[Federal Register Volume 64, Number 166 (Friday, August 27, 1999)]
[Rules and Regulations]
[Pages 46821-46839]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-22310]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 270, 274 and 275

[Release Nos. 33-7728, IC-23958, IA-1815; File No. S7-25-95]
RIN 3235-AG27


Personal Investment Activities of Investment Company Personnel

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
adopting amendments to the rule under the Investment Company Act that 
addresses conflicts of interest that arise from personal trading 
activities of investment company personnel. The amendments will 
increase the oversight role of an investment company's board of 
directors with respect to codes of ethics, improve the manner in which 
investment company personnel report their personal securities holdings, 
and require prior approval of investments in initial public offerings 
and certain limited offerings by certain investment company personnel 
(including portfolio managers). Related amendments to disclosure forms 
will require investment companies to provide information about their 
policies concerning personal investment activities in their 
registration statements. The rule amendments are designed to enhance 
the board of directors' oversight of the policies governing personal 
transactions in securities by investment company personnel, help 
compliance personnel and the Commission's examinations staff in 
monitoring potential conflicts of interest and detecting potentially 
abusive activities, and make information about personal investment 
policies available to the public.

DATES: Effective Date: The rule amendments will become effective 
October 29, 1999. Compliance Date: Section IV of this release contains 
information on compliance dates.

FOR FURTHER INFORMATION CONTACT: Penelope W. Saltzman, Senior Counsel, 
or C. Hunter Jones, Assistant Director, Office of Regulatory Policy, 
Division of Investment Management, at (202) 942-0690, Securities and 
Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-0506.

SUPPLEMENTARY INFORMATION: The Commission is adopting amendments to 
rule 17j-1 [17 CFR 270.17j-1] under the Investment Company Act of 1940 
[15 U.S.C. 80a] (the ``Investment Company Act'' or the ``Act''), rule 
204-2 [17 CFR 275.204-2] under the Investment Advisers Act of 1940 [15 
U.S.C. 80b] (the ``Advisers Act''), Forms N-1A [17 CFR 239.15A, 
274.11A], N-2 [17 CFR 239.14, 274.11a-1], N-3 [17 CFR 239.17a, 274.11b] 
and N-5 [17 CFR 239.24, 274.5] under the Investment Company Act and the 
Securities Act of 1933 [15 U.S.C. 77a-77aa] (the ``Securities Act''), 
and Form N-8B-2 [17 CFR 274.12] under the Investment Company 
Act.1
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    \1\ Unless otherwise noted, all references to ``amended rule 
17j-1,'' ``rule 17j-1, as amended,'' or any paragraph of the rule 
will be to 17 CFR 270.17j-1, as amended by this release, and all 
references to ``amended rule 204-2,'' ``rule 204-2, as amended,'' or 
any paragraph of the rule will be to 17 CFR 275.204-2, as amended by 
this release.
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Table of Contents

I. Executive Summary
II. Background
III. Discussion
    A. Codes of Ethics
    B. Role of Fund Boards
    C. Reports by Access Persons
    D. Pre-Approval of Investments in IPOs and Private Placements
    E. Disclosure of Policies Concerning Personal Investment 
Activities
    F. Beneficial Ownership
    G. ``Security Held or to be Acquired'' by a Fund
    H. Excepted Securities and Funds

[[Page 46822]]

    I. Conforming Amendments to Advisers Act Rules
IV. Effective Date; Compliance Dates
    A. Effective Date
    B. Compliance Dates
V. Cost-Benefit Analysis
VI. Effects on Competition, Efficiency and Capital Formation
VII. Paperwork Reduction Act
VIII. Summary of Final Regulatory Flexibility Analysis
IX. Statutory Authority
Text of Rule and Form Amendments

I. Executive Summary

    The Commission is adopting amendments to rule 17j-1 under the 
Investment Company Act. Rule 17j-1 addresses conflicts of interest 
between registered investment company (``fund'') personnel (such as 
portfolio managers) and their funds that may arise when these persons 
buy or sell securities for their own accounts (``personal investment 
activities'').
    Rule 17j-1 prohibits fraudulent, deceptive or manipulative acts by 
fund personnel in connection with their personal transactions in 
securities held or to be acquired by the fund. The rule also contains 
requirements that are designed to prevent fraud, including (i) 
requiring funds and their investment advisers and principal 
underwriters (collectively, ``rule 17j-1 organizations'') to adopt a 
code of ethics (``code'') containing provisions reasonably necessary to 
prevent fraudulent, deceptive or manipulative acts and (ii) requiring 
certain persons to report their personal securities transactions to 
their rule 17j-1 organization.
    The amendments to rule 17j-1 are designed to improve the regulation 
of personal investment activities in two respects. First, the 
amendments enhance fund directors' oversight of personal investment 
activities by requiring that a fund's board, including a majority of 
independent directors on the board, approve the fund's code and the 
code of any investment adviser or principal underwriter of the fund. 
Second, the amendments assist the management of rule 17j-1 
organizations in monitoring compliance with the rule. The amendments 
require initial and annual holdings reports from access persons, as 
well as review of reports on personal trading by compliance personnel. 
The amendments also require the fund or its investment adviser to 
review and pre-approve any investment in an initial public offering 
(``IPO'') or a limited offering (such as a private placement) by 
personnel who participate in managing the fund's portfolio 
(``investment personnel''). In addition, amendments to the disclosure 
forms under the Securities Act of 1933 and the Investment Company Act 
will make information about a rule 17j-1 organization's policies 
concerning personal investment activities available to the public in 
the fund's registration statement.

II. Background

    Section 17(j) of the Investment Company Act prohibits any 
affiliated person of a rule 17j-1 organization from engaging in 
fraudulent trading activities that violate rules adopted by the 
Commission.2 Section 17(j) authorizes the Commission to 
adopt rules to define or prevent fraudulent activities. Under this 
authority, the Commission adopted rule 17j-1 in 1980.3 Rule 
17j-1 prohibits fund personnel from engaging in fraud in connection 
with personal transactions in securities held or to be acquired by the 
fund.4 In addition, the rule requires every rule 17j-1 
organization to adopt a code of ethics designed to prevent ``access 
persons'' 5 from engaging in fraud,6 and requires 
that the organization use reasonable diligence and institute procedures 
reasonably necessary to prevent violations of its code of 
ethics.7 The rule also requires an access person to report 
personal securities transactions to his or her rule 17j-1 organization 
at least quarterly.8
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    \2\ 15 U.S.C. 80a-17(j). An ``affiliated person'' of a rule 17j-
1 organization includes: (i) any officer, director, partner, 
copartner, or employee of the rule 17j-1 organization; (ii) any 
person directly or indirectly controlling, controlled by, or under 
common control with the rule 17j-1 organization; (iii) any person 
owning five percent of the rule 17j-1 organization's voting 
securities; and (iv) any person in which the rule 17j-1 organization 
owns five percent or more of the voting securities. See Investment 
Company Act section 2(a)(3) [15 U.S.C. 80a-2(a)(3)].
    \3\ Prevention of Certain Unlawful Activities With Respect To 
Registered Investment Companies, Investment Company Act Release No. 
11421 (Oct. 31, 1980) [45 FR 73915 (Nov. 7, 1980)] (``1980 Adopting 
Release'').
    \4\ Amended rule 17j-1(b).
    \5\ Rule 17j-1 defines ``access person'' to include: (i) any 
director, officer, or general partner of a fund or of a fund's 
investment adviser, or any employee of a fund or of a fund's 
investment adviser who, in connection with his or her regular 
functions or duties, participates in the selection of a fund's 
portfolio securities or who has access to information regarding a 
fund's future purchases or sales of portfolio securities; or (ii) 
any director, officer, or general partner of a principal underwriter 
who, in the ordinary course of business, makes, participates in or 
obtains information regarding, the purchase or sale of securities 
for the fund for which the principal underwriter acts, or whose 
functions or duties in the ordinary course of business relate to the 
making of any recommendation to the fund regarding the purchase or 
sale of securities. Amended rule 17j-1(a)(1). The term ``principal 
underwriter'' is defined in section 2(a)(29) of the Act [15 U.S.C. 
80a-2(a)(29)].
    \6\ Amended rule 17j-1(c)(1)(i).
    \7\ Amended rule 17j-1(c)(2)(i).
    \8\ Amended rule 17j-1(d)(1)(ii). The rule 17j-1 organization 
also must keep records of violations of its code of ethics and 
certain other records. See amended rule 17j-1(f).
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    The Commission issued a release in 1995 proposing amendments to 
rule 17j-1 (``Proposing Release'').9 The proposed amendments 
were designed to: (i) increase the oversight role of a fund's board of 
directors with respect to the codes of ethics adopted by the fund, its 
investment adviser, and principal underwriter; (ii) require that rule 
17j-1 organizations receive information about the personal securities 
holdings of their employees; and (iii) improve disclosure to investors 
concerning policies on personal investment activities.
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    \9\ Personal Investment Activities of Investment Company 
Personnel and Codes of Ethics of Investment Companies and their 
Investment Advisers and Principal Underwriters, Investment Company 
Act Release No. 21341 (Sept. 8, 1995) [60 FR 47844 (Sept. 14, 
1995)]. The Proposing Release was preceded by a Commission staff 
study of rule 17j-1 and an industry advisory group report. Division 
of Investment Management, SEC, Personal Investment Activities of 
Investment Company Personnel (1994) (``PIA Report''); Investment 
Company Institute, Report of the Advisory Group on Personal 
Investing (1994) (``ICI Advisory Group Report''). The Investment 
Company Institute is an association of funds representing 
approximately 95 percent of total fund assets under management in 
the United States.
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    We received fourteen comment letters, which generally expressed 
strong support for the proposed amendments to rule 17j-1.10 
In addition, one commenter urged us to impose minimum guidelines that 
all codes of ethics must contain in order to address conflicts of 
interest. Two commenters stated that the current rule should not be 
revised. A number of commenters addressed particular issues raised by 
the proposals but did not express an overall view on the amendments. 
The comment letters have been very helpful to us in formulating the 
final rule amendments, which are described below.11
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    \10\ The comment letters and a summary of the comments prepared 
by Commission staff are available to the public in File No. S7-25-
95. The Commission received additional comments on the rule proposal 
after the summary of comments was completed on September 11, 1997. 
These comments also are available to the public in File No. S7-25-
95.
    \11\ In addition to the amendments described below, the 
amendments reorganize and add headings to the text of rule 17j-1 and 
replace the term ``security'' with ``covered security'' to make the 
rule easier to understand and use. The Commission also has changed 
the title of the rule from ``Certain unlawful acts, practices, or 
courses of business and requirements relating to codes of ethics 
with respect to registered investment companies'' to ``Personal 
investment activities of investment company personnel'' to reflect 
more clearly the substance of the rule.

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[[Page 46823]]

III. Discussion

A. Codes of Ethics

    Codes of ethics are an important part of a rule 17j-1 
organization's efforts to prevent fraud resulting from personal trading 
in securities by its employees. When the Commission adopted rule 17j-1 
in 1980, it stated that the ``introduction and tailoring of ethical 
restraints on the behavior of persons associated with an investment 
company can best be left in the first instance to the directors of the 
investment company.'' 12 Comments on the rule proposals 
confirmed that a ``one-size-fits-all'' approach to these codes would 
not be more effective in preventing fraudulent personal trading 
practices, and would be unnecessarily burdensome, particularly for 
smaller rule 17j-1 organizations.
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    \12\ See 1980 Adopting Release, supra note 3, at text following 
n.2.
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    Although rule 17j-1 does not specify the provisions that a code of 
ethics must contain, funds can take several steps to anticipate and 
avoid problems resulting from conflicts of interest. A 1994 report by 
an advisory group of the Investment Company Institute (``ICI Advisory 
Group Report'') recommended, among other things, that every code of 
ethics: (i) prohibit investment personnel from participating in IPOs; 
(ii) prohibit securities transactions during certain ``blackout 
periods''; 13 and (iii) prohibit short-term trading 
profits.14 A 1994 Commission staff report noted that the 
recommendations in the ICI Advisory Committee Report provide important 
guidance for a rule 17j-1 organization in preparing its own code of 
ethics.15 The Commission believes that a rule 17j-1 
organization should review the recommendations in the ICI Advisory 
Group Report and determine whether the specific restrictions and 
prohibitions recommended by the report are appropriate for inclusion in 
its code of ethics.
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    \13\ Blackout period restrictions generally prohibit 
transactions by fund personnel in a security during a certain period 
of time before and after the fund trades in that security.
    \14\ ICI Advisory Group Report, supra note 9, at 31-42. The 
report also recommended that every code of ethics require prior 
approval of any acquisition of securities by investment personnel in 
a private placement and prohibit investment personnel from serving 
on the boards of publicly traded companies without prior 
authorization. Id. In order to implement these restrictions 
effectively, the report recommended that fund codes of ethics, among 
other things, require all access persons to: (i) ``preclear'' 
personal securities investments; (ii) direct their brokers to 
provide copies of confirmations of all personal securities 
transactions and periodic statements of all securities accounts; and 
(iii) certify annually that they have read and understand the code 
of ethics, and that they have complied with the requirements of the 
code. Id. at 42-49.
    \15\ See PIA Report, supra note 9, at 31-32.
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B. Role of Fund Boards

1. Approval of Code of Ethics
    Rule 17j-1 requires each rule 17j-1 organization to adopt a code of 
ethics, but does not currently specify a role for a fund's board of 
directors with respect to the codes.16 We proposed that a 
majority of a fund's board, including a majority of independent 
directors,17 be required to approve the fund's code and 
review the codes of any investment adviser or principal underwriter to 
the fund.
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    \16\ All references in this release to boards of directors 
include boards of trustees for funds organized as business trusts. 
See Investment Company Act section 2(a)(12) [15 U.S.C. 80a-2(a)(12)] 
(definition of ``director'' for purposes of the Investment Company 
Act).
    \17\ As used in this release, the term ``independent directors'' 
means directors who are not ``interested persons'' of the fund under 
the Investment Company Act. See Investment Company Act section 
2(a)(19) [15 U.S.C. 80a-2(a)(19)] (definition of ``interested 
person'' for purposes of the Investment Company Act).
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    Commenters generally supported increasing board oversight of codes 
of ethics, and we are adopting the provision, with certain 
modifications.18 As suggested by one commenter, the amended 
rule requires that instead of reviewing the code of an investment 
adviser and principal underwriter, the board must approve the code and 
any material changes.19 In addition, the Commission is 
clarifying that the board must approve the code when the fund initially 
engages the investment adviser or principal underwriter (rather than 
upon each contract renewal). If an investment adviser or principal 
underwriter makes a material change to its code of ethics, the board 
has six months in which to approve the material change.20
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    \18\ Amended rule 17j-1(c)(1)(ii).
    \19\ Id. This change should not affect the substance of board 
action because, under the proposal, the same analysis would have 
been required by the board when it reviewed the code of an 
investment adviser or principal underwriter. See Proposing Release, 
supra note 9, at n.17 and accompanying text.
    \20\ Amended rule 17j-1(c)(1)(ii). Funds in a fund complex often 
have different fiscal year periods and, as a result, different 
schedules for meetings of their boards. The amendments to rule 17j-1 
permit fund boards six months in which to approve material changes 
to codes in order to avoid requiring all funds in a fund complex to 
approve simultaneously a material change in their investment 
adviser's or principal underwriter's code of ethics. Id.
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    Under amended rule 17j-1, a fund's board must base its approval of 
a code of ethics, or a material change to a code of ethics, upon a 
determination that the code contains provisions reasonably necessary to 
prevent access persons from violating the anti-fraud provision of the 
rule.21 The Commission is not, as suggested by one 
commenter, adopting specific detailed standards for board approval of a 
code of ethics. We believe that the relevant factors used to approve a 
code of ethics will vary from fund to fund. Nevertheless, we continue 
to believe that a basic issue for each board of directors is whether 
the code should permit personal trading by personnel of a rule 17j-1 
organization.22 This issue is relevant for each organization 
covered by the rule and is too important for a board to ignore.
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    \21\ The codes of ethics of some rule 17j-1 organizations only 
recite general principles, and the procedures (rather than the 
codes) of these organizations contain the specific restrictions, 
prohibitions, or requirements concerning an access person's personal 
investment activities. Under amended rule 17j-1, the board must 
approve a code based on its determination that the code contains 
provisions reasonably necessary to prevent access persons from 
violating the anti-fraud provisions of the rule. If a board can make 
this determination only if it takes into consideration the 
procedures, then the code must incorporate, or the board must 
explicitly approve, those procedures, as well as any subsequent 
material changes to those procedures.
    \22\ See Proposing Release, supra note 9, at text preceding 
n.18.
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2. Annual Issues and Certification Report
    The board's involvement in the personal investment policies 
applicable to the fund should not end after the board's initial 
approval of a code. Continued oversight of the personal investment 
policies applicable to the fund is in the interest of shareholders 
because it subjects these policies to independent, objective analysis 
by the ``watchdog'' for fund shareholders.23 Therefore, we 
are adopting, as proposed, amendments that require each rule 17j-1 
organization to report periodically to the board on issues raised under 
its code of ethics. Under the amended rule, the management of a rule 
17j-1 organization, at least once a year, must provide the fund's board 
a written report 24 that (i) describes issues that arose 
during the previous year under the code of ethics or procedures 
applicable to the rule 17j-1 organization, including, but not limited 
to,

[[Page 46824]]

information about material code or procedure violations and sanctions 
imposed in response to those material violations 25 and (ii) 
certifies to the fund's board that the rule 17j-1 organization has 
adopted procedures reasonably necessary to prevent its access persons 
from violating its code of ethics.26
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    \23\ See Division of Investment Management, SEC, Protecting 
Investors: A Half Century of Investment Company Regulation 253, 255-
56 (1992); PIA Report, supra note 9, at 47.
    \24\ The proposed amendments did not specify the method by which 
the management of a rule 17j-1 organization should provide the 
report to the fund's board. Two commenters questioned whether the 
reports could be made orally. The Commission believes that the 
issues and certification report is important to board oversight of 
personal investment policies and will best serve the board in 
written form. We have therefore clarified in the amended rule that 
the management of each rule 17j-1 organization must furnish a 
written report to the fund board. See amended rule 17j-1(c)(2)(ii).
    \25\ Amended rule 17j-1(c)(2)(ii)(A). As suggested by two 
commenters, we are limiting the scope of the annual issues and 
certification report to material violations or matters. 
Nevertheless, even immaterial individual violations (such as late 
filings of transaction reports) may collectively suggest material 
problems with an organization's compliance systems. We therefore 
would expect the report to include any violations that are material 
in the aggregate. In addition, the requirement to report on issues 
under the code of ethics or procedures means that a report also 
should include significant conflicts of interest that arose 
involving the personal investment policies of the organization, even 
if the conflicts have not resulted in a violation of the code. For 
example, a fund would be required to report to the board if a fund 
portfolio manager is a director of a company whose securities are 
held by the fund.
    \26\ Amended rule 17j-1(c)(2)(ii)(B). Although the amendments 
require an issues and certification report to be provided to the 
board only once a year, more frequent reports by the management of a 
rule 17j-1 organization may be appropriate in certain circumstances, 
such as when there have been significant violations of a code or 
procedures, or significant conflicts of interest arising under the 
code or procedures. The report also may be used as an opportunity to 
propose changes to the code or to the procedures that must be 
approved by the board.
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    The issues and certification report is designed to give the board 
an opportunity to evaluate the effectiveness of codes of ethics and 
procedures and the manner in which they have been implemented. We 
expect a fund's board to examine the report carefully, and thus the 
amended rule requires that the board ``consider'' the 
report.27 Upon receipt and consideration of a report, a fund 
board may determine that it is necessary to amend the fund's code or 
procedures, or to suggest to an investment adviser or principal 
underwriter that it consider amending its code or 
procedures.28
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    \27\ Amended rule 17j-1(c)(2)(ii). In considering the report, 
the board should determine whether any action is required in 
response to the report.
    \28\ The board also may determine that the fund, investment 
adviser or principal underwriter is not appropriately implementing 
its code and procedures, as required by rule 17j-1, to prevent 
violations of the organization's code of ethics. See amended rule 
17j-1(c)(2)(i).
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3. Unit Investment Trusts
    Rule 17j-1 currently applies to unit investment trusts (``UITs'') 
and requires a UIT and its principal underwriter to adopt codes of 
ethics.29 Because UITs do not have boards of directors, the 
Commission proposed to require that the principal underwriter or 
depositor for a UIT approve the codes of ethics of the UIT and its 
principal underwriter or depositor, and be responsible for ensuring 
that the code of ethics applicable to the UIT contains procedures 
reasonably necessary to prevent an access person from violating rule 
17j-1 and the code.30
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    \29\ See amended rule 17j-1(a)(5) (defining the term ``Fund'' to 
include any registered investment company). Unlike other types of 
funds, a UIT typically does not employ an investment adviser or have 
a board of directors and has a relatively fixed portfolio of 
investments. See Investment Company Act section 4(2) [15 U.S.C. 80a-
4(2)] (definition of ``unit investment trust'').
    \30\ See Proposing Release, supra note 9, at nn.30-31 and 
accompanying text.
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    Commenters generally accepted the proposed changes for UITs, which 
the Commission is adopting substantially as proposed.31 If a 
UIT has more than one principal underwriter or depositor, the principal 
underwriters and depositors may designate a single principal 
underwriter or depositor to be responsible for approving the UIT's code 
of ethics and any material changes to the code. The designated 
principal underwriter or depositor, however, would have to consent in 
writing to this arrangement.32
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    \31\ Amended rule 17j-1(c)(1)(iii).
    \32\ Id.
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C. Reports by Access Persons

1. Initial Holdings Report
    Rule 17j-1 currently requires an access person to report personal 
securities transactions to his or her rule 17j-1 organization at least 
quarterly (``quarterly transaction reports'') but does not require a 
complete report of all securities holdings that could create a conflict 
of interest with the fund. In the Proposing Release, the Commission 
expressed concern that a rule 17j-1 organization may not be able to 
monitor effectively potential conflicts of interest unless the rule 
17j-1 organization knows the identity of all securities held by the 
access person that could present a conflict, including securities 
acquired before the person became an access person.33 
Without knowledge of all those securities, for example, it would be 
difficult for a fund to monitor whether the access person is making 
trading decisions for the fund based on the securities that the access 
person holds in his or her own portfolio.
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    \33\ Proposing Release, supra note 9, at n.38 and accompanying 
text.
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    To improve the information that a rule 17j-1 organization currently 
receives under the rule, the Commission proposed to require that each 
access person provide an initial holdings report to its rule 17j-1 
organization listing all securities beneficially owned by the access 
person no later than 10 days after he or she becomes an access person. 
We are adopting this provision substantially as proposed.34
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    \34\ Amended rule 17j-1(d)(1)(i). In some cases, persons may 
have been reporting their securities holdings and brokerage accounts 
to their rule 17j-1 organizations before they become access persons. 
In such cases, we believe that an access person would satisfy the 
initial holdings report requirement, i.e., would not have to submit 
a report, if his or her rule 17j-1 organization maintains a record 
of the information required to be disclosed in the initial report 
and the access person confirms in writing (which writing may be 
electronic) the accuracy of the record within 10 days after becoming 
an access person.
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    Commenters generally supported the addition of an initial holdings 
report requirement, although some urged that it be limited to persons 
who participate in fund portfolio management.35 The 
Commission has decided not to narrow the initial holdings report 
requirement as suggested by these commenters. These reports are not 
burdensome to file, and other access persons may be called upon from 
time to time to participate in fund investment decision-making that may 
give rise to a conflict because of these persons' securities holdings. 
The initial holdings report (updated by transaction reports and annual 
holdings reports described below) will allow a rule 17j-1 organization 
to better monitor and address these conflicts.36
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    \35\ These commenters suggested limiting an initial holdings 
report to ``investment personnel,'' as defined in the ICI Advisory 
Group Report. See infra note 48.
    \36\ Persons who currently are or who become access persons 
before the effective date of the amendments to rule 17j-1 are not 
required to file initial holdings reports. See infra note 98.
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2. Annual Holdings Report
    In addition to the initial holdings report and quarterly 
transaction reports, the Commission is amending rule 17j-1 to require 
each access person to file with his or her rule 17j-1 organization an 
annual holdings report.37 In the Proposing Release, the 
Commission asked for comment on (but did not propose) an annual 
holdings report.38 Commenters differed on the issue. We have 
decided to require the additional report because of our concern that, 
without the report, neither the Commission's examinations staff nor a 
rule 17j-1 organization would be able to understand the full nature of 
an access person's current securities holdings without sorting through, 
in some cases,

[[Page 46825]]

many years of transaction reports.39 Thus, requiring an 
annual holdings report should improve the ability of fund compliance 
personnel and Commission examiners to detect illegal trading activity 
by fund personnel.
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    \37\ Amended rule 17j-1(d)(1)(iii).
    \38\ Proposing Release, supra note 9, at n.42 and accompanying 
text. The Commission noted that the ICI Advisory Group Report 
recommended that access persons file reports listing all of their 
securities holdings upon commencement of employment and annually 
thereafter. See ICI Advisory Group Report, supra note 9, at 46.
    \39\ Using an annual holdings report, a rule 17j-1 organization 
should better be able to determine the securities holdings of all 
access persons each year and would not need, for example, to keep a 
``running count'' of the holdings based on the initial holdings 
report and subsequent quarterly transaction reports. If holdings 
information were needed, for example, five years after a person 
becomes an access person, the Commission's examinations staff or a 
rule 17j-1 organization might have to piece together information 
from the initial holdings report and as many as 20 quarterly 
reports. Some rule 17j-1 organizations do, however, maintain a 
``running count'' of their employees' current securities holdings 
and brokerage accounts. We believe that access persons at these 
organizations would satisfy their annual holdings report requirement 
by confirming annually, in writing (which may be electronic), the 
accuracy of the organization's record of information required to be 
disclosed in the annual holdings report, and recording the date of 
the confirmation.
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3. Information Required in Reports
    The Commission proposed that an access person be required to report 
in an initial holdings report every security (as defined in rule 17j-1) 
that the access person beneficially owns, regardless of whether the 
fund owns, or intends or proposes to acquire, the 
security.40 The proposed amendments also would have required 
an initial holdings report to include the title of the security, the 
number of shares held, the principal amount of the security and its 
CUSIP number, and a quarterly transaction report to include the CUSIP 
number for each security for which a transaction occurred and the date 
that the access person submitted the report.
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    \40\ Proposing Release, supra note 9, at nn.43-46 and 
accompanying text. Under current rule 17j-1, the term ``security'' 
excludes certain securities, such as U.S. government securities and 
shares of open-end funds, that do not appear to present the same 
opportunities for fraudulent trading activities that rule 17j-1 was 
designed to prevent. See current rule 17j-1(e)(5). The amendments to 
rule 17j-1 change the term to ``covered security'' and expand the 
types of securities excluded from the definition. See amended rule 
17j-1(a)(4) (discussed infra in section III.H of this release). The 
Commission has revised the term in order to avoid any confusion with 
the term ``security'' as defined under the Act. See Investment 
Company Act section 2(a)(36) [15 U.S.C. 80a-2(a)(36)].
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    We are adopting these requirements with some 
modifications.41 The amended rule does not require 
disclosure of the security's CUSIP number. Commenters asserted that 
CUSIP numbers often are not readily available to access persons, and 
that requiring them could present an obstacle to timely filing of 
reports. The reports do, however, require disclosure of any securities 
account the access person maintains with a broker, dealer or 
bank.42 This information will assist the rule 17j-1 
organization and the Commission's compliance staff in evaluating 
compliance with the rule's reporting requirements.43
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    \41\ Amended rule 17j-1(d)(1).
    \42\ Amended rule 17j-1(d)(1)(i)(B), (ii)(B) and (iii)(B).
    \43\ This requirement is similar to a recommendation of the ICI 
Advisory Group Report that the National Association of Securities 
Dealers (``NASD'') adopt a rule to require all broker-dealers to 
notify a fund when any of the fund's employees open a brokerage 
account. ICI Advisory Group Report, supra note 9, at 44-45.
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4. Time for Providing Reports
    The Commission proposed that the initial holdings report would be 
required to be filed within ten days after the individual becomes an 
access person. Some commenters recommended lengthening this period to 
twenty or thirty days, arguing that a ten-day period may not allow 
sufficient time for access persons to gather and provide the required 
information to their rule 17j-1 organization. One commenter suggested 
that the ten-day period could be shortened for an initial holdings 
report by a portfolio manager.
    The Commission notes that quarterly transaction reports under 
existing rule 17j-1 are required to be submitted no later than ten days 
after the end of the calendar quarter. This time period does not appear 
to be unreasonable, and commenters did not argue that it has been 
burdensome. We are adopting this provision as proposed.44
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    \44\ Amended rule 17j-1(d)(1)(i).
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5. Review of Reports
    Rule 17j-1 currently includes no specific requirement that the 
quarterly transaction reports required by the rule be reviewed by 
anyone in the rule 17j-1 organization. In the Proposing Release, the 
Commission explained that the purposes of the rule will be served only 
if the reports are reviewed to detect conflicts of interest and abusive 
practices.45 The Commission therefore proposed to require 
that the procedures instituted by each rule 17j-1 organization include 
procedures to review all securities transaction and holdings reports 
required by rule 17j-1.
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    \45\ Proposing Release, supra note 9, at text following n.47.
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    The Commission is amending rule 17j-1 to require the review of all 
securities transaction and holdings reports. Under the amended rule, 
the procedures instituted by a rule 17j-1 organization to prevent a 
violation of a code must include procedures requiring that: (i) 
appropriate management or compliance personnel of the rule 17j-1 
organization review transaction and holdings reports (both initial and 
annual reports) submitted by access persons; and (ii) the rule 17j-1 
organization maintain the names of the persons responsible for 
reviewing these reports.46
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    \46\ Amended rule 17j-1(d)(3) and (f)(1)(D).
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D. Preapproval of Investments in IPOs and Private Placements

    As discussed above, the Commission did not propose specific 
restrictions on personal investment activities of fund personnel, but 
we did ask for comment on the issue.47 We noted that the ICI 
Advisory Group Report recommended that all funds prohibit investment 
personnel from investing in IPOs, require pre-clearance of investments 
in private placements, and restrict certain other trading 
practices.48 Many fund complexes have followed this advice 
and revised their codes of ethics accordingly.49 Not all 
have adopted these ethical restrictions, however, which caused us to 
consider procedures that would further assist funds and advisers in 
monitoring conflicts of interest that arise from these particular 
investment activities.
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    \47\ Proposing Release, supra note 9, at nn.32-34 and 
accompanying text. Five commenters emphasized that all funds should 
be given flexibility to determine their own policies and procedures 
governing personal investment activities. One of these commenters, 
however, supported specific basic requirements in codes, including 
restrictions on trading in IPOs and private placement offerings.
    \48\ Id. The report did not define the term ``private 
placement.'' See supra notes 13-14 and accompanying text for a 
discussion of the additional restrictions recommended in the report. 
The report defined ``investment personnel'' to include portfolio 
managers and employees who provide information and advice to a 
portfolio manager or who help execute a portfolio manager's 
decisions, such as securities analysts and traders. ICI Advisory 
Group Report, supra note 9, at 29-30.
    \49\ ICI, Report to the Division of Investment Management, U.S. 
Securities and Exchange Commission: Implementation of the 
Institute's Recommendations on Personal Investing 15-18 (1995) 
(``ICI Survey''). Approximately 66 percent of the fund complexes 
with funds that are ICI members (representing approximately 97 
percent of ICI member assets under management) responded to the 
survey. Seventy-two percent of those fund complexes adopted the ban 
on investment personnel acquiring securities in an IPO. Sixty-nine 
percent adopted the ban on purchasing securities in private 
placements without prior approval. Fourteen percent of the fund 
complexes that responded to the survey adopted recommendations based 
on their particular circumstances, which in some cases provided for 
more stringent restrictions than those recommended by the ICI 
Advisory Group Report. Id.
---------------------------------------------------------------------------

    Most individuals rarely have a chance to invest in IPOs, 
particularly ``hot issue'' IPOs,50 shares of which usually

[[Page 46826]]

are reserved for institutional investors, or wealthy individual 
customers with large brokerage accounts.51 As the ICI 
Advisory Group Report commented, the opportunity for investment 
personnel to purchase IPO shares presents a ``clear potential for 
conflict between the interests of the individual and the fund.'' 
52 The purchase of IPO shares by investment personnel may 
raise questions as to whether the investment is an undisclosed reward 
for directing fund business to the underwriter or issuer,53 
whether the individual is misappropriating an opportunity that should 
have been offered to the fund,54 and whether the 
individual's future investment decisions for the fund will be based 
solely on the best interests of the fund's shareholders.55
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    \50\ A ``hot issue'' IPO typically means an IPO in which the 
securities trade in the aftermarket at a premium over the offering 
price. See Rule IM-2110-1(a)(1) of the NASD Conduct Rules, NASD 
Manual (CCH) 4112 (1999) (introduction to rules on ``free-riding'' 
and ``withholding'').
    \51\ See Kathleen Weiss Hanley, William J. Wilhelm, Jr., 
Evidence on the Strategic Allocation of Initial Public Offerings, 37 
Journal of Financial Economics 239 (1995) (suggesting that 
approximately 67 percent of shares in IPOs are allocated to 
institutional investors). See also Michael Siconolfi, Underwriters 
Set Aside IPO Stock for Officials of Potential Customers, Wall St. 
J., Nov. 12, 1997, at A1 (``It is no news that underwriters make 
most of the shares in hot IPOs available not to the little-guy 
investor but to institutions, such as mutual fund companies and 
pension funds that provide a lot of trading commissions and other 
business.'').
    \52\ ICI Advisory Group Report, supra note 9, at 32.
    \53\ See, e.g., U.S. v. Ostrander, 999 F.2d 27 (2d Cir. 1993) 
(affirming conviction of portfolio manager, who purchased privately 
offered warrants of company whose securities she acquired for the 
fund, for accepting unlawful compensation for fund's purchase of 
property in violation of the Investment Company Act).
    \54\ See, e.g., In the Matter of Ronald V. Speaker and Janus 
Capital Corporation, Investment Company Act Release No. 22461 (Jan. 
13, 1997) (investment adviser made $16,000 profit on same day 
purchase and sale of debentures in which fund could have invested, 
and failed to disclose transactions to the fund or obtain prior 
consent of the fund (or a disinterested employee authorized to waive 
the opportunity on the fund's behalf)).
    \55\ See ICI Advisory Group Report, supra note 9, at 32.
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    Purchases by investment personnel of securities in private 
placements or other limited offerings (``private placements'') may 
raise similar conflicts because the opportunity to invest in the 
private placement may be a reward for past business deals.56 
In some cases, the conflict may occur later when the issuer of the 
privately placed security is considering making a public 
offering.57
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    \56\ See Ostrander, supra note 53.
    \57\ A fund portfolio manager who has invested in the private 
placement may have an opportunity to increase the value of his or 
her investment by causing the fund to invest in the public offering 
and contribute to its success. See ICI Advisory Group Report, supra 
note 9, at 33-34 (citing John Accola, Firms, Fund Exec Ties 
``Normal,'' Rocky Mountain News, Jan. 18, 1994, at 38A).
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    To ensure that the potential conflicts associated with these 
investments can be addressed before they arise, the amendments we are 
adopting require that investment personnel obtain approval from their 
fund or adviser before directly or indirectly acquiring any beneficial 
ownership in securities in an IPO or private placement.58 
The amendments do not prohibit these investments because we recognize 
that there may be situations in which investment in these offerings 
does not raise the types of conflicts that the rule is designed to 
address. In some circumstances, an investment opportunity clearly may 
be available to investment personnel for reasons other than the 
individual's position with the fund. The fund or adviser therefore 
could determine that, based on the particular nature of the offering 
59 or the particular facts of the purchase,60 the 
investment would create no material conflict. In other circumstances, 
the investment may raise only potential conflicts from which the fund 
and its investors can be protected.61 Because the portfolio 
manager's fund or investment adviser is in the best position to 
evaluate whether an investment in an IPO or limited offering creates or 
may create a conflict of interest, the amendments permit that 
organization to protect the fund by determining whether to approve the 
proposed investment.
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    \58\ Amended rule 17j-1(e). The rule is not limited to purchases 
of ``covered securities'' sold in an IPO or limited offering, but 
rather applies to purchases of all securities sold in an IPO or 
limited offering. See 15 U.S.C. 80a-2(a)(36) (definition of 
``security''). The rule generally defines an IPO to include an 
offering of securities registered with the Commission, the issuer of 
which, immediately before the registration, was not required to file 
reports with the Commission. Rule 17j-1(a)(6). This is the same 
definition used in section 12(f)(1)(G)(i) of the Securities Exchange 
Act of 1934 (the ``Securities Exchange Act'') [15 U.S.C. 
78l(f)(G)(i)]. The definition of ``limited offering'' under the rule 
includes private placement offerings that are exempt from 
registration under section 4(6) of the Securities Act [15 U.S.C. 
77d(6)] or under Regulation D [17 CFR 230.501-508], as well as 
offerings that are not public under section 4(2) of the Securities 
Act [15 U.S.C. 77d(2)]. Amended rule 17j-1(a)(8).
    \59\ A portfolio manager, for example, may have an opportunity 
to invest in an IPO of the fund adviser as a result of his or her 
service as an employee of the adviser, in an IPO of a mutual 
insurance company as a result of his or her ownership of a life 
insurance policy, or in an IPO of a spinoff company as a result of 
his or her ownership of stock in the company that spins off the 
issuer. In each case (and other similar cases), a fund or adviser 
could determine that the portfolio manager's access to the IPO did 
not result from his or her position with the fund.
    \60\ For example, a portfolio manager's purchase of privately 
offered securities issued by a small family business that is 
unlikely to make a public offering in the future would likely not 
raise a material conflict if the portfolio manager's fund is 
prohibited from investing in private placements. Similarly, an 
investment in an IPO in which all shares are allocated to investors 
on a non-discriminatory basis may not raise a material conflict. See 
Elizabeth Cochran, Taking a Seat at the IPO Table, Wash. Post, Jan. 
7, 1999, at E1 (some online firms allocate IPO shares on a ``first-
come, first-served'' basis or on a pro-rata basis to all interested 
investors); Lisa Bransten and Nick Wingfield, New Company Aims to 
Shift IPO Playing Field, Wall St. J., Feb. 8, 1999, at C1 (one 
online firm selling IPO shares will use a ``Dutch auction'' process 
to set the offering price and to allocate IPO stock to the highest 
bidding investors).
    \61\ For example, if a portfolio manager sought approval to 
invest in a private placement of securities of a business that might 
make a public offering in the future, the fund or adviser could 
decide to approve the investment subject to conditions designed to 
protect investors from potential conflicts. These conditions might 
require that the portfolio manager disclose his or her investment if 
the fund subsequently considers investing in the business, and that 
other investment personnel who have no personal interest in the 
issuer review any decision the portfolio manager may make regarding 
the fund's investment in the business. See ICI Advisory Group 
Report, supra note 9, at 33.
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    The Commission expects that a fund or investment adviser, in 
fulfilling its pre-clearance responsibilities, will assign appropriate 
compliance personnel to carefully review each request for 
approval.62 We also expect that the fund or adviser will use 
its judgment to distinguish between serious conflicts that must be 
avoided and those less serious conflicts that the organization can 
monitor and manage consistent with the protection of the fund and its 
investors.63 In addition, in order to further encourage 
careful monitoring of potential conflicts, amended rule 17j-1 requires 
funds and advisers to retain a record of the approval of, and rationale 
supporting, any direct or indirect acquisition by investment personnel 
of a beneficial interest in securities in an IPO or private 
placement.64 These records also should assist compliance 
personnel and Commission staff in detecting illegal trading activities 
by fund personnel.
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    \62\ We expect that funds and advisers will review these 
proposed investments on a case-by-case basis, except for those 
circumstances in which advance general approval may be appropriate 
because it is clear that conflicts are very unlikely to arise due to 
the nature of the opportunity for investing in the IPO or private 
placement. See supra text accompanying notes 59-60. The fund's 
inability to invest in the securities would not be a basis for 
concluding generally that the conflicts are unlikely to arise. See 
text accompanying note 53 supra.
    \63\ Some conflicts of interest must be reported to the fund's 
board of directors under rule 17j-1. See supra note 25; amended rule 
17j-1(c)(2)(ii) (annual issues and certification report 
requirement).
    \64\ Amended rule 17j-1(f)(2).
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    The application of the pre-clearance provision is limited to 
certain ``investment personnel.'' 65 The term is

[[Page 46827]]

defined in rule 17j-1 to include portfolio managers and other employees 
of the fund or its investment adviser who participate in making 
investment recommendations to the fund, and persons in a control 
relationship to the fund who obtain information about investment 
recommendations made to the fund.66 These persons are 
involved in investment decisions for the fund and thus have significant 
opportunities to influence fund decisions that may benefit them 
personally.
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    \65\ In deciding whether to approve securities transactions by 
investment personnel, the adviser should consider all conflicts that 
may cause the adviser and its investment personnel to violate their 
fiduciary obligations to the fund, other funds advised by the 
adviser, and other clients of the adviser. In the case of a proposed 
transaction in a security of limited availability, the adviser 
should consider whether the fund or other clients can invest in the 
security before approving the transaction. See Speaker, supra note 
54; In the Matter of Kemper Financial Services, Inc. et al., 
Investment Advisers Act Release No. 1494 (June 6, 1995); In the 
Matter of Joan Conan, Investment Advisers Act Release No. 1446 
(Sept. 30, 1994).
    \66\ Amended rule 17j-1(a)(7) defines ``investment personnel'' 
as: (i) any employee of a fund or its investment adviser (or any 
company in a control relationship with either) who, in connection 
with his or her regular functions or duties, makes or participates 
in making any recommendations regarding the purchase or sale of 
securities by the fund and (ii) any natural person in a control 
relationship to the fund or its investment adviser who obtains 
information concerning recommendations made to the fund regarding 
the purchase or sale of securities by the fund.
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E. Disclosure of Policies Concerning Personal Investment Activities

    Rule 17j-1 currently does not require funds to disclose publicly 
any information about their codes of ethics. The Commission proposed to 
require that a fund disclose in its registration statement (i) that the 
fund and its investment adviser and principal underwriter have adopted 
codes of ethics, (ii) whether these codes permit personnel to invest in 
securities for their own accounts, and (iii) that the codes are on 
public file with, and are available from, the Commission.67 
We also proposed to require a fund to file with the Commission all 
codes of ethics applicable to the fund as an exhibit to its 
registration statement. Commenters generally did not raise significant 
objections to these proposals, although some commenters questioned 
whether the proposed disclosure would be meaningful to 
investors.68
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    \67\ See Proposing Release, supra note 9, at nn.50-51 and 
accompanying text.
    \68\ Two commenters opposed the requirement that a fund disclose 
whether fund personnel may invest in ``securities, including 
securities that may be purchased or held by the fund'' and noted 
that this phrase could imply that investment by fund personnel in 
these securities is inherently suspect. We believe this information 
is important for investors, and, as discussed below, we are adopting 
this requirement as proposed. Funds are free to provide additional 
disclosure that personal trading by fund personnel is not inherently 
unlawful.
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    The Commission is adopting the disclosure requirements 
substantially as proposed, except that the disclosure may be in the 
Statement of Additional Information (``SAI'') rather than in the 
prospectus.69 This approach is more consistent with other 
disclosure rules that govern the type of information that appears in 
the SAI.70 We also are requiring that the codes of ethics be 
filed through the Commission's Electronic Data Gathering, Analysis and 
Retrieval (``EDGAR'') system as an exhibit to the fund's registration 
statement.71 Electronic filing will facilitate public access 
to the codes and permit investors, market professionals and the 
financial media to obtain information about a fund's policies 
concerning personal investment activities.
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    \69\ The SAI is the second part of Form N-1A, the form used to 
register open-end funds, of Form N-2, the form used to register 
closed-end funds, and of Form N-3, the form used to register 
separate accounts offering variable annuity contracts. The recent 
amendments to Form N-1A require a fund to send an SAI to requesting 
investors within three business days of a request. See Registration 
Form Used by Open-End Management Investment Companies, Investment 
Company Act Release No. 23064 (Mar. 13, 1998) [63 FR 13916 (Mar. 23, 
1998)], at text accompanying n.189 (``Amendments to Form N-1A''); 
Form N-1A [17 CFR 274.11A], Instruction 3 to Item 1(b)(1).
    \70\ See Amendments to Form N-1A, supra note 69, at text 
accompanying n.23 (stating that prospectus disclosure requirements 
are designed to include ``essential information'' about the 
fundamental characteristics and risks of investing in a fund, and to 
be limited to information ``necessary for an average or typical 
investor to make an investment decision'').
    \71\ Information in the EDGAR system is available through our 
Internet web site at <http://www.sec.gov>. Registration statements 
also can be reviewed and copied at the Commission's Public Reference 
Room in Washington, D.C.
    A fund that is not required to have a code of ethics because, 
for example, it does not invest in covered securities as defined in 
amended rule 17j-1(a)(4), would not be required to file any code as 
an exhibit to its registration statement, but should indicate on its 
exhibit list the reason that it is not filing a code of ethics. See 
Form N-1A, Item 23(p). A fund that invests only in the securities of 
one other fund (such as a feeder fund in a ``master/feeder'' fund 
arrangement) would be required to file the codes of ethics 
applicable to the fund in which it invests because the feeder fund 
is a vehicle for investment in the underlying fund. Id. A management 
investment company that invests in the securities of other funds and 
exercises discretion regarding the funds in which it invests (such 
as a ``fund of funds'') would not, however, be required to file the 
codes of ethics of those other funds.
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F. Beneficial Ownership

    Rule 17j-1 currently states that, for purposes of the rule 17j-1 
reporting requirement, beneficial ownership should be interpreted in a 
manner that is consistent with section 16 of the Exchange 
Act.72 In 1991, the Commission adopted revised rule 16a-1 
under the Exchange Act, which clarified the meaning of beneficial 
ownership for purposes of section 16.73 The Commission is 
amending rule 17j-1 to incorporate this interpretation.74 
The Commission is making a parallel amendment to rule 204-2 under the 
Advisers Act to incorporate this interpretation.75
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    \72\ Current rule 17j-1(c)(1); 15 U.S.C. 78p.
    \73\ 17 CFR 240.16a-1(a)(2). See Ownership Reports and Trading 
by Officers, Directors and Principal Security Holders, Securities 
Exchange Act Release No. 28869 (Feb. 8, 1991) [56 FR 7242 (Feb. 21, 
1991)]. The rule provides that, for purposes of determining whether 
a person is the beneficial owner of more than 10 percent of a 
registered class of equity securities under section 16 of the 
Securities Exchange Act [15 U.S.C. 78p], ownership should be 
calculated according to standards of beneficial ownership outlined 
under section 13(d) of the Securities Exchange Act [15 U.S.C. 
78m(d)] and the rules under section 13(d), subject to certain 
exclusions. 17 CFR 240.16a-1(a)(1). For all other purposes under 
section 16, beneficial ownership should be based on whether the 
person has a pecuniary interest in the equity security. 17 CFR 
240.16a-1(a)(2).
    \74\ Amended rule 17j-1(d)(5). The amended rule also clarifies 
that the definition of beneficial ownership applies to any ``covered 
security'' the access person owns or acquires. Id. To the extent 
that the clarification differs from any previous guidance that the 
staff has given, that guidance is withdrawn. See MI Fund, Inc., SEC 
No-Action Letter (Aug. 18, 1981).
    \75\ Amended rule 204-2(a)(12)(iii)(B), (13)(iii)(B).
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G. ``Security Held or To Be Acquired'' by a Fund

    Rule 17j-1 prohibits fraud by certain fund personnel 76 
in connection with their purchase or sale of a ``security held or to be 
acquired'' by the fund.77 The Commission proposed to amend 
the definition of a ``security held or to be

[[Page 46828]]

acquired'' by a fund, to clarify that the securities that are subject 
to the rule's anti-fraud provision include any option to purchase or 
sell, and any security that is exchangeable for or convertible into, 
any security that is held or to be acquired by a fund. As explained in 
the Proposing Release, a fund insider who purchases or sells an option 
or convertible security could improperly benefit from that transaction 
to the same extent as a fund insider who purchases or sells the 
underlying security.78 The only two commenters on this issue 
supported the proposed clarification, and we are adopting it as 
proposed.79
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    \76\ These personnel are ``affiliated persons'' of a fund or of 
its investment adviser or principal underwriter. An ``affiliated 
person'' of an organization includes any officer, director, partner, 
copartner, or employee of the organization. See supra note 2.
    \77\ Amended rule 17j-1(b); see also section 17(j) [15 U.S.C. 
80a-17(j)] (prohibiting violation of Commission rules in connection 
with purchase or sale of a ``security held or to be acquired'' by a 
fund). Under rule 17j-1, a ``security held or to be acquired'' by a 
fund includes a security that (i) is held or is being considered for 
purchase by the fund or its investment adviser for the fund at the 
time of the transaction, or (ii) was held or was considered for 
purchase by the fund or its investment adviser for the fund at any 
time during the 15 days before the transaction. Amended rule 17j-
1(a)(10). The effect of this provision is to include a transaction 
in such a security within the scope of the rule's anti-fraud 
provision. Rule 17j-1 does not prohibit fund personnel from 
purchasing or selling these securities unless the transaction would 
defraud the fund (although codes of ethics may prohibit or limit 
such transactions). In addition, rule 17j-1 does not limit a fund's 
ability to purchase or sell a security as a result of transactions 
by fund personnel. While a transaction by fund personnel in a 
security that is outside the scope of the rule will not violate 
section 17(j) or rule 17j-1, such a transaction may nonetheless 
violate other anti-fraud provisions of the federal securities laws. 
See, e.g., section 17(a) of the Securities Act [15 U.S.C. 77q(a)], 
section 10(b) of the Securities Exchange Act [15 U.S.C. 78j(b)], 
rule 10b-5 [17 CFR 240.10b-5] thereunder, and section 206 of the 
Advisers Act [15 U.S.C. 80b-6].
    \78\ Proposing Release, supra note 9, at nn.59-61 and 
accompanying text.
    \79\ Amended rule 17j-1(a)(10). A security that is exchangeable 
for or convertible into a security that is held or to be acquired by 
a fund would include warrants to purchase or sell the security.
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H. Excepted Securities and Funds

    Because certain types of securities do not present the opportunity 
for the type of improper trading activities that rule 17j-1 is designed 
to prevent, the rule has excepted from its coverage transactions in 
certain money market fund instruments, certain U.S. Government 
securities,80 and securities issued by mutual funds. The 
Commission proposed to expand the exceptions to cover a broader array 
of money market instruments, and to exclude from the rule's coverage 
all money market funds (which are generally limited to investing in 
money market instruments), as well as their investment advisers and 
principal underwriters. Commenters supported the amendments, which the 
Commission is adopting as proposed.81
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    \80\ Rule 17j-1 currently excepts ``securities issued by the 
Government of the United States'' from the definition. The 
Commission is not changing the securities subject to this exception, 
but is amending the exception to read ``direct obligations of the 
Government of the United States'' in order to conform the exception 
to the exception for these securities listed in rule 204-2(a)(12) 
and 204-2(a)(13) under the Advisers Act. Amended rule 17j-
1(a)(4)(i).
    \81\ Amended rule 17j-1(a)(4)(ii). As amended, rule 17j-1 
excludes from the definition of ``covered security'' ``bankers' 
acceptances, bank certificates of deposit, commercial paper, and 
high quality short-term debt instruments, including repurchase 
agreements.'' Id. We interpret ``high quality short-term debt 
instrument'' to mean any instrument that has a maturity at issuance 
of less than 366 days and that is rated in one of the two highest 
rating categories by a Nationally Recognized Statistical Rating 
Organization.
---------------------------------------------------------------------------

    As a result of these exceptions, all funds that are money market 
funds, or that limit their investments to certain money market 
instruments, certain U.S. Government securities and securities of other 
mutual funds, do not need to adopt codes of ethics under rule 17j-
1.82 Access persons of these organizations also would not be 
required to make holdings or transaction reports to their 
organization.83 In addition, access persons of rule 17j-1 
organizations that are required to adopt codes of ethics under the rule 
do not have to file transaction reports concerning transactions in 
these instruments or report them in their initial or annual holdings 
reports.84
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    \82\ See amended rule 17j-1(c)(1)(i). Similarly, investment 
advisers and principal underwriters to these funds would not have to 
adopt codes of ethics unless the investment adviser or principal 
underwriter also provides services to a fund that must adopt a code 
of ethics under rule 17j-1. See also supra note 71.
    \83\ See amended rule 17j-1(d)(1). If, however, an access person 
is an access person of another organization that is covered by rule 
17j-1, the access person would have to provide holdings and 
transaction reports to that organization.
    \84\ See amended rule 17j-1(d)(1)(i), (ii)(A) and (iii)(A) 
(reports limited to covered securities). The Proposing Release 
requested comment whether there are other types of securities that 
should be excepted from the scope of the rule. Commenters 
recommended several other types of securities that should be 
excepted, such as options and futures on broad-based market indices. 
The Commission does not believe that those recommended types of 
securities are insulated from the risks of market manipulation and 
the potential conflicts of interest that rule 17j-1 is intended to 
cover. The Commission therefore is not amending the rule's 
definition of ``covered security'' to exclude those securities.
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I. Conforming Amendments to Advisers Act Rules

    Rule 204-2(a) under the Advisers Act requires each investment 
adviser to keep records of the personal securities transactions of the 
adviser and its ``advisory representatives.'' 85 Although 
the purpose of this requirement is substantially the same as the 
quarterly transaction reporting requirements of rule 17j-1, the two 
rules except transactions in different securities from their respective 
reporting and recordkeeping requirements.86 The Commission 
is revising rule 204-2(a), as proposed, to conform its exceptions to 
those of rule 17j-1.87 The Commission also is adding an 
exception to the recordkeeping requirements under rule 204-2(a) to 
permit an investment adviser not to make certain records under the rule 
if the information required under rule 204-2(a) would duplicate 
information contained in a broker trade confirmation or account 
statement received and kept by the investment adviser.88
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    \85\ Amended rule 204-2(a)(12), (13).
    \86\ Rule 17j-1 currently excepts transactions in securities 
issued by the Government of the United States, bankers' acceptances, 
bank certificates of deposit, commercial paper and shares of 
registered open-end investment companies from its reporting 
requirements. Rule 204-2(a) currently excepts from its recordkeeping 
requirements only transactions in securities that are direct 
obligations of the United States.
    \87\ For a discussion of these exceptions, see supra section 
III.H of this release.
    \88\ Amended rule 204-2(a)(12), (13).
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IV. Effective Date; Compliance Dates

A. Effective Date

    The rule amendments the Commission is adopting today will become 
effective October 29, 1999.

B. Compliance Dates

    To permit the individuals and entities that are subject to rule 
17j-1 sufficient time to comply with the new provisions adopted today 
and to avoid conflicts with plans to address Y2K issues, the Commission 
is providing transition time for certain new requirements.
1. March 1, 2000
    No later than March 1, 2000, rule 17j-1 organizations (i.e., funds 
and their investment advisers and principal underwriters) and their 
personnel must meet the following requirements: 89
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    \89\ Rule 17j-1 organizations that already are in compliance 
with these requirements do not have to satisfy the requirements of 
the rule again to meet these compliance dates. Thus, a rule 17j-1 
organization that currently requires quarterly transaction, initial 
holdings and annual holdings reports containing the information 
required under amended rule 17j-1 and that already has identified 
and notified its access persons of those reporting obligations would 
not need to identify and notify the individuals again.
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    (i) Each rule 17j-1 organization must have identified access 
persons and notified them of their reporting obligations; 90
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    \90\ See amended rule 17j-1(d)(4).
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    (ii) Each rule 17j-1 organization must have adopted procedures for 
management or compliance personnel to review transaction and holdings 
reports; and 91
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    \91\ See amended rule 17j-1(d)(3).
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    (iii) Each rule 17j-1 organization must have established a record 
of access persons who are required to make transaction and holdings 
reports, and of persons who are responsible for reviewing those 
reports.92
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    \92\ See amended rule 17j-1(f)(4).
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2. September 1, 2000
    No later than September 1, 2000:
    (i) Each fund's board of directors must have approved codes of 
ethics of the fund, its investment advisers and principal underwriters 
(which codes may have been revised in response to the rule amendments 
adopted in this release); 93
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    \93\ See amended rule 17j-1(c)(1)(iii).
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    (ii) Each rule 17j-1 organization must have provided the fund's 
board of

[[Page 46829]]

directors with the first of its annual issues and certification 
reports; 94 and
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    \94\ See amended rule 17j-1(c)(2).
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    (iii) Each access person must have provided the first of his or her 
annual holdings reports to his or her rule 17j-1 
organization.95
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    \95\ See amended rule 17j-1(d)(1)(iii).
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3. April 10, 2000
    Each quarterly transaction report filed for the calendar quarter 
ending March 31, 2000 (due April 10, 2000), and for subsequent quarters 
must include all information required under amended rule 17j-
1(d)(1)(ii).96
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    \96\ The additional information required under this amendment 
is: (i) the date that the quarterly transaction report is filed; 
(ii) the name of any covered securities account established by the 
access person during that quarter; and (iii) the date the account 
was established. Amended rule 17j-1(d)(1)(ii)(A)(5), (B). Note that 
access persons need not file a quarterly transaction report if the 
information would duplicate information that their rule 17j-1 
organization has received in a broker's confirmation or account 
statement. See amended rule 17j-1(d)(2)(v).
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4. Other Compliance Dates
    (i) After March 1, 2000, investment personnel may not directly or 
indirectly acquire any beneficial interest in securities in an IPO or 
in a private placement without prior approval from the fund or the 
fund's investment adviser, and the fund and adviser must retain records 
of the approval and reasons for granting the approval; 97
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    \97\ See amended rule 17j-1(e), (f)(2).
---------------------------------------------------------------------------

    (ii) Each person who becomes an access person on or after March 1, 
2000 must file his or her initial holdings report with his or her rule 
17j-1 organization within 10 days after becoming an access person; 
98 and
---------------------------------------------------------------------------

    \98\ See amended rule 17j-1(d)(1)(i). Any person who has become 
an access person before March 1, 2000 need not file an initial 
holdings report, but must file the first of his or her annual 
holdings reports no later than the date specified above.
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    (iii) In the next post-effective amendment filed by a fund after 
March 1, 2000, the fund must file copies of codes of ethics of the rule 
17j-1 organizations as an exhibit to the registration statement, and 
disclose certain information about those codes.99
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    \99\ See Amended Forms N-1A, N-2, N-3, N-5 and N-8B-2. A post-
effective amendment made for the purpose of complying with these 
amendments may be made pursuant to rules 485(b) or 486(b) under the 
Securities Act [17 CFR 230.485(b), .486(b)], provided the post-
effective amendment otherwise meets the conditions for immediate 
effectiveness under those rules.
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V. Cost-Benefit Analysis

A. Summary

    The Commission is sensitive to the costs and benefits that result 
from its rules, and understands that complying with the requirements of 
rule 17j-1 may impose costs on rule 17j-1 organizations and their 
personnel. The Commission requested data on the costs and benefits of 
rule 17j-1 in the Proposing Release, but none of the comment letters on 
the Proposing Release provided specific estimates of any costs or 
benefits of amending the rule. Nevertheless, as discussed below, the 
Commission believes that the amendments to rule 17j-1 will improve the 
regulation of personal investment activities and that the benefits to 
investors justify the costs of compliance with the rule. Investors also 
should benefit from the additional disclosure of information about 
policies of rule 17j-1 organizations concerning personal investment 
activities.
    The amendments to rule 17j-1 require: (i) a fund's board, including 
a majority of independent directors on the board, to approve the fund's 
code and the code of any investment adviser or principal underwriter of 
the fund as well as any material changes to those codes; (ii) the 
management of a 17j-1 organization to provide the fund's board an 
annual report describing issues that arose under the code during the 
previous year; (iii) each access person to file with his or her rule 
17j-1 organization an initial and annual holdings report; and (iv) all 
investment personnel to obtain approval from the fund or investment 
adviser before investing in an IPO or private placement. The amendments 
also clarify certain provisions of rule 17j-1. Amendments to disclosure 
forms under the Securities Act and the Investment Company Act require 
funds to make available to the public information about the policies of 
rule 17j-1 organizations regarding personal investment activities.

B. Benefits

    The Commission believes that the rule amendments adopted today will 
yield important benefits for investors. The amendments to rule 17j-1 
are designed to improve the oversight and monitoring of personal 
trading activities. In addition, the amendments to disclosure forms 
under the Securities Act and Investment Company Act will allow the 
public, including the financial media and market professionals, to 
obtain information on rule 17j-1 organizations' policies regarding 
personal investment activities.
    These regulations will allow rule 17j-1 organizations more quickly 
to detect conflicts of interest that may arise from personal trading 
activities and help prevent subsequent conduct that could defraud the 
fund. Specifically, the rule's requirement that each fund board approve 
the codes of ethics of the fund and its investment advisers and 
principal underwriters will allow fund directors to better oversee the 
personal investment activities of fund personnel. The requirement that 
management of a rule 17j-1 organization annually provide a written 
report to the board on issues raised under its code of ethics will give 
the board the opportunity to evaluate the effectiveness of the codes 
and procedures and the manner in which they have been implemented.
    The requirement that each access person provide an initial and 
annual holdings report to his or her rule 17j-1 organization will allow 
the organization to better monitor the conflicts of interest that may 
arise when an access person participates in investment decisions for 
the fund that involve securities the access person holds in his or her 
portfolio. The annual holdings report requirement also will enable rule 
17j-1 organizations to monitor whether access persons are filing 
accurate quarterly transaction reports. In addition, the annual report 
will allow the rule 17j-1 organization and the Commission's examination 
staff to view the full scope of an access person's current securities 
holdings without having to sort through multiple years of transaction 
reports. Finally, the requirement that investment personnel pre-clear 
their investments in IPOs and private placements will allow funds and 
advisers to review carefully the personal investment activities that 
create the greatest opportunities for fraud and to address any 
potential conflicts of interest that could result from these 
investments before they arise.

C. Costs

    Several commenters who addressed the proposed amendments to rule 
17j-1 suggested that the Commission modify the rule to simplify its 
application and reduce compliance burdens, in order to reduce costs for 
rule 17j-1 organizations. We have evaluated these comments and 
determined that it is appropriate to adopt the amendments to rule 17j-1 
with a number of changes that simplify the rule for rule 17j-1 
organizations. The adopted amendments, for example, simplify the 
compliance requirements of rule 17j-1 organizations by extending the 
exception from the requirement to have a code of ethics to cover any 
fund that does not invest in covered securities as defined in the rule.
    We estimate that approximately 5,226 rule 17j-1 organizations would 
be required to comply with rule 17j-1. Those organizations include 
approximately: (i) 3,900 active

[[Page 46830]]

registered investment companies; (ii) 901 investment advisers to funds; 
and (iii) 425 principal underwriters of funds.100 The number 
of rule 17j-1 organizations is based on staff estimates of the number 
of entities that must comply with rule 17j-1 and data available for 
1998.101 Other estimates are based on the staff's experience 
and discussions with mutual fund organizations.
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    \100\ The estimated number of respondents may overstate the 
number of entities actually required to comply with the rule's 
requirements because money market funds, funds that invest only in 
securities excluded from the definition of ``covered security'' in 
rule 17j-1, and some investment advisers, principal underwriters, 
and access persons to those funds, do not have to comply with the 
rule's requirements concerning codes of ethics and transactions and 
holdings reports. See amended rule 17j-1(c)(1); 17j-1(d)(2)(i).
    \101\ Although the Proposing Release requested it, none of the 
comment letters provided data pertaining to the cost of complying 
with rule 17j-1.
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    Rule 17j-1 Organizations. Funds may incur additional expenses in 
the first year after the amendments become effective because the board 
of directors will have to approve the codes of the fund, its investment 
adviser and principal underwriter.102 The Commission 
believes these expenses will be minimal because all rule 17j-1 
organizations already are required to have adopted codes of 
ethics.103 In addition, we have allowed fund boards one year 
in which to comply with this requirement, which will allow boards to 
consider the codes during one of their regularly scheduled 
meetings.104 After initial approval, fund boards will be 
required to approve only material changes to the codes.105
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    \102\ Because the amendments to rule 17j-1 expand the types of 
funds that are exempt from rule 17j-1, in certain cases a rule 17j-1 
organization's costs could decrease under the amended rule.
    \103\ See current rule 17j-1(b)(1).
    \104\ We understand that fund directors generally receive 
compensation on the basis of the number of meetings that they 
attend. Therefore, no additional payment would be required for work 
performed during a regularly scheduled meeting.
    \105\ See amended rule 17j-1(c)(1)(ii).
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    Under the amendments, a rule 17j-1 organization also could incur 
additional costs in producing and filing the annual issues and 
certification report for the fund's board. We estimate that the report 
would take each rule 17j-1 organization approximately 3 hours to 
prepare, for an annual cost to the organization of approximately $315 
and a total annual cost to the industry of approximately 
$1,646,190.106
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    \106\ The cost estimate is based on our estimate that the report 
would take 2 hours of professional time (at $150 per hour) and 1 
hour of support staff time (at $15 per hour) to prepare.
    The amendments also require the procedures instituted by rule 
17j-1 organizations to require review of transaction and holdings 
reports. The Commission believes that most funds already have review 
procedures in place and the cost of implementing additional 
procedures to review transaction and holdings reports would not be 
significant.
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    The amendments also require the fund to disclose that the fund, its 
investment adviser and principal underwriter have adopted codes of 
ethics, and require each fund to file a copy of the applicable codes 
with the Commission. We estimate that the cost to funds of these 
requirements in the first year after the amendments are adopted would 
be $1,263,600.107 Funds would be required to file codes in 
subsequent years only to the extent that the codes had been materially 
amended.
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    \107\ The cost of including this disclosure in a post-effective 
amendment and filing the codes of ethics would be minimal for funds 
that submit their own filings through EDGAR. Funds that use outside 
contractors to submit EDGAR filings would incur some additional cost 
in filing the codes as exhibits. We estimate that approximately 40 
percent of funds submit their own EDGAR filings. Thus, approximately 
2,340 funds use outside contractors. We estimate that funds using 
outside contractors would file an average of 36 pages of exhibits at 
an average cost of $15 per page, for a total cost to funds of 
$1,263,600 (2,340  x  36  x  $15 = $1,263,600) in the first year 
after the amendments to rule 17j-1 become effective.
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    Finally, funds and advisers will have to maintain a written record 
of any approvals permitting investment personnel to purchase securities 
in an IPO or private placement. Many funds and advisers currently 
prohibit investment personnel from IPO investments and require pre-
clearance of investments in private placement offerings.108 
For those funds and advisers that would have to begin maintaining 
approval records, we estimate the review and documentation process 
would cost approximately $750 per organization each year, for a total 
annual cost to the industry of $900,000.109
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    \108\ See infra note 118.
    \109\ This estimate assumes that each fund and adviser will 
receive, on average, 10 applications for review each year, each of 
which will take, on average, approximately 0.5 hours of professional 
time (at $150 per hour) to review (and, if necessary, document), for 
an annual cost of $750 per organization (5  x  $150 = $750). These 
numbers may vary considerably depending on the fund or adviser and 
its personnel. The estimated annual cost of review and documentation 
is equal to the number of funds and advisers that must begin review 
multiplied by the number of hours per organization to review 
multiplied by the cost per hour to review, for a total of $900,000 
(1,200  x  5  x  $150 = $900,000).
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    Access Persons. Rule 17j-1 currently requires access persons to 
file quarterly transaction reports. The amendments to the rule require 
access persons to file initial holdings reports when they become access 
persons and annual holdings reports thereafter.110
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    \110\ We have assumed that a new access person who files an 
initial holdings report would not have to file an annual holdings 
report in the same year. An access person may, however, have to file 
an initial and annual holdings report in the same year if the rule 
17j-1 organization requires all access persons to file reports by 
the same date each year.
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    These amendments will impose additional costs on access persons 
only to the extent that their rule 17j-1 organization currently does 
not impose similar reporting requirements. A 1995 survey of members by 
the ICI found that a majority of fund complexes already require some 
form of reporting similar to that adopted in the 
amendments.111 Based on the ICI Survey, we estimate that the 
rule amendments would require approximately 67,518 access persons at 
approximately 4,703 rule 17j-1 organizations to begin filing annual 
holdings reports.112 We further estimate

[[Page 46831]]

that it would take an access person, on average, 0.5 hours of 
professional time to complete an annual report, for an estimated total 
annual cost to the industry of $5,063,850.113
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    \111\ Sixty-six percent of member fund complexes responded to 
the ICI Survey. ICI Survey, supra note 49, at 1. The Survey 
indicated that 66 percent of the fund complexes responding adopted 
the ICI Advisory Group Report recommendation that investment 
personnel disclose all personal securities holdings when they begin 
employment and annually thereafter. Id. at 30-31. An additional 11 
percent of the responding fund complexes stated that they had 
adapted the disclosure requirements to their circumstances. Some of 
these adaptations have imposed more frequent reporting requirements 
or extended reporting requirements to all access persons. Id.
    \112\ We estimate that 275 of the 5,226 rule 17j-1 organizations 
are new this year. Access persons at those organizations would file 
an initial holdings report in the first year rather than an annual 
holdings report. Of the remaining 4,951 existing rule 17j-1 
organizations, we estimate that 66 percent already have implemented 
initial and annual holdings report requirements for investment 
personnel, see supra note 111, and that investment personnel 
represent half of the access persons at these organizations. 
Therefore, the amendments would impose new reporting requirements on 
only half of the access persons at 66 percent of existing 
organizations. Based on the ICI Survey, we estimate that 5 percent 
of existing organizations currently require all access persons to 
submit initial and annual holdings reports. Therefore, the 
amendments would not impose new reporting requirements on any of the 
access persons at those organizations. (We do not know the precise 
percentage of funds that impose reporting requirements on all access 
persons, see supra note 111, so we have estimated 5 percent as the 
approximate midpoint of the 11 percent range of funds that adapted 
the reporting recommendations of the ICI Advisory Group Report.) We 
estimate that the remaining 29 percent of organizations (100 - (66 + 
5) = 29) currently do not require any access persons to make 
personal holdings disclosures comparable to those required by the 
amendments to rule 17j-1. Therefore, the amendments would impose new 
reporting requirements on all the access persons at those 
organizations.
    We estimate that, on average, a rule 17j-1 organization will 
have approximately 24 access persons (22 of whom would file an 
annual holdings report, and 2 of whom are new and would file an 
initial holdings report). Therefore, we estimate that the number of 
access persons who would have to begin filing annual reports as a 
result of the amendments to rule 17j-1 equals the sum of: all 
continuing access persons at 29 percent of 4,951 existing rule 17j-1 
organizations (22  x  1,435 = 31,570) plus half of continuing access 
persons at 66 percent of existing rule 17j-1 organizations (11  x  
3,268 = 35,948); or a total of 67,518 access persons.
    \113\ The estimated cost to the industry resulting from the 
rule's annual holdings report requirement equals the number of 
continuing access persons multiplied by the number of hours required 
to complete the report multiplied by the hourly cost of completing 
the report (67,518  x  0.5  x  $150 = $5,063,850). The estimated 
cost of professional time ($150) is an average and could be 
significantly higher or lower for individual rule 17j-1 
organizations and their access persons.
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    Initial reports are required to be provided only by persons who 
become access persons after the effective date of the 
amendments.114 The Commission estimates that the amendments 
to rule 17j-1 will result in approximately 10,218 new access persons 
having to file initial holdings reports each year.115 
Assuming the initial holdings report will take approximately 1 hour of 
professional time to prepare, we estimate an annual total cost to the 
industry of $1,532,700.116
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    \114\ See supra note 98.
    \115\ The estimated number of new access persons who would file 
initial holdings reports as a result of the amendments to rule 17j-1 
equals the number of new access persons each year at existing rule 
17j-1 organizations that do not have an initial holdings report 
requirement plus the number of new access persons at new 
organizations that do not have an initial holdings report 
requirement. Based on the ICI Survey, see supra note 112, we 
estimate the number of access persons each year who would have to 
submit an initial holdings report as a result of amendments to rule 
17j-1 equals the sum of: all new access persons at 29 percent of 
4,951 existing rule 17j-1 organizations (2  x  1,435); all access 
persons at 29 percent of 275 new rule 17j-1 organizations (24  x  79 
= 1,896); half of new access persons at 66 percent of 4,951 existing 
rule 17j-1 organizations (1  x  3,268 = 3,268); and half of access 
persons at 66 percent of 275 new rule 17j-1 organizations (12  x  
182); for a total of 10,218 access persons.
    \116\ The estimated cost to the industry of filing initial 
holdings reports equals the number of access persons required to 
file reports multiplied by the number of hours required to complete 
the report multiplied by the hourly cost to complete the report 
(10,218  x  1  x  $150 = $1,532,700).
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    Investment Personnel. The requirement that investment personnel 
obtain approval before investing in an IPO or private placement should 
impose minimal costs on those individuals for at least three reasons. 
First, the requirement may result in restrictions on their purchases of 
two types of offerings, but the provision does not restrict them from 
participating in the vast majority of investment opportunities. Second, 
as discussed above, few individuals have access to IPOs and private 
placements unless they have substantial accounts with a broker or may 
be in a position to direct business to the broker or 
issuer.117 Therefore, few investment personnel appear likely 
to be given an opportunity to purchase securities in an IPO or private 
placement that does not raise a serious conflict with the fund. Third, 
most fund complexes already prohibit these activities.118 
Although the Commission cannot quantify the costs to investment 
personnel associated with the pre-clearance provision because we cannot 
verify the number of investment personnel who invest in IPOs and 
private placements, we believe that any costs of the provision to 
investment personnel will be minimal and will be greatly outweighed by 
the benefits to investors of restricting these potentially fraudulent 
opportunities.
---------------------------------------------------------------------------

    \117\ See supra note 51 and accompanying text.
    \118\ According to the ICI Survey, 72 percent of fund complexes 
that responded to the Survey prohibit investment personnel from 
acquiring any securities in an IPO. In addition, approximately 14 
percent of responding fund complexes have adapted the prohibition to 
their circumstances, in some cases adopting broader prohibitions, 
such as prohibiting purchases of securities in secondary market 
transactions or extending the prohibition to all access persons or 
all employees. ICI Survey, supra note 49, at 15-16. Approximately 69 
percent of fund complexes responding to the Survey stated that they 
require prior approval before investment personnel may purchase 
securities in a private placement. An additional 14 percent of 
responding fund complexes stated that they have adapted this 
requirement to their situations, in some cases making the 
restrictions broader, such as by applying it to all access persons 
or employees in certain cases. Id. at 17-18. We estimate that after 
the amendments to rule 17j-1 become effective, investment personnel 
in approximately 25 percent of fund complexes will be subject to the 
restrictions on purchases of IPOs and private placements for the 
first time.
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    Issuers. We also believe that the pre-approval provision will 
result in minimal, if any, costs to issuers selling securities in IPOs 
or private placements. These offerings are often oversubscribed, and we 
expect that other purchasers will replace investment personnel who 
might otherwise invest in the offerings.119
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    \119\ See supra note 51 of this release. We are unable to 
quantify the number of investment persons who purchase securities in 
IPOs and private placements or the frequency of those purchases. The 
number may vary significantly among individual funds or advisers.
---------------------------------------------------------------------------

    Based on the estimates discussed above, we estimate that in the 
first year after the effective date, the costs of complying with the 
amendments to rule 17j-1 will be $10,406,340. In later years we 
anticipate these costs will decrease because funds will have to file 
codes again with the Commission only if the codes have been materially 
amended.

VI. Effects on Competition, Efficiency and Capital Formation

    As discussed above, we anticipate that the amendments to rule 17j-1 
will not result in a major increase in costs to funds or fund 
investors. We also have considered, in addition to the protection of 
investors, whether the provisions adopted today will promote 
efficiency, competition, or capital formation.

VII. Paperwork Reduction Act

    Certain provisions of the amendments to rule 17j-1 and the 
conforming amendments to rule 204-2 under the Advisers Act contain 
``collection of information'' requirements within the meaning of the 
Paperwork Reduction Act (``PRA'').120 Because the Proposing 
Release was published in 1995, prior to the effective date of the 1995 
amendments to the PRA, the Proposing Release did not contain a separate 
section requesting comment on the collection of information burdens 
imposed by the proposed amendments, as required by the 
PRA.121 The Proposing Release did, however, request comment 
regarding the specific reporting and recordkeeping requirements 
contained in the proposed amendments to rule 17j-1.
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    \120\ 44 U.S.C. 3501-3520.
    \121\ Prior to the revisions to the PRA in 1995, requiring 
disclosure of information to third parties was not a ``collection of 
information'' under the PRA. See 44 U.S.C. 3502(3)(A) (definition of 
``collection of information'').
---------------------------------------------------------------------------

    The collection of information requirements contained in the 
amendments were submitted to the Office of Management and Budget 
(``OMB'') for review pursuant to section 3507(d) of the PRA. OMB 
approved the PRA submission with respect to these amendments and 
assigned OMB control numbers with respect to the rules and forms 
amended by this release.122 We received an extension of the 
OMB approval of the collection of information for rule 17j-1 last 
year.123 The collection of information requirements are in 
accordance with section 3507 of the PRA. An agency may not conduct or 
sponsor, and a person is not required to respond to, a collection of 
information unless the agency displays a valid OMB control number.
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    \122\ OMB control numbers are as follows: rule 17j-1 (3235-0224, 
expires Oct. 31, 2001); rule 204-2 (3235-0278, expires Apr. 30, 
2000); Form N-1A (3235-0307, expires May 31, 2000); Form N-2 (3235-
0026, expires Oct. 31, 2001); Form N-3 (3235-0316, expires Mar. 31, 
2000); Form N-5 (3235-0169, expires Oct. 31, 2001); Form N-8B-2 
(3235-0186, expires Oct. 31, 2001); and Form S-6 (3235-0184, expires 
Mar. 31, 2002).
    \123\ As required under any request for extension of approval, 
the Commission sought comment on the collection of information. See 
Existing Collection; Comment Request, OMB Control No. 3235-0224 [63 
FR 37606 (July 13, 1998)]; and Submission for OMB Review; Comment 
Request, OMB Control No. 3235-0224 [63 FR 50608 (Sept. 22, 1998)].
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    As described in more detail above and in the Proposing Release, the 
collections of information under the rule and form amendments are 
necessary for funds to monitor potential conflicts of interest, to

[[Page 46832]]

facilitate the effective oversight of personal investment activities by 
a fund and our examinations staff, to provide the fund and the 
Commission with information regarding compliance with rule 17j-1, and 
to disclose information to investors about a fund's policies concerning 
personal investment activities. If the records required to be kept 
pursuant to the rule are requested by Commission examiners, they will 
be kept confidential to the extent permitted by relevant statutory and 
regulatory provisions. Information required by Form N-1A, Form N-2, 
Form N-3, Form N-5, Form N-8B-2, and Form S-6 and disclosed in a 
registration statement, is public, and we do not keep it confidential.
    The amendments to rule 17j-1 as adopted contain two collection of 
information requirements in addition to those in the proposed 
amendments. The adopted amendments require each access person to 
provide an annual holdings report listing all covered securities the 
access person beneficially owned at the end of the previous calendar 
year and all accounts in which securities are held for the benefit of 
the access person.124 The annual holdings report requirement 
imposes an additional paperwork burden on rule 17j-1 organizations and 
their access persons only to the extent that these organizations do not 
currently require their access persons to file this 
information.125 If an access person already submits 
equivalent information to his or her rule 17j-1 organization, the 
access person will simply have to confirm in writing the accuracy of 
that information to satisfy the annual holdings report requirement 
under rule 17j-1.126
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    \124\ The Proposing Release requested comment on an annual 
holdings report and whether an annual holdings report would impose 
an undue burden on persons required to file the report. See 
Proposing Release, supra note 9, at n.42 and accompanying text.
    \125\ See supra notes 111-12 and accompanying text.
    \126\ The amendments also require access persons to disclose two 
new items of information in their quarterly transaction and initial 
holdings reports: the name of any broker, dealer or bank with whom 
they maintain a securities account, and the date the report is 
filed. Amended rule 17j-1(d)(1)(i)(B), (ii)(B). We believe this 
information will take little additional time to disclose.
---------------------------------------------------------------------------

    The amendments to rule 17j-1 also require funds and their advisers 
to retain a written record of any decision to permit investment 
personnel to purchase securities in an IPO or private placement and the 
reasons supporting the approval.127 This requirement imposes 
additional burdens on funds and advisers only to the extent the fund or 
adviser does not currently prohibit investments in IPOs or require pre-
clearance of investments in private placements.128
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    \127\ The Proposing Release sought comment regarding specific 
restrictions on personal investment activities, including 
prohibition on the purchase of securities in an IPO. See supra note 
47.
    \128\ See supra note 118. Because this requirement and the 
requirement for access persons to provide an annual holdings report 
affect the paperwork burden estimate, the Commission has filed a 
``Paperwork Reduction Act Change Worksheet'' with OMB to reflect the 
changes in the annual reporting burden.
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    We estimate that each year 275 new rule 17j-1 organizations each 
will expend 8 hours to formulate and provide codes of ethics for an 
annual total of 275 responses and 2,200 burden hours (275  x  8 = 
2,200). We also estimate that the managements of 5,226 rule 17j-1 
organizations 129 each will expend 3 hours annually to 
provide the fund board with an annual issues and certification report 
for a total of 5,226 responses and 15,678 burden hours (5,226  x  3 = 
15,678). We estimate that in the first year after the amendments to 
rule 17j-1 become effective, each fund will require 0.25 hours to 
prepare the required disclosure regarding the appropriate codes of 
ethics, for a total of 3,900 responses and 975 burden hours (3,900  x  
0.25 = 975).130
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    \129\ See supra note 100 and accompanying text for a discussion 
of the estimated number of funds, and investment advisers and 
principal underwriters to funds.
    \130\ As noted above, funds should have to prepare disclosures 
regarding codes of ethics after the initial disclosure only to the 
extent the codes are materially amended.
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    We estimate that 103,800 access persons 131 each will 
spend 0.5 hours filing one quarterly transaction report per year, for a 
total of 103,800 responses and 51,900 burden hours (103,800  x  0.5 = 
51,900).132 We estimate that each year 16,502 new access 
persons each will expend 1 hour to file an initial holdings report for 
a total of 16,502 responses and 16,502 burden hours 133 and 
each of 108,922 existing access persons will expend 0.5 hours to file 
an annual holdings report, for a total of 108,922 responses and 54,461 
burden hours (108,922  x  0.5 = 54,461).134
---------------------------------------------------------------------------

    \131\ See supra note 112 for an estimate of the average number 
of access persons at each 17j-1 organization. Under amended rule 
17j-1, access persons of investment advisers to funds are exempt 
from filing quarterly transaction reports if the reports would 
duplicate information provided under rule 204-2 of the Advisers Act. 
Amended rule 17j-1(d)(2)(v). Thus, we estimate that the number of 
access persons filing quarterly transaction reports is equal to the 
average number of access persons for each rule 17j-1 organization 
multiplied by the total number of funds and principal underwriters 
of funds (24  x  (3900 + 425) = 103,800).
    \132\ The number of access persons who are required to file 
quarterly transaction reports will vary depending on the personal 
investment activities of each access person. In addition, amended 
rule 17j-1 contains several exceptions to filing quarterly 
transaction reports, including an exception if the report would 
duplicate information contained in broker trade confirmations or 
account statements received by the rule 17j-1 organization. Amended 
rule 17j-1(d)(2)(v). Although a number of access persons may, on 
average, have transactions to report during more than one quarter 
each year, many access persons may not have to provide a quarterly 
transaction report because their rule 17j-1 organizations have 
received the information in a broker trade confirmation or account 
statement. Accordingly, we estimate that each access person, on 
average, would file one quarterly transaction report each year. 
Estimates concerning quarterly transaction reports are not included 
in the cost-benefit analysis because access persons currently are 
required to file quarterly transaction reports under rule 17j-1. See 
current rule 17j-1(c)(1), (2).
    \133\ We estimate that the number of access persons who would 
have to file initial holdings reports each year equals the average 
number of access persons at each new rule 17j-1 organization (275 
x  24 = 6,600) plus the average number of new access persons at 
existing rule 17j-1 organizations (4,951  x  2 = 9,902), for a total 
of 16,502 (6,600 + 9,902 = 16,502). See supra note 112 and 
accompanying text.
    \134\ The number of access persons filing an annual report would 
not include new access persons. See supra note 110. Thus, we 
estimate that the number of access persons filing an annual report 
each year equals the number of existing rule 17j-1 organizations 
(5,226 - 275 = 4,951) multiplied by the average number of continuing 
access persons per organization (24 - 2 = 22), for a total of 
108,922 (4,951  x  22 = 108,922).
---------------------------------------------------------------------------

    The Commission estimates that 5,226 rule 17j-1 organizations each 
will expend 2 hours to maintain records of codes of ethics, records of 
violations of codes of ethics, reports by access persons, and issues 
and certification reports, for a total of 5,226 responses and 10,452 
burden hours (5,226  x  2 = 10,452). We also estimate that each of the 
approximately 1,200 funds and advisers that currently do not prohibit 
investment personnel from purchasing securities in an IPO would take, 
on average, approximately 0.25 hours to complete each of 3 responses 
each year to document approvals of IPO purchases, for a total of 3,600 
responses and 900 burden hours (1,200  x  0.25  x  3 = 
900).135 Finally, we estimate that 4,801 funds and advisers 
would make, on average, 3 responses each year to document approvals of 
investment in private placement offerings, for a total of 14,403 
responses and 3,601 burden hours (4,801  x  0.25  x  3 = 3,601).
---------------------------------------------------------------------------

    \135\ This estimate assumes that 75 percent of funds and 
advisers currently prohibit investment personnel from investing in 
IPOs. See supra note 118.
---------------------------------------------------------------------------

    The Commission therefore estimates the total number of annual 
responses required by the rule is 261,854, and the total annual burden 
of the collection of information requirements in the first year is 
156,669 hours. This estimate represents an increase of 82,099 hours 
from the current estimate of 74,570

[[Page 46833]]

burden hours. The increase is attributable primarily to the annual 
holdings report requirement, the documentation of approvals for 
investments in IPOs and private placements, and adjustments due to an 
increase in rule 17j-1 organizations reflected in the updated number of 
organizations.136
---------------------------------------------------------------------------

    \136\ We also did not adopt a proposed exception to the initial 
holdings report requirement. The proposed amendments would have 
excepted access persons from filing initial holdings reports if the 
information would duplicate information already maintained by the 
person's rule 17j-1 organization. Under the amended rule, all new 
access persons must file an initial holdings report. As discussed in 
note 34 supra, however, an access person may satisfy the requirement 
by simply confirming information required to be in the report that 
is maintained by the person's rule 17j-1 organization. This change 
from the proposed amendments accounts for the remainder of the 
increase in burden hours.
---------------------------------------------------------------------------

    In addition to the annual hour burden, we estimate that some funds 
will incur costs to file the codes of the fund and its investment 
adviser and principal underwriter. As discussed above, a fund that 
submits its own EDGAR filings will incur costs associated with the 
annual hourly burden. Funds that use an outside contractor to submit 
filings will incur costs for that service. We have estimated that the 
cost of filing codes for firms that use outside contractors would be 
approximately $1,263,600 in the first year after the amendments become 
effective.137 Thereafter, the annual cost would decrease 
significantly because funds would only have to refile a code if the 
code had been materially amended.
---------------------------------------------------------------------------

    \137\ See supra note 107.
---------------------------------------------------------------------------

VIII. Summary of Final Regulatory Flexibility Analysis

    A summary of the Initial Regulatory Flexibility Analysis (``IRFA'') 
regarding the proposed amendments, which was prepared in accordance 
with 5 U.S.C. 603, was published in the Proposing Release. No comments 
were received on the IRFA. We have prepared a Final Regulatory 
Flexibility Analysis (``FRFA'') in accordance with 5 U.S.C. 604 
relating to the adopted amendments.
    The FRFA discusses the need for, and objectives of, the amendments 
to rule 17j-1. The FRFA states that rule 17j-1 currently prohibits 
fraud by fund affiliates and certain other persons in connection with 
their personal transactions in securities held or to be acquired by the 
fund, requires funds and their investment advisers and principal 
underwriters to adopt codes of ethics containing provisions reasonably 
necessary to prevent fund personnel from engaging in conduct prohibited 
by the rule, and requires fund personnel to report their personal 
securities transactions to their employers. The FRFA further states 
that the amendments are designed to enhance the board of directors' 
oversight of the policies governing personal transactions in securities 
by investment company personnel, help fund compliance personnel and the 
Commission's examinations staff in monitoring potential conflicts of 
interest and detecting potentially abusive activities, and make 
available to the public additional information about these policies.
    The FRFA estimates that out of approximately 3,900 funds registered 
with the Commission, a total of approximately 732 would be considered 
small entities.138 The FRFA also states that investment 
advisers and principal underwriters of registered funds would be 
required to comply with certain amendments to rule 17j-1. The FRFA 
estimates that (i) out of approximately 901 investment advisers 
registered with the Commission that advise funds, a total of 
approximately 265 would be considered small entities 139 and 
(ii) out of approximately 425 principal underwriters to funds, a total 
of approximately 272 would be considered small entities.140 
The FRFA indicates that the amendments to rule 17j-1 would affect small 
entities in the same manner as other entities subject to the rule.
---------------------------------------------------------------------------

    \138\ As defined in rules adopted under the Investment Company 
Act for purposes of the Regulatory Flexibility Act, a small entity 
is an investment company with net assets of $50 million or less as 
of the end of its most recent fiscal year. 17 CFR 270.0-10 (1997). 
The Commission amended its definition of small entity under the 
Investment Company Act for purposes of the Regulatory Flexibility 
Act in 1998. See Definitions of ``Small Business'' or ``Small 
Organization'' Under the Investment Company Act of 1940, the 
Investment Advisers Act of 1940, the Securities Exchange Act of 1934 
and the Securities Act of 1933, Securities Act Release No. 7548 
(June 24, 1998), [63 FR 35508 (June 30, 1998)]. Because the IRFA for 
this proposal relied on the earlier definition (which was broader), 
the FRFA also relies on the earlier definition.
    \139\ As defined in rules adopted under the Investment Advisers 
Act for purposes of the Regulatory Flexibility Act, a small entity 
is an investment adviser that manages assets with a total value of 
$50 million or less, in discretionary or nondiscretionary accounts, 
as of the end of its most recent fiscal year and does not render 
other advisory services. 17 CFR 275.0-7 (1997). The FRFA relies on 
the definition of ``small entity'' under the Investment Advisers Act 
before it was amended in June 1998. See supra note 138.
    \140\ As defined in rules under the Securities Exchange Act for 
purposes of the Regulatory Flexibility Act, a small entity is a 
broker or dealer that had total capital of less than $500,000 on the 
date of its prior fiscal year. 17 CFR 240.0-10 (1997). The FRFA 
relies on the definition of ``small entity'' under the Securities 
Exchange Act before it was amended in June 1998. See supra note 138.
---------------------------------------------------------------------------

    Finally, the FRFA states that in adopting the amendments to rule 
17j-1, the Commission considered (a) the establishment of differing 
rule requirements that take into account the resources available to 
small entities; (b) the clarification, consolidation, or simplification 
of the rule's requirements for small entities; (c) the use of 
performance rather than design standards; and (d) an exemption from the 
rule for small entities. The FRFA states that the Commission concluded 
that different requirements for small entities would be inconsistent 
with investor protection. In addition, the amendments to rule 17j-1 
incorporate performance standards rather than design standards.
    The FRFA is available for public inspection in File No. S7-25-95. A 
copy may be obtained by contacting Penelope Saltzman, Senior Counsel, 
Office of Regulatory Policy, Division of Investment Management, at 
(202) 942-0690, Securities and Exchange Commission, 450 5th Street, 
N.W., Washington, D.C. 20549-0506.

IX. Statutory Authority

    The Commission is amending rule 17j-1 pursuant to the authority set 
out in sections 17(j) and 38(a) of the Investment Company Act [15 
U.S.C. 80a-17(j) and 80a-37(a)] and sections 206(4) and 211(a) of the 
Advisers Act [15 U.S.C. 80b-6(4) and 80b-11(a)]. The amendments to 
registration forms are adopted pursuant to the authority set out in 
sections 6, 7(a), 10 and 19(a) of the Securities Act [15 U.S.C. 77f, 
77g(a), 77j, 77s(a)], and sections 8(b), 24(a) and 38(a) of the 
Investment Company Act [15 U.S.C. 80a-8(b), 80a-24(a) and 80a-37(a)]. 
The Commission is adopting amendments to rule 204-2 under the Advisers 
Act pursuant to the authority set out in sections 204, 206(4) and 
211(a) of the Advisers Act [15 U.S.C. 80b-4, 80b-6(4) and 80b-11(a).]

Text of Rule and Form Amendments

List of Subjects in 17 CFR Parts 239, 270, 274 and 275

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

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

[[Page 46834]]

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

    1. The authority citation for Part 270 is amended by adding the 
following citation to read as follows:

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

* * * * *
    Section 270.17j-1 is also issued under secs. 206(4) and 211(a), 
Investment Advisers Act (15 U.S.C. 80b-6(4) and 80b-11(a));
* * * * *
    2. Section 270.17j-1 is revised to read as follows:


Sec. 270.17j-1  Personal investment activities of investment company 
personnel.

    (a) Definitions. For purposes of this section:
    (1) Access Person means:
    (i) Any director, officer, general partner or Advisory Person of a 
Fund or of a Fund's investment adviser.
    (A) If an investment adviser is primarily engaged in a business or 
businesses other than advising Funds or other advisory clients, the 
term Access Person means any director, officer, general partner or 
Advisory Person of the investment adviser who, with respect to any 
Fund, makes any recommendation, participates in the determination of 
which recommendation will be made, or whose principal function or 
duties relate to the determination of which recommendation will be 
made, or who, in connection with his or her duties, obtains any 
information concerning recommendations on Covered Securities being made 
by the investment adviser to any Fund.
    (B) An investment adviser is ``primarily engaged in a business or 
businesses other than advising Funds or other advisory clients'' if, 
for each of its most recent three fiscal years or for the period of 
time since its organization, whichever is less, the investment adviser 
derived, on an unconsolidated basis, more than 50 percent of its total 
sales and revenues and more than 50 percent of its income (or loss), 
before income taxes and extraordinary items, from the other business or 
businesses.
    (ii) Any director, officer or general partner of a principal 
underwriter who, in the ordinary course of business, makes, 
participates in or obtains information regarding, the purchase or sale 
of Covered Securities by the Fund for which the principal underwriter 
acts, or whose functions or duties in the ordinary course of business 
relate to the making of any recommendation to the Fund regarding the 
purchase or sale of Covered Securities.
    (2) Advisory Person of a Fund or of a Fund's investment adviser 
means:
    (i) Any employee of the Fund or investment adviser (or of any 
company in a control relationship to the Fund or investment adviser) 
who, in connection with his or her regular functions or duties, makes, 
participates in, or obtains information regarding the purchase or sale 
of Covered Securities by a Fund, or whose functions relate to the 
making of any recommendations with respect to the purchases or sales; 
and
    (ii) Any natural person in a control relationship to the Fund or 
investment adviser who obtains information concerning recommendations 
made to the Fund with regard to the purchase or sale of Covered 
Securities by the Fund.
    (3) Control has the same meaning as in section 2(a)(9) of the Act 
[15 U.S.C. 80a-2(a)(9)].
    (4) Covered Security means a security as defined in section 
2(a)(36) of the Act [15 U.S.C. 80a-2(a)(36)], except that it does not 
include:
    (i) Direct obligations of the Government of the United States;
    (ii) Bankers' acceptances, bank certificates of deposit, commercial 
paper and high quality short-term debt instruments, including 
repurchase agreements; and
    (iii) Shares issued by open-end Funds.
    (5) Fund means an investment company registered under the 
Investment Company Act.
    (6) An Initial Public Offering means an offering of securities 
registered under the Securities Act of 1933 [15 U.S.C. 77a], the issuer 
of which, immediately before the registration, was not subject to the 
reporting requirements of sections 13 or 15(d) of the Securities 
Exchange Act of 1934 [15 U.S.C. 78m or 78o(d)].
    (7) Investment Personnel of a Fund or of a Fund's investment 
adviser means:
    (i) Any employee of the Fund or investment adviser (or of any 
company in a control relationship to the Fund or investment adviser) 
who, in connection with his or her regular functions or duties, makes 
or participates in making recommendations regarding the purchase or 
sale of securities by the Fund.
    (ii) Any natural person who controls the Fund or investment adviser 
and who obtains information concerning recommendations made to the Fund 
regarding the purchase or sale of securities by the Fund.
    (8) A Limited Offering means an offering that is exempt from 
registration under the Securities Act of 1933 pursuant to section 4(2) 
or section 4(6) [15 U.S.C. 77d(2) or 77d(6)] or pursuant to rule 504, 
rule 505, or rule 506 [17 CFR 230.504, 230.505, or 230.506] under the 
Securities Act of 1933.
    (9) Purchase or sale of a Covered Security includes, among other 
things, the writing of an option to purchase or sell a Covered 
Security.
    (10) Security Held or to be Acquired by a Fund means:
    (i) Any Covered Security which, within the most recent 15 days:
    (A) Is or has been held by the Fund; or
    (B) Is being or has been considered by the Fund or its investment 
adviser for purchase by the Fund; and
    (ii) Any option to purchase or sell, and any security convertible 
into or exchangeable for, a Covered Security described in paragraph 
(a)(10)(i) of this section.
    (b) Unlawful Actions. It is unlawful for any affiliated person of 
or principal underwriter for a Fund, or any affiliated person of an 
investment adviser of or principal underwriter for a Fund, in 
connection with the purchase or sale, directly or indirectly, by the 
person of a Security Held or to be Acquired by the Fund:
    (1) To employ any device, scheme or artifice to defraud the Fund;
    (2) To make any untrue statement of a material fact to the Fund or 
omit to state a material fact necessary in order to make the statements 
made to the Fund, in light of the circumstances under which they are 
made, not misleading;
    (3) To engage in any act, practice or course of business that 
operates or would operate as a fraud or deceit on the Fund; or
    (4) To engage in any manipulative practice with respect to the 
Fund.
    (c) Code of Ethics.
    (1) Adoption and Approval of Code of Ethics.
    (i) Every Fund (other than a money market fund or a Fund that does 
not invest in Covered Securities) and each investment adviser of and 
principal underwriter for the Fund, must adopt a written code of ethics 
containing provisions reasonably necessary to prevent its Access 
Persons from engaging in any conduct prohibited by paragraph (b) of 
this section.
    (ii) The board of directors of a Fund, including a majority of 
directors who are not interested persons, must approve the code of 
ethics of the Fund, the code of ethics of each investment adviser and 
principal underwriter of the Fund, and any material changes to these 
codes. The board must base its approval of a code and any material 
changes to the code on a determination that the code

[[Page 46835]]

contains provisions reasonably necessary to prevent Access Persons from 
engaging in any conduct prohibited by paragraph (b) of this section. 
Before approving a code of a Fund, investment adviser or principal 
underwriter or any amendment to the code, the board of directors must 
receive a certification from the Fund, investment adviser or principal 
underwriter that it has adopted procedures reasonably necessary to 
prevent Access Persons from violating the investment adviser's or 
principal underwriter's code of ethics. The Fund's board must approve 
the code of an investment adviser or principal underwriter before 
initially retaining the services of the investment adviser or principal 
underwriter. The Fund's board must approve a material change to a code 
no later than six months after adoption of the material change.
    (iii) If a Fund is a unit investment trust, the Fund's principal 
underwriter or depositor must approve the Fund's code of ethics, as 
required by paragraph (c)(1)(ii) of this section. If the Fund has more 
than one principal underwriter or depositor, the principal underwriters 
and depositors may designate, in writing, which principal underwriter 
or depositor must conduct the approval required by paragraph (c)(1)(ii) 
of this section, if they obtain written consent from the designated 
principal underwriter or depositor.
    (2) Administration of Code of Ethics.
    (i) The Fund, investment adviser and principal underwriter must use 
reasonable diligence and institute procedures reasonably necessary to 
prevent violations of its code of ethics.
    (ii) No less frequently than annually, every Fund (other than a 
unit investment trust) and its investment advisers and principal 
underwriters must furnish to the Fund's board of directors, and the 
board of directors must consider, a written report that:
    (A) Describes any issues arising under the code of ethics or 
procedures since the last report to the board of directors, including, 
but not limited to, information about material violations of the code 
or procedures and sanctions imposed in response to the material 
violations; and
    (B) Certifies that the Fund, investment adviser or principal 
underwriter, as applicable, has adopted procedures reasonably necessary 
to prevent Access Persons from violating the code.
    (3) Exception for Principal Underwriters. The requirements of 
paragraphs (c)(1) and (c)(2) of this section do not apply to any 
principal underwriter unless:
    (i) The principal underwriter is an affiliated person of the Fund 
or of the Fund's investment adviser; or
    (ii) An officer, director or general partner of the principal 
underwriter serves as an officer, director or general partner of the 
Fund or of the Fund's investment adviser.
    (d) Reporting Requirements of Access Persons.
    (1) Reports Required. Unless excepted by paragraph (d)(2) of this 
section, every Access Person of a Fund (other than a money market fund 
or a Fund that does not invest in Covered Securities) and every Access 
Person of an investment adviser of or principal underwriter for the 
Fund, must report to that Fund, investment adviser or principal 
underwriter:
    (i) Initial Holdings Reports. No later than 10 days after the 
person becomes an Access Person, the following information:
    (A) The title, number of shares and principal amount of each 
Covered Security in which the Access Person had any direct or indirect 
beneficial ownership when the person became an Access Person;
    (B) The name of any broker, dealer or bank with whom the Access 
Person maintained an account in which any securities were held for the 
direct or indirect benefit of the Access Person as of the date the 
person became an Access Person; and
    (C) The date that the report is submitted by the Access Person.
    (ii) Quarterly Transaction Reports. No later than 10 days after the 
end of a calendar quarter, the following information:
    (A) With respect to any transaction during the quarter in a Covered 
Security in which the Access Person had any direct or indirect 
beneficial ownership:
    (1) The date of the transaction, the title, the interest rate and 
maturity date (if applicable), the number of shares and the principal 
amount of each Covered Security involved;
    (2) The nature of the transaction (i.e., purchase, sale or any 
other type of acquisition or disposition);
    (3) The price of the Covered Security at which the transaction was 
effected;
    (4) The name of the broker, dealer or bank with or through which 
the transaction was effected; and
    (5) The date that the report is submitted by the Access Person.
    (B) With respect to any account established by the Access Person in 
which any securities were held during the quarter for the direct or 
indirect benefit of the Access Person:
    (1) The name of the broker, dealer or bank with whom the Access 
Person established the account;
    (2) The date the account was established; and
    (3) The date that the report is submitted by the Access Person.
    (iii) Annual Holdings Reports. Annually, the following information 
(which information must be current as of a date no more than 30 days 
before the report is submitted):
    (A) The title, number of shares and principal amount of each 
Covered Security in which the Access Person had any direct or indirect 
beneficial ownership;
    (B) The name of any broker, dealer or bank with whom the Access 
Person maintains an account in which any securities are held for the 
direct or indirect benefit of the Access Person; and
    (C) The date that the report is submitted by the Access Person.
    (2) Exceptions from Reporting Requirements.
    (i) A person need not make a report under paragraph (d)(1) of this 
section with respect to transactions effected for, and Covered 
Securities held in, any account over which the person has no direct or 
indirect influence or control.
    (ii) A director of a Fund who is not an ``interested person'' of 
the Fund within the meaning of section 2(a)(19) of the Act [15 U.S.C. 
80a-2(a)(19)], and who would be required to make a report solely by 
reason of being a Fund director, need not make:
    (A) An initial holdings report under paragraph (d)(1)(i) of this 
section and an annual holdings report under paragraph (d)(1)(iii) of 
this section; and
    (B) A quarterly transaction report under paragraph (d)(1)(ii) of 
this section, unless the director knew or, in the ordinary course of 
fulfilling his or her official duties as a Fund director, should have 
known that during the 15-day period immediately before or after the 
director's transaction in a Covered Security, the Fund purchased or 
sold the Covered Security, or the Fund or its investment adviser 
considered purchasing or selling the Covered Security.
    (iii) An Access Person to a Fund's principal underwriter need not 
make a report to the principal underwriter under paragraph (d)(1) of 
this section if:
    (A) The principal underwriter is not an affiliated person of the 
Fund (unless the Fund is a unit investment trust) or any investment 
adviser of the Fund; and
    (B) The principal underwriter has no officer, director or general 
partner who serves as an officer, director or general partner of the 
Fund or of any investment adviser of the Fund.
    (iv) An Access Person to an investment adviser need not make a

[[Page 46836]]

quarterly transaction report to the investment adviser under paragraph 
(d)(1)(ii) of this section if all the information in the report would 
duplicate information required to be recorded under Secs. 275.204-
2(a)(12) or 275.204-2(a)(13) of this chapter.
    (v) An Access Person need not make a quarterly transaction report 
under paragraph (d)(1)(ii) of this section if the report would 
duplicate information contained in broker trade confirmations or 
account statements received by the Fund, investment adviser or 
principal underwriter with respect to the Access Person in the time 
period required by paragraph (d)(1)(ii), if all of the information 
required by that paragraph is contained in the broker trade 
confirmations or account statements, or in the records of the Fund, 
investment adviser or principal underwriter.
    (3) Review of Reports. Each Fund, investment adviser and principal 
underwriter to which reports are required to be made by paragraph 
(d)(1) of this section must institute procedures by which appropriate 
management or compliance personnel review these reports.
    (4) Notification of Reporting Obligation. Each Fund, investment 
adviser and principal underwriter to which reports are required to be 
made by paragraph (d)(1) of this section must identify all Access 
Persons who are required to make these reports and must inform those 
Access Persons of their reporting obligation.
    (5) Beneficial Ownership. For purposes of this section, beneficial 
ownership is interpreted in the same manner as it would be under 
Sec. 240.16a-1(a)(2) of this chapter in determining whether a person is 
the beneficial owner of a security for purposes of section 16 of the 
Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules and 
regulations thereunder. Any report required by paragraph (d) of this 
section may contain a statement that the report will not be construed 
as an admission that the person making the report has any direct or 
indirect beneficial ownership in the Covered Security to which the 
report relates.
    (e) Pre-approval of Investments in IPOs and Limited Offerings. 
Investment Personnel of a Fund or its investment adviser must obtain 
approval from the Fund or the Fund's investment adviser before directly 
or indirectly acquiring beneficial ownership in any securities in an 
Initial Public Offering or in a Limited Offering.
    (f) Recordkeeping Requirements.
    (1) Each Fund, investment adviser and principal underwriter that is 
required to adopt a code of ethics or to which reports are required to 
be made by Access Persons must, at its principal place of business, 
maintain records in the manner and to the extent set out in this 
paragraph (f), and must make these records available to the Commission 
or any representative of the Commission at any time and from time to 
time for reasonable periodic, special or other examination:
    (A) A copy of each code of ethics for the organization that is in 
effect, or at any time within the past five years was in effect, must 
be maintained in an easily accessible place;
    (B) A record of any violation of the code of ethics, and of any 
action taken as a result of the violation, must be maintained in an 
easily accessible place for at least five years after the end of the 
fiscal year in which the violation occurs;
    (C) A copy of each report made by an Access Person as required by 
this section, including any information provided in lieu of the reports 
under paragraph (d)(2)(v) of this section, must be maintained for at 
least five years after the end of the fiscal year in which the report 
is made or the information is provided, the first two years in an 
easily accessible place;
    (D) A record of all persons, currently or within the past five 
years, who are or were required to make reports under paragraph (d) of 
this section, or who are or were responsible for reviewing these 
reports, must be maintained in an easily accessible place; and
    (E) A copy of each report required by paragraph (c)(2)(ii) of this 
section must be maintained for at least five years after the end of the 
fiscal year in which it is made, the first two years in an easily 
accessible place.
    (2) A Fund or investment adviser must maintain a record of any 
decision, and the reasons supporting the decision, to approve the 
acquisition by investment personnel of securities under paragraph (e), 
for at least five years after the end of the fiscal year in which the 
approval is granted.

PART 239--FORMS PRESCRIBED UNDER THE SECURITIES ACT OF 1933

PART 274--FORMS PRESCRIBED UNDER THE INVESTMENT COMPANY ACT OF 1940

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

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 77z-2, 77sss, 78c, 
78l, 78m, 78n, 78o(d), 78u-5, 78w(a), 78ll(d), 79e, 79f, 79g, 79j, 
79l, 79m, 79n, 79q, 79t, 80a-8, 80a-24, 80a-29, 80a-30 and 80a-37, 
unless otherwise noted.
* * * * *
    4. The authority citation for Part 274 continues to read as 
follows:

    Authority: 15 U.S.C. 77f, 77g, 77h, 77j, 77s, 78c(b), 78l, 78m, 
78n, 78o(d), 80a-8, 80a-24, and 80a-29, unless otherwise noted.

    5. Item 1 of Form N-1A [referenced in Secs. 239.15A and 274.11A] is 
amended by revising paragraph (b)(3) to read as follows:

Form N-1A

* * * * *
Item 1. Front and Back Cover Pages
* * * * *
    (b) * * *
    (3) A statement that information about the Fund (including the SAI) 
can be reviewed and copied at the Commission's Public Reference Room in 
Washington, D.C., and that information on the operation of the Public 
Reference Room may be obtained by calling the Commission at 1-202-942-
8090. State that reports and other information about the Fund are 
available on the EDGAR Database on the Commission's Internet site at 
http://www.sec.gov, and that copies of this information may be 
obtained, after paying a duplicating fee, by electronic request at the 
following E-mail address: [email protected], or by writing the 
Commission's Public Reference Section, Washington, D.C. 20549-0102.
* * * * *
    6. Item 13 of Form N-1A [referenced in Secs. 239.15A and 274.11A] 
is amended by adding paragraph (f) and an instruction to read as 
follows:

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

Form N-1A

* * * * *
Item 13. Management of the Fund
* * * * *
    (f) Codes of Ethics. Provide a brief statement disclosing whether 
the Fund and its investment adviser and principal underwriter have 
adopted codes of ethics under rule 17j-1 of the Investment Company Act 
[17 CFR 270.17j-1] and whether these codes of ethics permit personnel 
subject to the codes to invest in securities, including securities that 
may be purchased or held by the Fund.
    Instruction: A Fund that is not required to adopt a code of ethics 
under rule 17j-1 of the Investment Company Act is not required to 
respond to this item.
* * * * *
    7. Item 23 of Form N-1A [referenced in Secs. 239.15A and 274.11A] 
is amended

[[Page 46837]]

by adding paragraph (p) and an Instruction to read as follows:

Form N-1A

* * * * *
Item 23. Exhibits
* * * * *
    (p) Codes of Ethics. Any codes of ethics adopted under rule 17j-1 
of the Investment Company Act [17 CFR 270.17j-1] and currently 
applicable to the Fund (i.e., the codes of the Fund and its investment 
advisers and principal underwriters). If there are no codes of ethics 
applicable to the Fund, state the reason (e.g., that the Fund is a 
Money Market Fund).
    Instruction: A Fund that is a feeder fund also must file a copy of 
all codes of ethics applicable to the master fund.
* * * * *
    8. Item 18 of Form N-2 [referenced in Secs. 239.14 and 274.11a-1] 
is amended by adding paragraph 5 and an instruction to read as follows:

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

Form N-2

* * * * *
Item 18. Management
* * * * *
    5. Codes of Ethics: Provide a brief statement disclosing whether 
the Registrant and its investment adviser and principal underwriter 
have adopted codes of ethics under Rule 17j-1 of the 1940 Act [17 CFR 
270.17j-1] and whether these codes of ethics permit personnel subject 
to the codes to invest in securities, including securities that may be 
purchased or held by the Registrant. Also explain in the statement that 
these codes of ethics can be reviewed and copied at the Commission's 
Public Reference Room in Washington, D.C., that information on the 
operation of the Public Reference Room may be obtained by calling the 
Commission at 1-202-942-8090, that these codes of ethics are available 
on the EDGAR Database on the Commission's Internet site at http://
www.sec.gov, and that copies of these codes of ethics may be obtained, 
after paying a duplicating fee, by electronic request at the following 
E-mail address: [email protected], or by writing the Commission's 
Public Reference Section, Washington, D.C. 20549-0102.

Instruction

    A Registrant that is not required to adopt a code of ethics under 
Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] is not required to 
respond to this item.
* * * * *
    9. Item 24 of Form N-2 [referenced in Secs. 239.14 and 274.11a-1] 
is amended by adding new paragraph 2.r. to read as follows:

Form N-2

* * * * *
Item 24. Financial Statements and Exhibits
* * * * *
    2. * * *
    r. copies of any codes of ethics adopted under Rule 17j-1 under the 
1940 Act [17 CFR 270.17j-1] and currently applicable to the Registrant 
(i.e., the codes of the Registrant and its investment advisers and 
principal underwriters). If there are no codes of ethics applicable to 
the Registrant, state the reason (e.g., the Registrant is a Money 
Market Fund).
* * * * *
    10. Item 20 of Form N-3 [referenced in Secs. 239.17a and 274.11b] 
is amended by adding paragraph (d) and an Instruction to read as 
follows:

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

Form N-3

* * * * *
Item 20. Management
* * * * *
    (d) Provide a brief statement disclosing whether the Registrant and 
its investment adviser and principal underwriter have adopted codes of 
ethics under Rule 17j-1 of the 1940 Act [17 CFR 270.17j-1] and whether 
these codes of ethics permit personnel subject to the codes to invest 
in securities, including securities that may be purchased or held by 
the Registrant. Also explain in the statement that these codes of 
ethics can be reviewed and copied at the Commission's Public Reference 
Room in Washington, D.C., that information on the operation of the 
Public Reference Room may be obtained by calling the Commission at 1-
202-942-8090, that these codes of ethics are available on the EDGAR 
Database on the Commission's Internet site at http://www.sec.gov, and 
that copies of these codes of ethics may be obtained, after paying a 
duplicating fee, by electronic request at the following E-mail address: 
[email protected], or by writing the Commission's Public Reference 
Section, Washington, D.C. 20549-0102.
    Instruction: A Registrant that is not required to adopt a code of 
ethics under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] is not 
required to respond to this item.
* * * * *
    11. Item 28 of Form N-3 [referenced in Secs. 239.17a and 274.11b] 
is amended by removing the word ``and'' at the end of paragraph 
(b)(14), removing the period at the end of paragraph (b)(15) and in its 
place adding a semicolon, removing the period at the end of paragraph 
(b)(16) and in its place adding ``; and'', and adding new paragraph 
(b)(17) to read as follows:

Form N-3

* * * * *
Item 28. Financial Statements and Exhibits
* * * * *
    (b) * * *
    (17) copies of any codes of ethics adopted under Rule 17j-1 under 
the 1940 Act [17 CFR 270.17j-1] and currently applicable to the 
Registrant (i.e., the codes of the Registrant and its investment 
advisers and principal underwriters). If there are no codes of ethics 
applicable to the Registrant, state the reason (e.g., the Registrant is 
a Money Market Fund).
* * * * *
    12. Item 3 of Form N-5 [referenced in Secs. 239.24 and 274.5] is 
amended by removing the word ``investment'' both times that it appears 
in the introductory text and adding paragraph (i) and an Instruction 
after the Instruction to read as follows:

    Note: The text of Form N-5 does not, and the amendments to the 
form will not, appear in the Code of Federal Regulations.

Form N-5

* * * * *
Item 3. Policies with Respect to Security Investments
* * * * *
    (i) Whether the registrant and its investment adviser and principal 
underwriter have adopted codes of ethics under Rule 17j-1 of the 
Investment Company Act of 1940 [17 CFR 270.17j-1] and whether these 
codes of ethics permit personnel subject to the codes to invest in 
securities, including securities that may be purchased or held by the 
registrant. Also explain that these codes of ethics can be reviewed and 
copied at the Commission's Public Reference Room in Washington, D.C., 
that information on the operation of the Public Reference Room may be 
obtained by calling the Commission at 1-202-942-8090, that these codes 
of ethics are available on the EDGAR Database on the Commission's 
Internet site at http://www.sec.gov, and that copies of these

[[Page 46838]]

codes of ethics may be obtained, after paying a duplicating fee, by 
electronic request at the following E-mail address: [email protected], 
or by writing the Commission's Public Reference Section, Washington, 
D.C. 20549-0102.
    Instruction: A registrant that is not required to adopt a code of 
ethics under Rule 17j-1 under the 1940 Act [17 CFR 270.17j-1] is not 
required to respond to this item.
* * * * *
    13. The Instructions As To Exhibits of Form N-5 [referenced in 
Secs. 239.24 and 274.5] are amended by adding paragraph 13 to read as 
follows:

Form N-5

* * * * *

Instructions as to Exhibits

* * * * *
    13. Copies of any codes of ethics adopted under Rule 17j-1 under 
the Investment Company Act of 1940 [17 CFR 270.17j-1] and currently 
applicable to the registrant (i.e., the codes of the registrant and its 
investment advisers and principal underwriters). If there are no codes 
of ethics applicable to the registrant, state the reason (e.g., the 
registrant is a Money Market Fund).
* * * * *
    14. Item 52 of Form N-8B-2 [referenced in Sec. 274.12] is amended 
by adding paragraph (e) and an Instruction to read as follows:

    Note: The text of Form N-8B-2 does not, and the amendments to 
the form will not, appear in the Code of Federal Regulations.

Form N-8B-2

* * * * *

Policy of Registrant

    52. * * *
    (e) Provide a brief statement disclosing whether the trust and its 
principal underwriter have adopted codes of ethics under rule 17j-1 of 
the Act [17 CFR 270.17j-1] and whether these codes of ethics permit 
personnel subject to the codes to invest in securities, including 
securities that may be purchased or held by the trust. Also explain 
that these codes of ethics can be reviewed and copied at the 
Commission's Public Reference Room in Washington, D.C., that 
information on the operation of the Public Reference Room may be 
obtained by calling the Commission at 1-202-942-8090, that these codes 
of ethics are available on the EDGAR Database on the Commission's 
Internet site at http://www.sec.gov, and that copies of these codes of 
ethics may be obtained, after paying a duplicating fee, by electronic 
request at the following E-mail address: [email protected], or by 
writing the Commission's Public Reference Section, Washington, D.C. 
20549-0102.
    Instruction: A trust that is not required to adopt a code of ethics 
under Rule 17j-1 under the Act [17 CFR 270.17j-1] is not required to 
respond to this item.
* * * * *
    15. Part IX of Form N-8B-2 [referenced in Sec. 274.12] is amended 
by adding paragraph A.(11) to read as follows:

Form N-8B-2

* * * * *

IX--Exhibits

    A. * * *
    (11) Copies of any codes of ethics adopted under rule 17j-1 under 
the Act [17 CFR 270.17j-1] and currently applicable to the trust (i.e., 
the codes of the trust and its principal underwriters). If there are no 
codes of ethics applicable to the trust, state the reason (e.g., the 
trust invests only in direct obligations of the United States 
Government).
* * * * *

PART 275--RULES AND REGULATIONS, INVESTMENT ADVISERS ACT OF 1940

    16. The authority citation for Part 275 continues to read in part 
as follows:

    Authority: 15 U.S.C. 80b-2(a)(17), 80b-3, 80b-4, 80b-6(4), 80b-
6a, 80b-11, unless otherwise noted.

* * * * *
    17. Section 275.204-2 is amended by revising paragraph (a)(12)(i), 
redesignating paragraphs (a)(12)(ii) and (a)(12)(iii) as paragraphs 
(a)(12)(iii) and (a)(12)(iv), adding new paragraph (a)(12)(ii), 
redesignating newly designated paragraph (a)(12)(iii)(B) as paragraph 
(a)(12)(iii)(C), adding new paragraph (a)(12)(iii)(B), revising 
paragraph (a)(13)(i), redesignating paragraphs (a)(13)(ii) and 
(a)(13)(iii) as paragraphs (a)(13)(iii) and (a)(13)(iv), adding new 
paragraph (a)(13)(ii), redesignating newly designated paragraphs 
(a)(13)(iii)(B) and (a)(13)(iii)(C) as paragraphs (a)(13)(iii)(C) and 
(a)(13)(iii)(D), and adding new paragraph (a)(13)(iii)(B) to read as 
follows:


Sec. 275.204-2  Books and records to be maintained by investment 
advisers.

    (a) * * *
    (12)(i) A record of every transaction in a security in which the 
investment adviser or any advisory representative (as defined in 
paragraph (a)(12)(iii)(A) of this section) of the investment adviser 
has, or by reason of the transaction acquires, any direct or indirect 
beneficial ownership, except:
    (A) Transactions effected in any account over which neither the 
investment adviser nor any advisory representative of the investment 
adviser has any direct or indirect influence or control; and
    (B) Transactions in securities that are: direct obligations of the 
Government of the United States; bankers' acceptances, bank 
certificates of deposit, commercial paper, and high quality short-term 
debt instruments, including repurchase agreements; or shares issued by 
registered open-end investment companies.
    (ii) The record required by paragraph (a)(12)(i) of this section 
must state the title and amount of the security involved; the date and 
nature of the transaction (i.e., purchase, sale or other acquisition or 
disposition); the price at which it was effected; and the name of the 
broker, dealer, or bank with or through whom the transaction was 
effected. Any record required by paragraph (a)(12)(i) of this section 
also may contain a statement declaring that the record of the 
transaction will not be construed as an admission that the investment 
adviser or advisory representative has any direct or indirect 
beneficial ownership in the security. A transaction must be recorded no 
later than 10 days after the end of the calendar quarter in which the 
transaction was effected. An investment adviser will be considered to 
have made a record required by paragraph (a)(12)(i) of this section if:
    (A) The investment adviser receives a broker trade confirmation or 
account statement in the time period required by this paragraph 
(a)(12)(ii);
    (B) The broker trade confirmation, account statement or other 
records of the investment adviser contains all the information required 
by this paragraph (a)(12)(ii);
    (C) The investment adviser keeps the broker trade confirmation, 
account statement, and other records containing the information 
required by this paragraph (a)(12)(ii); and
    (D) All broker trade confirmations and account statements that are 
printed on paper and kept under paragraph (a)(12)(ii)(C) of this 
section are organized in a manner that allows easy access to and 
retrieval of any particular confirmation or statement.
    (iii) * * *
    (B) Beneficial ownership will be interpreted in the same manner as 
it would be under Sec. 240.16a-1(a)(2) of this chapter in determining 
whether a person has beneficial ownership of a security for purposes of 
section 16 of the

[[Page 46839]]

Securities Exchange Act of 1934 [15 U.S.C. 78p] and the rules and 
regulations thereunder.
* * * * *
    (13)(i) Notwithstanding the provisions of paragraph (a)(12) of this 
section, an investment adviser that is primarily engaged in a business 
or businesses other than advising registered investment companies or 
other advisory clients, must maintain a record of every transaction in 
a security in which the investment adviser or any advisory 
representative (as defined in paragraph (a)(13)(iii)(A) of this 
section) of the investment adviser has, or by reason of the transaction 
acquires, any direct or indirect beneficial ownership, except:
    (A) Transactions effected in any account over which neither the 
investment adviser nor any advisory representative of the investment 
adviser has any direct or indirect influence or control; and
    (B) Transactions in securities that are: direct obligations of the 
Government of the United States; bankers' acceptances, bank 
certificates of deposit, commercial paper, and high quality short-term 
debt instruments, including repurchase agreements; or shares issued by 
registered open-end investment companies.
    (ii) The record required by paragraph (a)(13)(i) of this section 
must state the title and amount of the security involved; the date and 
nature of the transaction (i.e., purchase, sale or other acquisition or 
disposition); the price at which it was effected; and the name of the 
broker, dealer or bank with or through whom the transaction was 
effected. Any record required by paragraph (a)(13)(i) of this section 
also may contain a statement declaring that the record of the 
transaction will not be construed as an admission that the investment 
adviser or advisory representative has any direct or indirect 
beneficial ownership in the security. A transaction must be recorded no 
later than 10 days after the end of the calendar quarter in which the 
transaction was effected. An investment adviser will be considered to 
have made a record required by paragraph (a)(13)(i) of this section if:
    (A) The investment adviser receives a broker trade confirmation or 
account statement in the time period required by this paragraph 
(a)(13)(ii);
    (B) The broker trade confirmation, account statement or other 
records of the investment adviser contains all the information required 
by this paragraph (a)(13)(ii);
    (C) The investment adviser keeps the broker trade confirmation, 
account statement, and other records containing the information 
required by this paragraph (a)(13)(ii); and
    (D) All broker trade confirmations and account statements that are 
printed on paper and kept under paragraph (a)(13)(ii)(C) of this 
section are organized in a manner that allows easy access to and 
retrieval of any particular confirmation or statement.
    (iii) * * *
    (B) Beneficial ownership will be interpreted in the same manner as 
it would be under Sec. 240.16a-1(a)(2) of this chapter in determining 
whether a person has beneficial ownership of a security for purposes of 
section 16 of the Securities Exchange Act of 1934 [15 U.S.C. 78p] and 
the rules and regulations thereunder.
* * * * *
    By the Commission.

    Dated: August 20, 1999.
Jonathan G. Katz,
Secretary.
[FR Doc. 99-22310 Filed 8-26-99; 8:45 am]
BILLING CODE 8010-01-P