[Federal Register Volume 63, Number 103 (Friday, May 29, 1998)]
[Rules and Regulations]
[Pages 29345-29346]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-14187]


=======================================================================
-----------------------------------------------------------------------

SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release Nos. IC-23201; IS-1136; File No. S7-23-95]
RIN 3235-AE98


Custody of Investment Company Assets Outside the United States

AGENCY: Securities and Exchange Commission.

ACTION: Final rule; extension of compliance date.

-----------------------------------------------------------------------

SUMMARY: The Commission is extending the compliance date for certain 
amendments to the rule that governs the custody of investment company 
assets outside the United States.

DATES: The effective date of the rule amendments published on May 16, 
1997 (62 FR 26923) remains June 16, 1997. As of May 29, 1998, the 
compliance date for the rule amendments, except for the amended 
definition of an ``eligible foreign custodian,'' is extended to 
February 1, 1999. The compliance date for the amended definition of an 
eligible foreign custodian remains June 16, 1998.

FOR FURTHER INFORMATION CONTACT: Thomas M. J. Kerwin, Senior Counsel, 
or C. Hunter Jones, Assistant Director, Office of Regulatory Policy, at 
(202) 942-0690, in the Division of Investment Management, Mail Stop 5-
6, Securities and Exchange Commission, 450 5th Street, NW, Washington, 
DC 20549.

SUPPLEMENTARY INFORMATION: The Commission is extending the compliance 
date for certain amendments to rule 17f-5 [17 CFR 270.17f-5] under the 
Investment Company Act of 1940 [15 U.S.C. 80a] that the Commission 
adopted in 1997 (the ``1997 Amendments'').\1\ The release that adopted 
the 1997 Amendments (the ``1997 Release'') provided that the amendments 
would become effective on June 16, 1997.\2\ The 1997 Release further 
provided that registered management investment companies (``funds'') 
must bring their foreign custody arrangements into compliance with the 
amended rule by June 16, 1998 (i.e., the fund's board must make the 
findings required by the amended rule or appoint a delegate to do so by 
that date).
---------------------------------------------------------------------------

    \1\ See Custody of Investment Company Assets Outside the United 
States, Investment Company Act Release No. 22658 (May 12, 1997) [62 
FR 26923 (May 16, 1997)].
    \2\ Id., 62 FR at 26931.
---------------------------------------------------------------------------

    After the Commission adopted the 1997 Amendments, representatives 
of mutual funds and ten U.S. bank custodians asked the Commission's 
Division of Investment Management to clarify whether the 1997 
Amendments permit a fund board to delegate authority to a foreign 
custody manager to select a securities depository that a fund must use 
if it maintains assets in a particular country (a ``compulsory 
depository''). In a letter dated February 19, 1998, the Division of 
Investment Management answered that, in its view, under the rule, fund 
boards can delegate this authority.\3\
---------------------------------------------------------------------------

    \3\ Letter to Dorothy M. Donohue, Associate Counsel, Investment 
Company Institute, and Daniel L. Goelzer, Baker & McKenzie, from 
Robert E. Plaze, Associate Director, Division of Investment 
Management (Feb. 19, 1998) (the 1997 Amendments do not exclude 
compulsory depositories from rule 17f-5's selection process, and do 
not preclude fund boards from delegating to a foreign custody 
manager the selection of a compulsory depository).
---------------------------------------------------------------------------

    In a letter dated March 24, 1998, mutual fund representatives 
stated that certain requirements of the 1997 Amendments may present 
unanticipated problems when a foreign custody arrangement involves the 
selection of a compulsory depository.\4\ They asserted that, because 
most depositories are governmental or quasi-governmental organizations, 
it may not be possible for funds (or their foreign custody managers) to 
obtain necessary information to make the findings contemplated by the 
rule, to negotiate terms or conditions in custody agreements, or to 
assure U.S. jurisdiction over foreign custodians. The fund 
representatives stated that they and representatives of custodian banks 
will soon submit to the Commission proposed revisions to the 1997 
Amendments that would address these problems. In the interim, the fund 
representatives requested that the Commission suspend the compliance 
date for the 1997 Amendments to facilitate consideration of this 
submission.
---------------------------------------------------------------------------

    \4\ See Letter to Barry P. Barbash, Director, Division of 
Investment Management, from Dorothy M. Donohue, Associate Counsel, 
Investment Company Institute (Mar. 24, 1998) (placed in File No. S7-
23-95).
---------------------------------------------------------------------------

    The fund representatives state that a suspension is necessary 
because many funds have been unable to establish new custodial 
arrangements under the 1997 Amendments.\5\ Fund representatives also 
state that funds did not become fully aware of potential difficulties 
in applying the 1997 Amendments to compulsory depositories until 
recently, when they began to revise their foreign custody arrangements 
to attempt to comply with the amendments. Because of the difficulties 
in applying the rule, the fund representatives assert that many funds 
may not be prepared to comply with the 1997 Amendments as of June 16, 
1998. Some fund groups reportedly have considered withdrawing their 
assets from foreign custodians altogether, despite the burdens of 
alternative holding arrangements.\6\
---------------------------------------------------------------------------

    \5\ Id.
    \6\ See Custody of Investment Company Assets Outside the United 
States, Investment Company Act Release No. 21259 (July 27, 1995) [60 
FR 39592 (Aug. 2, 1995)] at n.3 (a fund may incur significant costs 
in maintaining securities outside the primary market for the 
securities).
---------------------------------------------------------------------------

    The Commission is extending until February 1, 1999, the compliance 
date for the 1997 Amendments, except for the amended definition of an 
``eligible foreign custodian,'' the compliance date for which will 
remain June 16, 1998.\7\

[[Page 29346]]

The extension of the compliance date for the other amendments will give 
the Commission time to review the proposal to be submitted by 
representatives of funds and banks, and to evaluate whether refinements 
to the 1997 Amendments are needed.\8\
---------------------------------------------------------------------------

    \7\ See rule 17f-5(a)(1) [17 CFR 270.17f-5(a)(1)]. This 
provision of the amended rule generally expands the class of 
eligible foreign custodians that may hold custody of fund assets. 
The amended definition of eligible foreign custodian also includes 
the definitions of ``qualified foreign bank'' and ``U.S. bank,'' 
which also will remain subject to the June 16, 1998 compliance date. 
See rule 17f-5(a)(4) and (7) [17 CFR 270.17f-5(a)(4) and (7)]. 
Retaining the original compliance date for this definition will 
enable funds to rely upon a provision of the 1997 Amendments that 
appears not to have presented difficulties, and avoid the necessity 
of seeking exemptive relief from the Commission to permit the use of 
a custodian that would qualify as an eligible foreign custodian 
under the amended definition.
    \8\ The extension of the compliance date is effective upon 
publication of this release in the Federal Register because the 
extension ``grants or recognizes an exemption or relieves a 
restriction.'' 5 U.S.C. 553(d)(1).
---------------------------------------------------------------------------

    Until February 1, 1999, a fund may maintain its foreign custody 
arrangements under either of two regulatory frameworks. First, the fund 
may continue to comply with rule 17f-5 as it existed prior to the 1997 
Amendments (``old rule 17f-5''). Because the compliance date for the 
amended definition of eligible foreign custodian will remain June 16, 
1998, a fund may comply with old rule 17f-5 while also selecting a 
custodian that is an eligible foreign custodian under the amended 
definition. Second, in the alternative, a fund may comply entirely with 
rule 17f-5 as amended by the 1997 Amendments (the ``amended rule'').
    The fund may apply either of these alternative frameworks 
separately to each foreign custodian it uses. The fund's arrangement 
with a particular foreign custodian or subcustodian, however, should 
comply in its entirety either with old rule 17f-5 (subject to the 
amended definition of eligible foreign custodian), or with the amended 
rule.\9\
---------------------------------------------------------------------------

    \9\ A fund may not seek to comply with the rule by meeting 
certain requirements of the old rule and certain requirements of the 
amended rule (other than the amended definition of eligible foreign 
custodian).
---------------------------------------------------------------------------

    The Commission for good cause finds that, based on the reasons 
cited above, notice and solicitation of comment regarding the extension 
of the compliance date for certain of the 1997 Amendments is 
impracticable, unnecessary, and contrary to the public interest.\10\ 
The Commission notes that the original compliance date is imminent, 
that many funds reportedly are not in a position to comply with the 
1997 Amendments, that funds need prompt guidance concerning the 
regulatory requirements that will apply to their foreign custody 
arrangements, and that a limited extension will aid funds, bank 
custodians, and the Commission in considering whether additional 
amendments are necessary. Fund representatives have stated that, 
without a suspension of the compliance date, some funds may withdraw 
assets from foreign custodians, which could increase costs for 
investors or otherwise harm investors.\11\ The Commission also notes 
that the 1997 Amendments were themselves submitted for public notice 
and comment, and that any amendments that may be considered in the 
future will be submitted for notice and comment.\12\
---------------------------------------------------------------------------

    \10\ See section 553(b)(3)(B) of the Administrative Procedure 
Act [5 U.S.C. 553(b)(3)(B)] (an agency may dispense with prior 
notice and comment when it finds, for good cause, that notice and 
comment are ``impracticable, unnecessary, or contrary to the public 
interest'').
    \11\ See supra note .
    \12\ The extension generally preserves the status quo that has 
existed since the adoption of the 1997 Amendments. Funds have been 
permitted to comply with either the old rule or the amended rule 
since June 16, 1997, the effective date of the 1997 Amendments. 
Retaining the original compliance date for the amended definition of 
eligible foreign custodian will allow funds to rely on a provision 
of the amended rule that appears not to have presented difficulties.

    In analyzing the costs and benefits of this action, the Commission 
believes that the extension of the compliance date for certain of the 
1997 Amendments will not impose costs on funds, but will enable funds 
to avoid the costs of attempting to comply with provisions of the rule 
that they assert may be unworkable for some funds. The Commission 
believes that the extension will produce potential benefits for funds 
by allowing funds the option to comply with the amended rule or the old 
rule, and by permitting funds and bank custodians to present a proposal 
---------------------------------------------------------------------------
to refine the 1997 Amendments.

    Dated: May 21, 1998.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 98-14187 Filed 5-28-98; 8:45 am]
BILLING CODE 8010-01-P