[Federal Register Volume 64, Number 87 (Thursday, May 6, 1999)]
[Proposed Rules]
[Pages 24489-24499]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-11357]



  Federal Register / Vol. 64, No. 87 / Thursday, May 6, 1999 / Proposed 
Rules  

[[Page 24489]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release Nos. IC-23815, IS-1194; File No. S7-15-99]
RIN 3235-AH55


Custody of Investment Company Assets Outside the United States

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing rule amendments and a new rule 
under the Investment Company Act to address the custody of investment 
company assets outside the United States. The amendments and new rule 
would establish new standards governing the maintenance of an 
investment company's assets with a foreign securities depository. The 
proposals are designed to provide a workable framework under which an 
investment company can protect its assets while maintaining them with a 
foreign securities depository.

DATES: Comments must be received on or before July 15, 1999.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 5th Street, 
NW, Washington, DC 20549-0609. Comments also may be submitted 
electronically to the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-15-99; this file number 
should be included on the subject line if E-mail is used. Comment 
letters will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 5th Street, NW, Washington, DC 
20549. Electronically submitted comment letters will be posted on the 
Commission's Internet web site (http://www.sec.gov).

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, Securities 
and Exchange Commission, 450 5th Street NW, Washington DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') today is proposing for public comment amendments to 
rule 17f-5 (17 CFR 270.17f-5),\1\ a new rule 17f-7, and conforming 
amendments to rule 7d-1 (17 CFR 270.7d-1) and rule 17f-4 (17 CFR 
270.17f-4) under the Investment Company Act of 1940 (15 U.S.C. 80a) 
(the ``Investment Company Act''). In a companion release, the 
Commission also is extending the compliance date for previous 
amendments to rule 17f-5 (except for the amended definition of an 
``eligible foreign custodian'') that were published on May 16, 1997 (62 
FR 26923). The compliance date is extended from May 1, 1999 until May 
1, 2000, or until a date to be announced by the Commission when it 
takes further action on the amendments proposed in this Release. See 
Investment Company Act Release No. 23814 (Apr. 29, 1999).
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    \1\ Unless otherwise noted, all references to ``rule 17f-5'' or 
any paragraph of the rule will be to 17 CFR 270.17f-5.
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I. Executive Summary

    Rule 17f-5 under the Investment Company Act governs the custody of 
the assets of registered management investment companies (``funds'') 
with custodians outside the United States. We amended the rule in 1997 
to modernize its conditions, but later suspended the compliance date 
for some of the amendments after learning that they presented problems 
for the use of foreign securities depositories. Depositories are 
systems for the central handling of securities in which transactions in 
securities are processed through adjustment of electronic account 
records rather than delivery of certificates.
    The Commission is proposing amendments to rule 17f-5 and a new rule 
17f-7, which together would permit funds to maintain their assets in 
foreign securities depositories based on conditions that reflect the 
operations and role of these depositories. The amendments would 
eliminate for foreign depository arrangements the requirements that 
certain findings be made by the fund board, its investment adviser, or 
global custodian, and that certain specified terms appear in depository 
rules for participants. Instead, the proposed rule would establish 
basic standards for foreign depositories eligible to be used by funds, 
and generally require that a fund's contract with its global custodian 
obligate the custodian to provide the fund or its adviser with an 
initial risk analysis of the depository, continuously monitor risks 
associated with use of the depository, and notify the fund or its 
adviser of material changes in these risks. The global custodian also 
generally would have to agree to exercise reasonable care with respect 
to these and other duties.
    Unlike rule 17f-5, proposed rule 17f-7 would not contain any 
provisions regarding the delegation of authority under the rule. 
Decisions to maintain assets with the depository should be made by the 
adviser, subject to the oversight of the fund board, based upon 
information provided by the global custodian. The adviser and board, in 
making these decisions, would be subject to the standards of care that 
are generally applicable to fund advisers and directors.

I. Introduction

    Rule 17f-5 was initially adopted in 1984,\2\ and extensively 
revised in 1997 (``1997 Amendments'') to reflect significant 
developments in foreign investment by U.S. funds and the Commission's 
greater experience with foreign custodial arrangements.\3\ The 1997 
Amendments expanded the types of foreign banks and securities 
depositories that may serve as custodians of fund assets by eliminating 
capital requirements and other restrictions that in some cases had 
precluded funds from using otherwise suitable custodians.\4\ Instead, 
the 1997 Amendments require that the selection of a foreign custodian 
be based on whether the fund's assets will be subject to reasonable 
care if maintained with that custodian, after consideration of all 
factors relevant to the safekeeping of fund assets.\5\
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    \2\ Section 17(f) of the Investment Company Act, which governs 
fund custody arrangements, does not address the use of a foreign 
custodian. The Commission adopted rule 17f-5 pursuant to its 
exemptive authority under section 6(c) of the Act. See Exemption for 
Custody of Investment Company Assets Outside the United States, 
Investment Company Act Release No. 14132 (Sept. 7, 1984) (49 FR 
36080 (Sept. 14, 1984)) (the ``1984 Release'').
    \3\ 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)) (the ``1997 Release'').
    \4\ 1997 Release, supra note 3, at text accompanying nn.71-73 
and nn.77-79.
    \5\ See rule 17f-5(c)(1). These provisions replaced earlier 
standards under which the fund board had determined whether 
maintaining assets with a custodian would be ``consistent with the 
best interests'' of the fund. See 1997 Release, supra note 3, at n.6 
and accompanying text.
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    The 1997 Amendments also eliminated from rule 17f-5 the 
consideration of ``prevailing country risks,'' i.e., risks associated 
with investing in a particular country rather than placing assets with 
a particular custodian, as well as the consideration of other 
investment risks.\6\ We made these changes after concluding that 
prevailing country risks were akin to investment risks, and that both 
should be considered by a fund's board or investment adviser when 
deciding whether the fund should invest in a

[[Page 24490]]

particular country. Finally, the amendments permitted directors to play 
a more traditional oversight role by allowing them to delegate their 
duties under the rule to a ``foreign custody manager,'' which could 
include the fund's investment adviser, officers, or a bank.\7\
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    \6\ 1997 Release, supra note 3, at text accompanying nn.13-16 
and at n.29.
    \7\ See rule 17f-5(b); 1997 Release, supra note 3, at text 
accompanying n.21.
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    The 1997 Amendments altered the conditions under which funds could 
maintain their assets with foreign securities depositories as well as 
other types of foreign custodians. Throughout the rulemaking, the 
Commission made it clear that we considered foreign depositories to be 
custodians for purposes of the rule.\8\ In response to comments on the 
proposals, the 1997 Amendments looked to depository rules for 
participants rather than custodial contracts to satisfy certain 
conditions of the rule.\9\ Having addressed what we believed to be 
commenters' concerns regarding depositories, we established a one-year 
transition period to allow funds and bank custodians to enter into new 
custodial agreements, which would include the use of foreign 
depositories.\10\
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    \8\ Custody of Investment Company Assets Outside the United 
States, Investment Company Act Release No. 21259 at n.71 and 
accompanying text (July 27, 1995) (60 FR 39592 (Aug. 2, 1995)); 1997 
Release, supra note 3, at n.29 and accompanying text.
    \9\ 1997 Release, supra note 3, at nn.65-66 and accompanying 
text. In response to comments, we also did not adopt proposed 
amendments that would have treated the selection of some types of 
depositories differently from the selection of other types of 
foreign custodians. Id. at n.29.
    \10\ Id. at text following n.86.
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    By early 1998, it became apparent that the rule would not operate 
as anticipated. Bank custodians refused to accept delegated 
responsibility to make findings under the rule regarding funds' use of 
most foreign securities depositories.\11\ Representatives of funds 
requested that we delay the compliance date for the 1997 Amendments to 
permit them to prepare a proposal to further amend the rule.\12\ They 
asserted that many funds had been unable to establish foreign custody 
arrangements under the amendments because of significant unforeseen 
problems with the evaluation and use of most depositories. In 
particular, they stated that global bank custodians were unable to 
commit to making ``subjective'' determinations of whether foreign 
securities depositories would exercise reasonable care with fund 
assets.\13\
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    \11\ See Letter to Douglas J. Scheidt, Chief Counsel, Division 
of Investment Management, from Dorothy M. Donohue, Associate 
Counsel, Investment Company Institute (Nov. 24, 1997) (placed in 
File No. S7-15-99).
    \12\ 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-
15-99) (the ``March 1998 Letter'').
    \13\ Id. In general, representatives of funds and bank 
custodians have asserted that depositories provide a necessary 
service for which no feasible alternative may exist, that depository 
standards vary from one country to another, that information about 
quasi-sovereign depositories may be more difficult to obtain than 
information about other foreign custodians, and that inflexible 
depository rules may not accommodate the contract terms or 
equivalent protections required by the 1997 Amendments. See id.; 
Letter to Barry P. Barbash, Director, Division of Investment 
Management, from Amy B.R. Lancellotta, Senior Counsel, Investment 
Company Institute and Daniel L. Goelzer, Baker & McKenzie (June 30, 
1998) (placed in File No. S7-15-99) (the ``June 1998 Letter'').
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    On May 21, 1998, we suspended the compliance date for most of the 
1997 Amendments to allow time for representatives of funds and 
custodians to submit suggested amendments to rule 17f-5.\14\ In June 
1998, representatives of funds and representatives of bank custodians 
submitted a joint proposal to further amend the rule (``ICI/Bank 
Proposal'').\15\ The ICI/Bank Proposal would deem fund assets 
maintained with a depository to be subject to reasonable care if eight 
objective criteria were met.\16\ Depository rules would not have to 
contain provisions that rule 17f-5 generally requires to be included in 
custody contracts, including provisions for indemnification or 
insurance.\17\
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    \14\ See Custody of Investment Company Assets Outside the United 
States, Investment Company Act Release No. 23201 (May 21, 1998) (63 
FR 29345 (May 29, 1998)). The compliance date for the amended 
definition of ``eligible foreign custodian'' remained June 16, 1998.
    \15\ See June 1998 Letter, supra note 13.
    \16\ The criteria would require that no foreign regulators have 
issued public statements indicating that the depository has not 
complied with financial strength or internal controls requirements 
(unless the problem has been cured); that the depository maintain 
certain safeguards such as segregating depository assets from 
participant assets, identifying assets in depository records, 
providing account reports to participants, and undergoing periodic 
review by auditors or regulators; and that the fund's custodian 
agree to comply with the depository's requirements. June 1998 
Letter, supra note 13.
    Representatives of funds and bank custodians submitted a revised 
proposal on February 26, 1999. See Letter to Paul F. Roye, Director, 
Division of Investment Management, from Amy B.R. Lancellotta, Senior 
Counsel, Investment Company Institute and Daniel L. Goelzer, Baker & 
McKenzie (Feb. 26, 1999) (placed in File No. S7-15-99) (the 
``Revised ICI/Bank Proposal''). Under the Revised ICI/Bank Proposal, 
the foreign custody manager would consider information known to it 
if the information established certain compliance problems, even if 
foreign regulators had not yet acted. In addition, the foreign 
custody manager would have to monitor depository arrangements for 
any material changes.
    \17\ See rule 17f-5(c)(2)(i) and (ii) (requiring specified 
terms, or other provisions that provide equivalent protection, to 
appear in custody contract).
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    The Commission has reviewed the ICI/Bank Proposal and related 
submissions, and is persuaded that the 1997 Amendments do not work well 
when applied to foreign securities depositories. Some contract 
provisions generally required by the amended rule to protect fund 
assets may not be feasible when applied to depository rules.\18\ We are 
not persuaded, however, that the ICI/Bank Proposal provides a solution. 
We are concerned that a rule that relied only on limited objective 
criteria may not adequately identify the potential risks of depository 
arrangements in a changing global marketplace. We are particularly 
reluctant to implement a proposal that might unduly narrow the 
evaluation of potential risks, and reduce incentives to provide 
relevant information to funds.\19\
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    \18\ See June 1998 Letter, supra note 13 (accompanying appendix 
suggests that contractual provisions for indemnification or 
insurance, no liens, free transferability of assets, and auditor 
access might be unworkable for depository custody). It is unclear 
whether other provisions might provide equivalent protection. See 
rule 17f-5(c)(2)(ii).
    \19\ We are also concerned that the terms of such a rule could 
be used to delimit responsibility under custodial contracts.
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    The Commission proposes to take a different approach in a proposed 
new rule with respect to foreign securities depositories. In doing so, 
we recognize that the establishment of depositories in countries around 
the world is generally a favorable development for funds and their 
shareholders. The use of depositories simplifies the clearance and 
settlement of securities transactions, and may eliminate some risks of 
loss, theft, and destruction of securities held in certificate 
form.\20\ Depositories in many countries, however, are relatively new 
institutions, and their financial strength and operational capabilities 
vary. Only a limited group of intermediaries, including global 
custodians and local banks that participate directly in depositories, 
may have any contractual relationship with a depository or the ties 
needed to monitor risks associated with the use of the depository.
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    \20\ See Uniform Commercial Code, Revised Article 8, Prefatory 
Note at I.C.; Randall D. Guynn, Modernizing Securities Ownership, 
Transfer and Pledging Laws 21 (Capital Markets Forum, International 
Bar Association 1996).
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    Our new approach can best be explained by reference to the 
regulatory discussion that preceded the 1997 Amendments. Those 
amendments distinguished between the ``custody risks'' of maintaining 
assets overseas, which must be addressed by a fund's foreign custody 
manager, and ``prevailing country risks,'' which no longer had to be 
considered under the rule because we believed they were more 
appropriately considered by a

[[Page 24491]]

fund's adviser or board of directors as part of the decision to invest 
in the country.\21\ A securities depository keeps asset ownership 
records that might be tampered with or destroyed, and the use of a 
depository thus exposes a fund to custody risks.\22\ Yet a securities 
depository also may be an instrumentality of a foreign government or 
market and may operate under an exclusive license, making its use 
practically (and perhaps legally) necessary for a fund that wishes to 
invest in a particular foreign market. As a result, a custody decision 
not to use a foreign depository because of custody risks may 
effectively compel an investment decision not to invest in the country.
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    \21\ 1997 Release, supra note 3, at text accompanying nn.13-16 
and at n.29.
    \22\ Thus, securities depositories were included in the 
``selection process'' of rule 17-5, as amended in 1997. See 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) (placed in File No. S7-15-99).
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    While global custodians ``are in the best position to obtain 
information concerning depositories and to evaluate whether that 
information suggests that a change in custody conditions has occurred 
at the depository,''\23\ the decision to maintain assets with the 
depository remains closely linked to the decision to invest or continue 
to invest in the country. Investment decisions are more appropriately 
the province of the fund's investment adviser or board of directors. 
Nevertheless, the adviser and the board are in a position to make these 
decisions only if fully informed of the custody risks by the fund's 
global custodian. Based on these conclusions, we are amending rule 17f-
5 and proposing a new rule designed to create a partnership between a 
fund adviser and a global custodian in which each performs 
responsibilities appropriate to its expertise for the purpose of 
protecting fund assets placed with the foreign depository.
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    \23\ See Revised ICI/Bank Proposal, supra note 16, Attachment 3 
at 3.
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II. Discussion

A. Foreign Bank Custodians: Rule 17f-5

    Under our proposal, a fund's use of a foreign bank custodian would 
continue to be governed by rule 17f-5, as amended in 1997.
    We propose to further amend this rule to exclude foreign securities 
depositories from its coverage,\24\ and to make other minor clarifying 
changes.\25\ Compliance with the 1997 Amendments to rule 17f-5 (except 
for the amended definition of Eligible Foreign Custodian) will continue 
to be suspended until we complete consideration of new rule 17f-7.\26\ 
We request comment on whether any further amendments to rule 17f-5 are 
necessary.
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    \24\ A proposed note to rule 17f-5 would clarify that custody 
arrangements involving securities depositories would be governed by 
rule 17f-7 and by relevant provisions of rule 17f-5, which would 
remain applicable to foreign bank subcustodians participating in 
these arrangements. Rule 17f-7 would include a similar note.
    \25\ The amendments would use the term ``foreign assets'' in 
place of ``fund assets'' for convenience, and to clarify that assets 
maintained with a foreign custodian may not be the exclusive 
property of the fund. See Uniform Commercial Code, Revised Article 
8, section 8-503(b) and comment 1 (entitlement holder's property 
interest in securities held by its securities intermediary is a pro 
rata interest shared with other customers of the intermediary).
    The amendments also would refer to ``maintaining assets with'' 
an eligible foreign custodian rather than ``selecting'' a custodian, 
and would use the term ``eligible foreign custodian'' throughout the 
rule. In addition, the amendments would note that the fund's foreign 
custody manager, as well as the fund itself, may place and maintain 
fund assets with an eligible foreign custodian. See proposed rule 
17f-5.
    \26\ See ``Supplementary Information'' section supra; Custody of 
Investment Company Assets Outside the United States; Extension of 
Compliance Date, Investment Company Act Release No. 23814 (Apr. 29, 
1999); Custody of Investment Company Assets Outside the United 
States, Investment Company Act Release No. 23670 (Jan. 28, 1999) (64 
FR 5156 (Feb. 3, 1999)); see also supra note 14.
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    When a depository custody arrangement involves a foreign bank 
subcustodian that participates in the depository, rule 17f-5 would 
continue to apply to the global custodian's use of the foreign bank 
subcustodian, while proposed rule 17f-7 would apply to the foreign bank 
subcustodian's use of the depository itself.\27\ Is the interaction 
between rule 17f-5 and proposed rule 17f-7 in regulating these 
respective custody arrangements sufficiently clear? If not, what 
further clarification is needed?
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    \27\ See supra note 24.
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B. Foreign Securities Depositories: Proposed Rule 17f-7

    Proposed rule 17f-7 would govern custody arrangements with foreign 
securities depositories. Funds usually deal with these depositories 
through a ``Primary Custodian'' (also often referred to as a ``global 
custodian''), which the rule would define as a U.S. Bank or Qualified 
Foreign Bank (under rule 17f-5) that contracts directly with the fund 
to provide custodial services for foreign assets.\28\ As discussed 
below, the rule would assign particular duties to the Primary 
Custodian.
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    \28\ Proposed rule 17f-7(b)(2).
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1. Eligible Securities Depository
    Under the proposed rule, funds or their custodians could maintain 
their assets with a securities depository only if it is an ``Eligible 
Securities Depository.'' An Eligible Securities Depository must 
function as a system for the central handling of securities, and must 
be regulated by a foreign financial regulatory authority.\29\ The 
Commission also is proposing four additional minimum requirements, 
which were suggested to us by representatives of funds and bank 
custodians. To be an Eligible Securities Depository under rule 17f-7, a 
depository must, among other requirements:
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    \29\ Proposed rule 17f-7(b)(1)(i) and (ii). The definition of an 
Eligible Securities Depository would combine elements of two related 
definitions in current rule 17f-5. See current rule 17f-5(a)(1)(ii) 
and (iii) (definitions of certain Eligible Foreign Custodians that 
are securities depositories or clearing agencies) and (a)(6) 
(definition of Securities Depository).
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     Hold assets on behalf of the fund under conditions no less 
favorable than those that apply to other participants;
     Maintain records identifying the assets of each 
participant and keep its own assets separated from those of the 
participants;
     Provide periodic reports to participants; and
     Be reviewed periodically by regulatory authorities or 
independent accountants.\30\
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    \30\ Proposed rule 17f-7(b)(1)(iii) to (vi). The proposed 
requirements address five of the requirements suggested in the ICI/
Bank Proposal. See supra note 16.
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    Comment is requested on the proposed criteria. Inclusion of these 
minimum requirements may have the effect of precluding funds from 
investing in some developing markets in which depositories might fail 
to meet the criteria. The existence of the rule provisions also may 
encourage depositories in these markets to meet these requirements. 
Comment is requested as to their effect on investment in developing 
markets. Comment also is requested on whether these minimum standards, 
together with the other protections described below, are sufficient to 
protect fund assets. With respect to the periodic review requirement, 
should the rule require review by regulators or auditors to focus on 
the depository's custodial activities, or to include verifications of 
assets held? The ICI/Bank Proposal included three other minimum 
requirements that are not included in proposed rule 17f-7.\31\ Should 
the rule include them? Are

[[Page 24492]]

there other minimum requirements that funds or their custodians 
typically insist on before placing assets with a depository? Instead of 
the proposed approach, should the definition state generally that a 
depository should meet minimum reasonable commercial standards, and 
then specify some but not all applicable requirements?
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    \31\ The ICI/Bank Proposal also required that (i) no foreign 
regulators have issued public statements indicating that the 
depository has not complied with financial strength requirements or 
(ii) internal controls requirements, unless the problem has been 
cured, and (iii) that the custodian for the fund has agreed to 
comply with the depository's requirements.
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    In some foreign securities markets, transfer agents or similar 
entities may perform custodial functions analogous to those of a 
depository. For example, an Australian central electronic subregistry 
may effectively function as a central transfer agent that performs 
custody functions in a manner similar to a depository.\32\ In Russia 
and other countries such as the Ukraine, registrars for each issuer may 
perform analogous custody functions.\33\ The proposed amendments would 
define an Eligible Securities Depository to include a transfer agent 
that, among other things, transfers and holds uncertificated securities 
on the books of an issuer for market participants.\34\ The transfer 
agent would have to be regulated by a foreign financial regulatory 
authority, and meet other minimum standards for securities depositories 
as discussed above.
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    \32\ Thomas Murray Ltd, Central Securities Depositories Guide 
1997 at 49. The Australian ``CHESS'' system supplements issuers' own 
share registers. It records market transactions as transfers of 
legal ownership on the issuer's records. Although local law may not 
treat CHESS as a custodian, CHESS may effectively perform custodial 
functions by holding definitive evidence of the ownership of 
securities that do not exist in certificate form Cf. ASX Settlement 
and Transfer Corporation Pty Ltd, SEC No-Action Letter (Apr. 19, 
1994) (suggesting that CHESS system may not perform custodial 
functions); rule 17f-4(a) under the Investment Company Act (17 CFR 
270.17f-4(a)) (defining a securities depository as a system for the 
central handling of securities where all securities of any 
particular class or series of any issuer deposited within the system 
are treated as fungible and may be transferred or pledged by 
bookkeeping entry without physical delivery of the securities).
    \33\ See Thomas Murray Ltd. Worldwide Securities Market Report 
(19)97, at 247 (1996). In Russia, equity securities are generally 
uncertificated, and entries on the registrar's books are generally 
recognized as the only binding evidence of the ownership of 
securities. The registrar may effectively act as a custodian by 
holding definitive evidence of the ownership of securities that are 
uncertificated. See Templeton Russia Fund, Inc., SEC No-Action 
Letter (Apr. 18, 1995) (Suggesting that registrars may be limited 
participants in the custodial process).
    \34\ Proposed rule 17f-7(b)(1); cf. American Pension Investors 
Trust, SEC No-Action Letter (Feb. 1, 1991) (custodian for fund of 
funds could maintain fund's investment in uncertificated shares of 
underlying funds with the domestic transfer agents of those funds 
acting as deemed depositories); FundVest, SEC No-Action Letter (Nov. 
21, 1984) (similar position).
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    The Commission requests comment on the proposed expansion of the 
definition of an Eligible Securities Depository. Is it appropriate to 
treat transfer agents as Eligible Securities Depositories in these 
circumstances? Should other requirements be added if a transfer agent 
is to be treated as a depository? To avoid confusion about whether a 
transfer agent performs all of the functions of a depository, should 
the rule define a broader type of entity, such as an ``eligible 
securities holding facility,'' and permit funds to maintain foreign 
assets with either a depository or a transfer agent that qualifies as 
this type of facility? In the alternative, should the rule omit any 
provision for the use of foreign transfer agents, and require funds and 
custodians to seek approval for their use on a case-by-case basis?
2. Risk-Limiting Conditions
    Proposed rule 17f-7 would provide two alternative approaches to 
managing the custody risks that funds may face when they maintain 
assets with an Eligible Securities Depository.
a. Indemnification or Insurance
    Under the first alternative, a fund could obtain indemnification or 
insurance that adequately protects it against all custody risks of 
using the depository.\35\ A fund would be ``adequately protected'' 
under this provision by an agreement with or policy issued by a 
reliable party to compensate the fund for any custody losses arising 
from use of the depository.\36\ A fund could rely on this alternative 
with respect to all of its assets maintained in foreign securities 
depositories or with respect to assets held by a particular 
depository.\37\
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    \35\ Proposed rule 17f-7(a)(1). Potential custody risks of using 
a depository might include, for example, faults in recordkeeping 
systems or securities handling procedures or systems for 
distributing losses among participants. See infra text accompanying 
notes 44 to 48 (list of factors that may be relevant to custody 
risks).
    \36\ Current rule 17f-5 requires a contract with a foreign 
custodian to provide for indemnification or insurance (or equivalent 
protections) that adequately protect the fund against the loss of 
assets held under the contract. Rule 17f-5(c)(2)(i)(A) and (ii): see 
also 1997 Release, supra note 3, at text accompanying n.27 (foreign 
custody manager itself may have obligation to indemnify the fund in 
some circumstances). The rule provision has been interpreted to bind 
the primary custodian globally unless each subcustodian satisfies it 
individually, and to extend to all foreseeable risks of loss. 
Investment Company Institute, SEC No-Action Letter, at nn. 1-2 and 
accompanying text (Nov. 4, 1987). In contrast, the first 
alternative, discussed in the text above, would require coverage of 
all custody losses.
    \37\ Protection available from the depository itself, such as a 
depository guarantee fund, normally would not protect a beneficial 
owner such as the fund, and may provide only for sharing or partial 
reimbursement of losses. A government guarantee of a depository may 
suffice if the guarantee is complete and extends to beneficial 
owners as well as depository participants.
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    This alternative would recognize that a fund that is indemnified or 
insured against all custodial losses of a depository arrangement is not 
exposed to the risks of using the depository (which are transferred to 
the indemnifying or insuring party), and therefore the risk analysis, 
monitoring, and notification requirements discussed below may not be 
necessary. The Commission requests comment on this approach. Should the 
rule define the types of custody risks that should be covered? Should 
the rule specify how the fund would determine that indemnification or 
insurance is adequate to protect the fund against all losses 
attributable to custody risks? Are there any reasons why 
indemnification or insurance could not cover all custody risks? Should 
the rule permit a determination that more limited coverage may be 
adequate in some circumstances?
b. Risk Analysis, Monitoring, and Notification
    Under the second alternative, the fund's contract with its Primary 
Custodian must require the custodian to provide the fund or its 
investment adviser an initial risk analysis of the custody risks of 
using a depository before the fund places its assets with the 
depository.\38\ The contract also must require the Primary Custodian to 
continuously monitor these custody risks and promptly notify the fund 
or its investment adviser of any material change.\39\ These provisions 
are designed to allocate responsibilities for overseeing the safety of 
fund assets to the parties best suited to the tasks involved.
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    \38\ Proposed rule 17f-7(a)(2)(i)(A). Cf. United Kingdom 
Securities and Futures Authority, Board Notice 433, New Safekeeping 
Rules, Custody Rule 4-107(1), Assessment of Custodian (July 21, 
1997) (``U.K. Custody Rule 4-107(1)'') (before a custodial firm or 
an arranger of custodial services holds a safe custody investment 
with an eligible custodian, it must undertake an appropriate risk 
assessment of the custodian).
    \39\ Proposed rule 17f-7(a)(2)(i)(B). Cf. U.K. Custody Rule 4-
107(1), supra note 38 (after firm makes an appropriate risk 
assessment of the eligible custodian, it must undertake a continuing 
risk assessment).
---------------------------------------------------------------------------

    In earlier commentary on rule 17f-5, representatives of funds 
argued that because of global custodians' expertise and their 
contractual relationships with depositories or their participants, 
custodians were in a better position to make findings regarding the use 
of depositories.\40\ Global custodians disagreed, arguing that the 
decision to use a depository, because it is often a prerequisite for 
participation in a particular foreign market, is an

[[Page 24493]]

investment decision more properly made by the fund or its investment 
adviser.\41\ Each of these views has merit and contributes to our 
proposed rule.
---------------------------------------------------------------------------

    \40\ E.g., Letter to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, from Craig S. Tyle, Vice President & Senior 
Counsel, Investment Company Institute at 1, 3-4 (July 26, 1996) 
(place in File No. S7-15-99).
    \41\ E.g., Letter to Jonathan G. Katz, Secretary, Securities and 
Exchange Commission, from Daniel L. Goelzer, Baker & McKenzie at 3-5 
(June 7, 1996) (place in File No. S7-15-99).
---------------------------------------------------------------------------

    Proposed rule 17f-7 would assign to the fund's Primary Custodian 
the responsibility to analyze and monitor the risks of using the 
depository, under an approach that reflects provisions that many 
custodial agreements may already contain.\42\ The Primary Custodian 
also would be required to agree to exercise reasonable care and 
diligence in performing these and other responsibilities, as discussed 
below, but would not be required to make specific findings under the 
rule. Its obligations under the required contractual provisions would 
be generally fulfilled by providing the adviser with an initial 
analysis and an ongoing assessment of the custody risks associated with 
the use of the depository. A local subcustodian or other agent could 
prepare the risk analysis on behalf of the Primary Custodian.\43\
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    \42\ See e.g., Amendment No. 2 to Custody Agreements between 
Templeton Funds and The Chase Manhattan Bank (July 23, 1998), filed 
with Templeton Funds Inc. Form N-1A, Post-Effective Amendment No. 31 
(Oct. 29, 1998) (custodian would monitor compulsory depositories and 
advise fund of any material negative change in the performance of, 
or arrangements with, any compulsory depository that would adversely 
affect the custody of assets); see also Revised ICI/Bank Proposal, 
supra note 16 (suggesting that foreign custody manager monitor 
whether any material change has occurred in fund custody 
arrangements with depository).
    \43\ Proposed rule 17f-7(a)(2)(i).
---------------------------------------------------------------------------

    The risk analysis requirements of the proposed rule are written 
broadly to provide custodians with flexibility to tailor the risk 
analysis in proportion to the risks involved in the use of each 
particular depository. We would expect, for example, the Primary 
Custodian to provide a more detailed analysis of a less established 
depository than of a depository with an extensive operating history. To 
facilitate the flexible application of the rule's requirements to 
different depository arrangements, the proposed rule does not specify 
particular types of risk that the custodian should analyze, monitor, 
and report.
    As a general matter, we would expect that a custodian's analysis 
could include a discussion of the depository's expertise and market 
reputation, quality of services, financial strength,\44\ insurance 
arrangements, extent and quality of regulation or other independent 
examination,\45\ standing in published ratings,\46\ internal controls 
and other procedures for safeguarding investments,\47\ and related 
legal protections. Comment is requested on whether the rule should 
specifically require the analysis to cover these or other areas.\48\
---------------------------------------------------------------------------

    \44\ Representatives of funds and bank custodians suggest that 
capital may not be a reliable gauge of financial strength because 
depository capital levels vary widely. See June 1998 Letter, supra 
note 13 (accompanying appendix). Other measures of depository 
financial strength that may be more significant include the level of 
depository settlement guarantee funds, collateral requirements, 
lines of credit, or insurance, as compared with participants' daily 
settlement obligations. See Gary Stephenson, Emerging Market 
Depositories: What to Look For, at 6 (speech delivered in Bermuda on 
May 4, 1998) (place in File Not. S7-15-99).
    \45\ This factor relates to requirements in the definition of an 
Eligible Securities Depository.
    \46\ These ratings may include evaluations or survey information 
published by sources such as Global Custodian or Thomas Murray Ltd, 
or more formal ratings of depositories that may be available.
    \47\ This factor related to requirements in the definition of an 
Eligible Securities Depository.
    \48\ See generally U.K. Custody Rule 4-107(1), supra note 38 
(cites seven analogous factors to be considered in undertaking 
continuing risk assessments).
---------------------------------------------------------------------------

    Proposed rule 17f-7 would not assign a particular role to the 
investment adviser or fund board, although it assumes that the 
investment adviser would generally determine whether to place fund 
assets with a depository under the general oversight of the fund board. 
The rule is designed to assure that sufficient material information 
about depositories is provided to the adviser in a timely manner. 
Decisions regarding whether to place fund assets with a depository 
would be made by the adviser or board based on standards of care that 
are generally applicable to fund advisers and directors.\49\ These 
standards generally require the exercise of care, but do not strictly 
limit the risks that may be acceptable in depository arrangements in 
appropriate circumstances.\50\
---------------------------------------------------------------------------

    \49\ See, e.g., Transamerica Mortgage Advisors, Inc. v. Lewis, 
444 U.S. 11 (1979) (section 206 of the Investment Advisers Act (15 
U.S.C. 80b-6) imposes fiduciary duties on investment advisers); 
Burks v. Lasker, 441 U.S. 471 (1979) (Investment Company Act 
entrusts independent directors with responsibility to furnish an 
independent check on management); American Law Institute, Principles 
of Corporate Governance: Analysis and Recommendations Sec. 4.01 
(1994) (discussing duties of directors and officers under state law, 
including duties of care and inquiry).
    \50\ See id. The primary custodian's analysis and continuous 
monitoring of risks may help to provide an ``early warning system'' 
concerning a depository custody arrangement that presents more risks 
than other arrangements.
---------------------------------------------------------------------------

    Fund boards do not typically have the expertise to make day-to-day 
decisions regarding foreign depository arrangements.\51\ Therefore, we 
assume (but the rule does not require) that a fund board would delegate 
this responsibility to the fund's adviser, subject to the board's 
general oversight. Fund boards play an important role, however, in 
deciding whether to invest in or exit the markets of a particular 
country.\52\ When custodial risks are a material factor in a decision 
to enter or exit a market, we would expect the adviser to inform the 
board of the risks based on analysis provided by the Primary 
Custodian.\53\ The rule does not require, nor would we expect, fund 
boards to continue to be provided with the lengthy and detailed 
briefing books they often receive today.
---------------------------------------------------------------------------

    \51\ See SEC, Division of Investment Management, Protecting 
Investors: A Half Century of Investment Company Regulation 270 n. 78 
(1992).
    \52\ See 1997 Release, supra note 3, at n. 20 and accompanying 
text.
    \53\ The Commission would expect that the primary custodian also 
would continue to provide other information relating to country risk 
and other investment risks. See id. at nn. 18-20 and accompanying 
text.
---------------------------------------------------------------------------

    The Commission requests comment on the proposed provisions relating 
to risk analysis, monitoring, and notification requirements. Should the 
rule permit a fund to use a primary custodian that is also a securities 
depository \54\ If it does, should the rule require the primary 
custodian/depository to prepare the initial analysis of the custody 
risks of its own custody arrangements (including arrangements with its 
subcustodians) and to monitor the risks \55\ Should the rule require 
another person to prepare the analysis and monitor the risks? For 
example, should the rule require the fund's investment adviser to 
retain an independent custody consultant to analyze and monitor the 
risks of any depository arrangement in which the fund's primary 
custodian is itself the depository?
---------------------------------------------------------------------------

    \54\ Some foreign depositories may permit funds to use their 
services directly as clients or participants. See Simon Thomas and 
Simon Murray, Global Securities Services: The Institutional 
Investors' Guide 55, 90 (1995) (Euroclear has altered its rules to 
permit fund mangers to participate); see generally rule 17f-4(c) 
under the Investment Company Act (17 CFR 270.17f-4(c)) (permitting a 
fund to participate directly in a domestic depository, subject to 
certain conditions); Midwest Securities Trust Company, SEC No-Action 
Letter (Mar. 14, 1990) (fund that participates directly in a 
depository may maintain a cash account to facilitate settlement of 
transactions or to secure obligations to a reserve fund to cover 
participant defaults).
    \55\ A foreign depository may itself maintain securities with 
other depositories. See Richard Dale, Clearing and Settlement Risks 
in Global Securities Markets: The Case of Euroclear, Journal of 
Business Law 434, 445 (Sept. 1998).
---------------------------------------------------------------------------

c. Exercise of Care
    Proposed rule 17f-7 also would require under the second alternative 
that the fund's contract with its Primary Custodian provide that the 
Primary Custodian, and each bank subcustodian

[[Page 24494]]

in its network involved in a depository arrangement, will agree to 
exercise reasonable care, prudence, and diligence in performing its 
duties under the rule and in all other conduct relating to the 
custodial arrangements, or to adhere to a higher standard of care.\56\ 
The proposed standard of care is the same required of foreign custody 
managers under rule 17f-5,\57\ and similar to standards for U.S. 
custodians under commercial law.\58\
---------------------------------------------------------------------------

    \56\ Proposed rule 17f-7(a)(2)(ii).
    \57\ Rule 17f-5(b)(3); see proposed rule 17f-5(b)(3) (same 
requirement); Revised ICI/Bank Proposal, supra note 16, Attachment 3 
at 5 (``(c)onsistent with that (reasonable care) standard, an FCM 
(foreign custody manager) could not, in our view, place assets with 
a depository that it knew to be unsafe'').
    \58\ See Uniform Commercial Code, Revised Article 8, sections 8-
504 and 8-509 (securities intermediary must perform its duties under 
Code, including duties to follow procedures in maintaining financial 
assets and to exercise care in selecting subcustodians, with ``due 
care in accordance with reasonable commercial standards,'' unless 
modified by regulatory requirements or contractual provisions that 
meet ``good faith'' standard).
---------------------------------------------------------------------------

C. Request for Comment on Other Issues

    The Commission requests comment on possible additional changes to 
rule 17f-5 and proposed rule 17f-7. For example, should the Commission 
consider adapting the proposed requirements for the use of a depository 
to apply to the use of a bank subcustodian as well, and eliminate the 
separate requirements for the use of a bank subcustodian? Because the 
fund's Primary Custodian would likely act as its foreign custody 
manager in most cases,\59\ should the Commission simply eliminate 
provisions that require the appointment of a foreign custody manager, 
and allocate related responsibilities directly to the Primary 
Custodian? Alternatively, should the Commission not adopt the proposed 
amendments to rule 17f-5 and proposed rule 17f-7, and instead revise 
the compliance date for the 1997 Amendments to allow funds to contract 
with global custodians that accept the responsibilities described in 
current rule 17f-5? Is there any need to address matters outside the 
scope of the proposed amendments, such as the handling of cash, or the 
use of affiliated custodians or subcustodians?
---------------------------------------------------------------------------

    \59\ See Revised ICI/Bank Proposal, supra note 16, Attachment 3 
at 3 (``global custodian banks * * * are most likely to be asked to 
assume delegated Foreign Custody Manager responsibilities in most 
cases'').
---------------------------------------------------------------------------

    The Commission requests comment on the new rule and rule amendments 
proposed in this Release, suggestions for additional provisions or 
changes to existing rules or forms, and comments on other matters that 
might have an effect on the proposals contained in this Release. The 
Commission also requests comment whether the proposals, if adopted, 
would promote efficiency, competition, and capital formation. Comments 
will be considered by the Commission as it satisfies its 
responsibilities under section 2(c) of the Investment Company Act.\60\ 
For purposes of the Small Business Regulatory Enforcement Fairness Act 
of 1996,\61\ the Commission also requests information regarding the 
potential impact of the proposals on the U.S. economy on an annual 
basis. Commenters are requested to provide empirical data to support 
their views.
---------------------------------------------------------------------------

    \60\ Section 2(c) of the Investment Company Act (15 U.S.C. 80a-
2(c)) requires the Commission, when it engages in rulemaking and is 
required to consider whether an action is consistent with the public 
interest, to consider, in addition to the protection of investors, 
whether the action will promote efficiency, competition, and capital 
formation.
    \61\ Pub. L. No. 104-121, Title II, Stat. 857 (1996).
---------------------------------------------------------------------------

III. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits that result 
from its rules. The proposed amendments to rule 17f-5 and proposed new 
rule 17f-7 respond to concerns expressed by global custodians and fund 
managers that rule 17f-5, as amended in 1997, is not workable. The 
proposals also address fund managers' concerns that, as a result of 
global custodians' unwillingness to assume delegated responsibilities 
under rule 17f-5, obligations to evaluate depositories' custodial 
capabilities may fall to fund boards, which lack the relevant knowledge 
and expertise to make these evaluations.
    Proposed rule 17f-7 should benefit funds and their investors by 
establishing a workable framework designed to require global 
custodians, which are in the best position to monitor and evaluate 
risks of foreign depositories, to assume these responsibilities. The 
rule also should benefit funds and their shareholders by freeing fund 
boards of the responsibility to make findings concerning foreign 
depositories that often remained with them after the 1997 Amendments 
because of global custodians' refusals to accept delegated 
responsibility. As a result, fund boards should have more time to 
address other issues that are important to investors.
    The proposed rule and rule amendments may impose costs. Although 
the proposed rule sets minimum requirements for depositories, its lack 
of a maximum standard for custody risks could cause losses to investors 
if a depository fails, despite diligent performance by global 
custodians and advisers of their responsibilities. Because the rule 
does not limit maximum custody risks in depository arrangements, 
additional prospectus disclosure may be required where it may be 
necessary for investors to evaluate the risks and rewards of investing 
in the fund.\62\ The Commission requests comment on the costs and 
benefits of current rule 17f-5, including its requirement that a 
foreign custody manager determine that assets maintained with a 
depository will be subject to reasonable care, as compared with the 
costs and benefits of proposed rule 17f-7's provisions that do not set 
limits on potential depository custody risks.
---------------------------------------------------------------------------

    \62\ See Form N-1A, Item 4(c) (requirement to disclose principal 
risks of investing in fund).
---------------------------------------------------------------------------

    Global custodians should not incur materially greater costs under 
proposed rule 17f-7, which generally would require them to perform 
duties they typically perform already under custodial contracts. The 
rule may have the effect of requiring global custodians to exercise a 
greater degree of vigilance in monitoring depositories (or to refrain 
in the future from reducing their diligence) and in this respect may 
impose costs. Such costs are necessary, however, for the protection of 
funds consistent with the purposes of sections 6(c) and 17(f) of the 
Investment Company Act. We expect that global custodians will pass on 
any additional costs to mutual funds, but that the costs are unlikely 
to materially affect overall fund expense ratios.
    Fund managers may bear the cost of evaluating the information 
provided by global custodians and making decisions regarding the 
continued use of a depository (and in this respect, continued 
investment in the country). We believe that in the context of foreign 
depository arrangements, this allocation of costs is appropriate in 
light of (i) the unwillingness of global custodians to assume 
responsibilities that may overlap with investment decisions and (ii) 
the extent to which the decision to use a foreign depository may affect 
an investment strategy that contemplates investment in a particular 
foreign market. Advisers to funds could pass on this responsibility to 
directors, but this result would not be mandated by the proposals, and 
fund directors would be free to reject this responsibility.
    The Commission requests comment on the potential costs and benefits 
associated with the proposed amendments and proposed rule, and on any 
suggested alternatives to the proposals.\63\ Specific comment is

[[Page 24495]]

requested on the potential costs or benefits of these proposals for 
funds and their boards of directors, investment advisers, primary 
custodians, foreign subcustodians, and depositories. Data is requested 
concerning these costs and benefits and how they could be quantified 
and expressed in dollar terms.
---------------------------------------------------------------------------

    \63\ As noted in Section IV, the Commission's staff estimates a 
slight reduction in the paperwork burden. The Commission 
particularly invites comment on the reasonableness to the staff's 
burden estimates.
---------------------------------------------------------------------------

IV. Paperwork Reduction Act

    Portions of the proposed amendments to rule 17f-5 and proposed new 
rule 17f-7 contain ``collection of information'' requirements within 
the meaning of the Paperwork Reduction Act of 1995 (44 U.S.C. 3501-
3520), and the Commission is submitting these proposals to the Office 
of Management and Budget (``OMB'') for review in accordance with 44 
U.S.C. 3507(d). The titles of the collections of information are 
``Custody of Investment Company Assets Outside the United States'' and 
``Custody of Investment Company Assets with a Foreign Securities 
Depository.'' An agency may not sponsor, conduct, or require responses 
to an information collection unless it displays a currently valid OMB 
control number.

A. Proposed Amendments to Rule 
17f-5

    The proposed amendments to rule 17f-5 would not substantively 
change the rule's collection of information requirements, which would 
continue to apply when a fund (i.e., a registered management investment 
company) maintains its assets with a foreign bank custodian. The 
amendments would remove custody arrangements with foreign securities 
depositories from the rule, however, so that the rule's requirements 
would no longer apply to these custody arrangements. In general, 
therefore, the proposed amendments would reduce the information 
collection burdens of rule 17f-5.
    The requirements of amended rule 17f-5 that may call for the 
collection of information would be substantially the same as under the 
current rule. The fund's board of directors must find that it is 
reasonable to rely on each delegate it selects to act as the fund's 
foreign custody manager. The delegate must agree to provide written 
reports that notify the board when the fund's assets are placed with a 
foreign custodian and when any material change occurs in the fund's 
custody arrangements. The delegate must agree to exercise reasonable 
care, prudence, and diligence, or to adhere to a higher standard of 
care. When the foreign custody manager selects an eligible foreign 
custodian, it must determine that the fund's assets will be subject to 
reasonable care if maintained with that custodian, and that the written 
contract that governs each custody arrangement will provide reasonable 
care for fund assets. The contract must contain certain specified 
provisions or others that provide at least equivalent care. The foreign 
custody manager must establish a system to monitor the contract and the 
appropriateness of continuing to maintain assets with the eligible 
foreign custodian.
    The Commission's staff estimates that during the first year after 
the proposed amendments go into effect, approximately 3,690 fund 
portfolios \64\ would be required to make an average of one response 
per portfolio under amended rule 17f-5, requiring approximately 2 hours 
of director time per response, to make the necessary findings 
concerning foreign custody managers.\65\ The total annual burden 
associated with these requirements of the rule during the first year 
would be approximately 7,380 hours (3,690 portfolios  x 2 hours per 
portfolio). The staff further estimates that during the first year 
after the proposed amendments go into effect, approximately 15 global 
custodians \66\ would be required to make an average of 80 responses 
per custodian concerning the use of foreign custodians other than 
depositories, requiring approximately 10 hours per response, plus one 
additional response per custodian that requires approximately 96 hours 
per response.\67\ The total annual burden associated with these 
requirements of the rule during the first year would be approximately 
13,440 hours (15 global custodians  x 896 hours per global custodian). 
Therefore, the total burden of all collection of information 
requirements of rule 17f-5 during the first year after its amendment is 
estimated to be approximately 20,820 hours (7,380 + 13,440).\68\
---------------------------------------------------------------------------

    \64\ This information is based on data reported by funds on Form 
N-SAR (17 CFR 274.101).
    \65\ The staff estimates that these 3,690 portfolios are divided 
among approximately 1,327 registered funds within approximately 650 
fund complexes that may share the same investment adviser, board of 
directors, U.S. bank custodian, or all of these entities. Each board 
of directors and its delegates for a fund complex could therefore 
meet rule 17f-5's requirements by simultaneously approving similar 
arrangements for some 6 portfolios in the same complex. The 
estimated hour amounts are based on discussions with representatives 
of funds about the burden of analogous requirements in another 
custody rule.
    \66\ This estimate is based on staff review of custody contracts 
and other research.
    \67\ These estimates assume that each of 15 custodians services 
an average of 250 client portfolios within 40 fund complexes, that a 
single response by each custodian can simultaneously address 
approximately 6 client portfolios in a fund complex, and that each 
custodian makes approximately 80 responses annually requiring 10 
hours per response to establish bank custody arrangements for 
approximately 40 fund complexes and report to their fund boards, and 
one response annually requiring 96 hours per response to establish a 
system to monitor custody arrangements for these clients.
    \68\ The number of responses may decline substantially after the 
first year because some responses made during that year would 
suffice for some time thereafter.
---------------------------------------------------------------------------

    The staff estimates that the proposed amendments' removal of 
custody arrangements involving securities depositories from rule 17f-5 
would eliminate as much as 28,600 additional burden hours currently 
imposed by the rule's collection of information requirements. This 
estimate assumes that without the amendments, approximately 650 
investment advisers \69\ would have to make an average of 3 responses 
per adviser annually, requiring a total of approximately 44 hours for 
each adviser, to address depository arrangements.\70\
---------------------------------------------------------------------------

    \69\ See supra note 65.
    \70\ These estimates assume that one adviser manages 6 
portfolios, and that each adviser would make 3 responses annually 
requiring a total of 44 hours to approve depository custody 
arrangements for each fund complex, report to fund boards, and 
establish a system to monitor depository arrangements for the fund 
complex. The 44 hours would include 10 hours spent to establish 
custody arrangements with depositories and make ``reasonable care'' 
determinations, 24 hours spent to monitor depository arrangements, 
and 10 hours spent to report to fund boards.
---------------------------------------------------------------------------

B. Proposed New Rule 17f-7

    Proposed new rule 17f-7 would contain some collection of 
information requirements. Under the proposed rule, an eligible 
depository would have to meet minimum standards for a depository.
    The fund or its investment adviser would generally determine 
whether the depository complies with those requirements based on 
information provided by the fund's primary custodian. The depository 
custody arrangement also would have to meet certain risk limiting 
requirements. The fund could obtain indemnification or insurance 
arrangements that adequately protect the fund against custody risks. 
The fund or its investment adviser generally would determine whether 
indemnification or insurance provisions are adequate. If the fund does 
not rely on indemnification or insurance, the fund's contract with its 
primary custodian would be required to state

[[Page 24496]]

that the custodian will provide to the fund or its investment adviser a 
custody risk analysis of each depository, monitor risks on a continuous 
basis, and promptly notify the fund or its adviser of material changes 
in risks. The primary custodian and other custodians also would be 
required to agree to exercise reasonable care.
    The staff estimates that during the first year after proposed rule 
17f-7 goes into effect, approximately 650 investment advisers would 
make an average of 3 responses per adviser under the proposed rule, 
requiring a total of approximately 25 hours for each adviser, to 
address depository compliance with minimum requirements, any 
indemnification or insurance arrangements, and reviews of risk analyses 
or notifications.\71\ The total annual burden associated with these 
requirements of the rule during the first year would be approximately 
16,250 hours (650 advisers  x 25 hours per adviser). The staff further 
estimates that during the first year after the proposed rule goes into 
effect, approximately 15 global custodians would make an average of 80 
responses per custodian under the rule that would require approximately 
10 hours per response.\72\ The total annual burden associated with 
these requirements of the new rule would be approximately 12,000 hours 
(15 custodians  x 800 hours). Therefore, the total annual burden 
associated with all collection of information requirements of the 
proposed new rule during the first year after its adoption is estimated 
to be 28,250 hours (16,250 + 12,000).
---------------------------------------------------------------------------

    \71\ These estimates assume that one adviser manages 6 
portfolios, and that each adviser would make 3 responses annually 
requiring a total of 25 hours for each adviser to address depository 
compliance with minimum requirements, any indemnification or 
insurance arrangements, and reviews of risk analyses or 
notifications for the adviser's fund complex. The 25 hours would 
include 3 hours spent to verify depository compliance with minimum 
requirements, 2 hours spent to address any indemnification or 
insurance arrangements, and 20 hours spent to review risk analyses 
or notification for the fund complex.
    \72\ These estimates assume that each of 15 custodians services 
an average of 250 client portfolios within 40 fund complexes, that a 
single response by each custodian can simultaneously address 
approximately 6 client portfolios in a fund complex, and that each 
custodian makes approximately 80 annual responses requiring 10 hours 
per response to prepare risk anslyses of depository arrangements and 
monitor risks for approximately 40 fund complexes, and to provide 
notices of material changes in risks to these clients.
---------------------------------------------------------------------------

    As reflected in the following summary of the burden hour 
requirements of the collection of information requirements in current 
rule 17f-5, rule 17f-5 as proposed to be amended, and proposed rule 
17f-7, the staff estimates that the net effect of the proposed 
amendments and new rule may be to reduce the total annual paperwork 
burden by 350 hours:

------------------------------------------------------------------------
                                                               Paperwork
                             Rule                                burden
                                                                 hours
------------------------------------------------------------------------
Current rule 17f-5...........................................     49,420
Rule 17f-5 as proposed to be amended.........................     20,820
Proposed rule 17f-7..........................................     28,250
Net reduction................................................       -350
------------------------------------------------------------------------

The Commission requests comment on the reasonableness of these 
estimates. Commenters who disagree are requested to provide their own 
estimates with supporting rationales.
    Pursuant to 44 U.S.C. 3506(c)(2)(B), the Commission solicits 
comments in order to: (i) evaluate whether the proposed collections of 
information are necessary for the proper performance of the functions 
of the Commission, including whether the information will have 
practical utility; (ii) evaluate the accuracy of the staff's estimate 
of the burden of the proposed collections of information; (iii) enhance 
the quality, utility and clarity of the information to be collected; 
and (iv) minimize the burden of the collections of information on those 
who are to respond, including through the use of automated collection 
techniques or other forms of information technology.
    Persons wishing to submit comments on the collection of information 
requirements of the proposed amendments and proposed rule should direct 
them to the following persons: (i) Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Office of Management and Budget, Room 3208, New Executive Office 
Building, Washington, DC 20503; and (ii) Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 5th Street NW, Washington, DC 
20549-0609, with reference to File No. S7-15-99. OMB is required to 
make a decision concerning the collections of information between 30 
and 60 days after publication; therefore, a comment to OMB is best 
assured of having its full effect if OMB receives it within 30 days 
after publication of this Release. Requests for materials submitted to 
OMB by the Commission with respect to these collections of information 
should be in writing, refer to File No. S7-15-99, and be submitted to 
the Securities and Exchange Commission, Records Management, Office of 
Filings and Information Services.

V. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding the 
proposed amendments to rule 17f-5 and proposed new rule 17f-7, and 
conforming amendments to rules 7d-1 and 17f-4. The following summarizes 
the IRFA.

A. Reasons for the Proposed Action

    Rule 17f-5 governs the custody of the assets of registered 
management investment companies (``funds'') with custodians outside the 
United States. The Commission amended the rule in 1997 to modernize its 
conditions. In 1998, representatives of funds and bank custodians 
informed the Commission that some conditions of the rule presented 
problems regarding the use of foreign securities depositories.

B. Objectives

    The Commission is proposing amendments to rule 17f-5 and a new rule 
17f-7, which together would permit funds to maintain their assets in 
foreign securities depositories based on conditions that reflect the 
operations and role of these depositories. The proposed amendments to 
rule 17f-5 would remove custody arrangements with foreign securities 
depositories from the rule, eliminating the applicability to depository 
arrangements of requirements that certain findings be made by the fund 
board, its investment adviser, or global custodian, and that certain 
specified terms or equivalent protections appear in the rules of the 
depository.
    Proposed new rule 17f-7 would establish new provisions for the use 
of depositories. The proposed rule would require every foreign 
securities depository that holds fund assets to meet specified minimum 
standards for depositories. The proposed rule also would require a 
custody arrangement with a depository to meet either of two alternative 
sets of risk-limiting conditions. Under one alternative, the fund could 
obtain adequate indemnification or insurance against the custody risks 
of depository arrangements. Under the other alternative, the fund's 
contract with its primary custodian would have to state that the 
custodian will provide the fund or its adviser an initial analysis of 
the custody risks of the depository arrangement, continuously monitor 
those risks, and notify the fund or its adviser of material changes in 
the risks. The primary custodian and other custodians involved in the 
depository

[[Page 24497]]

arrangement also would have to agree to exercise reasonable care in 
performing these duties and in other conduct relating to custody 
arrangements. The conforming amendments to rules 7d-1 and 17f-4 would 
clarify current references to rule 17f-5 by adding a reference to rule 
17f-7 as well.

C. Legal Basis

    The Commission is proposing the amendments to rule 17f-5 and new 
rule 17f-7 and conforming amendments to rules 7d-1 and 17f-4 pursuant 
to the authority set forth in sections 6(c), 7(d), 17(f), and 38(a) of 
the Investment Company Act (15 U.S.C. 80a-6(c), -7(d), -17(f), and -
37(a)).

D. Small Entities Subject to the Rules

    The proposed amendments and new rule will affect, among other 
persons, the approximately 15 global custodians that act as foreign 
custody managers for funds under rule 17f-5 and as primary custodians 
under proposed rule 17f-7. None of these global custodians would likely 
qualify as a small entity, because each custodian is a major bank with 
a global branch network or global ties to other banks. The proposed 
amendments and new rule also will affect the funds that invest in 
foreign markets and their investment advisers. Few if any of the 
affected funds and advisers would be small entities.\73\
---------------------------------------------------------------------------

    \73\ A fund is consisered 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. 17 CFR 270.0-10. 
An adviser is considered a small entity if it has assets under 
management of less than $25 million, has total assets of less than 
$5 million, and is not in a control relationship with other advisers 
or persons that are not small entities. 17 CFR 275.0-7. Most funds 
that invest in foreign securities are part of a fund complex that 
holds net assets of more than $50 million, and are advised by 
advisers with assets under management of $25 million or more.
---------------------------------------------------------------------------

    On balance, the impact of the proposed amendments and new rule on 
global custodians, funds, and advisers is not expected to be great, 
because the burdens of the new rule's requirements would be offset in 
part by the elimination of burdens under existing rule 17f-5. For this 
reason, and because few if any of the affected entities would qualify 
as small entities, the proposed amendments are unlikely to have a 
significant impact on a substantial number of small entities.

E. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposed amendments to rule 17f-5 would retain existing 
reporting, recordkeeping, and other compliance requirements of the rule 
without substantive changes, insofar as they apply to custody 
arrangements with a foreign bank custodian. The amendments would remove 
a custody arrangement with a foreign depository from the rule, 
eliminating the necessity for it to comply with these requirements.
    Proposed new rule 17f-7 would establish new requirements for 
arrangements with depositories. As described above, the new rule would 
require each foreign securities depository that holds fund assets to 
meet certain specified minimum requirements. Depository arrangements 
also would have to meet other risk-limiting conditions. A fund could 
obtain adequate indemnification or insurance against the custody risks 
of depository arrangements. In the alternative, the fund's contract 
with its primary custodian would have to state that the custodian will 
provide an analysis of depository custody risks, continuously monitor 
the risks, and promptly notify the fund of any material changes in 
risks. The primary custodian and other custodians also would have to 
agree to exercise reasonable care in all conduct relating to custody 
arrangements.

F. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant economic impact on small entities. As 
discussed above, none of the global custodians affected by the proposed 
amendments to rule 17f-5 or proposed rule 17f-7, and few if any of the 
affected funds and advisers, are likely to be considered small entities 
for purposes of the Regulatory Flexibility Act. As further discussed 
above, the impact of the amendments is likely to be limited, because 
burdens under the proposed new rule would be offset in part by reduced 
burdens under current rule 17f-5. Therefore, the potential impact of 
the amendments and the proposed new rule on small entities would not be 
significant.
    For these reasons, alternatives to the proposed amendments and 
proposed new rule are unlikely to minimize any impact that the proposed 
amendments may have on small entities. Alternatives in this category 
would include: (1) Establishing different compliance or reporting 
standards that take into account the resources available to small 
entities; (2) clarifying, consolidating or simplifying the compliance 
requirements for small entities; (3) using performance rather than 
design standards; and (4) exempting small entities from coverage of all 
or part of the rule.
    The Commission encourages the submission of comments on matters 
discussed in the IRFA. Comment specifically is requested on the number 
of small entities that would be affected by the proposals and the 
impact of the proposals on small entities. Commenters are asked to 
describe the nature of any impact and provide empirical data supporting 
the extent of the impact. These comments will be placed in the same 
public comment file as comments on the proposals. A copy of the IRFA 
may be obtained by contacting Thomas M.J Kerwin, Securities and 
Exchange Commission, 450 5th Street, NW, Washington, DC 20549-0506.

VI. Statutory Authority

    The Commission is proposing amendments to rule 17f-5 and new rule 
17f-7 and conforming amendments to rules 7d-1 and 17f-4 pursuant to 
authority set forth in sections 6(c), 7(d), 17(f), and 38(a) of the 
Investment Company Act (15 U.S.C. 80a-6(c), -7(d), -17(f) and -37(a)).

List of Subjects in 17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rule

    For the reasons set out in the preamble, Title 17, Chapter II of 
the Code of Federal Regulations is proposed to be amended as follows:

PART 270--RULES AND REGULATIONS, INVESTMENT COMPANY ACT OF 1940

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

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39 
unless otherwise noted:
* * * * *
    2. Section 270.7d-1 is amended by revising the introductory text of 
paragraph (b)(8)(v) to read as follows:


Sec. 270.7d-1  Specification of conditions and arrangements for 
Canadian management investment companies requesting order permitting 
registration.

* * * * *
    (b) * * *
    (8) * * *
    (v) Except as provided in Sec. 270.17f-5 and Sec. 270.17f-7, 
applicant will appoint, by contract, a bank, as defined in section 
2(a)(5) of the Act (15 U.S.C. 80a-2(a)(5)) and having the qualification 
described in section 26(a)(1) of the Act (15 U.S.C. 80a-26(a)(1)), to 
act as trustee of, and maintain in its sole custody in the United 
States, all of applicant's securities and cash, other than cash

[[Page 24498]]

necessary to meet applicant's current administrative expenses. The 
contract will provide, inter alia, that the custodian will:
* * * * *
    3. Section 270.17f-4 is amended by revising the introductory text 
of paragraph (b) to read as follows:


Sec. 270.17f-4  Deposits of securities in securities depositories.

* * * * *
    (b) A registered management investment company (investment company) 
or any qualified custodian may deposit all or any part of the 
securities owned by the investment company in a foreign Eligible 
Securities Depository as defined in Sec. 270.17f-7 in accordance with 
the provisions of Sec. 270.17f-7 and applicable provisions of 
Sec. 270.17f-5, or in:
* * * * *
    4. Section 270.17f-5 is revised to read as follows:


Sec. 270.17f-5  Custody of investment company assets outside the United 
States.

    (a) Definitions. For purposes of this section:
    (1) Eligible Foreign Custodian means an entity that is incorporated 
or organized under the laws of a country other than the United States 
and that is a Qualified Foreign Bank or a majority-owned direct or 
indirect subsidiary of a U.S. Bank or bank-holding company.
    (2) Foreign Assets means any investments (including foreign 
currencies) for which the primary market is outside the United States, 
and any cash and cash equivalents that are reasonably necessary to 
effect the Fund's transactions in those investments.
    (3) Foreign Custody Manager means a Fund's or a Registered Canadian 
Fund's board of directors or any person serving as the board's delegate 
under paragraphs (b) or (d) of this section.
    (4) Fund means a management investment company registered under the 
Act (15 U.S.C. 80a) and incorporated or organized under the laws of the 
United States or of a state.
    (5) Qualified Foreign Bank means a banking institution or trust 
company, incorporated or organized under the laws of a country other 
than the United States, that is regulated as such by the country's 
government or an agency of the country's government.
    (6) Registered Canadian Fund means a management investment company 
incorporated or organized under the laws of Canada and registered under 
the Act pursuant to the conditions of Sec. 270.7d-1.
    (7) U.S. Bank means an entity that is:
    (i) A banking institution organized under the laws of the United 
States;
    (ii) A member bank of the Federal Reserve System;
    (iii) Any other banking institution or trust company organized 
under the laws of any state or of the United States, whether 
incorporated or not, doing business under the laws of any state or of 
the United States, a substantial portion of the business of which 
consists of receiving deposits or exercising fiduciary powers similar 
to those permitted to national banks under the authority of the 
Comptroller of the Currency, and which is supervised and examined by 
state or federal authority having supervision over banks, and which is 
not operated for the purpose of evading the provisions of this section, 
or
    (iv) A receiver, conservator, or other liquidating agent of any 
institution or firm included in paragraphs (a)(7)(i), (ii), or (iii) of 
this section.
    (b) Delegation. A Fund's board of directors may delegate to the 
Fund's investment adviser or officers or to a U.S. Bank or to a 
Qualified Foreign Bank the responsibilities set forth in paragraphs 
(c)(1), (c)(2), or (c)(3) of this section, provided that:
    (1) The board determines that it is reasonable to rely on the 
delegate to perform the delegated responsibilities;
    (2) The board requires the delegate to provide written reports 
notifying the board of the placement of Foreign Assets with a 
particular custodian and of any material change in the Fund's foreign 
custody arrangements, with the reports to be provided to the board at 
such times as the board deems reasonable and appropriate based on the 
circumstances of the Fund's arrangements; and
    (3) The delegate agrees to exercise reasonable care, prudence and 
diligence such as a person having responsibility for the safekeeping of 
the Fund's Foreign Assets would exercise, or to adhere to a higher 
standard of care, in performing the delegated responsibilities.
    (c) Maintaining Assets with an Eligible Foreign Custodian. A Fund 
or its Foreign Custody Manager may place and maintain the Fund's 
Foreign Assets in the care of an Eligible Foreign Custodian, provided 
that:
    (1) General Standard. The Foreign Custody Manager determines that 
the Foreign Assets will be subject to reasonable care, based on the 
standards applicable to custodians in the relevant market, if 
maintained with the Eligible Foreign Custodian, after considering all 
factors relevant to the safekeeping of the Foreign Assets, including, 
without limitation:
    (i) The Eligible Foreign Custodian's practices, procedures, and 
internal controls, including, but not limited to, the physical 
protections available for certificated securities (if applicable), the 
method of keeping custodial records, and the security and data 
protection practices;
    (ii) Whether the Eligible Foreign Custodian has the requisite 
financial strength to provide reasonable care for Foreign Assets;
    (iii) The Eligible Foreign Custodian's general reputation and 
standing; and
    (iv) Whether the Fund will have jurisdiction over and be able to 
enforce judgments against the Eligible Foreign Custodian, such as by 
virtue of the existence of offices in the United States or consent to 
service of process in the United States.
    (2) Contract. The arrangement with the Eligible Foreign Custodian 
is governed by a written contract that the Foreign Custody Manager has 
determined will provide reasonable care for Foreign Assets based on the 
standards specified in paragraph (c)(1) of this section.
    (i) The contract must provide:
    (A) For indemnification or insurance arrangements (or any 
combination) that will adequately protect the Fund against the risk of 
loss of Foreign Assets held in accordance with the contract;
    (B) That the Foreign Assets will not be subject to any right, 
charge, security interest, lien or claim of any kind in favor of the 
Eligible Foreign Custodian or its creditors, except a claim of payment 
for their safe custody or administration or, in the case of cash 
deposits, liens or rights in favor of creditors of the custodian 
arising under bankruptcy, insolvency, or similar laws;
    (C) That beneficial ownership of the Foreign Assets will be freely 
transferable without the payment of money or value other than for safe 
custody or administration;
    (D) That adequate records will be maintained identifying the 
Foreign Assets as belonging to the Fund or as being held by a third 
party for the benefit of the Fund;
    (E) That the Fund's independent public accountants will be given 
access to those records or confirmation of the contents of those 
records; and
    (F) That the Fund will receive periodic reports with respect to the 
safekeeping of the Foreign Assets, including, but not limited to, 
notification of any transfer to or from the Fund's account or a third 
party account containing assets held for the benefit of the Fund.
    (ii) The contract may contain, in lieu of any or all of the 
provisions specified

[[Page 24499]]

in paragraph (c)(2)(i) of this section, other provisions that the 
Foreign Custody Manager determines will provide, in their entirety, the 
same or a greater level of care and protection for the Foreign Assets 
as the specified provisions, in their entirety.
    (3)(i) Monitoring the Foreign Custody Arrangements. The Foreign 
Custody Manager has established a system to monitor the appropriateness 
of maintaining the Foreign Assets with a particular custodian under 
paragraph (c)(1) of this section, and to monitor performance of the 
contract under paragraph (c)(2) of this section.
    (ii) If an arrangement with an Eligible Foreign Custodian no longer 
meets the requirements of this section, the Fund must withdraw the 
Foreign Assets from the Eligible Foreign Custodian as soon as 
reasonably practicable.
    (d) Registered Canadian Funds. Any Registered Canadian Fund may 
place and maintain its Foreign Assets outside the United States in 
accordance with the requirements of this section, provided that:
    (1) The Foreign Assets are placed in the care of an overseas branch 
of a U.S. Bank that has aggregate capital, surplus, and undivided 
profits of a specified amount, which must not be less than $500,000; 
and
    (2) The Foreign Custody Manager is the Fund's board of directors, 
its investment adviser or officers, or a U.S. Bank.

    Note to Sec. 270.17f-5: A custody arrangement that involves an 
Eligible Securities Depository (as defined in Sec. 270.17f-7) would 
be governed by the provisions of Sec. 270.17f-7 as well as by 
provisions of Sec. 270.17f-5 that apply to any Eligible Foreign 
Custodian involved in the depository custody arrangement.

    5. Section 270.17f-7 is added to read as follows:


Sec. 270.17f-7  Custody of investment company assets with a foreign 
securities depository.

    (a) Custody arrangement with an Eligible Securities Depository. A 
Fund, including a Registered Canadian Fund, may place and maintain its 
Foreign Assets with an Eligible Securities Depository, provided that:
    (1) Indemnification or insurance. The Fund has obtained 
indemnification or insurance arrangements (or any combination) that 
will adequately protect the Fund against all losses attributable to the 
custody risks associated with maintaining assets with the Eligible 
Securities Depository; or (2)
    (2) Alternative safeguards. The custody arrangement provides other 
reasonable safeguards against the custody risks associated with 
maintaining assets with the Eligible Securities Depository, including:
    (i) Risk analysis and monitoring. The Fund's contract with its 
Primary Custodian states that the Primary Custodian (or its agent) 
will:
    (A) Provide the Fund or its investment adviser with an analysis of 
the custody risks associated with maintaining assets with the Eligible 
Securities Depository, before the Fund places its assets with the 
depository; and
    (B) Continuously monitor the custody risks associated with 
maintaining assets with the Eligible Securities Depository and promptly 
notify the Fund or its investment adviser regarding any material change 
in these risks.
    (ii) Exercise of care. The Fund's contract with its Primary 
Custodian states that the Primary Custodian and each other custodian 
that acts on behalf of the Fund in maintaining assets with the Eligible 
Securities Depository will agree to exercise reasonable care, prudence, 
and diligence in performing the requirements of paragraph (a)(2)(i) of 
this section and in all other conduct relating to custody arrangements, 
or to adhere to a higher standard of care.
    (3) Withdrawal of assets from Eligible Securities Depository. If a 
custody arrangement with an Eligible Securities Depository no longer 
meets the requirements of this section, the Fund's Foreign Assets must 
be withdrawn from the depository as soon as reasonably practicable.
    (b) Definitions. The terms Foreign Assets, Fund, Qualified Foreign 
Bank, Registered Canadian Fund, and U.S. Bank have the same meanings as 
in Sec. 270.17f-5. In addition:
    (1) Eligible Securities Depository means a system for the central 
handling of securities as defined in Sec. 270.17f-4, or a transfer 
agent that transfers and holds uncertificated securities on the books 
of an issuer for market participants, that:
    (i) Acts as a transnational system for the central handling of 
securities or equivalent book-entries, or acts as a system for the 
central handling of securities or equivalent book-entries in the 
country where it is incorporated or organized;
    (ii) Is regulated by a foreign financial regulatory authority as 
defined under section 2(a)(50) of the Act (15 U.S.C. 80a-2(a)(50));
    (iii) Holds assets for the custodian that participates in the 
system on behalf of the Fund under conditions no less favorable than 
the conditions that apply to other participants;
    (iv) Maintains records that identify the assets of each participant 
and segregate the system's own assets from the assets of participants;
    (v) Provides periodic reports to its participants with respect to 
its safekeeping of assets, including notices of transfers to or from 
any participant's account; and (vi) Is subject to periodic review by 
regulatory authorities or independent accountants.
    (2) Primary Custodian means a U.S. Bank or Qualified Foreign Bank 
that contracts directly with a Fund to provide custodial services 
related to maintaining the Fund's assets outside the United States.

    Note to Sec. 270.17f-7: A custody arrangement that involves an 
Eligible Securities Depository would also be governed by provisions 
of Sec. 270.17f-5 that apply to any Eligible Foreign Custodian (as 
defined in Sec. 270.17f-5) involved in the depository custody 
arrangement.

    Dated: April 29, 1999.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 99-11357 Filed 5-5-99; 8:45 am]
BILLING CODE 8010-01-P