws. See, e.g., 12 CFR 12.4-12.5 (Office of the Comptroller of the Currency ("OCC") confirmation requirements for national banks). The OCC recently proposed amendments to these rules that would make their confirmation requirements more closely reflect the requirements of rule 10b-10. OCC, Recordkeeping and Confirmation Requirements for Securities Transactions (Dec. 7, 1995), 60 FR 66517 (Dec. 22, 1995). In addition, the Federal Deposit Insurance Corporation ("FDIC") recently considered when and how to amend its regulations governing recordkeeping and confirmation requirements for securities transactions by state nonmember banks (12 CFR part 344). FDIC, Recordkeeping and Confirmation Requirements for Securities Transactions (May 14, 1996), 61 FR 26135 (May 24, 1996).

July Release, supra note 5, at n.60 and accompanying text, citing Securities Exchange Act Release No. 34962 (Nov. 10, 1994), 59 FR 59612 (Nov. 17, 1994) ("Exchange Act Release 34962").

Although a client may waive his or her right to receive the immediate confirmation, the client may not waive his or her right to receive the periodic statement. Exchange Act Release 34962, supra note 68, at nn.34-36 and accompanying text.

One commenter observed that a person executing transactions on behalf of a client whose shares are held in nominee name may not know the identity of the client, and asked the Commission to clarify how a program relying on the safe harbor could comply with the confirmation provision with respect to such a client. In the case of transactions effected by a registered broker- dealer, the Division of Market Regulation has expressed the view that a good faith effort should be made in these circumstances to obtain the information necessary to send the confirmation required by rule 10b-10 directly to the client. If these efforts are not successful, then the confirmation should be sent, in accordance with certain procedures, to the client's custodian or a fiduciary authorized to manage the account. See Letter from Catherine McGuire, Chief Counsel, Division of Market Regulation, U.S. Securities and Exchange Commission, to George P. Miller, Vice President and Associate General Counsel, Public Securities Association (Sept. 29, 1995).

See, e.g., Westfield Consultants Group, supra note 3; Manning & Napier Advisors, Inc., supra note 12; Jeffries & Company, supra note 12; Rauscher Pierce Refsnes, Inc., supra note 3.

See supra Section II.D.

Paragraph (a)(5)(iv) of rule 3a-4, as adopted.

July Release, supra note 5, at Section II.A.4.

See rule 3a-1 (certain prima facie investment companies); rule 3a-2 (transient investment companies); rule 3a-3 (certain investment companies owned by companies that are not investment companies); rule 3a-5 (exemption for subsidiaries organized to finance the operations of domestic or foreign companies); rule 3a-6 (foreign banks and foreign insurance companies); and rule 3a-7 (issuers of asset-backed securities).

For instance, paragraph (a)(7) of rule 204-2 [17 CFR 275.204-2(a)(7)] generally requires a registered adviser to maintain originals of all written communications received and copies of all written communication sent by the adviser relating to the adviser's advice or recommendations. Under Section 204 of the Advisers Act, records maintained under rule 204-2 must be made available to Commission examiners.

Section 203(e)(5) of the Advisers Act [15 USC 80b-3(e)(5)] provides that no person will be deemed to have failed to supervise another person subject to his or her supervision if: (1) the person has established procedures that would reasonably be expected to prevent or detect the other person's violation, and a system for applying such procedures; and (2) the supervisor reasonably discharged his or her duties under the procedures and system and did not have reasonable cause to believe that such procedures were not being complied with.

July Release, supra note 5, at Section II.C.

See supra Section II.C.4.

See supra Section II.E.

E. Safe Harbor for Wrap Accounts (SEC Rule 3a-4)

FDIC Informal Guidance - Safe Harbor for Wrap Accounts Informal Message to Trust Specialists and Examiners

Effective: March 31, 1997

Citations: Rule is SEC Reg 270.3a-4 (17 CFR 270.3a-4)

Published in Federal Register on March 31, 1997 (62 FR 15098)

Problem Being Addressed:

This rule provides a "non-exclusive" safe harbor against inadvertently operating a nonregistered investment company (mutual fund). If the provisions in the safe harbor rule are complied with, "wrap" accounts offered by banks will not be deemed to be either a "security" under the 1933 Act or an "investment company" under the 1940 Act.

In such accounts, a customer's funds are invested according to pre-established general investment guidelines, often based (at least in part) on the customer's age and current financial/investment situation. This often takes the form of an asset-allocation product. The "wrap" means that the customer pays only one fee for everything.

The bank (or the third-party provider) has discretion to change the individual investments in the pool, and maybe also the percentages of stock-income-MM allocations. Since each account in such a program may be invested identically, the bank is, in effect, operating a mutual fund.

The safe harbor is "non-exclusive", meaning it is not absolute. Compliance with Rule 3a-4 means that the SEC would not consider the program to be an unregistered investment company.

It is possible for other types of wrap programs (or wrap programs which meet some, but not all, of the safe harbor provisions, to not be considered investment companies. Sponsors of nonconforming wrap programs would have to write the SEC for "no action" relief in order to be assured that their particular program is not an "unregistered investment company" under the Investment Company Act of 1940.

Accounts/Services Covered:

Most likely, asset-allocation programs (including those offered by a third-party provider) and similar investment "models".

Bank Areas Affected:

Trust departments and/or retail investment areas.

Definitions:

Sponsor - Any person who receives compensation for

sponsoring, organizing, or administering the program

selecting, or providing advice to clients regarding the selection of, persons the persons responsible for managing the client's account in the program.

If a program has more than one sponsor, one person shall be designated the principal sponsor, and such person shall be considered the sponsor of the program (for purposes of Rule 3a-4).

SEC notes that this is a broad definition, intended to cover programs whose structure varies widely, and will provide both the industry and the SEC with flexibility.

Investment Advisory Program - This is the term used in the Rule to describe covered wrap programs. The term is not defined in the Rule, giving the SEC flexibility in applying it.

A wrap program is generally one in which individual clients' assets are invested on a pooled basis according to an asset allocation model. The customer pays a single fee, which includes both a management fee and transactions costs (commissions and loads). The sponsor has discretion over how the funds are invested, which may be in mutual funds and/or individual securities.

General Requirements:

Applicable only to discretionary accounts (as explained above). Non-discretionary accounts are not at risk of being considered unregistered investment companies.
Account Requirements
1. You should expect to see a written account agreement, although that is not specifically required. A standardized agreement is acceptable; it does not need to be custom-drawn.
2. Account acceptance/management must reflect that it is based on the each individual client's financial situation, investment objectives, and risk tolerance. This must be documented. [270.3a-4(a)(2)(i)]
3. Each client must be able to impose reasonable restrictions on what his/her account can be invested in. This is a "negative" investment privilege (no tobacco, nuclear, defense, or chemical investments, or no International Paper stock). Therefore, reasonable investment prohibitions must be permitted. [270.3a-4(a)(3)]
  The client may not impose any positive investment requirements requiring the purchase of certain specific investments.
Bank Administration Requirements
1. Account Opening: The bank must obtain information about each individual client's financial situation, investment objectives, and risk tolerance. This must be documented. [270.3a-4(a)(2)(i)]
2. Quarterly Statements: Customers must be provided a statement at least quarterly. The statement must show all transactions, contributions, withdrawals, fees and expenses, and the value of the account at the beginning and end of the period. A statement is required even if the account is inactive. The bank should keep a copy of such statements. [270.3a-4(a)(4)]
3. Quarterly Status Change Requests: Not less than quarterly, the bank must request that the client notify the bank of any substantive changes in the customer's status that would affect how his/her account is invested (or the model selected). The type of changes envisioned are marriage, birth of children, retirement, health problems, etc. [270.3a-4(a)(2)(iii)]
  This quarterly request may be an insert to the quarterly statement, or a message printed on the quarterly statement. Recurring standardized/boilerplate language is permissible.
4. Annual Contacts: The bank must contact each customer not less than annually in order to determine whether there has been any change in the customer's status. Refer to the Quarterly Status Change Requests for the types of changes envisioned. [270.3a-4(a)(2)(ii)]
  Per the commentary by the "SEC commission", any number of methods may be used to make contact. Examples include in person, by telephone, or by letter or electronic mail. The contact should include a questionnaire requesting the client to provide or update relevant information. The provision contemplates that a reasonable attempt will be made. If current information is not available after pursuing all reasonable means the safe harbor exclusion remains intact.
Client Rights:
The client must have the [270.3a-4(a)(5)]:

power to vote securities (or to delegate such power) in which his account is invested.
ability to withdraw funds from his/her account either in the form of securities or in cash. Investments may, however, be held in nominee name. Problems might arise if, for instance, pooled clients' funds were large enough to invest in a mutual fund with a minimum investment of $100,000 - but no client's individual investment was larger than $25,000. How could the individual client withdraw the actual shares of the mutual fund?
right to require a confirmation (that complies with FDIC Part 344 requirements) for every (or any individual) transaction affecting the customer's account.
right to consult with the "sponsor" and/or the portfolio manager.
ability to sue the issuer of any securities in which his/her account is invested.

Note:

There is no registration requirement imposed by this Rule.
No annual reports are required under this Rule.
No general or specific written policies are required by the Rule. The "SEC commission" does believe that it is important for the sponsor of these programs to monitor compliance with the safe harbor provisions and feels that each person relying on the rule is responsible for demonstrating compliance with the rule. The existence of formal policies and procedures would reduce the probability of failing to comply with the provisions of the safe harbor. Therefore, the "SEC commission" strongly recommends that written policies and procedures be developed to guide and monitor this type of activity.

Optional Examination Guidance

Work with management to achieve compliance. Examiners should bring this safe harbor to management's attention and ascertain the bank's intentions as to compliance.

If corrections are promised and the examiner has no reason to doubt management's intentions, merely a mention in the pink (for the next exam) may be sufficient.

This is a safe harbor. The attorneys make a point that safe harbors cannot be violated. It would be considered noncompliance with the safe harbor provisions, but not a violation of law. Use the correct terminology in any criticisms, but you can show them on the Violations exam report page.

If there is a large degree of noncompliance, or blatant noncompliance, or an unwillingness to effect correction, it would seem reasonable to cite the noncompliance in the examination report, with a recommendation that the bank either correct them or seek qualified legal advice. The FDIC should be kept advised as to the bank's actions.

The SEC has indicated that it evaluates compliance on an individual facts-and-circumstances basis. In some cases, failure to comply with a specific requirement may be outweighed by compliance with another factor.
Contact Tony DiMilo at FDIC with questions. DO NOT call the SEC directly.
Your questions and/or citations of apparent violations may be referred to the SEC for answer or for further resolution.

F. Disclosure of Proxy Voting Policies and Records (SEC Rule 206(4)-6, Sec Rule 204-2)

SEC Rule 206 (4)-6, Sec Rule 204-2
(Release No. IA-2106; File No. S7-38-02)

Final Rule: Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies

Securities and Exchange Commission
17 CFR Parts 239, 249, 270, and 274
Release Nos. 33-8188, 34-47304, IC-25922; File No. S7-36-02
RIN 3235-AI64

Agency: Securities and Exchange Commission

Action: Final rule; request for comments on Paperwork Reduction Act burden estimate

Summary: The Securities and Exchange Commission is adopting rule and form amendments under the Securities Act of 1933, the Securities Exchange Act of 1934, and the Investment Company Act of 1940 to require registered management investment companies to provide disclosure about how they vote proxies relating to portfolio securities they hold. These amendments require registered management investment companies to disclose the policies and procedures that they use to determine how to vote proxies relating to portfolio securities. The amendments also require registered management investment companies to file with the Commission and to make available to shareholders the specific proxy votes that they cast in shareholder meetings of issuers of portfolio securities.

Dates: Effective Date: April 14, 2003.

Compliance Dates: See Section III of this release for information on compliance dates.

Comment Date: Comments regarding the "collection of information" requirements, within the meaning of the Paperwork Reduction Act of 1995, of Form N-PX should be received by March 14, 2003.

Addresses: To help us process and review your comments more efficiently, comments should be sent by hard copy or electronic mail, but not by both methods.

Comments sent by hard copy should be submitted in triplicate to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-0609. Comments also may be submitted electronically at the following E-mail address: rule-comments@sec.gov. All comment letters should refer to File No. S7-36-02; this file number should be included on the subject line if E-mail is used. All comments received will be available for public inspection and copying in the Commission's Public Reference Room, 450 5th Street, N.W., Washington, D.C. 20549-0102. Electronically submitted comment letters will also be posted on the Commission's Internet site (https://www.sec.gov).

For Further Information Contact: Christian L. Broadbent, Attorney, Christopher P. Kaiser, Senior Counsel, or Paul G. Cellupica, Assistant Director, Office of Disclosure Regulation, Division of Investment Management, (202) 942-0721, at the Securities and Exchange Commission, 450 Fifth Street NW, Washington, DC 20549-0506.

Supplementary Information: The Securities and Exchange Commission ("Commission") is adopting new rule 30b1-4 [17 CFR 270.30b1-4] and new Form N-PX [17 CFR 274.130] under the Investment Company Act of 1940 [15 U.S.C. 80a-1 et seq.] ("Investment Company Act"); amendments to Forms N-1A [17 CFR 239.15A; 274.11A], N-2 [17 CFR 239.14; 274.11a-1], and N-3 [17 CFR 239.17a; 17 CFR 274.11b], the registration forms used by management investment companies to register under the Investment Company Act and to offer their securities under the Securities Act of 1933 [15 U.S.C. 77a et seq.] ("Securities Act"); and amendments to Form N-CSR [17 CFR 249.331; 17 CFR 274.128], the form to be used by registered management investment companies to file certified shareholder reports with the Commission under the Sarbanes-Oxley Act of 2002.

Executive Summary

We are adopting rule and form amendments that:

Require a management investment company registered under the Investment Company Act of 1940 ("fund") to disclose in its registration statement (and, in the case of a closed-end fund, Form N-CSR) the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities; and
Require a fund to file with the Commission and to make available to its shareholders, either on its website or upon request, its record of how it voted proxies relating to portfolio securities. A fund will be required to disclose in its annual and semi-annual reports to shareholders and in its registration statement the methods by which shareholders may obtain information about proxy voting.

In a companion release, we are also adopting a new rule and rule amendments under the Investment Advisers Act of 1940 that will require a registered investment adviser that exercises voting authority over client proxies to adopt policies and procedures reasonably designed to ensure that the adviser votes proxies in the best interests of clients, to disclose to clients information about those policies and procedures, to disclose to clients how they may obtain information on how the adviser voted their proxies, and to maintain certain records relating to proxy voting.

I. Introduction and Background
As of September 2002, mutual funds held $2.0 trillion in publicly traded U.S. corporate equity, representing approximately 18% of all publicly traded U.S. corporate equity. This represents a dramatic increase from only 7.4% at the end of 1992. Millions of individual American investors, in turn, hold shares of equity mutual funds, relying on these funds - and the value of the corporate securities in which they invest - to fund their retirements, their childrens' educations, and their other basic financial needs. Yet, despite the enormous influence of mutual funds in the capital markets and their huge impact on the financial fortunes of American investors, funds have been reluctant to disclose how they exercise their proxy voting power with respect to portfolio securities. We believe that the time has come to increase the transparency of proxy voting by mutual funds. This increased transparency will enable fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies, which may have a dramatic impact on shareholder value.
Mutual funds are formed as corporations or business trusts under state law and, as in the case of other corporations and trusts, must be operated for the benefit of their shareholders. Because a mutual fund is the beneficial owner of its portfolio securities, the fund's board of directors, acting on the fund's behalf, has the right and the obligation to vote proxies relating to the fund's portfolio securities. As a practical matter, however, the board typically delegates this function to the fund's investment adviser as part of the adviser's general management of fund assets, subject to the board's continuing oversight. The investment adviser to a mutual fund is a fiduciary that owes the fund a duty of "utmost good faith, and full and fair disclosure. "This fiduciary duty extends to all functions undertaken on the fund's behalf, including the voting of proxies relating to the fund's portfolio securities. An investment adviser voting proxies on behalf of a fund, therefore, must do so in a manner consistent with the best interests of the fund and its shareholders.

Traditionally, mutual funds have been viewed as largely passive investors, reluctant to challenge corporate management on issues such as corporate governance. Funds have often followed the so-called "Wall Street rule," according to which an investor should either vote as management recommends or, if dissatisfied with management, sell the stock. In recent years, however, some funds, along with other institutional investors, have become more assertive in exercising their proxy voting responsibilities. The increased assertiveness by mutual funds in the voting of proxies may have a number of causes. In some instances, funds have come to hold such large positions in a particular portfolio company that they cannot easily sell the company's stock if the company's management is performing poorly. The investment policies of index funds typically do not permit them to sell poorly performing investments, and thus these funds may become active in corporate governance in order to maximize value for their shareholders.

Recent corporate scandals have created renewed investor interest in issues of corporate governance and have underscored the need for mutual funds and other institutional investors to focus on corporate governance. The increased equity holdings and accompanying voting power of mutual funds place them in a position to have enormous influence on corporate accountability. As major shareholders, mutual funds may play a vital role in monitoring the stewardship of the companies in which they invest.

Moreover, in some situations the interests of a mutual fund's shareholders may conflict with those of its investment adviser with respect to proxy voting. This may occur, for example, when a fund's adviser also manages or seeks to manage the retirement plan assets of a company whose securities are held by the fund. In these situations, a fund's adviser may have an incentive to support management recommendations to further its business interests.

Yet, in spite of the substantial institutional voting power held by mutual funds, the increasing importance of the exercise of that power to fund shareholders, and the potential for conflicts of interest with respect to the exercise of fund proxy voting power, limited information is available regarding how funds vote their proxies. At present, the Commission's rules do not require mutual funds to disclose either their proxy voting policies and procedures or their proxy voting records. Several mutual fund complexes voluntarily provide information to investors, often on their websites, about the policies and procedures that they use to determine how to vote proxies and, in some cases, their actual proxy voting decisions. The Internet provides a medium for these funds to make information about their proxy voting available to shareholders quickly and in a cost-effective manner. We applaud these voluntary efforts of mutual funds to disclose proxy voting information to shareholders.

We believe, however, that the time has now arrived for the Commission to require mutual funds to disclose their proxy voting policies and procedures, and their actual voting records. Investors in mutual funds have a fundamental right to know how the fund casts proxy votes on shareholders' behalf. Last September, we proposed amendments that would require mutual funds and other registered management investment companies to provide disclosure about how they vote proxies relating to portfolio securities that they hold ("Proposing Release"). Our proposals resulted in an extraordinary level of public interest and vigorous debate and over 8,000 comment letters. Today we adopt these proposals, with modifications to address commenters' concerns.

Proxy voting decisions by funds can play an important role in maximizing the value of the funds' investments, thereby having an enormous impact on the financial livelihood of millions of Americans. Further, shedding light on mutual fund proxy voting could illuminate potential conflicts of interest and discourage voting that is inconsistent with fund shareholders' best interests. Finally, requiring greater transparency of proxy voting by funds may encourage funds to become more engaged in corporate governance of issuers held in their portfolios, which may benefit all investors and not just fund shareholders.
II. Discussion
The Proposing Release generated significant comment and public interest. Of the approximately 8,000 comment letters, the overwhelming majority supported the proposals and urged us to adopt the proposed amendments. Many commenters, including individual investors, fund groups that currently provide proxy voting information to their shareholders, labor unions, and pension and retirement plan trustees, supported the proposals, and in some cases commented that the proposals did not go far enough in requiring funds to provide proxy voting disclosure. Many fund industry members supported the proposed amendments regarding the disclosure of policies and procedures. However, most fund industry members opposed the proposed amendments that would require disclosure of a fund's complete proxy voting record and disclosure of votes that are inconsistent with fund policies and procedures.
The Commission is adopting the proposed amendments with the modifications described below that address some of the concerns expressed by commenters.

A. Disclosure of Policies and Procedures With Respect To Voting Proxies Relating to Portfolio Securities
The Commission is adopting, with one modification to address commenters' concerns, the requirement that mutual funds that invest in voting securities disclose in their statements of additional information ("SAIs") the policies and procedures that they use to determine how to vote proxies relating to securities held in their portfolios. We are also adopting the requirement that closed-end funds disclose their proxy voting policies and procedures annually on Form N-CSR. This disclosure would include the procedures that a fund uses when a vote presents a conflict between the interests of fund shareholders, on the one hand, and those of the fund's investment adviser, principal underwriter, or an affiliated person of the fund, its investment adviser, or principal underwriter, on the other. It also includes any policies and procedures of a fund's investment adviser, or any other third party, that the fund uses, or that are used on the fund's behalf, to determine how to vote proxies relating to portfolio securities. For example, if a fund delegates proxy voting decisions to its investment adviser and the adviser uses its own policies and procedures to vote the fund's proxies, disclosure of the adviser's policies and procedures is required. Or a fund's board may wish to adopt its adviser's policies and procedures, rather than designing its own.
We also are adopting, as proposed, the requirement that a fund disclose in its shareholder reports that a description of the fund's proxy voting policies and procedures is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; (ii) on the fund's website, if applicable; and (iii) on the Commission's website at https://www.sec.gov. A fund will be required to send this description of the fund's proxy voting policies and procedures within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

Commenters generally supported the proposed disclosure requirements regarding proxy voting policies and procedures. A number of commenters, however, objected to certain aspects of the disclosure requirements. Some commenters recommended that we provide additional, more specific guidelines regarding the categories of disclosure that should be included in proxy voting policies and procedures. These commenters, which included many "socially responsible" fund groups, argued that the absence of specific guidelines could create an incentive for funds to adopt as few policies and procedures as possible, thereby minimizing reporting and disclosure obligations.

We have determined not to prescribe more specific guidelines or requirements for the proxy voting policies and procedures that a fund must disclose in its SAI or Form N-CSR for closed-end funds. The intent of our proposal is to promote transparency with respect to proxy voting information, and not to mandate the content of a fund's policies or procedures. Therefore, we believe that funds should be allowed the flexibility to determine the content that would be appropriate for this disclosure.

We do expect, however, that funds' disclosure of their policies and procedures will include general policies and procedures, as well as policies with respect to voting on specific types of issues. The following are examples of general policies and procedures that some funds include in their proxy voting policies and procedures and with respect to which disclosure would be appropriate:

The extent to which the fund delegates its proxy voting decisions to its investment adviser or another third party, or relies on the recommendations of a third party;

Policies and procedures relating to matters that may affect substantially the rights or privileges of the holders of securities to be voted; and

Policies regarding the extent to which the fund will support or give weight to the views of management of a portfolio company.

The following are examples of specific types of issues that are covered by some funds' proxy voting policies and procedures and with respect to which disclosure would be appropriate:

Corporate governance matters, including changes in the state of incorporation, mergers and other corporate restructurings, and anti-takeover provisions such as staggered boards, poison pills, and supermajority provisions;

Changes to capital structure, including increases and decreases of capital and preferred stock issuance;

Stock option plans and other management compensation issues; and

Social and corporate responsibility issues.

We are modifying our proposal in one respect, however, to clarify that a fund may satisfy the requirements for a description of its policies and procedures by including a copy of the policies and procedures themselves. A number of commenters recommended that we streamline the disclosure of policies and procedures that would be required in the SAI. Several of these commenters were fund groups that noted that they have funds with multiple sub-advisers, each of which uses its own proxy voting policies and procedures to vote the fund's proxies. Because the proposed rules would require the fund to include a description of each such sub-adviser's policies and procedures in the fund's SAI, commenters argued, the requirements would add lengthy disclosure to the SAI. Further, because different sub-advisers for a single fund could have policies that vary with respect to a particular issue, this disclosure could confuse investors. These commenters argued that disclosure of policies and procedures was not necessary or appropriate given the lack of genuine shareholder interest in the information.

We have determined that it would not be appropriate to modify the proposal to allow a fund to reduce or eliminate the disclosure regarding its proxy voting policies and procedures. Shareholders have a right to know the policies and procedures that are being used by a fund to vote proxies on their behalf. To the extent that multiple policies are being used by a single fund, shareholders should have access to information about all the policies that are in effect. In order to mitigate the burden of preparing descriptions of policies and procedures, however, we have modified our disclosure requirements to permit a fund to include the actual policies and procedures used to vote proxies in the SAI or N-CSR, rather than a description of the policies.

Some commenters argued that the SAI was not the appropriate location for disclosure of proxy voting policies and procedures because the SAI is not likely to reach a wide base of investors. These commenters argued that the policies and procedures should be required to be distributed to all investors, as part of the fund's prospectus, annual report, or in a separate mailing. We continue to believe, however, that the SAI is the most appropriate and cost-effective location for this disclosure. The disclosure will be readily accessible to shareholders because funds are required to provide an SAI promptly to any investor who requests one. On the other hand, funds and their shareholders will not be forced to bear the costs for printing and mailing this information to every shareholder, without regard to their level of interest in this information.
B. Disclosure of Proxy Voting Record
The Commission is adopting, with modifications, amendments that will require each fund to file with the Commission its proxy voting record and make this record available to its shareholders. The Commission is not, however, adopting its proposal to require a fund to disclose in its annual and semi-annual reports to shareholders information regarding any proxy votes that are inconsistent with its proxy voting policies and procedures.
The proposal to require funds to disclose their proxy voting records generated strong and divergent views among commenters. A number of commenters, including an overwhelming number of individual investors, strongly supported the Commission's proposal to require a fund to disclose its complete proxy voting record. Many of these commenters stated that this disclosure would improve shareholders' ability to monitor funds' voting decisions on their behalf and that it would allow investors to make more informed decisions when choosing among funds.

On the other hand, many commenters, including a large number of fund industry participants, strongly opposed any requirement for a fund to provide disclosure of its actual proxy votes cast. First, they argued that shareholders are not interested in this disclosure, with many fund groups claiming that they have received virtually no requests from their shareholders for proxy voting information. Second, they argued that the proposals would deny funds the ability to vote confidentially and subject funds to pressure from corporate management to influence proxy voting decisions, as well as to retaliatory actions by management, such as restricting access by portfolio managers to corporate personnel. Third, on a related point, commenters argued that mandatory disclosure of proxy votes would undermine their ability to change corporate governance practices of portfolio companies through "behind the scenes" private communications. Fourth, they argued that requiring funds to disclose their proxy votes publicly will subject them to orchestrated campaigns in the media and elsewhere by special interest groups with social or political agendas different from those of fund shareholders, which will detract from a fund's ability to concentrate on the management of its portfolio. Fifth, fund industry commenters argued that the required disclosure of proxy votes would undermine the role of fund boards of directors, including independent directors, in overseeing proxy voting and protecting fund shareholders against conflicts of interest. Some of these commenters suggested that rather than requiring disclosure of proxy votes, the Commission should mandate that fund directors approve proxy voting policies and procedures, including policies and procedures for addressing potential conflicts of interest, and should require reports to be provided to fund directors concerning actual proxy votes cast. Sixth, the commenters argued that the costs of collecting and disclosing the information in semi-annual reports on Form N-CSR would be substantial and would exceed any benefit to shareholders from the disclosure.

After careful consideration of these comments, we continue to believe that requiring funds to disclose their complete proxy voting records will benefit investors by improving transparency and enabling fund shareholders to monitor their funds' involvement in the governance activities of portfolio companies. With respect to the specific arguments raised by commenters who opposed disclosure of proxy votes, we note first that the argument that investors are not interested in proxy voting disclosure is to some extent belied by the large number of favorable comments from individual investors that the proposal attracted. In addition, we note that a recent shareholder proposal seeking to require a major fund to disclose its proxy votes on social and environmental issues generated significant support from fund shareholders. Further, regardless of whether all, or a majority of, investors are interested in proxy vote disclosure, we believe that fund shareholders who are interested in this information have a fundamental right to know how the fund has exercised its proxy votes on their behalf.

Second, while we are cognizant of concerns that disclosure will undermine funds' ability to vote confidentially and thereby lead to pressure on or retaliation against funds, we believe that this risk is not sufficient to outweigh shareholders' interests in knowing how their funds have voted their portfolio securities. In addition, as some proponents of the disclosure requirements argued, the principle of confidential voting is intended to protect shareholders from having their votes disclosed prior to a shareholder meeting, while the amendments that we are adopting would only require disclosure of votes two months or more after a shareholder meeting. We are also persuaded by other commenters who noted that a large majority of portfolio companies currently do not have confidential voting policies and that companies are often able to identify when and how a particularly large shareholder, such as a fund, has cast its votes.

Third, with respect to the argument that the disclosure of a fund's proxy voting record will undermine the use of "behind the scenes" communications to change corporate governance practices, we note that disclosure by funds of their proxy votes is not inconsistent with these communications and will not force funds to disclose these communications. Further, we believe that requiring a fund to disclose its proxy voting record may actually encourage it to become more engaged in corporate governance matters involving issuers held in its portfolio, through "behind the scenes" communications as well as other means.

Fourth, with respect to the argument that proxy vote disclosure will "politicize" the process of proxy voting by funds to the detriment of fund shareholders, we believe that to the extent that greater disclosure may encourage and enable shareholders to express their views on their funds' proxy decisions, that is an appropriate development. We agree, however, that fund shareholders could be adversely affected if, in fact, disclosure of fund proxy votes results in significant politicization of the proxy voting process by non-shareholder interest groups and interference with funds' ability to change corporate governance practices through "behind the scenes" communications. Therefore, the Commission has asked the staff to monitor the effects of the disclosure and report back to the Commission on the operation of the rules, and whether there have been any unintended consequences as a result of the disclosure, no later than December 31, 2005.

Fifth, we disagree with the argument that proxy voting disclosure will undermine the authority of funds' boards of directors, and that we instead should adopt amendments to require that boards be more involved in the proxy voting process. Disclosure of proxy votes is not inconsistent with, and, in fact, will promote recognition by fund boards of their obligation to exercise their proxy voting responsibilities in a manner that is consistent with shareholders' interests. Further, we believe that the additional requirements with respect to fund boards that some commenters suggested that we adopt in lieu of proxy voting disclosure are unnecessary. A fund's board of directors, acting on the fund's behalf, already has the obligation to vote proxies relating to the fund's portfolio securities. Although the board typically delegates this function to the fund's investment adviser, the adviser remains subject to the board's continuing oversight. By increasing transparency of proxy voting, the amendments will work in tandem with the existing obligation of fund boards.

Finally, with respect to arguments that the disclosure may impose excessive costs, we note that several fund groups that currently provide disclosure of their complete proxy voting records to their shareholders commented that although there are start-up costs for compliance systems, this cost decreases over time, and that the overall costs of the disclosure are minimal. We find these arguments made by funds that are providing this disclosure to be particularly persuasive and continue to believe that the costs of disclosure are reasonable. We also note that by requiring disclosure of the proxy voting record in filings with the Commission, with additional disclosure in the fund's SAI and annual and semi-annual reports to shareholders about how investors may obtain this voting record, we have tailored the disclosure requirement to allow those investors who are interested in this disclosure to access the information without imposing undue cost burdens. In addition, as discussed below, we have modified our proposals in order to further reduce the costs associated with this disclosure.

Disclosure of Complete Proxy Voting Record
The Commission is adopting new rule 30b1-4 under the Investment Company Act to require that a fund file its complete proxy voting record on an annual basis. This rule will require a fund to file new Form N-PX, containing its complete proxy voting record for the twelve-month period ended June 30, by no later than August 31 of each year. Form N-PX will be a reporting form required under the Investment Company Act, and will be required to be signed by the fund, and on behalf of the fund by its principal executive officer or officers.

We had proposed to require a fund to file its complete proxy voting record as part of its semi-annual reports on Form N-CSR, which will be used by registered management investment companies to file certified shareholder reports with the Commission under the Sarbanes-Oxley Act of 2002. One commenter argued that this means of disclosure would impose unnecessary costs and substantial administrative complexity. The commenter noted that, under our proposed rules, fund complexes that have funds with staggered fiscal year ends would be required to file reports on Form N-CSR containing their proxy voting records as many as twelve times per year. We are persuaded that annual disclosure of a fund's proxy voting record is sufficient and that the filing does not need to be based on a fund's fiscal year end. Therefore, to reduce the burden of proxy vote disclosure, we are modifying our proposal to require that all funds file their voting records annually not later than August 31, for the twelve-month period ended June 30. This approach will have the advantages of making each fund's proxy voting record available within a relatively short period of time after the proxy voting season, and of providing disclosure of all funds' proxy voting records over a uniform period of time.

Funds will be required to disclose the following information on Form N-PX for each matter relating to a portfolio security considered at any shareholder meeting held during the period covered by the report and with respect to which the fund was entitled to vote:

The name of the issuer of the portfolio security;

The exchange ticker symbol of the portfolio security;

The Council on Uniform Securities Identification Procedures ("CUSIP") number for the portfolio security;

The shareholder meeting date;

A brief identification of the matter voted on;

Whether the matter was proposed by the issuer or by a security holder;

Whether the fund cast its vote on the matter;

How the fund cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding election of directors); and

Whether the fund cast its vote for or against management.

In response to commenters who noted that the exchange ticker symbol and CUSIP number may be difficult to obtain for certain portfolio securities, particularly foreign securities, we have added an instruction permitting a fund to omit this information if it is not available through reasonably practicable means.

A fund also will be required to make its proxy voting record available to shareholders. However, we are modifying our proposal, in response to a comment, to allow a fund the flexibility to choose to make its proxy voting record available to shareholders either upon request or by making available an electronic version on or through the fund's website. The proposed amendments would have required a fund to send the proxy voting record upon request. This modification addresses concerns that the proposals would require funds with large numbers of holdings to produce lengthy proxy voting spreadsheets and to send them to investors who request them.

As adopted, our amendments will require a fund to include in its annual and semi-annual reports to shareholders as well as its SAI a statement that information regarding how the fund voted proxies relating to portfolio securities during the most recent twelve-month period ended June 30 is available (1) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the fund's website at a specified Internet address; or both; and (2) on the Commission's website. If a fund discloses that its proxy voting record is available by calling a toll-free (or collect) telephone number, it must send the information disclosed in the fund's most recently filed report on Form N-PX within three business days of receipt of a request for this information, by first-class mail or other means designed to ensure equally prompt delivery.

If a fund discloses that its proxy voting record is available on or through its website, it must make available free of charge the information disclosed in the fund's most recently filed report on Form N-PX on or through its website as soon as reasonably practicable after filing the report with the Commission. We interpret the "as soon as reasonably practicable" standard to mean that the information would be available, barring unforeseen circumstances, on the same day as filing. We could revisit this requirement if posting on the same day does not generally occur. A fund would not be required to continue to make available on or through its website any information from reports on Form N-PX that precede the most recently filed report on Form N-PX.

These rules require that a fund's proxy voting record be publicly available through filings with us. They also require that this information be readily available to fund shareholders from the fund itself and that shareholders be apprised of how this information may be obtained. We believe that these rules strike an appropriate balance - ensuring that a fund's proxy voting record is readily available to interested fund shareholders, while allowing funds the flexibility to choose how to make this information available in the most effective and cost-efficient manner.

Some commenters recommended other specific modifications to our proposed disclosure requirements, which we are not adopting. Several of these commenters suggested that we require funds to provide additional disclosure with respect to situations where the fund's investment adviser has a conflict of interest, including, for example, disclosure of any business and financial relationship with the issuer and all fees received by the adviser or its affiliates from the issuer during a designated period of time.

We have determined not to require additional disclosure regarding conflict of interest situations at the present time. We believe that disclosure of a fund's complete voting record will enable shareholders to monitor how the fund voted in specific instances and whether the vote is in the shareholders' best interests. Further, requiring additional public disclosure with respect to conflicts of interest would significantly increase the complexity and cost of the proxy vote disclosure.

Several commenters argued that we should require a fund to provide its proxy vote disclosure in a uniform, web-accessible, downloadable format. Other commenters indicated that we should require a fund to disclose its proxy voting record on its website, if it has one. Commenters also suggested that we require funds to provide an executive summary of their votes, that might include, for example, the percentage of votes cast for and against management, sorted by the type of issue.

We have determined not to modify our proposals in order to add these requirements, in order to minimize the cost to funds and their shareholders of providing disclosure of fund proxy voting records. As adopted, our requirements will allow funds the flexibility to determine the best manner in which to make their proxy voting records available to shareholders. We continue to believe that our disclosure requirements strike an appropriate balance by ensuring that a fund's proxy voting record, as well as its policies and procedures, is readily available to interested fund shareholders without imposing undue costs. We would, however, encourage funds to use their websites and other available means to make their proxy voting records readily accessible to shareholders in a user-friendly format.

Other commenters, by contrast, requested that we limit the proposed disclosure regarding a fund's proxy voting record. For example, some commenters recommended that we require a fund to disclose information regarding only those proxy votes cast against management of the portfolio companies in which it invests, or where a conflict of interest exists. In addition, one commenter suggested that we require only a summary of all proxy votes in the aggregate arranged according to issue. We believe, however, that limiting disclosure of the proxy voting record to specific votes, or to a general summary of all votes, would significantly undercut the intent of our proposals, which is to enable fund shareholders to determine how a fund voted with respect to any particular proxy vote.
Disclosure of Proxy Votes that are Inconsistent with Fund's Policies and Procedures
The Commission has determined not to adopt the proposed requirement that a fund disclose in its annual and semi-annual reports to shareholders proxy votes (or failures to vote) that are inconsistent with the fund's proxy voting policies and procedures. Many commenters, including both those who generally supported the disclosure of funds' proxy voting records and those who generally opposed this disclosure, expressed concerns regarding the proposed requirements for disclosure of inconsistent votes. Proponents of proxy voting record disclosure argued that a requirement to disclose inconsistent votes might lead funds to draft overly broad policies and procedures to avoid triggering the required disclosure. Opponents of proxy voting record disclosure argued that the disclosure of inconsistent votes would be burdensome because it would require funds to analyze a large volume of proxy votes to determine whether any vote triggered the disclosure and then to provide a lengthy explanation to shareholders regarding each inconsistent vote, which would be expensive to prepare and not meaningful to investors. We find these arguments persuasive and have therefore determined not to adopt the requirement that funds disclose information regarding votes that are inconsistent with the fund's policies and procedures.
III. Effective Date and Compliance Date
The effective date of these amendments is April 14, 2003. Registered management investment companies must file their first report on Form N-PX not later than August 31, 2004, for the twelve-month period beginning July 1, 2003, and ending June 30, 2004. Based on the comments, we believe that this will provide funds with sufficient time to make any necessary changes to existing software and internal systems in order to compile proxy voting information in the manner that will be required by new Form N-PX.
All initial registration statements on Form N-1A, N-2, or N-3, and all post-effective amendments that are annual updates to effective registration statements on these forms, filed on or after July 1, 2003, must include the disclosure required by Item 13(f) of Form N-1A, Item 18.16 of Form N-2, or Item 20(o) of Form N-3, as applicable, regarding the fund's proxy voting policies and procedures. Every annual report by a closed-end fund on Form N-CSR filed on or after July 1, 2003, must include the disclosure required by Item 7 of Form N-CSR regarding the fund's proxy voting policies and procedures.

All initial registration statements on Form N-1A, N-2, or N-3, and all post-effective amendments that are annual updates to effective registration statements on these forms, filed on or after August 31, 2004, must include the disclosure required by Item 13(f) of Form N-1A, Item 18.16 of Form N-2, or Item 20(o) of Form N-3, as applicable, regarding the availability of the fund's proxy voting record. Every report to shareholders of a fund registered on Form N-1A, N-2, or N-3 that is transmitted to shareholders on or after August 31, 2004, must include the disclosure required by Item 22(b)(8) and 22(c)(6) of Form N-1A, Instructions 4.h. and 5.f. to Item 23 of Form N-2, or Instructions 4(viii) and 5(vi) to Item 27(a) of Form N-3, as applicable, regarding the availability of a fund's proxy voting record. Every report to shareholders of a fund registered on Form N-1A, N-2, or N-3 that is transmitted to shareholders on or after the effective date of an initial registration statement or post-effective amendment that is required to include a description of the fund's proxy voting policies and procedures (or, in the case of a closed-end fund, the filing date of its first annual report on Form N-CSR filed on or after July 1, 2003) must include the disclosure required by Item 22(b)(7) and 22(c)(5) of Form N-1A, Instructions 4.g. and 5.e. to Item 23 of Form N-2, or Instructions 4(vii) and 5(v) to Item 27(a) of Form N-3 regarding the availability of the fund's proxy voting policies and procedures.
IV. Paperwork Reduction Act
As explained in the Proposing Release, certain provisions of the amendments contain "collection of information" requirements within the meaning of the Paperwork Reduction Act of 1995 ("PRA") [44 U.S.C. 3501 et seq.], and the Commission has submitted the proposed collections of information to the Office of Management and Budget ("OMB") for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11. The titles for the collections of information that we have submitted are: (1) "Form N-1A under the Investment Company Act of 1940 and Securities Act of 1933, Registration Statement of Open-End Management Investment Companies"; (2) "Form N-2 - Registration Statement of Closed-End Management Investment Companies"; (3) "Form N-3 - Registration Statement of Separate Accounts Organized as Management Investment Companies"; (4) "Form N-CSR - Certified Shareholder Report of Registered Management Investment Companies"; and (5) "Rule 30e-1 under the Investment Company Act of 1940, Reports to Stockholders of Management Companies." OMB approved the collections of information for the amendments to Forms N-1A, N-2, and N-3, and rule 30e-1. Because we have modified our proposals as described above, we are revising the burden estimate for Form N-CSR and rule 30e-1. We have submitted a revised collection of information for Form N-CSR to OMB, and have submitted the following additional collection of information to OMB: "Form N-PX - Annual Report of Proxy Voting Record of Registered Management Investment Companies." An agency may not conduct or sponsor, and a person is not required to respond to, a collection of information unless it displays a currently valid OMB control number.
Form N-1A (OMB Control No. 3235-0307), Form N-2 (OMB Control No. 3235-0026), and Form N-3 (OMB Control No. 3235-0316) were adopted pursuant to Section 8(a) of the Investment Company Act [15 U.S.C. 80a-8] and Section 5 of the Securities Act [15 U.S.C. 77e]. Form N-CSR (OMB Control No. 3235-0570) was adopted pursuant to Section 30 of the Investment Company Act [15 U.S.C. 80a-29] and Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 ("Exchange Act") [15 U.S.C. 78m and 78o(d)]. Form N-PX is being adopted pursuant to Section 30 of the Investment Company Act [15 U.S.C. 80a-29]. Rule 30e-1 under the Investment Company Act (OMB Control No. 3235-0025) was adopted pursuant to Section 30(e) of the Investment Company Act [15 U.S.C. 80a-29(e)].

As discussed above, the amendments will require that funds holding equity securities disclose the policies and procedures that they use to determine how to vote the proxies of their portfolio securities. The amendments also require funds to file with the Commission and to make available to their shareholders the specific proxy votes that they cast in shareholder meetings of issuers of portfolio securities. These changes are intended to enhance the transparency of fund proxy voting and will allow shareholders to monitor whether funds are voting portfolio securities in the best interests of shareholders.

Summary of Comment Letters and Revisions to Proposals
We requested comment on the PRA analysis contained in the Proposing Release, and we received numerous comment letters concerning the proposed collection of information requirements, particularly with respect to the proposed requirement to disclose funds' actual proxy voting records. Many commenters, including in particular funds that currently provide disclosure of their proxy votes, indicated that the Commission's estimates of the burden of the proposed disclosure were reasonable, and that available technology and other resources would render record-keeping and reporting requirements relatively routine. Other commenters, including many other members of the fund industry, argued that the Commission's estimates substantially underestimated the burden of providing the proposed disclosure. Some of these commenters argued that the Commission's estimates omitted start-up and one-time transition costs for collecting proxy voting information and preparing it in the format that would be required by Form N-CSR.
Several commenters provided specific estimates of the costs of providing the disclosure of their proxy vote records. However, these commenters generally did not provide any breakdown of the components of these estimates (e.g., number of tasks required, persons required to perform each task, wage rates for each person). One fund group which opposed the requirement to disclose its proxy voting record prepared a sample disclosure in the format prescribed by the proposed amendment to Form N-CSR for one of its funds which cast proxy votes on 1,607 agenda items at 500 shareholder meetings during a six-month period. The fund group estimated that the collection of votes from its information systems would take four hours, reformatting the data to the format of Form N-CSR would take eight hours, and reconfirming that each vote was cast in accordance with the fund's proxy voting policies would take at least another two hours. Another fund group which recently began to post its proxy voting guidelines and proxy voting records for two of its funds on its website estimated that this task took approximately two days. These estimates are generally consistent with the estimate in the Proposing Release that the disclosure on Form N-CSR of a fund's proxy voting record would take 10 hours per semi-annual filing on Form N-CSR, at an annual cost of $1,379 per fund. By contrast, a fund industry trade group estimated, based on a survey of fund complexes conducted on its behalf by a third-party, that proxy voting record disclosure would cost approximately $3,380 per fund in start-up costs, and $5,530 per year in ongoing costs.

We note that we have modified our proposal in two significant ways, in part in response to concerns expressed about costs by commenters. First, the amendments will require disclosure of proxy votes cast in annual reports on new Form N-PX, rather than semi-annually on Form N-CSR. Second, we are not adopting the proposed requirement that funds disclose in their annual and semi-annual reports to shareholders votes that were inconsistent with their proxy voting policies and procedures. Because of these modifications, we have revised our burden estimates for Form N-CSR and rule 30e-1. The burden estimate for disclosure of a fund's proxy voting record will be the burden estimated for new Form N-PX. These revisions to the burden estimates are described below.
Form N-1A
Form N-1A, including the amendments, contains collection of information requirements. The likely respondents to this information collection are open-end funds registering with the Commission on Form N-1A. Compliance with the disclosure requirements of Form N-1A is mandatory. Responses to the disclosure requirements are not confidential.
Prior to the proposed amendments, the estimated hour burden for preparing an initial registration statement on Form N-1A was 801 hours per portfolio, and the estimated hour burden for preparing post-effective amendments on Form N-1A was 99 hours per portfolio. The Commission estimates that, on an annual basis, 193 portfolios file initial registration statements on Form N-1A and 7,525 portfolios file post-effective amendments on Form N-1A. Thus, the total hour burden for the preparation and filing of Form N-1A, prior to the proposed amendments, was 899,568 hours.

We estimated in the Proposing Release that the amendments would increase the hour burden per portfolio per filing of an initial registration statement by 8 hours, to 809 hours per portfolio, and would increase the hour burden per portfolio per filing of a post-effective amendment to a registration statement by 2 hours, to 101 hours per portfolio. Thus, the current total annual hour burden for all funds for preparation and filing of initial registration statements and post-effective amendments to Form N-1A is 916,162 hours.
Form N-2
Form N-2, including the amendments, contains collection of information requirements. The likely respondents to this information collection are closed-end funds registering with the Commission on Form N-2. Compliance with the disclosure requirements of Form N-2 is mandatory. Responses to the disclosure requirements are not confidential.
Prior to the proposed amendments, the estimated hour burden for preparing an initial registration statement on Form N-2 was 536.7 burden hours per filing, and the estimated annual hour burden for preparing post-effective amendments on Form N-2 was 101.7 hours per filing. The Commission estimates that, on an annual basis, 140 respondents file an initial registration statement on Form N-2 and 38 respondents file post-effective amendments on Form N-2. Thus, the total annual hour burden for the preparation and filing of Form N-2, prior to the proposed amendments, was 79,003 hours.

We estimated in the Proposing Release that the amendments would increase the hour burden per filing of an initial registration statement on Form N-2 by 8 hours, to 544.7 hours per filing, and would increase the hour burden per filing of a post-effective amendment to a registration statement on Form N-2 by 2 hours, to 103.7 hours per filing. Thus, the current total annual hour burden for all funds for preparation and filing of initial registration statements and post-effective amendments on Form N-2 is 80,198 hours.
Form N-3
Form N-3, including the amendments, contains collection of information requirements. The likely respondents to this information collection are separate accounts, organized as management investment companies and offering variable annuities, registering with the Commission on Form N-3. Compliance with the disclosure requirements of Form N-3 is mandatory. Responses to the disclosure requirements are not confidential.
Prior to the proposed amendments, the estimated hour burden for preparing an initial registration statement on Form N-3 was 907.2 hours per portfolio, and the estimated hour burden for preparing post-effective amendments on Form N-1A was 148.4 hours per portfolio. The Commission estimates that, on an annual basis, no initial registration statements will be filed on Form N-3 and 60 post-effective amendments will be filed on Form N-3. The estimated average number of portfolios per filing is 4, bringing the estimated total number of portfolios in post-effective amendments to filings on Form N-3 annually to 240. Thus, the total hour burden for the preparation and filing of Form N-3, prior to the proposed amendments, was 35,616 hours.

We estimated in the Proposing Release that the amendments to Form N-3 would increase the hour burden per portfolio of an initial registration statement by 8 hours, to 915.2 hours per portfolio, and would increase the hour burden per portfolio of a post-effective amendment to a registration statement by 2 hours, to 150.4 hours per portfolio. Thus, the current total annual hour burden for all funds for preparation and filing of initial registration statements and post-effective amendments on Form N-3 will be 36,096 hours.
Form N-CSR
Form N-CSR, including the amendments, contains collection of information requirements. The respondents to this information collection will be closed-end management investment companies subject to rule 30e-1 under the Investment Company Act of 1940 registering with the Commission on Form N-2. Compliance with the disclosure requirements of Form N-CSR is mandatory. Responses to the disclosure requirements are not confidential.
The current estimated total hour burden for preparation of Form N-CSR is 35,139 hours. In the Proposing Release, we estimated that 3,700 registered investment companies would file Form N-CSR on a semi-annual basis for a total of 7,400 filings. We estimated in the Proposing Release that the amendments to Form N-CSR would increase the hour burden per filing of each semi-annual report on Form N-CSR by 10 hours, or 74,000 hours total. However, we have modified our proposal to require funds to disclose their proxy voting record in reports on new Form N-PX on an annual basis, rather than in reports on Form N-CSR on a semi-annual basis. As proposed, however, we are requiring registered closed-end management investment companies to include in their annual reports on Form N-CSR a description of the policies and procedures that they use to determine how to vote proxies relating to portfolio securities. We estimate that 663 closed-end management investment companies will file reports on Form N-CSR, and are revising our estimate of the increase in the hour burden resulting from the amendments to 2 hours per filing. We estimate that the total annual burden attributable to the disclosure of proxy voting policies and procedures for closed-end funds will be 1,326 hours. Thus, the new total annual hour burden for preparation and filing of Form N-CSR will be 36,465 hours.
Shareholder Reports
Rule 30e-1, including the amendments to Forms N-1A, N-2, and N-3, contains collection of information requirements. Compliance with the disclosure requirements of rule 30e-1 is mandatory. Responses to the disclosure requirements are not confidential.
There are approximately 3,700 funds subject to rule 30e-1. We estimated in the Proposing Release that the hour burden for preparing and filing semi-annual and annual shareholder reports in compliance with rule 30e-1, prior to the proposed amendments, was 202.5 hours per year, and that the amendments would increase the hour burden of complying with rule 30e-1 by 10 hours per fund per year for a total increase in burden hours of 37,000 hours. However, we have revised our proposed amendments to eliminate the proposed requirement that annual and semi-annual shareholder reports include disclosure of proxy votes that are inconsistent with the fund's proxy voting policies. Thus, we are revising our estimate of the increase in the hour burden of complying with rule 30e-1 attributable to the proposed amendments to 3,700 hours, rather than 37,000 hours, to reflect the elimination of this proposed disclosure requirement. The total hour burden of complying with rule 30e-1 will be 203.5 hours per year, for a total annual burden to the industry of 752,950 hours.
Rule 30b1-4
The purpose of rule 30b1-4 is to improve the transparency of information about funds' proxy voting records. Rule 30b1-4 will require a fund to file Form N-PX, containing its complete proxy voting record for the twelve-month period ended June 30, by no later than August 31 of each year. The respondents to rule 30b1-4 will be registered management investment companies, other than small business investment companies registered with the Commission on Form N-5.
We estimate that there are approximately 3,700 funds that will be affected by the rule. Each of these 3,700 funds will be required by rule 30b1-4 to file complete proxy voting records with the Commission on Form N-PX. For purposes of this PRA analysis, the burden associated with the requirement of Rule 30b1-4 has been included in the collection of information required by Form N-PX, rather than the rule. Compliance with rule 30b1-4 is mandatory for every registered management investment company, other than a small business investment company registered with the Commission on Form N-5. Responses to the disclosure requirements are not confidential.
Form N-PX
Form N-PX contains collection of information requirements. The respondents to this information collection will be registered management investment companies, other than small business investment companies registered with the Commission on Form N-5. Compliance with the disclosure requirements of Form N-PX is mandatory. Responses to the disclosure requirements are not confidential.
Every registered management investment company, other than a small business investment company registered with the Commission on Form N-5, will be required to file Form N-PX, containing its complete proxy voting record for the twelve-month period ended June 30, by no later than August 31 of each year. We estimate that there are approximately 3,700 funds registered with the Commission, with 5,200 fund portfolios that hold equity securities that will be required to file Form N-PX. We further estimate that for each of these funds the disclosure of its proxy voting record in filings on Form N-PX as of the end of each twelve-month period ended June 30 will require, on average, 14.4 hours per filing per equity portfolio, for a total annual burden of 74,880 hours (14.4 hours per filing x 5,200 equity portfolios).

In the Proposing Release, we estimated that the hour burden imposed by the proposed amendments to Form N-CSR, including the requirement for a fund to disclose its proxy voting record on Form N-CSR, would increase the hour burden per filing of a Form N-CSR by 10 hours, or 74,000 hours total. This total burden hour estimate is comparable to our estimate of 74,880 total burden hours for filing Form N-PX. However, our estimate of the hour burden per filing of Form N-PX differs from the estimated hour burden per filing of Form N-CSR, in part because Form N-PX will be filed annually rather than semi-annually, and in part because we are calculating the hour burden for Form N-PX by portfolio, rather than by fund.
Request for Comments
We request comments on the accuracy of our estimates with respect to Form N-PX.Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) evaluate whether the proposed collection of information is necessary for the proper performance of the functions of the agency, including whether the information will have practical utility; (ii) evaluate the accuracy of the Commission's estimate of burden of the proposed collection of information; (iii) determine whether there are ways to enhance the quality, utility, and clarity of the information to be collected; and (iv) evaluate whether there are ways to minimize the burden of the collection of information on those who are to respond, including through the use of automated collection techniques or other forms of information technology.
Persons submitting comments on the collection of information requirements should direct the comments to the Office of Management and Budget, Attention: Desk Officer for the Securities and Exchange Commission, Office of Information and Regulatory Affairs, Room 3208, New Executive Office Building, Washington, DC 20503, and should send a copy to Jonathan G. Katz, Secretary, Securities and Exchange Commission, 450 5th Street, NW, Washington, DC 20549-0609, with reference to File No. S7-36-02. OMB is required to make a decision concerning the collection of information between 30 and 60 days after publication of this Release. Consequently, a comment to OMB is best assured of having its full effect if OMB receives it within 30 days after publication of this Release.

V. Cost/Benefit Analysis
The Commission is sensitive to the costs and benefits imposed by its rules. The amendments we are adopting will require funds to provide disclosure about how they vote proxies of the portfolio securities they hold. A fund will be required to disclose in its registration statement the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities, and to include disclosure about the availability of the fund's proxy voting record. This disclosure will be included in the fund's Statement of Additional Information ("SAI") (and on Form N-CSR also, in the case of a closed-end fund's policies and procedures), which is not part of the fund's prospectus but is delivered to investors free of charge upon request. We are also requiring a fund to file with the Commission an annual report on Form N-PX, containing the fund's complete proxy voting record for the twelve-month period ended June 30, by no later than August 31 of each year. Our amendments will also require a fund to include in its annual and semi-annual reports to shareholders disclosure that the fund's proxy voting policies and procedures are available (i) without charge, upon request from the fund, (ii) on the fund's website, if applicable, and (iii) on the SEC website. In addition, a fund will be required to state in its registration statement and reports to shareholders that its proxy voting record is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the fund's website at a specified Internet address; or both; and (ii) on the SEC website.

In the Proposing Release, we analyzed the costs and benefits of our proposals and requested comments and data regarding the costs and benefits of the proposed form amendments. These comments are summarized below.

A. Benefits
The amendments to the registration statement and reporting forms that we are adopting will benefit fund investors, by providing them with access to information about how funds vote their proxies.
First, the amendments will provide better information to investors who wish to determine:

to which fund managers they should allocate their capital, and

whether their existing fund managers are adequately maximizing the value of their shares.

The investment adviser to a mutual fund is a fiduciary that owes the fund a duty of "utmost good faith, and full and fair disclosure. "This fiduciary duty extends to all functions undertaken on the fund's behalf, including the voting of proxies relating to the fund's portfolio securities. An investment adviser voting proxies on behalf of a fund, therefore, must do so in a manner consistent with the best interests of the fund and its shareholders. The increased transparency resulting from proxy voting disclosure may increase investors' confidence that their fund managers are voting proxies in accordance with their fiduciary duties. Without disclosure about how the fund votes proxies, fund shareholders cannot evaluate this aspect of their managers' performance. To the extent that investors choose among funds based on their proxy voting policies and records, in addition to other factors such as expenses, performance, and investment policies, investors will be better able to select funds that suit their preferences. Further, insofar as investors may over-emphasize certain of these factors, e.g., past performance, in selecting funds, it may be beneficial to provide additional information to use in selecting funds. On a related point, we anticipate that over time, commercial third-party information providers will offer services that will enable investors to better analyze proxy voting by funds. These developments will further facilitate the benefits to fund investors from proxy vote disclosure.

Second, in some situations the interests of a fund's shareholders may conflict with those of its investment adviser with respect to proxy voting. This may occur, for example, when a fund's adviser also manages or seeks to manage the retirement plan assets of a company whose securities are held by the fund. In these situations, a fund's adviser may have an incentive to support management recommendations to further its business interests. The amendments require funds to disclose how they address such conflicts of interest in determining how to vote their proxies. This disclosure requirement may benefit fund shareholders by deterring voting decisions that are motivated by considerations of the interests of the fund's adviser rather than the interests of fund shareholders. Further, the increased transparency resulting from proxy voting disclosure may increase investors' confidence that their fund managers are voting proxies in accordance with their fiduciary duties.

A third significant benefit of the amendments comes from providing stronger incentives to fund managers to vote their proxies conscientiously. The amendments could increase the incentives for fund managers to vote their proxies carefully, and thereby improve corporate performance and enhance shareholder value. The improved corporate performance that could result from better decision making in corporate governance matters may benefit fund investors. In addition, other equity holders may benefit from the improvement to corporate governance that results from more conscientious proxy voting by fund managers. We note that assets held in equity funds account for approximately 18% of the $11 trillion market capitalization of all publicly traded U.S. corporations, and therefore funds exercise a considerable amount of influence in proxy votes affecting the value of these corporations.

The benefits to the economy that will result from improved corporate governance are difficult to measure. While measuring the effects of such a rule involves a high degree of uncertainty, the scale of the aggregate portfolio holdings involved suggests that they may be substantial.

A number of commenters addressed the benefits of the proposals identified in the Proposing Release. Most commenters who addressed the costs and benefits of our proposals concurred with our assessment of the benefits of the proposed requirements to disclose the policies and procedures that funds use to determine how to vote proxies relating to securities held in their portfolios.

Our proposals to require disclosure of the actual votes cast by funds generated divergent views as to the possible benefits of this disclosure. Many commenters, including individual investors, labor unions, trustees of pension and retirement plans, and funds that currently make their proxy voting records available to their shareholders agreed with our assessment of the benefits of this disclosure, and argued that these benefits would be substantial. These commenters stated that investors would benefit from the increased transparency resulting from disclosure of proxy voting records, by allowing investors to consider a fund's proxy voting record when making an investment decision. In addition, commenters argued that disclosure of proxy votes cast would have beneficial effects across the entire U.S. economy, by encouraging better decision making in corporate governance matters, which would enhance shareholder value of the issuers of portfolio securities and, in turn, benefit both investors in the fund and other investors in these issuers.

Many other commenters, however, argued that the disclosure of proxy votes cast would not benefit fund investors. These commenters, who consisted primarily of funds, investment advisers, and members of boards of directors of funds, argued that the funds with which they are associated have received virtually no requests from their shareholders for proxy voting information. They also argued that investors who care about proxy vote disclosure can decide to invest in those funds that choose to disclose their votes.

The arguments of these commenters do not address two important considerations, however. First, investors consider many factors besides proxy voting histories when choosing their investment managers. If other factors-for example, fund performance-are more important to them than proxy voting, competitive pressures alone may cause few funds to reveal their proxy votes. The fact that market pressure has not forced many funds to reveal their votes merely suggests that investors do not value transparency of proxy votes as much as they value other factors. That does not mean that investors do not value transparency of proxy votes. In addition, the availability of proxy voting information may increase shareholder interest in the future. Second, these arguments do not consider the external benefits that all fund investors may obtain if, as discussed above, disclosure increases the incentives for fund managers to vote their proxies more carefully, and thereby improve corporate performance and enhance shareholder value.

Commenters who objected to the proposed disclosure requirement also questioned whether disclosure of proxy voting records would benefit investors by discouraging voting motivated by conflicts of interest, and noted that the Proposing Release did not provide any evidence of any fund failing to vote its proxies in its shareholders' best interests due to a conflict of interest. However, as noted above, funds may have strong incentives to vote in a certain way when, for example, a fund's adviser also manages or seeks to manage the retirement plan assets of a company whose securities are held by the fund. It may be difficult to prove that a particular vote in such a situation was motivated by a conflict of interest, and therefore disclosure may be the most effective means of deterring these conflicts.

In addition, commenters objected to the argument that proxy voting disclosure would result in benefits to all investors by encouraging funds to be more engaged in corporate governance of issuers held in their portfolios. The commenters asserted that funds were already sufficiently engaged in corporate governance issues, and that requiring disclosure of proxy votes by funds, but not other institutional investors, would unfairly single out one class of investors and force them to bear the burdens of the Commission's broader objectives with respect to the improvement of corporate governance.

We recognize that while the costs of the disclosure requirements will be borne by funds, the benefits of improved corporate governance resulting from the disclosure will accrue to all investors. We note, however, that investors in a fund may benefit from any improved oversight of its portfolio companies resulting from more careful proxy voting by other funds. In addition, we note that some of the other positive effects resulting from the disclosure, such as allowing investors to better evaluate whether their fund managers are voting proxies in accordance with their fiduciary duties, are benefits to fund investors.

We also note that, as adopted, the disclosure required by the amendments will provide the same benefits to investors as the proposal. However, the modifications to the proposal will mitigate the costs of disclosure, for funds and fund investors, by requiring a fund to file its proxy voting record on Form N-PX annually, by allowing a fund flexibility in determining how to disclose its proxy voting record to shareholders, and by not requiring a fund to disclose votes that are inconsistent with its policies and procedures.
B. Costs
The amendments will lead to some additional costs for funds, which may be passed on to fund shareholders. As discussed below, the amendments require new disclosure by a fund regarding how it votes proxies relating to portfolio securities it holds, in its SAI (and in Form N-CSR for closed-end funds), in annual reports on new Form N-PX, and in the fund's annual and semi-annual reports to shareholders. The direct costs of this disclosure will include both internal costs (for attorneys and other non-legal staff of a fund, such as computer programmers, to prepare and review the required disclosure) and external costs (for typesetting, printing, and mailing of the disclosure).
First, the amendments require disclosure of the fund's proxy voting policies and procedures, and disclosure about the availability of its proxy voting record, in the fund's SAI (and in the case of a closed-end fund, disclosure of its policies and procedures on Form N-CSR also). Because the SAI is typically not typeset and is only provided to shareholders upon request, we estimate that the external costs per fund of this additional disclosure in the SAI will be minimal. Similarly, because the disclosure in Form N-CSR will only be required to be provided to shareholders upon request, we estimate that the external costs of this disclosure on Form N-CSR will be minimal as well. For purposes of the Paperwork Reduction Act, we have estimated that the disclosure requirements will add 19,596 hours to the burden of completing Forms N-1A, N-2, N-3, and N-CSR. We estimate that this additional burden will equal total internal costs of $1,350,948 annually, or $365 per fund.

Second, the amendments will require a fund to file with the Commission an annual report on new Form N-PX, containing the fund's complete proxy voting record for the twelve month period ended June 30, by no later than August 31 of each year, and to make available to its shareholders the information contained in Form N-PX. We estimate that because this information will be available on the Commission's website, and because we anticipate that many funds will choose to make this information available to their shareholders on or through their websites, the external costs to funds (for typesetting, printing, and mailing) of providing this disclosure to shareholders will be minimal. For purposes of the Paperwork Reduction Act, we estimate that funds will spend 74,880 hours to comply with Form N-PX, or 14.4 hours per equity fund portfolio filing on Form N-PX annually. Further, we estimate that funds will file reports on Form N-PX for 5,200 portfolios holding equity securities. Thus, we estimate that the burden of filing Form N-PX will equal $5,162,227 in total internal costs annually, or $992 per equity fund portfolio. We had originally proposed to require a fund to file its complete proxy voting record as part of its semi-annual reports on Form N-CSR. However, we modified our proposal in response to one commenter who suggested that requiring disclosure on Form N-CSR would impose unnecessary costs and substantial administrative complexity for fund complexes that have funds with staggered fiscal year ends.

Third, with respect to reports to shareholders, funds will be required to include in their annual and semi-annual reports to shareholders disclosure about the availability of information regarding the fund's proxy voting policies and procedures, and the fund's proxy voting record. We estimate that to comply with these disclosure requirements, a typical fund will need to include at most one additional page in its annual and semi-annual reports to shareholders, at a typesetting cost of $55 per page and a printing cost of $0.025 per page. We estimate that a typical fund may have, on average, 30,000 shareholder accounts; therefore, the additional disclosure in shareholder reports will cost approximately $1,610 (($0.025 x 30,000 shareholder accounts, plus $55) x 2 reports per year) in external costs per fund. Based on the Commission's estimate of 3,700 funds that are required to transmit annual and semi-annual reports to shareholders, we estimate these external costs will be $5,957,000 for the industry as a whole. In addition, we estimate for purposes of the Paperwork Reduction Act that these disclosure requirements will add 3,700 burden hours for funds required to transmit shareholder reports, or one hour per fund, equal to internal costs of $255,078 for the industry annually, or $69 per investment company.

Therefore, based on this analysis, we estimate that the total external and internal direct costs of the additional disclosure required by the amendments will be $12,725,253. Because the amendments may have the effect of inducing fund advisers and fund boards to devote more resources to articulating their proxy voting policies and procedures in more detail, and to monitoring proxy voting decisions, they may result in higher expenses and advisory fees for funds. Some or all of these expenses may be passed on to shareholders.

Numerous commenters responded to the Commission's request for comment on the potential costs of the proposed disclosure requirements, particularly with respect to the required disclosure of their complete proxy voting records in reports on Form N-CSR, and the proposed disclosure of inconsistent votes in annual and semi-annual reports to shareholders. A number of commenters, principally members of the fund industry, argued that the Commission's estimates substantially underestimated the direct costs of the proposed disclosure requirements. First, commenters argued that the estimates omitted any start-up or one-time transition costs, noting that fund groups would need to establish systems or make arrangements with outside vendors to capture the information on proxy votes cast. Second, a commenter argued that while some fund groups rely on outside service providers to vote their proxies, and these service providers may provide proxy voting records in electronic form, many fund groups do not use such outside service providers, and hence may have higher costs to compile their proxy voting records in electronic form. Third, commenters argued that the costs of preparing the voting record disclosure may be higher for funds with significant holdings in foreign securities, because foreign proxies typically contain more proposals than those of U.S. issuers, and certain required data, such as ticker symbols and sponsorship of proposals, is not readily available for meetings of foreign portfolio companies. Fourth, some fund groups also stated that they would incur costs by having to hire and train shareholder servicing personnel in order to respond to requests from shareholders for the proxy voting records disclosed in Form N-CSR.

We continue to believe that our estimates of the direct costs imposed by the disclosure are reasonable. First, we note that our cost estimates, which were based in part on the costs of funds that currently disclose their proxy votes, incorporate start-up costs and one-time transition costs amortized over time. In addition, we believe that start-up costs should be limited in most cases, because most funds currently keep track of information regarding their proxy votes. Second, our cost estimates are derived both from funds that outsource the collection and disclosure of proxy voting information, and from funds that perform these tasks internally. We anticipate that funds will choose to provide the required proxy voting information in the most cost-efficient manner. Third, with respect to the argument that the costs incurred by funds with significant foreign holdings may be higher than estimated, we note that we have modified our proposal to include an instruction permitting a fund to omit exchange ticker symbols and CUSIP numbers if they are not available through reasonably practicable means. Finally, with respect to the argument that funds would incur costs by having to hire and train personnel to respond to requests for their proxy voting records, we note that we have modified our proposals to allow funds to choose to provide their proxy voting records to shareholders through website disclosure or upon request, which should reduce the number of shareholder requests received by phone.

Other commenters argued that the estimates of direct costs in the Proposing Release were reasonable. Several fund groups which currently disclose proxy voting records on their websites as well as through hard copy stated that based on their experience the costs of the proposed disclosure requirements would be minimal. These commenters argued that funds should already be keeping track of their proxy votes internally, so that providing the required disclosure should be a matter of converting existing data to new fields for web interface. One commenter noted that the expense ratios of funds that disclose their proxy votes are not higher than those of funds in general.

A few commenters, including supporters and opponents of the proposed requirement to disclose proxy voting records, provided specific estimates of the direct costs of providing this disclosure. One fund group which opposed the requirement to disclose its proxy voting record prepared a sample disclosure in the format prescribed by the proposed amendment to Form N-CSR, and estimated that the collection of votes from its information systems would take four hours, reformatting the data to the format of Form N-CSR would take eight hours, and that reconfirming that each vote was cast in accordance with the fund's proxy voting policies would take at least another two hours. Another fund group which recently began to post its proxy voting guidelines and proxy voting records for two of its funds on its website estimated that this task took approximately two days. These estimates are generally consistent with our estimate that proxy vote disclosure on Form N-PX will take 14.4 hours per equity portfolio per filing, at an annual cost of $992 per equity portfolio. By contrast, a fund industry trade group estimated, based on a survey of eight fund complexes conducted on its behalf by a third-party, that proxy voting record disclosure would cost approximately $3,380 per fund in start-up costs, and $5,530 per year in ongoing costs.

We also note, as discussed above, that we have modified our proposals in three significant ways, in part in response to concerns expressed about costs by commenters. First, the amendments will require disclosure of proxy votes cast in annual reports on Form N-PX, rather than semi-annually on Form N-CSR. Second, we are not adopting the proposed requirement that funds disclose in their annual and semi-annual reports to shareholders votes that were inconsistent with their proxy voting policies and procedures. Third, rather than requiring funds to send their proxy voting records without charge and upon request, we are permitting them to choose to make their records available either upon request or by making available an electronic version on or through their websites.

The rules may also impose potential indirect costs on fund managers. Several commenters identified certain indirect costs that they argued were not addressed by the cost-benefit analysis in the Proposing Release. First, commenters argued that depriving funds of confidential voting would subject them to possible retaliatory actions by corporate management of the issuers of portfolio securities, such as restricting access by portfolio managers to corporate personnel. These costs are difficult to quantify. Further, these commenters did not provide any evidence that this retaliatory action has occurred or might occur as a result of proxy vote disclosure. We also note that while it is possible that corporations could retaliate against fund managers if they knew that those fund managers had voted against them in the past, it is also possible that corporations could react by trying to work harder to develop cooperative relationships with fund managers. One additional advantage of the amendments is that they will permit fund managers to demonstrate credibly to management of a portfolio company that they have been willing to vote against the recommendations of corporate management in other cases.

Second, several commenters, including funds, claimed that required disclosure of proxy voting records would politicize the process of proxy voting and thereby impose costs on funds in order to address orchestrated campaigns in the media and elsewhere by special interest groups, which would detract from a fund's ability to concentrate on the management of its portfolio. These commenters did not provide any estimates of the magnitude of these costs, however. Some commenters argued that proxy vote disclosure might lead to certain groups threatening to encourage their members and others to withdraw their investments from a fund complex unless the funds' adviser voted in a certain way. To the extent that this possibility is real, and that fund managers may be pressured by large or influential shareholders to vote as directed, making voting policies and procedures available to investors will mitigate this influence to a large degree. Because of the disclosure requirements we are adopting, shareholders will be able to evaluate how closely fund managers follow their stated proxy voting policies, and to react adversely to fund managers who vote inconsistently with these policies.

VI. Consideration of Burden on Competition; Promotion of Efficiency, Competition, and Capital Formation
Section 23(a)(2) of the Exchange Act requires us, when adopting rules under the Exchange Act, to consider the impact that any new rule would have on competition. Section 23(a)(2) also prohibits us from adopting any rule that would impose a burden on competition not necessary or appropriate in furtherance of the purposes of the Exchange Act. In addition, Section 2(c) of the Investment Company Act, Section 2(b) of the Securities Act, and Section 3(f) of the Exchange Act require the Commission, when engaging in rulemaking that requires it to consider or determine whether an action is necessary or appropriate in the public interest, to consider, in addition to the protection of investors, whether the action will promote efficiency, competition, and capital formation. The Commission has considered these factors.

The amendments requiring disclosure of funds' proxy voting policies and procedures and actual proxy voting records are intended to provide greater transparency for fund shareholders regarding the management of their investments in funds. The amendments may improve efficiency. The enhanced disclosure requirements will provide shareholders with greater access to information regarding the proxy voting policies and decisions of the funds in which they invest, which should promote more efficient allocation of investments by investors and more efficient allocation of assets among competing funds. The amendments may also improve competition, as enhanced disclosure may prompt funds to seek to differentiate themselves based on their proxy voting policies and practices. Finally, the effects of the amendments on capital formation are unclear. Although, as noted above, we believe that the amendments will benefit investors, the magnitude of the effect of the amendments on efficiency, competition, and capital formation is difficult to quantify.

In the Proposing Release, we requested comment on whether the proposed amendments would promote efficiency, competition, and capital formation, or, conversely, would impose a burden on competition. The Commission received several letters addressing the effect of the proposed amendments on efficiency, competition, and capital formation. A number of commenters expressed concern that the required disclosure, particularly the requirements that funds disclose their proxy votes cast and any votes that are inconsistent with their proxy voting policies, may have adverse effects on competition and capital formation among funds. Commenters argued that the amendments would disadvantage funds relative to other institutional investors such as banks and pension funds, because funds would be the only class of investors not allowed to vote confidentially. Further, the commenters argued, depriving funds of confidential voting would subject them to possible retaliatory actions by corporate management of the issuers of portfolio securities, such as restricting access by portfolio managers to corporate personnel. Commenters also argued that requiring funds to disclose their proxy votes would subject them to orchestrated campaigns in the media and elsewhere by special interest groups with social or political agendas different from those of fund shareholders, which would detract from a fund's ability to concentrate on the management of its portfolio and ultimately harm fund shareholders. Finally, commenters asserted that the proposed disclosure requirements would impose substantial costs on funds, which would be passed on to their shareholders.

Other commenters, however, argued that proxy voting disclosure would improve competition by allowing investors who wish to consider proxy voting policies and records when deciding between two funds to do so. According to one such commenter, mandating proxy voting disclosure would thereby allow proxy voting policies and records to be fully "valued" by the marketplace. Many commenters also asserted that because funds hold a significant percentage of equity securities, requiring proxy vote disclosure by funds would improve corporate governance and accountability among issuers of portfolio securities, which would benefit investors broadly. With respect to the argument that disclosure would harm funds by "politicizing" the proxy voting process, one commenter argued that to the extent that this meant funds would come under market pressure for behavior that their investors disapprove of, this would be a positive, not a negative, result.

As discussed in more detail in the Cost-Benefit Analysis above, we continue to believe that the proxy vote disclosure required by the amendments will provide several benefits to fund investors. The amendments will provide better information to investors to use in selecting funds, and in determining whether fund managers are adequately maximizing the value of their shares. The amendments may also deter votes motivated by conflicts of interest. In addition, the amendments may provide stronger incentives to fund managers to vote their proxies carefully, which could thereby improve corporate performance and enhance shareholder value. With respect to the commenters' argument that the amendments may disadvantage funds by depriving them of confidential voting, we note that there is no evidence that retaliatory action by portfolio company management has occurred or might occur as a result of proxy vote disclosure, and that it is possible that this disclosure will encourage corporations to work harder to develop cooperative relationships with fund managers. With respect to the argument that disclosure of a fund's proxy voting record may subject it to pressure from special interest groups to vote in a certain manner, we note that to the extent that this possibility is real, making voting policies and procedures available to investors will mitigate this influence to a large degree. With respect to the argument that the proposed disclosure requirements would impose substantial costs on funds, we have modified certain of our proposals to mitigate costs by requiring a fund to file its proxy voting record annually on new Form N-PX rather than semi-annually on Form N-CSR, by eliminating the requirement that a fund disclose its proxy votes (or failures to vote) that are inconsistent with its proxy voting policies and procedures, and by permitting a fund to choose to make available to its shareholders its record of how it voted proxies relating to portfolio securities on or through its website or upon request.

VII. Final Regulatory Flexibility Analysis
This Final Regulatory Flexibility Analysis ("FRFA") has been prepared in accordance with 5 U.S.C. 604, and relates to the Commission's rule and form amendments under the Securities Act, the Exchange Act, and the Investment Company Act to require funds to provide disclosure about how they vote proxies of portfolio securities they hold. Under the amendments, a fund will be required to disclose in its registration statement the policies and procedures that it uses to determine how to vote the proxies of portfolio securities. The amendments also require a fund to file with the Commission on new Form N-PX, and to make available to its shareholders, on or through its website or upon request, its record of how it voted proxies relating to portfolio securities.

Specifically, a fund will be required to disclose in its statement of additional information ("SAI") its policies and procedures used to determine how to vote proxies of the securities held in its portfolio, and to provide disclosure regarding the availability of its proxy voting record to shareholders. The amendments also require a fund to file with the Commission, in an annual report on Form N-PX, its complete proxy voting record for the most recent twelve-month period ended June 30. The amendments require a fund to include in its annual and semi-annual reports to shareholders disclosure that the fund's proxy voting policies and procedures, are available (i) without charge, upon request from the fund, (ii) on the fund's website, if applicable, and (iii) on the SEC website. The amendments also require a fund to state in its registration statement and reports to shareholders that its proxy voting record is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the fund's website at a specified Internet address; or both; and (ii) on the SEC website. The Commission prepared an Initial Regulatory Flexibility Analysis ("IRFA") in accordance with 5 U.S.C. 603 in conjunction with the Proposing Release, which was made available to the public. The Proposing Release included the IRFA and solicited comments on it.

A. Reasons for, and Objectives of, Amendments
Proxy voting decisions may play an important role in maximizing the value of a fund's investments for its shareholders. Requiring funds to disclose specific proxy voting information could enable shareholders to make an informed assessment as to whether funds are utilizing proxy voting for the benefit of fund shareholders. We are adopting these amendments because we believe that requiring management investment companies to disclose their proxy policies and procedures as well as voting records will result in greater transparency for fund shareholders regarding the overall management of their investments. We also believe it is possible to achieve this improved disclosure efficiently at minimal cost because of recent advances in technology, such as the Internet.

B. Significant Issues Raised by Public Comment
No comments specifically addressed the IRFA. However, a few commenters asserted that the proposed amendments that would require disclosure of a fund's proxy voting record would have a negative impact on small entities. These commenters noted that the loss of confidential voting that would result from the disclosure of proxy votes would raise the risk that portfolio company management might retaliate against a fund, and that this risk of retaliation would be disproportionately greater for small funds. One commenter argued that small funds should not be required to bear the burden and costs of providing proxy voting disclosure, when many much larger institutional investors, such as pension plans, insurance companies, common and collective trust funds, and hedge funds would not be required to do so. On the other hand, an association of "socially responsible" funds commented that some smaller fund companies have been providing proxy voting disclosure for some time, with little cost to their investors.

C. Small Entities Subject to the Rule
For purposes of the Regulatory Flexibility Act, an investment company is a small entity if it, together with other investment companies in the same group of related investment companies, has net assets of $50 million or less as of the end of its most recent fiscal year. Approximately 205 out of 3700 investment companies that will be affected by this rule meet this definition.

D. Reporting, Recordkeeping, and Other Compliance Requirements
The amendments require a fund to disclose in its SAI (and in Form N-CSR, in the case of a closed-end fund) the policies and procedures it uses to determine how to vote proxies for the securities held in its portfolio, and to provide disclosure in its SAI regarding the availability of its proxy voting record to shareholders. The amendments also require a fund to file with the Commission, on Form N-PX, its complete proxy voting record for its most recent twelve-month period ended June 30. Finally, the amendments require a fund to include in its annual and semi-annual reports to shareholders disclosure that a description of the policies and procedures that the fund uses to determine how to vote proxies relating to portfolio securities is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; (ii) on the fund's website, if applicable; and (iii) on the SEC website. The amendments also require a fund to state in its registration statement and reports to shareholders that its proxy voting record is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the fund's website at a specified Internet address; or both; and (ii) on the SEC website.

The Commission estimates some one-time formatting and ongoing costs and burdens that will be imposed on all funds, but which may have a relatively greater impact on smaller firms. These include the costs related to disclosing proxy voting policies and procedures to fund shareholders; filing proxy voting records with the Commission on Form N-PX; and disclosing voting records through website disclosure or upon request. These costs could include expenses for computer time, legal and accounting fees, information technology staff, and additional computer and telephone equipment. However, we believe, based on consultations with a number of fund complexes, including smaller fund complexes, that many investment companies presently collect in-house or outsource the collection of proxy voting information on a basis at least as current as annually and, therefore, that the marginal cost increases for most funds will be minimal.

E. Agency Action to Minimize Effect on Small Entities
The Commission believes at the present time that special compliance or reporting requirements for small entities, or an exemption from coverage for small entities, would not be appropriate or consistent with investor protection. The disclosure amendments will provide shareholders with greater transparency regarding a fund's proxy voting polices and procedures, as well as records of votes cast. Different disclosure requirements for small entities, such as reducing the level of proxy voting disclosure that small entities would have to provide shareholders, may create the risk that those shareholders would not receive sufficient information to make an informed evaluation as to whether the fund's board and its investment adviser are complying with their fiduciary duties to vote proxies of portfolio securities in the best interest of fund shareholders. We believe it is important for the proxy disclosure required by the amendments to be provided to shareholders by all funds, not just funds that are not considered small entities.

We have endeavored through the amendments to minimize the regulatory burden on all funds, including small entities, while meeting our regulatory objectives. Small entities should benefit from the Commission's reasoned approach to the amendments to the same degree as other investment companies. Further clarification, consolidation, or simplification of the amendments for funds that are small entities would be inconsistent with the Commission's concern for investor protection. Finally, we do not consider using performance rather than design standards to be consistent with our statutory mandate of investor protection in the present context.

We note, however, that we have modified our proposals in response to comments, in part to reduce the regulatory burden on funds, including small funds. As adopted, our amendments will require a fund to provide disclosure of its proxy voting record annually on Form N-PX, rather than semi-annually. In addition, we are not adopting the proposed requirement that a fund's annual and semi-annual reports to shareholders include all votes that are inconsistent with the fund's proxy voting policies and procedures. Further, we are modifying our proposed requirement that a fund must send its proxy voting record without charge and upon request, by permitting a fund to make its proxy voting record available on or through its website instead.

VIII. Statutory Authority
The Commission is adopting amendments to Forms N-1A, N-2, N-3, and N-CSR pursuant to authority set forth in Sections 5, 6, 7, 10, 19(a), and 28 of the Securities Act [15 U.S.C. 77e, 77f, 77g, 77j, 77s(a), and 77z-3], Sections 10(b), 13, 15(d), 23(a), and 36 of the Exchange Act [15 U.S.C. 78j(b), 78m, 78o(d), 78w(a), and 78mm], and Sections 6(c), 8, 24(a), 30, and 38 of the Investment Company Act [15 U.S.C. 80a-6(c), 80a-8, 80a-24(a), 80a-29, and 80a-37]. The Commission is adopting new rule 30b1-4 and new Form N-PX pursuant to authority set forth in Sections 8, 30, 31, and 38 of the Investment Company Act [15 U.S.C. 80a-8, 80a-29, 80a-30, and 80a-37].

List of Subjects

17 CFR Parts 239 and 249

Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

Investment companies, Reporting and recordkeeping requirements, Securities.

Text of Rule and Form Amendments

For the reasons set out in the preamble, the Commission amends Title 17, Chapter II of the Code of Federal Regulations as follows:

Part 239 - Forms Prescribed Under The Securities Act of 1933

1. The authority citation for Part 239 continues to read in part as follows:

Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-26, 80a-29, 80a-30, and 80a-37, unless otherwise noted.

* * * * *

Part 249 - Forms, Securities Exchange Act of 1934

2. The authority citation for Part 249 continues to read in part as follows:

Authority: 15 U.S.C. 78a, et seq., unless otherwise noted.

* * * * *

Section 249.331 is also issued under secs. 3(a), 202, 208, 302, 406, and 407, Pub. L. No. 107-204, 116 Stat. 745.

Part 270 - Rules and Regulations, Investment Company Act of 1940

3. The general authority citation for part 270 continues to read as follows:

Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, and 80a-39, unless otherwise noted.

* * * * *

4. Section 270.30b1-4 is added to read as follows:

§ 270.30b1-4 Report of proxy voting record.

Every registered management investment company, other than a small business investment company registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), shall file an annual report on Form N-PX (§ 274.129 of this chapter) not later than August 31 of each year, containing the registrant's proxy voting record for the most recent twelve-month period ended June 30.

Part 239 - Forms Prescribed Under the Securities Act of 1933

Part 274 - Forms Prescribed Under the Investment Company Act of 1940

5. The authority citation for Part 274 is amended by revising the sectional authority for § 274.128 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, 80a-26, and 80a-29, unless otherwise noted.

* * * * *

Section 274.128 is also issued under secs. 3(a), 202, 208, 302, 406, and 407, Pub. L. No. 107-204, 116 Stat. 745.

6. Form N-1A (referenced in §§ 239.15A and 274.11A) is amended by:

a. In Item 13, adding paragraph (f); and

b. In Item 22, adding paragraphs (b)(7) and (8) and (c)(5) and (6).

These additions read as follows:

Note: The text of Form N-1A does not, and these amendments will not, appear in the Code of Federal Regulations.

Form N-1A

* * * * *

Item 13. Management of the Fund

* * * * *

(f) Proxy Voting Policies. Unless the Fund invests exclusively in non-voting securities, describe the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities, including the procedures that the Fund uses when a vote presents a conflict between the interests of Fund shareholders, on the one hand, and those of the Fund's investment adviser; principal underwriter; or any affiliated person of the Fund, its investment adviser, or its principal underwriter, on the other. Include any policies and procedures of the Fund's investment adviser, or any other third party, that the Fund uses, or that are used on the Fund's behalf, to determine how to vote proxies relating to portfolio securities. Also, state that information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Fund's website at a specified Internet address; or both; and (2) on the Commission's website at https://www.sec.gov.

Instructions.

1. A Fund may satisfy the requirement to provide a description of the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities by including a copy of the policies and procedures themselves.

2. If a Fund discloses that the Fund's proxy voting record is available by calling a toll-free (or collect) telephone number, and the Fund (or financial intermediary through which shares of the Fund may be purchased or sold) receives a request for this information, the Fund (or financial intermediary) must send the information disclosed in the Fund's most recently filed report on Form N-PX, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

3. If a Fund discloses that the Fund's proxy voting record is available on or through its website, the Fund must make available free of charge the information disclosed in the Fund's most recently filed report on Form N-PX on or through its website as soon as reasonably practicable after filing the report with the Commission. The information disclosed in the Fund's most recently filed report on Form N-PX must remain available on or through the Fund's website for as long as the Fund remains subject to the requirements of Rule 30b1-4 (17 CFR 270.30b1-4) and discloses that the Fund's proxy voting record is available on or through its website.

* * * * *

Item 22. Financial Statements

* * * * *

(b) * * *

(7) A statement that a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; (ii) on the Fund's website, if applicable; and (iii) on the Commission's website at https://www.sec.gov.

Instruction. When a Fund (or financial intermediary through which shares of the Fund may be purchased or sold) receives a request for a description of the policies and procedures that the Fund uses to determine how to vote proxies, the Fund (or financial intermediary) must send the information disclosed in response to Item 13(f) of this Form, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

(8) A statement that information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Fund's website at a specified Internet address; or both; and (ii) on the Commission's website at https://www.sec.gov.

Instructions.

1. If a Fund discloses that the Fund's proxy voting record is available by calling a toll-free (or collect) telephone number, and the Fund (or financial intermediary through which shares of the Fund may be purchased or sold) receives a request for this information, the Fund (or financial intermediary) must send the information disclosed in the Fund's most recently filed report on Form N-PX, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

2. If a Fund discloses that the Fund's proxy voting record is available on or through its website, the Fund must make available free of charge the information disclosed in the Fund's most recently filed report on Form N-PX on or through its website as soon as reasonably practicable after filing the report with the Commission. The information disclosed in the Fund's most recently filed report on Form N-PX must remain available on or through the Fund's website for as long as the Fund remains subject to the requirements of Rule 30b1-4 (17 CFR 270.30b1-4) and discloses that the Fund's proxy voting record is available on or through its website.

(c) * * *

(5) A statement that a description of the policies and procedures that the Fund uses to determine how to vote proxies relating to portfolio securities is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; (ii) on the Fund's website, if applicable; and (iii) on the Commission's website at https://www.sec.gov.

Instruction. When a Fund (or financial intermediary through which shares of the Fund may be purchased or sold) receives a request for a description of the policies and procedures that the Fund uses to determine how to vote proxies, the Fund (or financial intermediary) must send the information disclosed in response to Item 13(f) of this Form, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

(6) A statement that information regarding how the Fund voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Fund's website at a specified Internet address; or both; and (ii) on the Commission's website at https://www.sec.gov.

Instruction. Instructions 1 and 2 to Item 22(b)(8) also apply to this Item 22(c)(6).

* * * * *

7. Form N-2 (referenced in §§ 239.14 and 274.11a-1) is amended by:

a. In Item 18, adding paragraph 16;

b. In Item 23, removing "and" from the end of Instruction 4.e.;

c. In Item 23, removing the period from the end of Instruction 4.f. and in its place adding a semi-colon;

d. In Item 23, adding Instructions 4.g. and 4.h.;

e. In Item 23, removing "and" from the end of Instruction 5.c.;

f. In Item 23, removing the period from the end of Instruction 5.d. and in its place adding a semi-colon;

g. In Item 23, adding Instructions 5.e. and 5.f.;

h. In Item 23, redesignating Instruction 6 as Instruction 7; and

i. In Item 23, adding new Instruction 6.

These additions read as follows:

Note: The text of Form N-2 does not, and these amendments will not, appear in the Code of Federal Regulations.

Form N-2

* * * * *

Item 18. Management

* * * * *

16. Unless the Registrant invests exclusively in non-voting securities, describe the policies and procedures that the Registrant uses to determine how to vote proxies relating to portfolio securities, including the procedures that the Registrant uses when a vote presents a conflict between the interests of the Registrant's shareholders, on the one hand, and those of the Registrant's investment adviser; principal underwriter; or any affiliated person (as defined in Section 2(a)(3) of the 1940 Act (15 U.S.C. 80a-2(a)(3)) and the rules thereunder) of the Registrant, its investment adviser, or its principal underwriter, on the other. Include any policies and procedures of the Registrant's investment adviser, or any other third party, that the Registrant uses, or that are used on the Registrant's behalf, to determine how to vote proxies relating to portfolio securities. Also, state that information regarding how the Registrant voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available

(i) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Registrant's website at a specified Internet address; or both; and (ii) on the Commission's website at https://www.sec.gov.

Instructions.

1. A Registrant may satisfy the requirement to provide a description of the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities by including a copy of the policies and procedures themselves.

2. If a Registrant discloses that the Registrant's proxy voting record is available by calling a toll-free (or collect) telephone number, and the Registrant (or financial intermediary through which shares of the Registrant may be purchased or sold) receives a request for this information, the Registrant (or financial intermediary) must send the information disclosed in the Registrant's most recently filed report on Form N-PX, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

3. If a Registrant discloses that the Registrant's proxy voting record is available on or through its website, the Registrant must make available free of charge the information disclosed in the Registrant's most recently filed report on Form N-PX on or through its website as soon as reasonably practicable after filing the report with the Commission. The information disclosed in the Registrant's most recently filed report on Form N-PX must remain available on or through the Registrant's website for as long as the Registrant remains subject to the requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-4) and discloses that the Registrant's proxy voting record is available on or through its website.

* * * * *

Item 23. Financial Statements

* * * * *

Instructions:

* * * * *

4. * * *

g. a statement that a description of the policies and procedures that the Registrant uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling a specified toll-free (or collect) telephone number; (2) on the Registrant's website, if applicable; and (3) on the Commission's website at https://www.sec.gov; and

h. a statement that information regarding how the Registrant voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Registrant's website at a specified Internet address; or both; and (2) on the Commission's website at https://www.sec.gov.

5. * * *

e. a statement that a description of the policies and procedures that the Registrant uses to determine how to vote proxies relating to portfolio securities is available (1) without charge, upon request, by calling a specified toll-free (or collect) telephone number; (2) on the Registrant's website, if applicable; and (3) on the Commission's website at https://www.sec.gov; and

f. a statement that information regarding how the Registrant voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Registrant's website at a specified Internet address; or both; and (2) on the Commission's website at https://www.sec.gov.

6. a. When a Registrant (or financial intermediary through which shares of the Registrant may be purchased or sold) receives a request for a description of the policies and procedures that the Registrant uses to determine how to vote proxies, the Registrant (or financial intermediary) must send the information most recently disclosed in response to Item 18.16 of this Form or Item 7 of Form N-CSR within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

b. If a Registrant discloses that the Registrant's proxy voting record is available by calling a toll-free (or collect) telephone number, and the Registrant (or financial intermediary through which shares of the Registrant may be purchased or sold) receives a request for this information, the Registrant (or financial intermediary) must send the information disclosed in the Registrant's most recently filed report on Form N-PX, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

c. If a Registrant discloses that the Registrant's proxy voting record is available on or through its website, the Registrant must make available free of charge the information disclosed in the Registrant's most recently filed report on Form N-PX on or through its website as soon as reasonably practicable after filing the report with the Commission. The information disclosed in the Registrant's most recently filed report on Form N-PX must remain available on or through the Registrant's website for as long as the Registrant remains subject to the requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-4) and discloses that the Registrant's proxy voting record is available on or through its website.

* * * * *

8. Form N-3 (referenced in §§ 239.17a and 274.11b) is amended by:

a. In Item 20, adding paragraph (o);

b. In Item 27(a), removing "and" from the end of Instruction 4(v);

c. In Item 27(a), removing the period from the end of Instruction 4(vi) and in its place adding a semi-colon;

d. In Item 27(a), adding Instructions 4(vii) and 4(viii);

e. In Item 27(a), removing "and" from the end of Instruction 5(iii);

f. In Item 27(a), removing the period from the end of Instruction 5(iv) and in its place adding a semi-colon;

g. In Item 27(a), adding Instructions 5(v) and 5(vi);

h. In Item 27(a), redesignating Instruction 6 as Instruction 7; and

i. In Item 27(a), adding new Instruction 6.

These additions read as follows:

Note: The text of Form N-3 does not, and these amendments will not, appear in the Code of Federal Regulations.

Form N-3

* * * * *

Item 20. Management

* * * * *

(o) Unless the Registrant invests exclusively in non-voting securities, describe the policies and procedures that the Registrant uses to determine how to vote proxies relating to portfolio securities, including the procedures that the Registrant uses when a vote presents a conflict between the interests of the Registrant's contractowners, on the one hand, and those of the Registrant's investment adviser; principal underwriter; or any affiliated person (as defined in Section 2(a)(3) of the 1940 Act (15 U.S.C. 80a-2(a)(3)) and the rules thereunder) of the Registrant, its investment adviser, or its principal underwriter, on the other. Include any policies and procedures of the Registrant's investment adviser, or any other third party, that the Registrant uses, or that are used on the Registrant's behalf, to determine how to vote proxies relating to portfolio securities. Also, state that information regarding how the Registrant voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (1) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Registrant's website at a specified Internet address; or both; and (2) on the Commission's website at https://www.sec.gov.

Instructions.

1. A Registrant may satisfy the requirement to provide a description of the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities by including a copy of the policies and procedures themselves.

2. If a Registrant discloses that the Registrant's proxy voting record is available by calling a toll-free (or collect) telephone number, and the Registrant (or financial intermediary through which shares of the Registrant may be purchased or sold) receives a request for this information, the Registrant (or financial intermediary) must send the information disclosed in the Registrant's most recently filed report on Form N-PX, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

3. If a Registrant discloses that the Registrant's proxy voting record is available on or through its website, the Registrant must make available free of charge the information disclosed in the Registrant's most recently filed report on Form N-PX on or through its website as soon as reasonably practicable after filing the report with the Commission. The information disclosed in the Registrant's most recently filed report on Form N-PX must remain available on or through the Registrant's website for as long as the Registrant remains subject to the requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-4) and discloses that the Registrant's proxy voting record is available on or through its website.

* * * * *

Item 27. Financial Statements

(a) * * *

Instructions:

* * * * *

4. * * *

(vii) a statement that a description of the policies and procedures that the Registrant uses to determine how to vote proxies relating to portfolio securities is available (A) without charge, upon request, by calling a specified toll-free (or collect) telephone number; (B) on the Registrant's website, if applicable; and (C) on the Commission's website at https://www.sec.gov; and

(viii) a statement that information regarding how the Registrant voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (A) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Registrant's website at a specified Internet address; or both; and (B) on the Commission's website at https://www.sec.gov.

5. * * *

(v) a statement that a description of the policies and procedures that the Registrant uses to determine how to vote proxies relating to portfolio securities is available (A) without charge, upon request, by calling a specified toll-free (or collect) telephone number; (B) on the Registrant's website, if applicable; and (C) on the Commission's website at https://www.sec.gov; and

(vi) a statement that information regarding how the Registrant voted proxies relating to portfolio securities during the most recent 12-month period ended June 30 is available (A) without charge, upon request, by calling a specified toll-free (or collect) telephone number; or on or through the Registrant's website at a specified Internet address; or both; and (B) on the Commission's website at https://www.sec.gov.

6. (i) When a Registrant (or financial intermediary through which shares of the Registrant may be purchased or sold) receives a request for a description of the policies and procedures that the Registrant uses to determine how to vote proxies, the Registrant (or financial intermediary) must send the information disclosed in response to Item 20(o) of this Form, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

(ii) If a Registrant discloses that the Registrant's proxy voting record is available by calling a toll-free (or collect) telephone number, and the Registrant (or financial intermediary through which shares of the Registrant may be purchased or sold) receives a request for this information, the Registrant (or financial intermediary) must send the information disclosed in the Registrant's most recently filed report on Form N-PX, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery.

(iii) If a Registrant discloses that the Registrant's proxy voting record is available on or through its website, the Registrant must make available free of charge the information disclosed in the Registrant's most recently filed report on Form N-PX on or through its website as soon as reasonably practicable after filing the report with the Commission. The information disclosed in the Registrant's most recently filed report on Form N-PX must remain available on or through the Registrant's website for as long as the Registrant remains subject to the requirements of Rule 30b1-4 under the 1940 Act (17 CFR 270.30b1-4) and discloses that the Registrant's proxy voting record is available on or through its website.

* * * * *

Part 249 - Forms, Securities Exchange Act of 1934

Part 274 - Forms Prescribed Under the Investment Company Act of 1940

9. Form N-CSR (referenced in §§ 249.331 and 274.128) is amended by adding new Item 7 to read as follows:

Note: The text of Form N-CSR does not, and these amendments will not, appear in the Code of Federal Regulations.

Form N-CSR

* * * * *

Item 7. Disclosure of Proxy Voting Policies and Procedures for Closed-End Management Investment Companies.
A closed-end management investment company that is filing an annual report on this Form N-CSR must, unless it invests exclusively in non-voting securities, describe the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities, including the procedures that the company uses when a vote presents a conflict between the interests of its shareholders, on the one hand, and those of the company's investment adviser; principal underwriter; or any affiliated person (as defined in Section 2(a)(3) of the Investment Company Act of 1940 (15 U.S.C. 80a-2(a)(3)) and the rules thereunder) of the company, its investment adviser, or its principal underwriter, on the other. Include any policies and procedures of the company's investment adviser, or any other third party, that the company uses, or that are used on the company's behalf, to determine how to vote proxies relating to portfolio securities.

Instruction. A company may satisfy the requirement to provide a description of the policies and procedures that it uses to determine how to vote proxies relating to portfolio securities by including a copy of the policies and procedures themselves.

* * * * *

10. Section 274.129 is added to read as follows:

§ 274.129 Form N-PX, annual report of proxy voting record of registered management investment company.
This form shall be used by registered management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), for annual reports to be filed not later than August 31 of each year, containing the company's proxy voting record for the most recent twelve-month period ended June 30, pursuant to Section 30 of the Investment Company Act of 1940 and

§ 270.30b1-4 of this chapter.

11. Add Form N-PX (referenced in § 274.129) to read as follows:

Note: The text of Form N-PX will not appear in the Code of Federal Regulations.

United States
Securities and Exchange Commission
Washington, DC 20549

Form N-PX

Annual Report of Proxy Voting Record of Registered Management Investment Company

Investment Company Act file number____________________

________________________________________________________________
(Exact name of registrant as specified in charter)

________________________________________________________________
(Address of principal executive offices) (Zip code)

________________________________________________________________
(Name and address of agent for service)

Registrant's telephone number, including area code:_____________

Date of fiscal year end:________________

Date of reporting period:_______________

Form N-PX is to be used by a registered management investment company, other than a small business investment company registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file reports with the Commission, not later than August 31 of each year, containing the registrant's proxy voting record for the most recent twelve-month period ended June 30, pursuant to Section 30 of the Investment Company Act of 1940 and rule 30b1-4 thereunder (17 CFR 270.30b1-4). The Commission may use the information provided on Form N-PX in its regulatory, disclosure review, inspection, and policymaking roles.

A registrant is required to disclose the information specified by Form N-PX, and the Commission will make this information public. A registrant is not required to respond to the collection of information contained in Form N-PX unless the Form displays a currently valid Office of Management and Budget ("OMB") control number. Please direct comments concerning the accuracy of the information collection burden estimate and any suggestions for reducing the burden to the Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, Washington, DC 20549-0609. The OMB has reviewed this collection of information under the clearance requirements of 44 U.S.C. § 3507.

General Instructions

A. Rule as to Use of Form N-PX.
Form N-PX is to be used for reports pursuant to Section 30 of the Investment Company Act of 1940 (the "Act") and Rule 30b1-4 under the Act (17 CFR 270.30b1-4) by all registered management investment companies, other than small business investment companies registered on Form N-5 (§§ 239.24 and 274.5 of this chapter), to file their complete proxy voting record not later than August 31 of each year for the most recent twelve-month period ended June 30.

B. Application of General Rules and Regulations.
The General Rules and Regulations under the Act contain certain general requirements that are applicable to reporting on any form under the Act. These general requirements should be carefully read and observed in the preparation and filing of reports on this form, except that any provision in the form or in these instructions shall be controlling.

C. Preparation of Report.
1. This Form is not to be used as a blank form to be filled in, but only as a guide in preparing the report in accordance with Rules 8b-11 (17 CFR 270.8b-11) and 8b-12 (17 CFR 270.8b-12) under the Act. The Commission does not furnish blank copies of this form to be filled in for filing.

2. These general instructions are not to be filed with the report.

D. Incorporation by Reference
No items of this Form shall be answered by incorporating any information by reference.

E. Definitions
Unless the context clearly indicates the contrary, terms used in this Form N-PX have meanings as defined in the Act and the rules and regulations thereunder. Unless otherwise indicated, all references in the form to statutory sections or to rules are sections of the Act and the rules and regulations thereunder.

F. Signature and Filing of Report.
1. If the report is filed in paper pursuant to a hardship exemption from electronic filing (see Item 201 et seq. of Regulation S-T (17 CFR 232.201 et seq.)), eight complete copies of the report shall be filed with the Commission. At least one complete copy of the report filed with the Commission must be manually signed. Copies not manually signed must bear typed or printed signatures.

2.(a) The report must be signed by the registrant, and on behalf of the registrant by its principal executive officer or officers.

(b) The name and title of each person who signs the report shall be typed or printed beneath his or her signature. Attention is directed to Rule 8b-11 under the Act (17 CFR 270.8b-11) concerning manual signatures and signatures pursuant to powers of attorney.

Item 1. Proxy Voting Record.
Disclose the following information for each matter relating to a portfolio security considered at any shareholder meeting held during the period covered by the report and with respect to which the registrant was entitled to vote:

(a) The name of the issuer of the portfolio security;

(b) The exchange ticker symbol of the portfolio security;

(c) The Council on Uniform Securities Identification Procedures ("CUSIP") number for the portfolio security;

(d) The shareholder meeting date;

(e) A brief identification of the matter voted on;

(f) Whether the matter was proposed by the issuer or by a security holder;

(g) Whether the registrant cast its vote on the matter;

(h) How the registrant cast its vote (e.g., for or against proposal, or abstain; for or withhold regarding election of directors); and

(i) Whether the registrant cast its vote for or against management.

Instructions.

1. In the case of a registrant that offers multiple series of shares, provide the information required by this Item separately for each series. The term "series" means shares offered by a registrant that represent undivided interests in a portfolio of investments and that are preferred over all other series of shares for assets specifically allocated to that series in accordance with Rule 18f-2(a) under the Act (17 CFR 270.18f-2(a)).

2. The exchange ticker symbol or CUSIP number required by paragraph (b) or (c) of this Item may be omitted if it is not available through reasonably practicable means, e.g., in the case of certain securities of foreign issuers.

Signatures

[See General Instruction F]

Pursuant to the requirements of the Investment Company Act of 1940, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

(Registrant)____________________________________________________

By (Signature and Title)* _________________________________________

Date___________________________________________________________

* Print the name and title of each signing officer under his or her signature.

By the Commission.

Margaret H. McFarland
Deputy Secretary

Dated: January 31, 2003
Endnotes
We do not edit personal identifying information, such as names or e-mail addresses, from electronic submissions. Submit only information that you wish to make publicly available.
See Investment Company Act Release No. 25914 (Jan. 27, 2003) (adopting Form N-CSR).

Pub. L. 107-204, § 302, 116 Stat. 745 (2002).

See Disclosure of Proxy Voting Policies and Proxy Voting Records by Registered Management Investment Companies, Investment Company Act Release No. 25739 (Sept. 20, 2002) [67 FR 60828 (Sept. 26, 2002)] ("Proposing Release").

See Investment Advisers Act Release No. 2106 (Jan. 31, 2003).

For simplicity, this release focuses on mutual funds (i.e., open-end management investment companies). An open-end management investment company is an investment company, other than a unit investment trust or face-amount certificate company, that offers for sale or has outstanding any redeemable security of which it is the issuer. See Sections 4 and 5(a)(1) of the Investment Company Act [15 U.S.C. 80a-4 and 80a-5(a)(1)]. The amendments, however, would also apply to registered closed-end management investment companies and insurance company separate accounts organized as management investment companies that offer variable annuity contracts.

See Board of Governors of the Federal Reserve System, Flow of Funds Accounts of the United States: Flows and Outstandings, Third Quarter 2002, at 90 (2002) [hereinafter Flow of Funds Accounts] (estimating $2.005 trillion market value of mutual fund corporate equity holdings and $10.960 trillion market value of all corporate equity issues).

Securities Industry Association, Securities Industry Fact Book 71 (2002).

Investment Company Institute, Mutual Fund Fact Book 37 (42nd ed. 2002). Approximately 93 million individual investors hold shares of mutual funds. Id. Shares of equity mutual funds are held through 164.8 million shareholder accounts. Id. at 63. A single individual may hold mutual fund shares through multiple accounts.

See John Wasik, Speak Loudly - Or Lose Your Big Stick, The Financial Times, July 24, 2002, at 26 (only eight retail mutual fund groups openly disclose how they vote on proxies). We have previously prepared reports commenting on the role of institutional investors in the corporate accountability process and their impact on portfolio companies. See Division of Corporation Finance, SEC, Staff Report on Corporate Accountability (Sept. 4, 1980) (printed for the use of Senate Comm. on Banking, Housing and Urban Affairs, 96th Cong., 2d Sess.) [hereinafter SEC, Staff Report on Corporate Accountability]; SEC, Institutional Investor Study Report (Mar. 10, 1971) (printed for the use of House Comm. on Interstate and Foreign Commerce, 92nd Cong., 1st Sess.) [hereinafter SEC, Institutional Investor Study Report].

See generally James M. Storey & Thomas M. Clyde, Mutual Fund Law Handbook § 7.2 (1998); Allan S. Mostoff & Olivia P. Adler, Organizing an Investment Company - Structural Considerations § 2.4 in The Investment Company Regulation Deskbook (Amy L. Goodman ed., 1997).

SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (interpreting Section 206 of the Investment Advisers Act of 1940). Cf. Section 36(b) of the Investment Company Act [15 U.S.C. 80a-35] (investment adviser of a fund has a fiduciary duty with respect to the receipt of compensation paid by the fund).

See Investment Advisers Act Release No. 2106, supra note 5. See also SEC, Staff Report on Corporate Accountability, supra note 10, at 391 (fiduciary principle applies to all aspects of investment management, including voting). Cf. Dep't of Labor, Interpretive Bulletins Relating to the Employee Retirement Income Security Act of 1974, 29 CFR 2509.94-2 (2002) (fiduciary act of managing employee benefit plan assets consisting of equity securities includes voting of proxies appurtenant to those securities).

See, e.g., SEC, Staff Report on Corporate Accountability, supra note 10, at 404 (investment managers have routinely supported management slates of director nominees); Alan R. Palmiter, Mutual Fund Voting of Portfolio Shares: Why Not Disclose?, 23 Cardozo L. Rev. 1419, 1430-31 (2002) (discussing mutual fund passivity in corporate governance). See generally John C. Coffee, Jr., The SEC and The Institutional Investor: A Half-Time Report, 15 Cardozo L. Rev. 837 (1994) (institutional investors have historically been passive investors); Bernard S. Black, Shareholder Passivity Reexamined, 89 Mich. L. Rev. 520 (1990) (shareholder voting has historically been passive).

See SEC, Staff Report on Corporate Accountability, supra note 10, at 392 (describing "Wall Street Rule").

See, e.g., Aaron Lucchetti, A Mutual-Fund Giant Is Stalking Excessive Pay, Wall Street Journal, June 12, 2002, at C1 (Fidelity has voted against management recommendations involving stock-option plans); Kathleen Day, Prodding For Disclosure of Funds' Proxy Votes, Washington Post, Apr. 8, 2001, at H1 (Domini Social Equity Fund voted against management proposal to issue additional stock options for directors).

See Palmiter, supra note 14, at 1435-36 (as holdings have increased, mutual funds have realized that they cannot easily sell blocks of poorly performing stock).

See Kathleen Pender, The Influence of Indexing on the Markets, San Francisco Chronicle, June 23, 2002, at G1 (some index funds are more likely to vote proxies because they generally cannot sell portfolio securities consistent with their investment policies).

See, e.g., Josh Friedman, Vanguard to Turn More Activist in Proxy Voting, Los Angeles Times, Aug. 22, 2002, at B3 (Vanguard imposing stricter corporate governance guidelines in light of recent events); Tom Hamburger, Union Targets Corporate Change, Wall Street Journal, July 30, 2002, at A2 (workers should use pension funds and votes to compel changes in corporate behavior); Beth Healy, Big Investors Assuming a More Activist Stance, Boston Globe, July 11, 2002, at C1 (big investors say they are taking a more activist stance after financial scandals at Enron, Global Crossing, and WorldCom); Russ Wiles, Funds May Have More to Say on Governance, Chicago Sun-Times, June 3, 2002, at F53 (investors taking a closer look at corporate governance issues as a result of Enron).

See, e.g., Aaron Bernstein & Geoffrey Smith, Can You Trust Your Fund Company?, BusinessWeek Online, Aug. 8, 2002 (AFL-CIO argues that conflicts of interest lead mutual funds to vote with management).

For additional examples of potential conflicts of interest involving investment advisers, see Investment Advisers Act Release No. 2106, supra note 5, at Section I., "Background."

In general, investment companies are organized either as business trusts in Delaware or Massachusetts, or as corporations in Maryland. The applicable state statutes do not specifically permit shareholders to inspect books and records relating to proxy voting by funds with respect to portfolio securities. See Del. Code Ann. tit. 12, § 3801-3824 (2001); Mass. Gen. Laws. Ann. ch. 182, § 1-14 (2002); Md. Code Ann., Corporations § 2-512 (2001).

See Calvert Group, Ltd. <www.calvertgroup.com> (visited January 14, 2003) (proxy voting policies and votes cast); Domini Social Investments LLC <www.domini.com> (visited January 14, 2003) (proxy voting policies and votes cast); Fidelity Management & Research Company <www.fidelity.com > (visited January 14, 2003) (proxy voting policies); PAX World Management Corporation <www.paxfund.com> (visited January 14, 2003) (proxy voting policies and votes cast); Teachers Insurance and Annuity Association of America-College Retirement and Equities Fund <www.tiaa-cref.org> (visited January 14, 2003) (proxy voting policies); The Vanguard Group <www.vanguard.com> (visited January 14, 2003) (proxy voting policies).

See Proposing Release, supra note 4. Prior to our rule proposal, we received three rulemaking petitions urging that we adopt rules requiring funds to disclose both the policies and guidelines followed by the funds in determining how to vote on proxy proposals and the record of actual proxy votes cast. See Rulemaking Petition by Domini Social Investments, LLC (Nov. 27, 2001); Rulemaking Petition by the International Brotherhood of Teamsters (Jan. 18, 2001); Rulemaking Petitions by the American Federation of Labor and Congress of Industrial Organizations (July 30, 2002 and Dec. 20, 2000). The rulemaking petitions are available for inspection and copying in File No. 4-439 in the Commission's Public Reference Room.

See, e.g., John J. Brennan and Edward C. Johnson 3d, No Disclosure: The Feeling is Mutual, Wall Street Journal, Jan. 14, 2003, at A14 (arguing that proxy voting disclosure would harm shareholders); Aaron Lucchetti, SEC Proposal on Proxy Votes Finds Supporters in the House, Wall Street Journal, Dec. 17, 2002, at C14 (reporting that House Financial Services Committee Chairman Michael G. Oxley and Capital Markets Subcommittee Chairman Richard H. Baker support the proxy voting disclosure proposal); John C. Bogle, Mutual Fund Secrecy, New York Times, Dec. 14, 2002, at A35 (arguing that fund agents should disclose proxy voting information); Gretchen Morgenson, Wider Support Is Sought For Disclosing Mutual Fund Votes, New York Times, Oct. 23, 2002, at C11 (explaining joint efforts of Pax World Funds, AFL-CIO, and Fund Democracy to urge investors to support the proposal, and discussing comments by industry participants); Kathleen Day, SEC Wants Funds To Disclose Votes, Washington Post, Sept. 20, 2002, at E3 (reporting comments on the proposal by disclosure advocates and opponents).

The comment letters are available for public inspection and copying in the Commission's Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. 20549 (File No. S7-36-02). Public comments submitted by electronic mail are also available on our website, www.sec.gov. Many of the comment letters that the Commission received commented on both the Proposing Release and a companion release proposing a new rule and rule amendments under the Investment Advisers Act of 1940 that we are also adopting today. See Investment Advisers Act Release No. 2106, supra note 5.

Item 13(f) of Form N-1A; Item 18.16 of Form N-2; Item 20(o) of Form N-3. The SAI is part of a fund's registration statement and contains information about a fund in addition to that contained in the prospectus. The SAI is required to be delivered to investors upon request and is available on the Commission's Electronic Data Gathering, Analysis, and Retrieval System ("EDGAR").

Item 7 of Form N-CSR.

See Investment Advisers Act Release No. 2106, supra note 5, at Section II.A.2.b. "Resolving Conflicts of Interest" (discussing need for investment adviser's policies and procedures to address how adviser resolves material conflicts of interest with its clients).

See Item 22(b)(7) and 22(c)(5) of Form N-1A; Instructions 4.g. & 5.e. to Item 23 of Form N-2; Instructions 4(vii) & 5(v) to Item 27(a) of Form N-3.

Instructions to Items 22(b)(7) and 22(c)(5) of Form N-1A; Instruction 6.a. to Item 23 of Form N-2; Instruction 6(i) to Item 27(a) of Form N-3.

"Socially responsible" funds use social and moral criteria as well as traditional investment criteria to select investments.

Instruction 1 to Item 13(f) of Form N-1A; Instruction 1 to Item 18.16 of Form N-2; Instruction 1 to Item 20(o) of Form N-3; Instruction to Item 7 of Form N-CSR.

Instruction 3 to Item 1(b)(1) of Form N-1A (requiring fund or financial intermediary through which shares of the fund may be purchased or sold to send the SAI, within three business days of receipt of the request, by first-class mail or other means designed to ensure equally prompt delivery).

See CREF Participants Reject All Four Resolutions at 2002 Annual Meeting, TIAA-CREF Press Release, Nov. 7, 2002 <www.tiaa-cref.org> (visited Jan. 14, 2002) (18.7% of shares voted in favor of shareholder proposal that College Retirement Equities Fund (CREF) disclose how it votes proxies that involve social and environmental issues).

See Timothy M. Hunt, IRRC Corporate Governance Service 2002 Background Report F, Background Reports (IRRC) at 7, 10 (Jan. 2002) (noting that 26.9% of the S&P 500 companies have confidential voting procedures, with smaller percentages at smaller companies, and that use of street names often does not protect the identity of shareholders).

See discussion infra, "Disclosure of Complete Proxy Voting Record."

17 CFR 270.30b1-4; General Instruction A and Item 1 to Form N-PX [17 CFR 274.129].

General Instruction F.2.(a) to Form N-PX.

Investment Company Act Release No. 25914 (Jan. 27, 2003) (adopting Form N-CSR).

Memorandum from Paul G. Cellupica, Assistant Director, Office of Disclosure Regulation, Division of Investment Management, Securities and Exchange Commission re: Comments of Investment Company Institute (Jan. 15, 2003) ("ICI Memorandum") (available in the comment file for File Nos. S7-36-02 and S7-38-02 and on the Commission's website, www.sec.gov).

Based on information provided to the Commission staff by a third party that provides proxy voting services, the staff estimates that over 54% of shareholder meetings are held in the period from April through June of each year.

Item 1 of Form N-PX.

Instruction 2 to Item 1 of Form N-PX. See ICI Memorandum, supra note 40; Letter of Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Company (Dec. 6, 2002).

In addition, the fund's proxy voting record will be publicly available on the EDGAR section of the Commission's website.

Proposed Instructions to Items 13(f), 22(b)(7), and 22(c)(5) of Form N-1A; Proposed Instruction to Item 18.16 and proposed Instruction 6 to Item 23 of Form N-2; Proposed Instruction to Item 20(o) and proposed Instruction 6 to Item 27(a) of Form N-3.

Letter of Matthew P. Fink, President, Investment Company Institute (Jan. 21, 2003).

Items 13(f), 22(b)(8), and 22(c)(6) of Form N-1A; Item 18.16 and Instructions 4.h and 5.f to Item 23 of Form N-2; Item 20(o) and Instructions 4(viii) and 5(vi) to Item 27(a) of Form N-3.

If a fund is complying with this disclosure requirement, the inclusion of the fund's website address will not, by itself, include or incorporate by reference the information on the site into the fund's reports to shareholders or SAI, unless the fund otherwise acts to incorporate the information by reference. Cf. Securities Act Release No. 8128 (Sept. 5, 2002) [67 FR 58480, 58494 (Sept. 16, 2002)] (noting that if a company is complying with the requirement to disclose its website address in its annual report on Form 10-K, inclusion of its website address would not, by itself, include or incorporate by reference the information on the website into the filing).

Instruction 2 to Item 13(f), Instruction 1 to Item 22(b)(8), and Instruction to Item 22(c)(6) of Form N-1A; Instruction 2 to Item 18.16 and Instruction 6.b. to Item 23 of Form N-2; Instruction 2 to Item 20(o) and Instruction 6(ii) to Item 27(a) of Form N-3.

Instruction 3 to Item 13(f), Instruction 2 to Item 22(b)(8), and Instruction to Item 22(c)(6) of Form N-1A; Instruction 3 to Item 18.16 and Instruction 6.c. to Item 23 of Form N-2; Instruction 3 to Item 20(o) and Instruction 6(iii) to Item 27(a) of Form N-3.

A fund could satisfy this requirement through hyperlinking to a third-party service or our EDGAR website. Cf. Securities Act Release No. 8128 (Sept. 5, 2002) [67 FR 58480, 58493 (Sept. 16, 2002)]. We direct funds to this release for guidance concerning satisfaction of this requirement through hyperlinking.

Cf. Securities Act Release No. 8128 (Sept. 5, 2002) [67 FR 58480, 58493 (Sept. 16, 2002)] (construing the "as soon as reasonably practicable" standard to mean the same day as filing, barring unforeseen circumstances, with respect to the requirement that issuers disclose whether they make reports on Forms 10-K, 10-Q, and 8-K available on their websites as soon as reasonably practicable after filing of these reports with the Commission).

See Letter of Peter C. Clapman, Senior Vice President and Chief Counsel, Teachers Insurance and Annuity Association of America/College Retirement and Equities Fund (Dec. 6, 2002) (recommending proxy vote disclosure in instances of potential conflict of interest); Letter of Leslie L. Ogg, President, Board Services Corporation (Nov. 22, 2002) (recommending disclosure when a fund votes against the recommendation of management and where a conflict of interest exists).

Letter of Peter C. Clapman, Teachers Insurance and Annuity Association of America/College Retirement Equities Fund (Dec. 6, 2002).

Proposed Items 22(b)(8) & (c)(6) of Form N-1A; Proposed Instructions 4.h. & 5.f. to Item 23 of Form N-2; Proposed Instructions 4(viii) & 5(vi) to Item 27(a) of Form N-3.

We would not object if existing funds file their first annual update complying with the amendments pursuant to rule 485(b) under the Securities Act [17 CFR 230.485(b)], provided that the post-effective amendment otherwise meets the conditions for immediate effectiveness under the rule.

See, e.g., Letter of Craig Tyle, General Counsel, Investment Company Institute (Dec. 6, 2002) ("ICI Letter").

Letter of Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Co. (Dec. 6, 2002).

Letter of Timothy Smith, Senior Vice-President, Walden Asset Management (Nov. 20, 2002).

ICI Letter, supra note 55, at 14-15.

See Investment Company Act Release No. 25914 (Jan. 27, 2003) (release adopting Form N-CSR).

Investment Company Act Release No. 25739 (Sept. 20, 2002) [67 FR 60828 (Sept. 26, 2002)].

The Commission has submitted additional collections of information to OMB for Form N-CSR in connection with Investment Company Act Release No. 25775 (Oct. 22, 2002) [67 FR 66208 (Oct. 30, 2002)] (code of ethics and financial expert disclosure); Investment Company Act Release No. 25838 (Dec. 2, 2002) [67 FR 76780 (Dec. 13, 2002)] (auditor independence provisions of the Sarbanes-Oxley Act); Investment Company Act Release No. 25845 (Dec. 10, 2002) [67 FR 77593 (Dec. 18, 2002)] (revisions to rule 10b-18 under the Exchange Act); Investment Company Act Release No. 25870 (Dec. 18, 2002) [68 FR 160 (Jan. 2, 2003)] (shareholder reports and quarterly portfolio disclosure); and Investment Company Act Release No. 25885 (Jan. 8, 2003) [68 FR 2637 (Jan. 17, 2003)] (standards relating to listed company audit committees). These submissions are currently pending before OMB. If these submissions are approved, the approved total burden hours for Form N-CSR will be 195,472 hours. With the adjustment to reflect the modifications we are making here to our proposed amendments to Form N-CSR, the approved total burden hours for Form N-CSR would be 122,798 hours (195,472 - (74,000 - 1,326)).

Rule 30e-1(a) under the Investment Company Act of 1940 [17 CFR 270.30e-1(a)] requires funds to include in their shareholder reports the information that is required by the fund's registration statement form.

We have submitted an additional collection of information to OMB in connection with Investment Company Act Release No. 25870 (Dec. 18, 2002) [68 FR 160 (Jan. 2, 2003)] (proposing amendments regarding shareholder reports and quarterly portfolio disclosure). This submission is currently pending before OMB. If the submission is approved, the approved total burden hours for complying with rule 30e-1 will be 926,350 hours. With the adjustment to reflect the modifications we are making here to our proposed amendments to Forms N-1A, N-2, and N-3, the approved total burden hours for complying with rule 30e-1 would be 893,050 hours (926,350-(37,000-3,700)).

The estimate of 3,700 funds is based on the number of management investment companies currently registered with the Commission. We estimate, based on data from the Investment Company Institute and other sources, that there are approximately 4,700 fund portfolios that invest primarily in equity securities and 500 "hybrid" or bond portfolios that may hold some equity securities, for a total of 5,200 portfolios holding equity securities.

The estimate of 14.4 hours per equity portfolio is based on the staff's consultations with funds that currently provide disclosure of their proxy voting records, and estimates that the average equity fund will cast votes at 144 shareholder meetings during a twelve-month reporting period, and will vote on three matters at each shareholder meeting, for a total of 432 matters voted on per year. The estimate of the number of shareholder meetings per equity fund is based on the staff's analysis of data on the average number of equities held per fund from the December 2002 edition of the Morningstar Principia Pro database. The estimate of the number of matters voted on at each shareholder meeting is based on information provided to the staff by a third-party provider of proxy voting services for funds and other institutional investors.

Proposing Release, supra note 4, 67 FR at 60834.

We believe it is more appropriate to estimate the burden of complying with Form N-PX by portfolio, rather than by fund, as we estimated the burden of complying with Form N-CSR in the Proposing Release. We note that many funds do not have portfolios that hold equity securities, while many funds have multiple equity portfolios. Funds with multiple equity portfolios would be required to report their proxy voting records for each portfolio holding equity securities.

SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 194 (1963) (interpreting Section 206 of the Investment Advisers Act of 1940). Cf. Section 36(b) of the Investment Company Act [15 U.S.C. 80a-35] (investment adviser of a fund has a fiduciary duty with respect to the receipt of compensation paid by the fund).

See Investment Advisers Act Release No. 2106, supra note 5. See also SEC, Staff Report on Corporate Accountability, supra note 10, at 391 (fiduciary principle applies to all aspects of investment management, including voting). Cf. Dep't of Labor, Interpretive Bulletins Relating to the Employee Retirement Income Security Act of 1974, 29 CFR 2509.94-2 (2002) (fiduciary act of managing employee benefit plan assets consisting of equity securities includes voting of proxies appurtenant to those securities).

See Flow of Funds Accounts, supra note 7.

Id.

See, e.g., Letter of Mercer Bullard, Fund Democracy, LLC (Oct. 21, 2002).

See, e.g., ICI Letter, supra note 55, at 9; Letter of Robert D. Neary, Chairman of the Board, Armada Funds, at 2 (Dec. 4, 2002); Letter of Domenick Pugliese, Senior Vice President, Alliance Capital Management L.P. (Dec. 5, 2002).

See, e.g., ICI Letter, supra note 55, at 12.

Because closed-end funds do not offer their shares continuously, and are therefore generally not required to maintain an updated SAI to meet their obligations under the Securities Act of 1933, they will be required to disclose their proxy voting policies and procedures in their annual reports on Form N-CSR. We are not requiring closed-end funds to provide disclosure about the availability of their proxy voting policies and records on Form N-CSR.

This represents 16,594 additional hours for Form N-1A, 1,196 additional hours for Form N-2, 480 additional hours for Form N-3, and 1,326 additional hours for Form N-CSR. The estimated total hour burden for disclosure of proxy voting policies and procedures differs from the figure of 18,270 hours used in the Proposing Release, because here we are including the estimated hour burden for disclosure of policies and procedures by closed-end funds on Form N-CSR as well.

These figures are based on a Commission estimate that approximately 3,700 management investment companies are subject to the amendments and an estimated hourly wage rate of $68.94. The estimate of the number of funds is based on data derived from the Commission's EDGAR filing system. The estimated wage rate figure is based on published hourly wage rates for compliance attorneys in New York City ($74.22) and programmers ($27.91), and the estimate, based on the Commission staff's discussions with certain fund complexes, that attorneys and programmers will divide time equally on compliance with the proxy voting disclosure requirements, yielding a weighted wage rate of $51.065 (($74.22 x .50) + (27.91 x .50)) = $51.065). See Securities Industry Association, Report on Management & Professional Earnings in the Securities Industry 2001 (Oct. 2001). This weighted wage rate was then adjusted upward by 35% for overhead, reflecting the costs of supervision, space, and administrative support, to obtain the total per hour internal cost of $68.94 (51.065 x 1.35) = $68.94.

The estimate of 14.4 hours per equity portfolio is based on the staff's consultations with funds that currently provide disclosure of their proxy voting records, and estimates that the average equity fund will cast votes at 144 shareholder meetings during a twelve-month reporting period, and will vote on three matters at each shareholder meeting, for a total of 432 matters voted on per year. The estimate of the number of shareholder meetings per equity fund is based on the staff's analysis of data on the average number of equities held per fund from the December 2002 edition of the Morningstar Principia Pro database. The estimate of the number of matters voted on at each shareholder meeting is based on information provided to the staff by a third-party provider of proxy voting services for funds and other institutional investors.

This estimate is based on the staff's analysis of data from the Investment Company Institute and other sources indicating that there are approximately 4,700 fund portfolios that invest primarily in equity securities and 500 "hybrid" or bond portfolios that may hold some equity securities.

These figures are based on the Commission's estimate that approximately 3,700 funds, with 5,200 portfolios holding equity securities, will report their proxy voting records on Form N-PX, an estimate of 14.4 hours per equity fund portfolio filing on Form N-PX, and an estimated hourly wage rate of $68.94. See supra note 77.

This estimate is based on information provided to the Division of Investment Management by registered investment companies regarding printing and typesetting costs for prospectuses and SAIs.

This estimate regarding the average number of shareholder accounts per typical fund is derived from data provided in the Mutual Fund Fact Book, supra note 9, at 63, 64.

These figures are based on a Commission estimate that approximately 3,700 investment companies will be subject to the amendments and an estimated hourly wage rate of $68.94. See supra note 77.

The Commission has modified its estimate of the total external and internal costs of the additional disclosure required by the amendments from the estimate in the Proposing Release, to reflect that it is not adopting the proposal to require a fund to disclose in its annual and semi-annual reports to shareholders information regarding any proxy votes that are inconsistent with its proxy voting policies and procedures, and that it is requiring funds to disclose their proxy voting records annually on Form N-PX rather than semi-annually on Form N-CSR.

See, e.g., ICI Letter, supra note 55, at 14.

ICI Letter, supra note 55, at 14-15.

See, e.g., Letter of Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Co., at 4 (Dec. 6, 2002).

Instruction 2 to Item 1 of Form N-PX.

See, e.g., Letter of Amy Domini, CEO, Domini Social Investments LLC (Nov. 1, 2002); Letter of Thomas W. Grant, President, and Laurence A. Shadek, Chairman, Pax World Funds (Nov. 26, 2002); Letter of Timothy Smith, Senior Vice President, Walden Asset Management (Nov. 20, 2002).

See, e.g., Letter of Timothy H. Smith, President and Chair, Social Investment Forum (Nov. 11, 2002).

See, e.g., Letter of Mercer Bullard, Fund Democracy, LLC (Oct. 21, 2002).

Letter of Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Co., at 3 (Dec. 6, 2002).

Letter of Timothy Smith, Senior Vice President, Walden Asset Management (Nov. 20, 2002).

By comparison, a third-party service provider of proxy voting services to funds and other institutional investors indicated to the staff that for a basic vote disclosure website it charges a $3,000 setup fee, a $12,000 base fee for disclosure for the first fund in the complex, and $1,000 for additional funds after the first fund. Thus, a fund complex with 20 funds would pay $34,000 ($3,000 + $12,000 + (19 x $1,000)), or $1,700 per fund.

ICI Letter, supra note 55, at 14-15.

See, e.g., Letter of Richard Mason, General Counsel, Mosaic Funds (Nov. 27, 2002).

See, e.g., Letter of Eric D. Roiter, Senior Vice President and General Counsel, Fidelity Management & Research Co., at 6-7 (Dec. 6, 2002); Letter of Philip L. Kirstein, General Counsel, Merrill Lynch Investment Managers, L.P., at 7 (Dec. 6, 2002).

See, e.g., Jonathan S. Bowater, Paul S. Lowengrub, and James C. Miller III, The SEC's Proposal to Require Mutual Funds to Publish Proxy Votes, at 23, attachment to Letter of Craig Tyle, General Counsel, Investment Company Institute (Jan. 16, 2003).

15 U.S.C. 78w(a)(2).

15 U.S.C. 77(b), 78c(f), and 80a-2(c).

Letter of Mercer Bullard, Fund Democracy, LLC (Oct. 21, 2002).

Letter of Richard L. Trumka, Secretary-Treasurer, AFL-CIO, at 4 (Dec. 6, 2002).

Because closed-end funds do not offer their shares continuously, and are therefore generally not required to maintain an updated SAI to meet their obligations under the Securities Act of 1933, they will be required to disclose their proxy voting policies and procedures in their annual reports on Form N-CSR.

See, e.g., Letter of Richard Mason, General Counsel, Mosaic Funds (Nov. 27, 2002); ICI Letter, supra note 55, at 16.

Letter of Richard Mason, General Counsel, Mosaic Funds (Nov. 27, 2002).

Letter of Timothy H. Smith, President and Chair, Social Investment Forum, at 3 (Nov. 11, 2002).

17 CFR 270.0-10.

This estimate is based on figures compiled by the Commission's staff regarding investment companies registered on Form N-1A, Form N-2, and Form N-3.

https://www.sec.gov/rule-release/33-8188

Shareholder Communications Facilitation
17 CFR Parts 200 and 240
(Release No. 34-23847; 1C-15435; File No. 87-12-86)

Agency: Securities and Exchange Commission.

Action: Final rules.

Summary: The Securities and Exchange Commission ("Commission") today is adopting new Rule 14b-2 under the Securities Exchange Act of 1934 ("Exchange Act") and related amendments to Rules 14a-1, 14a-13, 14c-1 and 14c-7, which implement provisions of the Shareholder Communications Act of 1985. New Rule 14b-2 and the related rule amendments will govern: (1) The process by which registrants communicate with the beneficial owners of securities registered in the name of a bank, association or other entity that exercises fiduciary powers (hereinafter collectively referred to as "banks"); and (2) the proxy processing activities of banks.

In addition, the Commission is adopting certain other amendments to Rule 14a-3 regarding the circumstances under which registrants are no longer obligated to deliver annual reports or proxy statements to security holders. This amendment will also apply to registrant's delivery obligations in connection with information statements under Rule 14c-2.

G. Solicitation of Proxies - Definitions (SEC Rule 14a-1)

SEC Regulation 240.14a-1
17 CFR 240.14a-1

Solicitation of Proxies - Definitions

Originally issued December 18, 1952 (17 FR 11431)
As revised through October 22, 1992 (57 FR 48290)

Unless the context otherwise requires, all terms used in this regulation have the same meanings as in the Act or elsewhere in the general rules and regulations thereunder. In addition, the following definitions apply unless the context otherwise requires:

Associate. The term "associate," used to indicate a relationship with any person, means:

Any corporation or organization (other than the registrant or a majority owned subsidiary of the registrant) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities;
Any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and
Any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the registrant or any of its parents or subsidiaries.

Employee benefit plan. For purposes of §§ 240.14a-13, 240.14b-1 and 240.14b-2, the term "employee benefit plan" means any purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan solely for employees, directors, trustees or officers.
Entity that exercises fiduciary powers. The term "entity that exercises fiduciary powers" means any entity that holds securities in nominee name or otherwise on behalf of a beneficial owner but does not include a clearing agency registered pursuant to Section 17A of the Act or a broker or a dealer.
Exempt employee benefit plan securities. For purposes of §§ 240.14a-13, 240.14b-1 and 240.14b-2, the term "exempt employee benefit plan securities" means:

Securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, where such plan is established by the registrant; or
If notice regarding the current solicitation has been given pursuant to § 240.14a-13(a)(1)(ii)(C) or if notice regarding the current request for a list of names, addresses and securities positions of beneficial owners has been given pursuant to § 240.14a-13(b)(3), securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, where such plan is established by an affiliate of the registrant.

Last fiscal year. The term "last fiscal year" of the registrant means the last fiscal year of the registrant ending prior to the date of the meeting for which proxies are to be solicited or if the solicitation involves written authorizations or consents in lieu of a meeting, the earliest date on which that they may be used to effect corporate action.
Proxy. The term "proxy" includes every proxy, consent or authorization within the meaning of Section 14(a) of the Act. The consent or authorization may take the form of failure to object or to dissent.
Proxy statement. The term "proxy statement" means the statement required by § 240.14a-3(a) whether or not contained in a single document.
Record date. The term "record date" means the date as of which the record holders of securities entitled to vote at a meeting or by written consent or authorization shall be determined.
Record holder. For purposes of §§ 240.14a-13, 240.14b-1 and 240.14b-2, the term "record holder" means any broker, dealer, voting trustee, bank, association or other entity that exercises fiduciary powers which holds securities of record in nominee name or otherwise or as a participant in a clearing agency registered pursuant to Section 17A of the Act.
Registrant. The term "registrant" means the issuer of the securities in respect of which proxies are to be solicited.
Respondent bank. For purposes of §§ 240.14a-13, 240.14b-1 and 240.14b-2, the term "respondent bank" means any bank, association or other entity that exercises fiduciary powers which holds securities on behalf of beneficial owners and deposits such securities for safekeeping with another bank, association or other entity that exercises fiduciary powers.
Solicitation.

The terms "solicit" and "solicitation" include:

Any request for a proxy whether or not accompanied by or included in a form of proxy;
Any request to execute or not to execute, or to revoke, a proxy; or
The furnishing of a form of proxy or other communication to security holders under circumstances reasonably calculated to result in the procurement, withholding or revocation of a proxy.

The terms do not apply, however, to:

The furnishing of a form of proxy to a security holder upon the unsolicited request of such security holder;
The performance by the registrant of acts required by § 240.14a-7;
The performance by any person of ministerial acts on behalf of a person soliciting a proxy; or
A communication by a security holder who does not otherwise engage in a proxy solicitation (other than a solicitation exempt under § 240.14a-2) stating how the security holder intends to vote and the reasons therefore, provided that the communication:

Is made by means of speeches in public forums, press releases, published or broadcast opinions, statements, or advertisements appearing in a broadcast media, or newspaper, magazine or other bona fide publication disseminated on a regular basis,
Is directed to persons to whom the security holder owes a fiduciary duty in connection with the voting of securities of a registrant held by the security holder, or
Is made in response to unsolicited requests for additional information with respect to a prior communication by the security holder made pursuant to this paragraph (l)(2)(iv).

H. Shareholder Communications - Beneficial Owners (SEC Rule 14a-13)

SEC Regulation 240.14a-13*
17 CFR 240.14a-13

Obligations of registrant in communicating with beneficial owners.

Originally issued December 6, 1986 (51 FR 44276)
As revised through January 10, 1992 (57 FR 1099)

If the registrant knows that securities of any class entitled to vote at a meeting (or by written consents or authorizations if no meeting is held) with respect to which the registrant intends to solicit proxies, consents or authorizations are held of record by a broker, dealer, voting trustee, bank, association, or other entity that exercises fiduciary powers in nominee name or otherwise, the registrant shall:

By first class mail or other equally prompt means:

Inquire of each such record holder:

Whether other persons are the beneficial owners of such securities and if so, the number of copies of the proxy and other soliciting material necessary to supply such material to such beneficial owners;
In the case of an annual (or special meeting in lieu of the annual) meeting, or written consents in lieu of such meeting, at which directors are to be elected, the number of copies of the annual report to security holders necessary to supply such report to beneficial owners to whom such reports are to be distributed by such record holder or its nominee and not by the registrant;
If the record holder has an obligation under § 240.14b-1(b)(3) or § 240.14b-2(b)(4)(ii) and (iii), whether an agent has been designated to act on its behalf in fulfilling such obligation and, if so, the name and address of such agent; and
Whether it holds the registrant's securities on behalf of any respondent bank and, if so, the name and address of each such respondent bank; and

Indicate to each such record holder:

Whether the registrant, pursuant to paragraph (c) of this section, intends to distribute the annual report to security holders to beneficial owners of its securities whose names, addresses and securities positions are disclosed pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii) and (iii);
The record date; and
At the option of the registrant, any employee benefit plan established by an affiliate of the registrant that holds securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities;

Upon receipt of a record holder's or respondent bank's response indicating, pursuant to § 240.14b-2(b)(1)(i), the names and addresses of its respondent banks, within one business day after the date such response is received, make an inquiry of and give notification to each such respondent bank in the same manner required by paragraph (a)(1) of this section; Provided, however, the inquiry required by paragraphs (a)(1) and (a)(2) of this section shall not cover beneficial owners of exempt employee benefit plan securities;
Make the inquiry required by paragraph (a)(1) of this section at least 20 business days prior to the record date of the meeting of security holders, or

If such inquiry is impracticable 20 business days prior to the record date of a special meeting, as many days before the record date of such meeting as is practicable or,
If consents or authorizations are solicited, and such inquiry is impracticable 20 business days before the earliest date on which they may be used to effect corporate action, as many days before that date as is practicable, or
At such later time as the rules of a national securities exchange on which the class of securities in question is listed may permit for good cause shown; Provided, however, That if a record holder or respondent bank has informed the registrant that a designated office(s) or department(s) is to receive such inquiries, the inquiry shall be made to such designated office(s) or department(s); and

Supply, in a timely manner, each record holder and respondent bank of whom the inquiries required by paragraphs (a)(1) and (a)(2) of this section are made with copies of the proxy, other proxy soliciting material, and/or the annual report to security holders, in such quantities, assembled in such form and at such place(s), as the record holder or respondent bank may reasonably request in order to send such material to each beneficial owner of securities who is to be furnished with such material by the record holder or respondent bank; and
Upon the request of any record holder or respondent bank that is supplied with proxy soliciting material and/or annual reports to security holders pursuant to paragraph (a)(4) of this section, pay its reasonable expenses for completing the mailing of such material to beneficial owners.

Note 1: If the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to Section 17A of the Act (e.g., "Cede & Co.," nominee for the Depository Trust Company), the registrant shall make appropriate inquiry of the clearing agency and thereafter of the participants in such clearing agency who may hold on behalf of a beneficial owner or respondent bank, and shall comply with the above paragraph with respect to any such participant (see § 240.14a-1).

Note 2: The attention of registrants is called to the fact that each broker, dealer, bank, association, and other entity that exercises fiduciary powers has an obligation pursuant to § 240.14b-1 and § 240.14b-2 (except as provided therein with respect to exempt employee benefit plan securities held in nominee name) and, with respect to brokers and dealers, applicable self-regulatory organization requirements to obtain and forward, within the time periods prescribed therein, (a) proxies (or in lieu thereof requests for voting instructions) and proxy soliciting materials to beneficial owners on whose behalf it holds securities, and (b) annual reports to security holders to beneficial owners on whose behalf it holds securities, unless the registrant has notified the record holder or respondent bank that it has assumed responsibility to mail such material to beneficial owners whose names, addresses, and securities positions are disclosed pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii) and (iii).

Note 3: The attention of registrants is called to the fact that registrants have an obligation, pursuant to paragraph (d) of this section, to cause proxies (or in lieu thereof requests for voting instructions), proxy soliciting material and annual reports to security holders to be furnished, in a timely manner, to beneficial owners of exempt employee benefit plan securities.

Any registrant requesting pursuant to § 240.14b-1(b)(3) or § 240.14b- 2(b)(4)(ii) and (iii) a list of names, addresses and securities positions of beneficial owners of its securities who either have consented or have not objected to disclosure of such information shall:

By first class mail or other equally prompt means, inquire of each record holder and each respondent bank identified to the registrant pursuant to § 240.14b-2(b)(4)(i) whether such record holder or respondent bank holds the registrant's securities on behalf of any respondent banks and, if so, the name and address of each such respondent bank;
Request such list to be compiled as of a date no earlier than five business days after the date the registrant's request is received by the record holder or respondent bank; Provided, however, That if the record holder or respondent bank has informed the registrant that a designated office(s) or department(s) is to receive such requests, the request shall be made to such designated office(s) or department(s);
Make such request to the following persons that hold the registrant's securities on behalf of beneficial owners: all brokers, dealers, banks, associations and other entities that exercises fiduciary powers; Provided however, such request shall not cover beneficial owners of exempt employee benefit plan securities as defined in § 240.14a-1(d)(1); and, at the option of the registrant, such request may give notice of any employee benefit plan established by an affiliate of the registrant that holds securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities;
Use the information furnished in response to such request exclusively for purposes of corporate communications; and

Upon the request of any record holder or respondent bank to whom such request is made, pay the reasonable expenses, both direct and indirect, of providing beneficial owner information. Note: A registrant will be deemed to have satisfied its obligations under paragraph (b) of this section by requesting consenting and non-objecting beneficial owner lists from a designated agent acting on behalf of the record holder or respondent bank and paying to that designated agent the reasonable expenses of providing the beneficial owner information.

A registrant, at its option, may mail its annual report to security holders to the beneficial owners whose identifying information is provided by record holders and respondent banks, pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii) and (iii), provided that such registrant notifies the record holders and respondent banks, at the time it makes the inquiry required by paragraph (a) of this section, that the registrant will mail the annual report to security holders to the beneficial owners so identified.
If a registrant solicits proxies, consents or authorizations from record holders and respondent banks who hold securities on behalf of beneficial owners, the registrant shall cause proxies (or in lieu thereof requests or voting instructions), proxy soliciting material and annual reports to security holders to be furnished, in a timely manner, to beneficial owners of exempt employee benefit plan securities.

I. Shareholder Communications - Brokers and Dealers (SEC Rule 14b-1)

SEC Regulation 240.14b-1*
17 CFR 240.14b-1

Obligation of registered brokers and dealers in connection with the prompt forwarding of certain communications to beneficial owners.

Originally issued July 13, 1977 (42 FR 35955)
As revised through January 10, 1992 (57 FR 1099)

Definitions. Unless the context otherwise requires, all terms used in this section shall have the same meanings as in the Act and, with respect to proxy soliciting material, as in § 240.14a-1 thereunder and, with respect to information statements, as in § 240.14c-1 thereunder. In addition, as used in this section, the term "registrant" means:

The issuer of a class of securities registered pursuant to Section 12 of the Act; or
An investment company registered under the Investment Company Act of 1940.

Dissemination and beneficial owner information requirements. A broker or dealer registered under Section 15 of the Act shall comply with the following requirements for disseminating certain communications to beneficial owners and providing beneficial owner information to registrants.

The broker or dealer shall respond, by first class mail or other equally prompt means, directly to the registrant no later than seven business days after the date it receives an inquiry made in accordance with § 240.14a-13(a) or § 240.14c-7(a) by indicting, by means of a search card or otherwise:

The approximate number of customers of the broker or dealer who are beneficial owners of the registrant's securities that are held of record by the broker, dealer, or its nominee;
The number of customers of the broker or dealer who are beneficial owners of the registrant's securities who have objected to disclosure of their names, addresses, and securities positions if the registrant has indicated, pursuant to § 240.14a-13(a)(1)(ii)(A) or § 240.14c-7(a)(1)(ii)(A), that it will distribute the annual report to security holders to beneficial owners of its securities whose names, addresses and securities positions are disclosed pursuant to paragraph (b)(3) of this section; and
The identity of the designated agent of the broker or dealer, if any, acting on its behalf in fulfilling its obligations under paragraph (b)(3) of this section; Provided, however, that if the broker or dealer has informed the registrant that a designated office(s) or department(s) is to receive such inquiries, receipt for purposes of paragraph (b)(1) of this section shall mean receipt by such designated office(s) or department(s).

The broker or dealer shall, upon receipt of the proxy, other proxy soliciting material, information statement, and/or annual reports to security holders, forward such materials to its customers who are beneficial owners of the registrant's securities no later than five business days after receipt of the proxy material, information statement or annual reports.

The broker or dealer shall, through its agent or directly:

Provide the registrant, upon the registrant's request, with the names, addresses, and securities positions, compiled as of a date specified in the registrant's request which is no earlier than five business days after the date the registrant's request is received, of its customers who are beneficial owners of the registrant's securities and who have not objected to disclosure of such information; Provided , however, that if the broker or dealer has informed the registrant that a designated office(s) or department(s) is to receive such requests, receipt shall mean receipt by such designated office(s) or department(s); and
Transmit the data specified in paragraph (b)(3)(i) of this section to the registrant no later than five business days after the record date or other date specified by the registrant.

Note 1: Where a broker or dealer employs a designated agent to act on its behalf in performing the obligations imposed on the broker or dealer by paragraph (b)(3) of this section, the five business day time period for determining the date as of which the beneficial owner information is to be compiled is calculated from the date the designated agent receives the registrant's request. In complying with the registrant's request for beneficial owner information under paragraph (b)(3) of this section, a broker or dealer need only supply the registrant with the names, addresses, and securities positions of non-objecting beneficial owners.

Note 2: If a broker or dealer receives a registrant's request less than five business days before the requested compilation date, it must provide a list compiled as of a date that is no more than five business days after receipt and transmit the list within five business days after the compilation date.

Exceptions to dissemination and beneficial owner information requirements. A broker or dealer registered under Section 15 of the Act shall be subject to the following with respect to its dissemination and beneficial owner information requirements.

With regard to beneficial owners of exempt employee benefit plan securities, the broker or dealer shall:

Not include information in its response pursuant to paragraph (b)(1) of this section or forward proxies (or in lieu thereof requests for voting instructions), proxy soliciting material, information statements, or annual reports to security holders pursuant to paragraph (b)(2) of this section to such beneficial owners; and
Not include in its response, pursuant to paragraph (b)(3) of this section, data concerning such beneficial owners.

A broker or dealer need not satisfy:

Its obligations under paragraphs (b)(2) and (b)(3) of this section if a registrant does not provide assurance of reimbursement of the broker's or dealer's reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by paragraphs (b)(2) and (b)(3) of this section; or
Its obligation under paragraph (b)(2) of this section to forward annual reports to non-objecting beneficial owners identified by the broker or dealer, through its agent or directly, pursuant to paragraph (b)(3) of this section if the registrant notifies the broker or dealer pursuant to § 240.14a-13(c) or § 240.14c-7(c) that the registrant will mail the annual report to such non- objecting beneficial owners identified by the broker or dealer and delivered in a list to the registrant pursuant to paragraph (b)(3) of this section.

J. Shareholder Communications - Banks and Fiduciaries (SEC Rule 14b-2)

SEC Regulation 240.14b-2*

Obligation of banks, associations and other entities that exercise fiduciary powers in connection with the prompt forwarding of certain communications to beneficial owners.

Originally issued December 9, 1986 (51 FR 44278)
As revised through January 10, 1992 (57 FR 1100)

Definitions. Unless the context otherwise requires, all terms used in this section shall have the same meanings as in the Act and, with respect to proxy soliciting material, as in § 240.14a-1 thereunder and, with respect to information statements, as in § 240.14c-1 thereunder. In addition, as used in this section, the following terms shall apply:

The term "bank" means a bank, association, or other entity that exercises fiduciary powers.
The term "beneficial owner" includes any person who has or shares, pursuant to an instrument, agreement, or otherwise, the power to vote, or to direct the voting of a security.

Note 1: If more than one person shares voting power, the provisions of the instrument creating that voting power shall govern with respect to whether consent to disclosure of beneficial owner information has been given.

Note 2: If more than one person shares voting power or if the instrument creating that voting power provides that such power shall be exercised by different persons depending on the nature of the corporate action involved, all persons entitled to exercise such power shall be deemed beneficial owners; Provided, however, that only one such beneficial owner need be designated among the beneficial owners to receive proxies or requests for voting instructions, other proxy soliciting material, information statements, and/or annual reports to security holders, if the person so designated assumes the obligation to disseminate, in a timely manner, such materials to the other beneficial owners.

The term "registrant" means:

The issuer of a class of securities registered pursuant to Section 12 of the Act; or
An investment company registered under the Investment Company Act of 1940.

Dissemination and beneficial owner information requirements. A bank shall comply with the following requirements for disseminating certain communications to beneficial owners and providing beneficial owner information to registrants.

The bank shall:

Respond, by first class mail or other equally prompt means, directly to the registrant, no later than one business day after the date it receives an inquiry made in accordance with § 240.14a-13(a) or § 240.14c-7(a) by indicating the name and address of each of its respondent banks that holds the registrant's securities on behalf of beneficial owners, if any; and
Respond, by first class mail or other equally prompt means, directly to the registrant no later than seven business days after the date it receives an inquiry made in accordance with § 240.14a-13(a) or § 240.14c-7(a) by indicating, by means of a search card or otherwise:

The approximate number of customers of the bank who are beneficial owners of the registrant's securities that are held of record by the bank or its nominee;
If the registrant has indicated, pursuant to § 240.14a-13(a)(1)(ii)(A) or § 240.14c-7(a)(1)(ii)(A), that it will distribute the annual report to security holders to beneficial owners of its securities whose names, addresses, and securities positions are disclosed pursuant to paragraphs (b)(4)(ii) and (iii) of this section:

With respect to customer accounts opened on or before December 28, 1986, the number of beneficial owners of the registrant's securities who have affirmatively consented to disclosure of their names, addresses, and securities positions; and
With respect to customer accounts opened after December 28, 1986, the number of beneficial owners of the registrant's securities who have not objected to disclosure of their names, addresses, and securities positions; and

The identity of its designated agent, if any, acting on its behalf in fulfilling its obligations under paragraphs (b)(4)(ii) and (iii) of this section;

Provided, however, that, if the bank or respondent bank has informed the registrant that a designated office(s) or department(s) is to receive such inquiries, receipt for purposes of paragraphs (b)(1)(i) and (ii) of this section shall mean receipt by such designated office(s) or department(s).

Where proxies are solicited, the bank shall, within five business days after the record date:

Execute an omnibus proxy, including a power of substitution, in favor of its respondent banks and forward such proxy to the registrant; and
Furnish a notice to each respondent bank in whose favor an omnibus proxy has been executed that it has executed such a proxy, including a power of substitution, in its favor pursuant to paragraph (b)(2)(i) of this section.

Upon receipt of the proxy, other proxy soliciting material, information statement, and/or annual reports to security holders, the bank shall forward such materials to each beneficial owner on whose behalf it holds securities, no later than five business days after the date it receives such material and, where a proxy is solicited, the bank shall forward, with the other proxy soliciting material and/or the annual report, either:

A properly executed proxy:

Indicating the number of securities held for such beneficial owner;
Bearing the beneficial owner's account number or other form of identification, together with instructions as to the procedures to vote the securities;
Briefly stating which other proxies, if any, are required to permit securities to be voted under the terms of the instrument creating that voting power or applicable state law; and
Being accompanied by an envelope addressed to the registrant or its agent, if not provided by the registrant; or

A request for voting instructions (for which registrant's form of proxy may be used and which shall be voted by the record holder bank or respondent bank in accordance with the instructions received), together with an envelope addressed to the record holder bank or respondent bank.

The bank shall:

Respond, by first class mail or other equally prompt means, directly to the registrant no later than one business day after the date it receives an inquiry made in accordance with § 240.14a-13(b)(1) or § 240.14c-7(b)(1) by indicating the name and address of each of its respondent banks that holds the registrant's securities on behalf of beneficial owners, if any;
Through its agent or directly, provide the registrant, upon the registrant's request, and within the time specified in paragraph (b)(4)(iii) of this section, with the names, addresses, and securities position, compiled as of a date specified in the registrant's request which is no earlier than five business days after the date the registrant's request is received, of:

With respect to customer accounts opened on or before December 28, 1986, beneficial owners of the registrant's securities on whose behalf it holds securities who have consented affirmatively to disclosure of such information, subject to paragraph (b)(5) of this section; and
With respect to customer accounts opened after December 28, 1986, beneficial owners of the registrant's securities on whose behalf it holds securities who have not objected to disclosure of such information;

Provided, however, that if the record holder bank or respondent bank has informed the registrant that a designated office(s) or department(s) is to receive such requests, receipt for purposes of paragraphs (b)(4)(i) and (ii) of this section shall mean receipt by such designated office(s) or department(s); and

Through its agent or directly, transmit the data specified in paragraph (b)(4)(ii) of this section to the registrant no later than five business days after the date specified by the registrant.

Note 1: Where a record holder bank or respondent bank employs a designated agent to act on its behalf in performing the obligations imposed on it by paragraphs (b)(4)(ii) and (iii) of this section, the five business day time period for determining the date as of which the beneficial owner information is to be compiled is calculated from the date the designated agent receives the registrant's request. In complying with the registrant's request for beneficial owner information under paragraphs (b)(4)(ii) and (iii) of this section, a record holder bank or respondent bank need only supply the registrant with the names, addresses and securities positions of affirmatively consenting and non-objecting beneficial owners.

Note 2: If a record holder bank or respondent bank receives a registrant's request less than five business days before the requested compilation date, it must provide a list compiled as of a date that is no more than five business days after receipt and transmit the list within five business days after the compilation date.

For customer accounts opened on or before December 28, 1986, unless the bank has made a good faith effort to obtain affirmative consent to disclosure of beneficial owner information pursuant to paragraph (b)(4)(ii) of this section, the bank shall provide such information as to beneficial owners who do not object to disclosure of such information. A good faith effort to obtain affirmative consent to disclosure of beneficial owner information shall include, but shall not be limited to, making an inquiry:

Phrased in neutral language, explaining the purpose of the disclosure and the limitations on the registrant's use thereof;
Either in at least one mailing separate from other account mailings or in repeated mailings; and
In a mailing that includes a return card, postage paid enclosure.

Exceptions to dissemination and beneficial owner information requirements. The bank shall be subject to the following respect to its dissemination and beneficial owner requirements.

With regard to beneficial owners of exempt employee benefit plan securities, the bank shall not:

Include information in its response pursuant to paragraph (b)(1) of this section; or forward proxies (or in lieu thereof requests for voting instructions), proxy soliciting material, information statements, or annual reports to security holders pursuant to paragraph (b)(3) of this section to such beneficial owners; or
Include in its response pursuant to paragraphs (b)(4) and (b)(5) of this section data concerning such beneficial owners.

The bank need not satisfy:

Its obligations under paragraphs (b)(2), (b)(3), and (b)(4) of this section if a registrant does not provide assurance of reimbursement of its reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by paragraphs (b)(2), (b)(3), and (b)(4) of this section; or
Its obligation under paragraph (b)(3) of this section to forward annual reports to consenting and non-objecting beneficial owners identified pursuant to paragraphs (b)(4)(ii) and (iii) of this section if the registrant notifies the record holder bank or respondent bank, pursuant to § 240.14a-13(c) or § 240.14c-7(c), that the registrant will mail the annual report to beneficial owners whose names addresses and securities positions are disclosed pursuant to paragraphs (b)(4)(ii) and (iii) of this section.

For the purposes of determining the fees which may be charged to registrants pursuant to § 240.14a-13(b)(5), § 240.14c-7(a)(5), and paragraph (c)(2) of this section for performing obligations under paragraphs (b)(2), (b)(3), and (b)(4) of this section, an amount no greater than that permitted to be charged by brokers or dealers for reimbursement of their reasonable expenses, both direct and indirect, incurred in connection with performing the obligations imposed by paragraphs (b)(2) and (b)(3) of § 240.14b-1, shall be deemed to be reasonable.

K. Shareholder Communications - Section 14(C) Definitions (SEC Rule 14c-1)

SEC Regulation 240.14c-1*

Distribution of Information Pursuant to Section 14(C) Definitions

Originally issued November 20, 1986 (51 FR 42070)
As revised through January 10, 1992 (57 FR 1101)

Associate. The term "associate," used to indicate a relationship with any person, means:

Any corporation or organization (other than the registrant or a majority owned subsidiary of the registrant) of which such person is an officer or partner or is, directly or indirectly, the beneficial owner of 10 percent or more of any class of equity securities;
Any trust or other estate in which such person has a substantial beneficial interest or as to which such person serves as trustee or in a similar fiduciary capacity; and
Any relative or spouse of such person, or any relative of such spouse, who has the same home as such person or who is a director or officer of the registrant or any of its parents or subsidiaries.

Employee benefit plan. For purposes of § 240.14c-7, the term "employee benefit plan" means any purchase, savings, option, bonus, appreciation, profit sharing, thrift, incentive, pension or similar plan primarily for employees, directors, trustees or officers.
Entity that exercises fiduciary powers. The term "entity that exercises fiduciary powers" means any entity that holds securities in nominee name or otherwise on behalf of a beneficial owner but does not include a clearing agency registered pursuant to Section 17A of the Act, or a broker or a dealer.
Exempt employee benefit plan securities. For purposes of § 240.14c-7, the term "exempt employee benefit plan securities" means:

Securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, where such plan is established by the registrant; or
If notice regarding the current distribution of information statements has been given pursuant to § 240.14c-7(a)(1)(ii)(C) or if notice regarding the current request for a list of names, addresses and securities positions of beneficial owners has been given pursuant to § 240.14c-7(b)(3), securities of the registrant held by an employee benefit plan, as defined in paragraph (b) of this section, where such plan is established by an affiliate of the registrant.

Information statement. The term "information statement" means the statement required by § 240.14c-2, whether or not contained in a single document.
Last fiscal year. The term "last fiscal year" of the registrant means the last fiscal year of the registrant ending prior to the date of the meeting with respect to which an information statement is required to be distributed, or if the information statement involves consents or authorizations in lieu of a meeting, the earliest date on which they may be used to effect corporate action.
Proxy. The term "proxy" includes every proxy, consent or authorization within the meaning of Section 14(a) of the Act. The consent or authorization may take the form of failure to object or to dissent.
Record date. The term "record date" means the date as of which the record holders of securities entitled to vote at a meeting or by written consent or authorization shall be determined.
Record holder. For purposes of § 240.14c-7, the term "record holder" means any broker, dealer, voting trustee, bank, association or other entity that exercises fiduciary powers which holds securities of record in nominee name or otherwise or as a participant in a clearing agency registered pursuant to Section 17A of the Act.
Registrant. The term "registrant" means:

The issuer of a class of securities registered pursuant to Section 12 of the Act; or
An investment company registered under the Investment Company Act of 1940 that has made a public offering of its securities.

Respondent bank. For purposes of § 240.14c-7, the term "respondent bank" means any bank, association or other entity that exercises fiduciary powers which holds securities on behalf of beneficial owners and deposits such securities for safekeeping with another bank, association or other entity that exercises fiduciary powers.

L. Shareholder Communications - Copies of Materials (SEC Rule 14c-7)

SEC Regulation 240.14c-7 *
* codified at 17 CFR Part 240 - General Rules and Regulations - Securities Exchange Act of 1934.

Providing Copies of material for certain beneficial owners.

Originally issued December 9, 1986 (51 FR 44280)
As revised through January 10, 1992 (57 FR 1102)

If the registrant knows that securities of any class entitled to vote at a meeting, or by written authorizations or consents if no meeting is held, are held of record by a broker, dealer, voting trustee, or bank, association, or other entity that exercises fiduciary powers in nominee name or otherwise, the registrant shall:

By first class mail or other equally prompt means:

Inquire of each such record holder:

Whether other persons are the beneficial owners of such securities and, if so, the number of copies of the information statement necessary to supply such material to such beneficial owners;
In the case of an annual (or special meeting in lieu of the annual) meeting, or written consents in lieu of such meeting, at which directors are to be elected, the number of copies of the annual report to security holders, necessary to supply such report to such beneficial owners for whom proxy material has not been and is not to be made available and to whom such reports are to be distributed by such record holder or its nominee and not by the registrant;
If the record holder or respondent bank has an obligation under § 240.14b- 1(b)(3) or § 240.14b-2(b)(4)(ii) and (iii), whether an agent has been designated to act on its behalf in fulfilling such obligation, and, if so, the name and address of such agent; and
Whether it holds the registrant's securities on behalf of any respondent bank and, if so, the name and address of each such respondent bank; and

Indicate to each such record holder:

Whether the registrant pursuant to paragraph (c) of this section, intends to distribute the annual report to security holders to beneficial owners of its securities whose names, addresses and securities positions are disclosed pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii) and (iii);
The record date; and
At the option of the registrant, any employee benefit plan established by an affiliate of the registrant that holds securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities;

Upon receipt of a record holder's or respondent bank's response indicating, pursuant to § 240.14b-2(a)(1), the names and addresses of its respondent banks, within one business day after the date such response is received, make an inquiry of and give notification to each such respondent bank in the same manner required by paragraph (a)(1) of this section; Provided, however, the inquiry required by paragraphs (a)(1) and (a)(2) of this section shall not cover beneficial owners of exempt employee benefit plan securities;
Make the inquiry required by paragraph (a)(1) of this section on the earlier of:

At least 20 business days prior to the record date of the meeting of security holders or the record date of written consents in lieu of a meeting; or
At least 20 business days prior to the date the information statement is required to be sent or given pursuant to § 240.14c-2(b);

Provided, however, That, if a record holder or respondent bank has informed the registrant that a designated office(s) or department(s) is to receive such inquiries, the inquiry shall be made to such designated office(s) or department(s);

Supply, in a timely manner, each record holder and respondent bank of whom the inquires required by paragraphs (a)(1) and paragraphs (a)(2) of this section are made with copies of the information statement and/or the annual report to security holders, in such quantities, assembled in such form and at such place(s), as the record holder or respondent bank may reasonably request in order to send such material to each beneficial owner of securities who is to be furnished with such material by the record holder or respondent bank; and

Upon the request of any record holder or respondent bank that is supplied with information statements and/or annual reports to security holders pursuant to paragraph (a)(3) of this section, pay its reasonable expenses for completing the mailing of such material to beneficial owners.

Note 1: If the registrant's list of security holders indicates that some of its securities are registered in the name of a clearing agency registered pursuant to Section 17A of the Act (e.g., "Cede & Co.," nominee for the Depository Trust Company), the registrants shall make appropriate inquiry of the clearing agency and thereafter of the participants in such clearing agency who may hold on behalf of a beneficial owner or respondent bank, and shall comply with the above paragraph with respect to any such participant (see § 240.14c-1 (h)).

Note 2: The requirement for sending an annual report to security holders of record having the same address will be satisfied by sending at least one report to a holder of record at that address provided that those holders of record to whom a report is not sent agree thereto in writing. This procedure is not available to registrants, however, where banks, associations, other entities that exercise fiduciary powers, brokers, dealers and other persons hold securities in nominee accounts or "street names" on behalf of beneficial owners, and such persons are not relieved of any obligation to obtain or send such annual report to the beneficial owners.

Note 3: The attention of registrants is called to the fact that each broker, dealer, bank, association, and other entity that exercises fiduciary powers has an obligation pursuant to § 240.14b-1 and § 240.14b-2 (except as provided therein with respect to exempt employee benefit plan securities held in nominee name) and, with respect to brokers and dealers, applicable self-regulatory organization requirements to obtain and forward, within the time periods prescribed therein, (a) information statements to beneficial owners on whose behalf it holds securities, and (b) annual reports to security holders to beneficial owners on whose behalf it holds securities, unless the registrant has notified the record holder or respondent bank that it has assumed responsibility to mail such material to beneficial owners whose names, addresses, and securities positions are disclosed pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii) and (iii).

Note 4: The attention of registrants is called to the fact that registrants have an obligation, pursuant to paragraph (d) of this section, to cause information statements and annual reports to security holders to be furnished, in accordance with § 240.14c-2, to beneficial owners of exempt employee benefit plan securities.

Any registrant requesting pursuant to § 240.14b-1(b)(3) and § 240.14b- 2(b)(4)(ii) and (iii) a list of names, addresses and securities positions of beneficial owners of its securities who either have consented or have not objected to disclosure of such information shall:

By first class mail or other equally prompt means, inquire of each record holder and each respondent bank identified to the registrant pursuant to § 240.14b-2(e)(1) whether such record holder or respondent bank holds the registrant's securities on behalf of any respondent banks and, if so, the name and address of each such respondent bank;
Request such list be compiled as of a date no earlier than five business days after the date the registrant's request is received by the record holder or respondent bank; Provided, however, That if the record holder or respondent bank has informed the registrant that a designated office(s) or department(s) is to receive such requests, the request shall be made to such designated office(s) or department(s);
Make such request to the following persons that hold the registrant's securities on behalf of beneficial owners: all brokers, dealers, banks, associations and other entities that exercise fiduciary powers; Provided, however, such request shall not cover beneficial owners of exempt employee benefit plan securities as defined in § 240.14a-1(d)(1); and, at the option of the registrant, such request may give notice of any employee benefit plan established by an affiliate of the registrant that holds securities of the registrant that the registrant elects to treat as exempt employee benefit plan securities;
Use the information furnished in response to such request exclusively for purposes of corporate communications; and
Upon the request of any record holder or respondent bank to whom such request is made, pay the reasonable expenses, both direct and indirect, of providing beneficial owner information.

Note: A registrant will be deemed to have satisfied its obligations under paragraph (b) of this section by requesting consenting and non-objecting beneficial owner lists from a designated agent acting on behalf of the record holder or respondent bank and paying to that designated agent the reasonable expenses of providing the beneficial owner information.

A registrant, at its option, may mail its annual report to security holders to the beneficial owners whose identifying information is provided by record holders and respondent banks, pursuant to § 240.14b-1(b)(3) and § 240.14b-2(b)(4)(ii) and (iii), provided that such registrant notifies the record holders and respondent banks at the time it makes the inquiry required by paragraph (a) of this section that the registrant will mail the annual report to security holders to the beneficial owners so identified.
If a registrant furnishes information statements to record holders and respondent banks who hold securities on behalf of beneficial owners, the registrant shall cause information statements and annual reports to security holders to be furnished, in accordance with § 240.14c-2, to beneficial owners of exempt employee benefit plan securities.

M. Research Analysts and Research Reports (NASD Rule 2711)

National Association of Securities Dealers (NASD) Rule 2711 - Research Analysts and Research Reports

SR-NASD-2002-21 effective April 24, 2002;
(amended by SR-NASD-2002-74 effective June 4, 2002 and SR-NASD-2002-154 effective July 29, 2003)

Rule 2711. Research Analysts and Research Reports

NASD members must implement the provisions of Rule 2711 No later than Tuesday, July 9, 2002, except for those sections which indicate a different implementation date below:

(a) Definitions
For purposes of this rule, the following terms shall be defined as provided.

(1) "Investment banking department" means any department or division, whether or not identified as such, that performs any investment banking service on behalf of a member.

(2) "Investment banking services" include, without limitation, acting as an underwriter in an offering for the issuer; acting as a financial adviser in a merger or acquisition; providing venture capital, equity lines of credit, PIPEs or similar investments; or serving as placement agent for the issuer.

(3) "Member of a research analyst's household" means any individual whose principal residence is the same as the research analyst's principal residence.

(4) "Public appearance" means any participation in a seminar, forum (including an interactive electronic forum), radio, television or print media interview, or other public speaking activity, or the writing of a print media article, in which a research analyst makes a recommendation or offers an opinion concerning an equity security.

(5) "Research analyst" means the associated person who is primarily responsible for, and any associated person who reports directly or indirectly to such a research analyst in connection with, preparation of the substance of a research report, whether or not any such person has the job title of "research analyst."

(6) "Research analyst account" means any account in which a research analyst or member of the research analyst's household has a financial interest, or over which such analyst has discretion or control, other than an investment company registered under the Investment Company Act of 1940. This term does not include a "blind trust" account that is controlled by a person other than the research analyst or member of the research analyst's household where neither the research analyst nor a member of the research analyst's household knows of the account's investments or investments transactions.

(7) "Research department" means any department or division, whether or not identified as such, that is principally responsible for preparing the substance of a research report on behalf of a member.

(8) "Research Report" means a written or electronic communication that includes an analysis of equity securities of individual companies or industries, and that provides information reasonably sufficient upon which to base an investment decision.

(9) "Subject company" means the company whose equity securities are the subject of a research report or a public appearance.

(b) Restrictions on Relationship with Research Department
(1) No research analyst may be subject to the supervision or control of any employee of the member's investment banking department, and no personnel engaged in investment banking activities may have any influence or control over the compensatory evaluation of a research analyst.

(2) Except as provided in paragraph (b)(3), no employee of the investment banking department or any other employee of the member who is not directly responsible for investment research ("non-research personnel"), other than legal or compliance personnel, may review or approve a research report of the member before its publication.

(3) Non-research personnel may review a research report before its publication as necessary only to verify the factual accuracy of information in the research report or identify any potential conflict of interest, provided that:

(A) any written communication between non-research personnel and research department personnel concerning the content of a research report must be made either through authorized legal or compliance personnel of the member or in a transmission copied to such personnel; and

(B) any oral communication between non-research personnel and research department personnel concerning the content of a research report must be documented and made either through authorized legal or compliance personnel acting as intermediary or in a conversation conducted in the presence of such personnel.

(c) Restrictions on Communications with the Subject Company
(1) Except as provided in paragraphs (c)(2) and (c)(3), a member may not submit a research report to the subject company before its publication.

(2) A member may submit sections of such a research report to the subject company before its publication for review as necessary only to verify the factual accuracy of information in those sections, provided that:

(A) the sections of the research report submitted to the subject company do not contain the research summary, the research rating or the price target;

(B) a complete draft of the research report is provided to legal or compliance personnel before sections of the report are submitted to the subject company; and

(C) if after submitting the sections of the research report to the subject company the research department intends to change the proposed rating or price target, it must first provide written justification to, and receive written authorization from, legal or compliance personnel for the change. The member must retain copies of any draft and the final version of such a research report for three years following its publication.

NASD members must implement the provisions of Rule 2711(c)(2) No later than Wednesday, September 9, 2002

(3) The member may notify a subject company that the member intends to change its rating of the subject company's securities, provided that the notification occurs on the business day before the member announces the rating change, after the close of trading in the principal market of the subject company's securities.

(4) No research analyst may participate in efforts to solicit investment banking business. Accordingly, no research analyst may, among other things, participate in any "pitches" for investment banking business to prospective investment banking clients, or have other communications with companies for the purpose of soliciting investment banking business.

(d) Restrictions on Research Analyst Compensation
(1)No member may pay any bonus, salary or other form of compensation to a research analyst that is based upon a specific investment banking services transaction.

(2) The compensation of a research analyst who is primarily responsible for the preparation of the substance of a research report must be reviewed and approved at least annually by a committee that reports to the members board' of directors, or when the member has no board of directors, to a senior executive officer of the member. This committee may not have representation from the member's investment banking department. The committee must consider the following factors when reviewing such a research analyst's compensation, if applicable:

NASD members must implement the following provisions of Rule 2711(d)(2) no later than October 27, 2003

(A) the research analyst's individual performance, including the analyst's productivity and the quality of the analyst's research;

(B) the correlation between the research analyst's recommendations and the stock price performance; and

(C) the overall ratings received from clients, sales force, and peers independent of the member's investment banking department, and other independent ratings services.

The committee may not consider as a factor in reviewing and approving such a research analyst's compensation his or her contributions to the member's investment banking business. The committee must document the basis upon which each such research analyst's compensation was established. The annual attestation required by Rule 2711(i) must certify that the committee reviewed and approved each such research analyst's compensation and documented the basis upon which this compensation was established.

(e) Prohibition of Promise of Favorable Research
No member may directly or indirectly offer favorable research, a specific rating or a specific price target, or threaten to change research, a rating or a price target, to a company as consideration or inducement for the receipt of business or compensation.

(f) Restrictions on Publishing Research Reports and Public Appearances; Termination of Coverage
(1) No member may publish or otherwise distribute a research report and no research analyst may make a public appearance regarding a subject company for which the member acted as manager or co-manager of:

(A) an initial public offering, for 40 calendar days following the date of the offering; or

(B) a secondary offering, for 10 calendar days following the date of the offering; provided that:

(i) paragraphs (f)(1)(A) and (f)(1)(B) will not prevent a member from publishing or otherwise distributing a research report, or prevent a research analyst from making a public appearance, concerning the effects of significant news or a significant event on the subject company within such 40- and 10-day periods, and provided further that legal or compliance personnel authorize publication of that research report before it is issued or authorize the public appearance before it is made; and

(ii) paragraph (f)(1)(B) will not prevent a member from publishing or otherwise distributing a research report pursuant to SEC Rule 139 regarding a subject company with "actively-traded securities," as defined in Regulation M, 17 CFR 242.101(c)(1), and will not prevent a research analyst from making a public appearance concerning such a company.

(2) No member that has agreed to participate or is participating as an underwriter or dealer (other than as manager or co-manager) of an issuer's initial public offering may publish or otherwise distribute a research report or make a public appearance regarding that issuer for 25 calendar days after the date of the offering.

(3) For purposes of paragraphs (f)(1) and (f)(2), the term "date of the offering" refers to the later of the effective date of the registration statement or the first date on which the security was bona fide offered to the public.

(4) No member that has acted as a manager or co-manager of a securities offering may publish or otherwise distribute a research report or make a public appearance concerning a subject company 15 days prior to and after the expiration, waiver or termination of a lock-up agreement or any other agreement that the member has entered into with a subject company or its shareholders that restricts or prohibits the sale of securities held by the subject company or its shareholders after the completion of a securities offering. This paragraph will not prevent a member from publishing or otherwise distributing a research report concerning the effects of significant news or a significant event on the subject company within such period, provided legal or compliance personnel authorize publication of that research report before it is issued. In addition, this paragraph shall not apply to the publication or distribution of a research report pursuant to SEC Rule 139 regarding a subject company with "actively traded securities," as defined in Regulation M, 17 CFR 242.101(c)(1), or to a public appearance concerning such a subject company.

(5) If a member intends to terminate its research coverage of a subject company, notice of this termination must be made. The member must make available a final research report on the subject company using the means of dissemination equivalent to those it ordinarily uses to provide the customer with its research reports on the subject company. The report must be comparable in scope and detail to prior research reports and must include a final recommendation or rating, unless it is impracticable for the member to produce a comparable report (e.g., if the research analyst covering the subject company or sector has left the member or if the member terminates coverage of the industry or sector). If it is impracticable to produce a final recommendation or rating, the final research report must disclose the member's rationale for the decision to terminate coverage.

(g) Restrictions on Personal Trading by Research Analysts
(1) No research analyst account may purchase or receive any securities before the issuer's initial public offering if the issuer is principally engaged in the same types of business as companies that the research analyst follows.

(2) No research analyst account may purchase or sell any security issued by a company that the research analyst follows, or any option on or derivative of such security, for a period beginning 30 calendar days before and ending five calendar days after the publication of a research report concerning the company or a change in a rating or price target of the company's securities; provided that:

(A) a member may permit a research analyst account to sell securities held by the account that are issued by a company that the research analyst follows, within 30 calendar days after the research analyst began following the company for the member;

(B) a member may permit a research analyst account to purchase or sell any security issued by a subject company within 30 calendar days before the publication of a research report or change in the rating or price target of the subject company's securities due to significant news or a significant event concerning the subject company, provided that the legal or compliance personnel pre-approve the research report and any change in the rating or price target.

(3) No research analyst account may purchase or sell any security or any option on or derivative of such security in a manner inconsistent with the research analyst's recommendation as reflected in the most recent research report published by the member.

(4) Legal or compliance personnel may authorize a transaction otherwise prohibited by paragraphs (g)(2) and (g)(3) based upon an unanticipated significant change in the personal financial circumstances of the beneficial owner of the research analyst account, provided that:

(A) legal or compliance personnel authorize the transaction before it is entered;

(B) each exception is granted in compliance with policies and procedures adopted by the member that are reasonably designed to ensure that these transactions do not create a conflict of interest between the professional responsibilities of the research analyst and the personal trading activities of a research analyst account; and

(C) the member maintains written records concerning each transaction and the justification for permitting the transaction for three years following the date on which the transaction is approved.

(5) The prohibitions in paragraphs (g)(1) through (g)(3) do not apply to a purchase or sale of the securities of:

(A) any registered diversified investment company as defined under Section (5)(b)(1) of the Investment Company Act of 1940; or

(B) any other investment fund over which neither the research analyst nor a member of the research analyst's household has any investment discretion or control, provided that:

(i) the research analyst accounts collectively own interests representing no more than 1% of the assets of the fund;

(ii) the fund invests no more than 20% of its assets in securities of issuers principally engaged in the same types of business as companies that the research analyst follows; and

(iii) if the investment fund distributes securities in kind to the research analyst or household member before the issuer's initial public offering, the research analyst or household member must either divest those securities immediately or the research analyst must refrain from participating in the preparation of research reports concerning that issuer.

(6) Legal or compliance personnel of the member shall pre-approve all transactions of persons who oversee research analysts to the extent such transactions involve equity securities of subject companies covered by the research analysts that they oversee. This pre-approval requirement shall apply to all persons, such as the director of research, supervisory analyst, or member of a committee, who have direct influence or control with respect to the preparation of the substance of research reports or establishing or changing a rating or price target of a subject company's equity securities.

(h) Disclosure Requirements

(1) Ownership and Material Conflicts of Interest
A member must disclose in research reports and a research analyst must disclose in public appearances:

(A) if the research analyst or a member of the research analyst's household has a financial interest in the securities of the subject company, and the nature of the financial interest (including, without limitation, whether it consists of any option, right, warrant, future, long or short position);

(B) if, as of the end of the month immediately preceding the date of publication of the research report or the public appearance (or the end of the second most recent month if the publication date is less than 10 calendar days after the end of the most recent month), the member or its affiliates beneficially own 1% or more of any class of common equity securities of the subject company. Computation of beneficial ownership of securities must be based upon the same standards used to compute ownership for purposes of the reporting requirements under Section 13(d) of the Securities Exchange Act of 1934;

NASD members must implement the provisions of Rule 2711(h)(1)(B) No later than Wednesday, November 6, 2002

(C) any other actual, material conflict of interest of the research analyst of which the research analyst or member knows or has reason to know at the time of publication of the research report or at the time of the public appearance.

(2) Receipt of Compensation
NASD members must implement the new compensation and client disclosure provisions of Rule 2711(h)(2) no sooner than January 29, 2004

(A) A member must disclose in research reports:

(i) if the research analyst received compensation:

(a.) based upon (among other factors) the member's investment banking revenues; or

(b.) from the subject company in the past 12 months.

(ii) the member or affiliate:

a. managed or co-managed a public offering of securities for the subject company in the past 12 months;

b. received compensation for investment banking services from the subject company in the past 12 months; or

c. expects to receive or intends to seek compensation for investment banking services from the subject company in the next 3 months.

(iii) if (1) as of the end of the month immediately preceding the date of publication of the research report (or the end of the second most recent month if the publication date is less than 30 calendar days after the end of the most recent month) or (2) to the extent the research analyst or an employee of the member with the ability to influence the substance of the research knows:

a. the member received any compensation for products or services other than investment banking services from the subject company in the past 12 months; or

b. the subject company currently is, or during the 12-month period preceding the date of distribution of the research report was, a client of the member. In such cases, the member also must disclose the types of services provided to the subject company. For purposes of this Rule 2711(h)(2), the types of services provided to the subject company shall be described as investment banking services, non-investment banking securities-related services, and non-securities services.

(iv) if, to the extent the research analyst or an employee of the member with the ability to influence the substance of the research report knows an affiliate of the member received any compensation for products or services other than investment banking services from the subject company in the past 12 months.

(v) if, to the extent the research analyst or member has reason to know, an affiliate of the member received any compensation for products or services other than investment banking services from the subject company in the past 12 months.

a. This requirement will be deemed satisfied if such compensation is disclosed in research reports within 30 days after completion of the last calendar quarter, provided that the member has taken steps reasonably designed to identify any such compensation during that calendar quarter. This requirement shall not apply to any subject company as to which the member initiated coverage since the beginning of the current calendar quarter.

b. The research analyst and the member will be presumed not to have reason to know whether an affiliate received any compensation for products or services other than investment banking services from the subject company in the past 12 months if the member maintains and enforces policies and procedures reasonably designed to prevent the research analysts and employees of the member with the ability to influence the substance of research reports from, directly or indirectly, receiving information from the affiliate concerning whether the affiliate received such compensation.

(vi) For the purposes of this Rule 2711(h)(2), an employee of the member with the ability to influence the substance of the research report is an employee who, in the ordinary course of that person's duties, has the authority to review the particular research report and to change that research report prior to publication.

(B) A research analyst must disclose in public appearances:

(i) if, to the extent the research analyst knows or has reason to know, the member or any affiliate received any compensation from the subject company in the past 12 months;

(ii) if the research analyst received any compensation from the subject company in the past 12 months; or

(iii) if, to the extent the research analyst knows or has reason to know, the subject company currently is, or during the 12-month period preceding the date of distribution of the research report, was, a client of the member. In such cases, the research analyst also must disclose the types of services provided to the subject company, if known by the research analyst.

(C) A member or research analyst will not be required to make a disclosure required by paragraphs (h)(2)(A)(ii)(b) and (c), (h)(2)(A)(iii)(b), or (h)(2)(B)(i) and (iii) to the extent such disclosure would reveal material non-public information regarding specific potential future investment banking transactions of the subject company.

NASD members must implement the provisions of Rule 2711(h)(2)(C) as they apply to disclosures under Rules 2711(h)(2)(A)(ii)(b) and (c) no later than July 29, 2003, and as they apply to disclosures under Rule 2711(h)(2)(A)(iii)(b), (h)(2)(B)(i) and (iii) by Jan. 26, 2004

(3) Position as Officer or Director
A member must disclose in research reports and a research analyst must disclose in public appearances if the research analyst or a member of the research analyst's household serves as an officer, director or advisory board member of the subject company.

(4) Meaning of Ratings
A member must define in its research reports the meaning of each rating used by the member in its rating system. The definition of each rating must be consistent with its plain meaning.

(5) Distribution of Ratings

(A) Regardless of the rating system that a member employs, a member must disclose in each research report the percentage of all securities rated by the member to which the member would assign a "buy," "hold/neutral," or "sell" rating.
(B) In each research report, the member must disclose the percentage of subject companies within each of these three categories for whom the member has provided investment banking services within the previous twelve months.

(C) The information that is disclosed under paragraphs (h)(5)(A) and (h)(5)(B) must be current as of the end of the most recent calendar quarter (or the second most recent calendar quarter if the publication date is less than 15 calendar days after the most recent calendar quarter).

NASD members must implement the provisions of Rule 2711(h)(5) No later than Wednesday, September 9, 2002

(6) Price Chart
A member must present in any research report concerning an equity security on which the member has assigned any rating for at least one year, a line graph of the security's daily closing prices for the period that the member has assigned any rating or for a three-year period, whichever is shorter. The line graph must:

(A) indicate the dates on which the member assigned or changed each rating or price target;

(B) depict each rating and price target assigned or changed on those dates; and

(C) be current as of the end of the most recent calendar quarter (or the second most recent calendar quarter if the publication date is less than 15 calendar days after the most recent calendar quarter).

NASD members must implement the provisions of Rule 2711(h)(5) No later than Wednesday, September 9, 2002

(7) Price Targets
A member must disclose in research reports the valuation methods used to determine a price target. Price targets must have a reasonable basis and must be accompanied by a disclosure concerning the risks that may impede achievement of the price target.

(8) Market Making
A member must disclose in research reports if it was making a market in the subject company's securities at the time that the research report was published.

(9) Disclosure Required by Other Provisions
In addition to the disclosure required by this rule, members and research analysts must provide disclosure in research reports and public appearances that is required by applicable law or regulation, including NASD Rule 2210 and the antifraud provisions of the federal securities laws.

(10) Prominence of Disclosure
The disclosures required by this paragraph (h) must be presented on the front page of research reports or the front page must refer to the page on which disclosures are found. Disclosures and references to disclosures must be clear, comprehensive and prominent.

(11) Disclosures in Research Reports Covering Six or More Companies
When a member distributes a research report covering six or more subject companies, for purposes of the disclosures required in paragraph (h), such research report may direct the reader in a clear manner as to where they may obtain applicable current disclosures in written or electronic format.

(12) Records of Public Appearances
Members must maintain records of public appearances by research analysts sufficient to demonstrate compliance by those research analysts with the applicable disclosure requirements under paragraph (h) of this Rule. Such records must be maintained for three years from the date of the public appearance.

NASD members must implement the provisions of Rule 2711(j) no later than Sept. 29, 2003

(i) Supervisory Procedures
Each member subject to this rule must adopt and implement written supervisory procedures reasonably designed to ensure that the member and its employees comply with the provisions of this rule (including the attestation requirements of Rule 2711(d)(2)), and a senior officer of such a member must attest annually to NASD by April 1 of each year that it has adopted and implemented those procedures.

NASD members must implement the provisions of Rule 2711(i) in accordance with the implementation schedule for Rule 2711

(j) Prohibition of Retaliation Against Research Analysts
No member and no employee of a member who is involved with the member's investment banking activities may, directly or indirectly, retaliate against or threaten to retaliate against any research analyst employed by the member or its affiliates as a result of an adverse, negative, or otherwise unfavorable research report or public appearance written or made by the research analyst that may adversely affect the member's present or prospective investment banking relationship with the subject company of a research report. This prohibition shall not limit a member's authority to discipline or terminate a research analyst, in accordance with the member's policies and procedures, for any cause other than the writing of such an unfavorable research report or the making of such an unfavorable public appearance.

NASD members must implement the provisions of Rule 2711(j) no later than July 29, 2003.

(k) Exceptions for Small Firms
NASD members must implement the provisions of Rule 2711(k) no later than July 29, 2003

The provisions of paragraph (b) shall not apply to members that over the previous three years, on average per year, have participated in 10 or fewer investment banking services transactions as manager or co-manager and generated $5 million or less in gross investment banking services revenues from those transactions. For purposes of this paragraph (k), the term "investment banking services transactions" includes the underwriting of both corporate debt and equity securities but not municipal securities. Members that qualify for this exemption must maintain records for three years of any communication that, but for this exemption, would be subject to paragraph (b) of this Rule.

[Adopted by SR-NASD-2002-21 eff. April 24, 2002; amended by SR-NASD-2002-74 eff. June 4, 2002; amended by SR-NASD-2002-154 eff. July 29, 2003.]

Selected Notices to Members: 02-39, 03-44

Securities Law, Regulations, and Miscellaneous Statutes

A. Links to Securities Law, Regulations, and Miscellaneous Statutes

The following items can be found in the three volume FDIC Rules and Regulations.

Investment Company Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

Investment Advisers Act of 1940: To provide for the registration and regulation of investment companies and investment advisers, and for other purposes.

FDIC Part 344: Recordkeeping and Confirmation Requirements for Securities Transactions.

SEC Rule 240.10b-5: Employment of manipulative and deceptive devices

SEC Rule 240.13f-1: Reporting by institutional investment managers of information with respect to accounts over which they exercise investment discretion

SEC Rule 249.325: Form 13F, report of institutional investment manager pursuant to Section 13(f)

SEC Rule 240.14e-3: Transactions in securities on the basis of material, nonpublic information in the context of tender offers (Insider information)

SEC Rule 240.17f-1: Requirements for reporting and inquiry with respect to missing, lost, counterfeit or stolen securities.

*codified at 17 CFR Part 240 - General Rules and Regulations - Securities Exchange Act of 1934.

About

Resources

Analysis

News

Table of Contents

General Information

Securities and Exchange Commission

Securities Law, Regulations, and Miscellaneous Statutes

General Information

A. Glass-Steagall Act As Modified By Gramm-Leach-Bliley Act

B. Applicability of Federal Securities Laws to Banks and Bank Sponsored Securities Activities

Securities and Exchange Commission

A. Dealer Statutory Exceptions and Rules (SEC Staff Compliance Guide to Banks)

B. Section 28(e) and Soft Dollars (Release No. 34-23170)

C. Waiver of 12b-1 Fees for ERISA Plans (SEC No-Action Letter)

D. Status of Investment Advisory Programs (ICA of 1940 Release IC-22579)

E. Safe Harbor for Wrap Accounts (SEC Rule 3a-4)

F. Disclosure of Proxy Voting Policies and Records (SEC Rule 206(4)-6, Sec Rule 204-2)

Executive Summary

Form N-PX

Annual Report of Proxy Voting Record of Registered Management Investment Company

G. Solicitation of Proxies - Definitions (SEC Rule 14a-1)

H. Shareholder Communications - Beneficial Owners (SEC Rule 14a-13)

I. Shareholder Communications - Brokers and Dealers (SEC Rule 14b-1)

J. Shareholder Communications - Banks and Fiduciaries (SEC Rule 14b-2)

K. Shareholder Communications - Section 14(C) Definitions (SEC Rule 14c-1)

L. Shareholder Communications - Copies of Materials (SEC Rule 14c-7)

M. Research Analysts and Research Reports (NASD Rule 2711)

Securities Law, Regulations, and Miscellaneous Statutes

A. Links to Securities Law, Regulations, and Miscellaneous Statutes