[Federal Register Volume 63, Number 183 (Tuesday, September 22, 1998)]
[Notices]
[Pages 50608-50610]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 98-25227]


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SECURITIES AND EXCHANGE COMMISSION


Submission for OMB Review; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange 
Commission, Office of Filings and Information Services, 450 5th Street, 
N.W., Washington, D.C. 20549

Extension:
    Rule 17j-1 [17 CFR 270.17j-1], SEC File No. 270-239, OMB Control 
No. 3235-0224

    Notice is hereby given that, pursuant to the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange 
Commission (the ``Commission'') has submitted to the

[[Page 50609]]

Office of Management and Budget (``OMB'') a request for extension and 
approval of the collection of information discussed below.
    Rule 17j-1 under the Investment Company Act of 1940 (15 U.S.C. 80a) 
(the ``Investment Company Act'') addresses conflicts of interest 
between registered investment company (``fund'') personnel and their 
funds that may arise when fund personnel buy or sell securities for 
their personal accounts (``personal investment activities''). Rule 17j-
1, which the Commission adopted in 1980,\1\ generally prohibits fund 
personnel from engaging in fraud in connection with personal 
transactions in securities held or to be acquired by the fund. In order 
to prevent fraud, the rule currently (i) requires a fund and each 
investment adviser and principal underwriter to the fund (collectively, 
``rule 17j-1 organizations'') to adopt a code of ethics (``code'') 
designed to prevent ``access persons'' \2\ from engaging in fraudulent 
securities activities, (ii) requires an access person to report 
personal securities transactions to his or her rule 17j-1 organization 
at least quarterly, and (iii) requires a rule 17j-1 organization to 
maintain certain records.
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    \1\ Prevention of Certain Unlawful Activities With Respect To 
Registered Investment Companies, Investment Company Act Release No. 
11421 (Oct. 31, 1980) [45 FR 73915 (Nov. 7, 1980)].
    \2\ Rule 17j-1 defines ``access person'' to include directors, 
officers, general partners, and any employee who, in connection with 
his or her regular functions or duties, participates in the 
selection of a fund's portfolio securities or who has access to 
information regarding a fund's upcoming purchases or sales of 
portfolio securities.
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    In 1995, the Commission issued a release proposing amendments to 
rule 17j-1 (``Proposing Release'').\3\ The proposed amendments would 
require, among other things, that a majority of a fund's board, 
including a majority of independent directors, approve the fund's code, 
and review the codes of any investment adviser or principal underwriter 
to the fund. The proposed amendments also would require that the 
management of a rule 17j-1 organization, at least once a year, provide 
the fund's board with an issues and certification report (i) describing 
issues that arose during the previous year under the code of ethics 
applicable to the rule 17j-1 organization and (ii) certifying to the 
fund's board that the rule 17j-1 organization has adopted procedures 
that are reasonably necessary to prevent its access persons from 
violating its code of ethics.
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    \3\ Personal Investment Activities of Investment Company 
Personnel and Codes of Ethics of Investment Companies and their 
Investment Advisers and Principal Underwriters, Investment Company 
Act Release No. 21341 (Sept. 8, 1995) [60 FR 47844 (Sept. 14, 
1995)]. The Commission's proposal was based on reports prepared by 
the Commission's Division of Investment Management and the 
Investment Company Institute (``ICI'') Advisory Group on Personal 
Investing, which studied the practices and standards governing 
personal investment activities of fund personnel. Division of 
Investment Management, Personal Investment Activities of Investment 
Company Personnel (1994); ICI, Report of the Advisory Group on 
Personal Investing (1994). These studies followed press reports and 
Congressional inquiries in the early 1990s regarding the personal 
investment activities of fund personnel.
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    In order to facilitate the identification of all securities held by 
access person, the proposed amendments would require that every access 
person provide an initial holdings report to his or her rule 17j-1 
organization listing all securities beneficially owned by the access 
person at the time that he or she becomes an active person. The 
proposed amendments also would expand the types of securities excepted 
from the requirements of the rule, thereby increasing the number of 
rule 17j-1 organizations and access persons excluded from the rule's 
requirements concerning codes of ethics, quarterly transaction reports, 
and initial holdings reports.
    Funds also currently are not required to disclose to the public any 
information about their codes of ethics. In order to provide more 
information to the public about a fund's policies concerning personal 
investment activities, the proposed amendments to rule 17j-1 would 
require a fund to disclose in its registration statement (i) that the 
fund and its investment adviser and principal underwriter have adopted 
codes of ethics, (ii) whether these codes permit personnel subject to 
the codes to invest in securities for their own accounts, and (iii) 
that the codes are on public file with, and are available from the 
Commission.\4\ The proposed conforming amendments to rule 204-2 under 
the Investment Advisers Act of 1940 (15 U.S.C. 80b) (the ``Advisers 
Act'') \5\ would reduce the burden on registered investment advisers by 
expanding the types of transactions in securities excepted from the 
rule's recordkeeping requirement.
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    \4\ The registration forms the Commission is proposing to amend 
are: Form N-1A (open-end funds); Form N-2 (closed-end funds); Form 
N-3 (separate accounts that offer variable annuity contracts that 
are registered under the Investment Company Act); Form N-5 (small 
business funds); and form N-8B-2 (unit investment trusts). Although 
the Commission has not proposed amending Form S-6 (unit investment 
trusts), the proposed amendments to Form N-8B-2 would affect the 
burden of complying with Form S-6 because Form S-6 requires a unit 
investment trust to provide information required by Form N-8B-2.
    \5\ Rule 204-2(a)(12),(13) [17 CFR 275.204-2(a)(12),(13)].
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    The requirement that the management of a rule 17j-1 organization 
provide the fund's board with an annual issues and certification report 
is intended to enhance board oversight of personal investment policies 
applicable to the fund and the personal investment activities of access 
persons. The requirement that every access person provide an initial 
holdings report is intended to help fund compliance personnel and the 
Commission's examinations staff monitor potential conflicts of interest 
and detect potentially abusive activities. The requirement that each 
rule 17j-1 organization maintain certain records is intended to assist 
rule 17j-1 organizations and the Commission's examinations staff in 
determining whether there have been violations of rule 17j-1.
    The requirement that a fund make available in its registration 
statement information on the fund's policies concerning personal 
investment activities is intended to promote the integrity of the fund 
industry and provide investors with information they may want when 
making investment decisions. Disclosure also may encourage fund boards 
to give closer consideration when approving and reviewing the contents 
of codes of ethics applicable to their funds.
    The conforming amendments to rule 204-2 are intended to reduce the 
reporting and recordkeeping burden on advisers and to modify rule 204-
2(a) to except from the recordkeeping requirement transactions in 
securities that are excepted from the definition of ``security'' in 
rule 17j-1.
    The Commission's staff estimates that there are approximately 3,800 
registered investment companies that would be required to comply with 
the requirements of rule 17j-1. Investment advisers and principal 
underwriters of registered investment companies also are required to 
comply with certain requirements of rule 17j-1. The staff estimates 
that there are approximately 7,500 investment advisers registered with 
the Commission, of which the staff estimates 820 are investment 
advisers to registered investment companies. The staff also estimates 
that there are approximately 425 principal underwriters of registered 
investment companies.\6\
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    \6\ Funds that are money market funds or that invest only in 
securities excluded from the definition of ``security'' in rule 17j-
1, and any investment advisers, principal underwriters, and access 
persons to these funds, do not have to comply with the rule's 
requirements concerning codes of ethics, quarterly transaction 
reports, and initial holdings reports. The estimated number of 
respondents reported in this section may therefore overstate the 
number of entities actually required to comply with the rule's 
requirements.

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[[Page 50610]]

    The staff estimates that each year 275 new rule 17j-1 organizations 
each will expend 8 burden hours to formulate and provide codes of 
ethics for a total of 2,200 burden hours. The staff estimates that the 
management of 5,045 rule 17j-1 organizations\7\ each will annually 
expend 3 burden hours to provide the fund board with an annual issues 
and certification report for a total of 15,135 burden hours. The staff 
estimates that access persons\8\ each will expend .5 burden hours for 
the filing of each quarterly transaction report\9\ for a total of 
42,250 burden hours. The staff estimates that each year new access 
persons each will expend 1 burden hour for the filing of an initial 
holdings report to be provided by persons who become access persons\10\ 
for a total of 4,895 burden hours. Finally, the staff estimates that 
5,045 rule 17j-1 organizations each will expend 2 burden hours to 
maintain records of codes of ethics, records of violations of codes of 
ethics, reports by access persons, and issues and certification reports 
for a total of 10,090 burden hours.
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    \7\ Comprised of an estimated 3,800 registered investment 
companies, 820 investment advisers to registered investment 
companies, and 425 principal underwriters to registered investment 
companies.
    \8\ The Commission estimates that, on average, a rule 17j-1 
organization will have 20 access persons. This number may vary 
considerably depending on the size of the rule 17j-1 organization. 
Under rule 17j-1, access persons of investment advisers to funds are 
exempt from filing quarterly transaction reports if the reports 
would duplicate information provided under rule 204-2 of the 
Advisers Act. Thus, the Commission staff estimates that the number 
of access persons filing quarterly transaction reports is equal to 
the average number of access persons for each 17j-1 organization 
multiplied by the total number of funds and principal underwriters 
of funds (20  x  (3800 + 425) = 84,500).
    \9\ The number of access persons who are required to file 
quarterly transaction reports will vary depending on the personal 
investment activities of each access person. In addition, proposed 
rule 17j-1 contains several exceptions to filing quarterly 
transaction reports, including an exception if the report would 
duplicate information contained in broker trade confirmations or 
account statements received by the rule 17j-1 organization. Although 
a number of access persons may, on average, have transactions to 
report during more than one quarter each year, many access persons 
also may not have to provide a quarterly transaction report because 
their 17j-1 organizations have received the information in a broker 
trade confirmation or account statement. Accordingly, the Commission 
staff has estimated that each access person, on average, would file 
one quarterly transaction report each year.
    \10\ Based on conversations with the industry, the Commission 
estimates that, on average, rule 17j-1 organizations will have two 
new access persons each year. However, proposed rule 17j-1 would not 
require an access person to submit an initial holdings report if the 
access person has previously provided information equivalent to that 
which is required in the initial holdings report. Proposed rule 17j-
1 also contains several other exceptions to filing initial holdings 
reports. The Commission therefore estimates, after taking into 
consideration the number of respondents excluded from this 
requirement of the rule, that, on average, there will be 4,895 
annual responses to this requirement.
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    The total annual burden of the rule's paperwork requirements 
therefore is estimated to be 74,570 hours. This estimate represents an 
increase of 25,470 hours from the prior estimate of 49,100 hours. The 
increase in burden hours is attributable to updated information about 
the number of affected portfolios and other entities, and to a more 
accurate calculation of the component parts of some information 
burdens.
    These burden hour estimates are based upon the Commission staff's 
experience and discussions with the fund industry. The estimates of 
average burden hours are made solely for the purposes of the Paperwork 
Reduction act. These estimates are not derived from a comprehensive or 
even a representative survey or study of the costs of Commission rules.
    Compliance with the collection of information requirements of the 
rule is mandatory and is necessary to comply with the requirements of 
the rule in general. 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 control number.
    Please direct general comments regarding the above information to 
the following persons: (i) Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Office of 
Management and Budget, New Executive Office Building, Washington, D.C. 
20503; and (ii) Michael E. Bartell, Associate Executive Director, 
Office of Information Technology, Securities and Exchange Commission, 
Mail Stop 0-4, 450 5th Street, N.W., Washington, D.C. 20549. Comments 
must be submitted to OMB within 30 days of this notice.

    Dated: September 14, 1998.
Jonathan G. Katz,
Secretary.
[FR Doc. 98-25227 Filed 9-21-98; 8:45 am]
BILLING CODE 8010-01-M