[Federal Register Volume 64, Number 212 (Wednesday, November 3, 1999)]
[Proposed Rules]
[Pages 59826-59876]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 99-27442]



[[Page 59825]]

_______________________________________________________________________

Part II





Securities and Exchange Commission





_______________________________________________________________________



17 CFR Parts 239, 240, 270, 271 and 274



Role of Independent Directors of Investment Companies; Proposed Rule 
Interpretive Matters Concerning Independent Directors of Investment 
Companies; Final Rule

  Federal Register / Vol. 64, No. 212 / Wednesday, November 3, 1999 / 
Proposed Rules  

[[Page 59826]]



SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 240, 270 and 274

[Release Nos. 33-7754; 34-42007; IC-24082; File No. S7-23-99]
RIN 3235-AH75


Role of Independent Directors of Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule.

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SUMMARY: The Commission is publishing for comment proposed amendments 
to certain exemptive rules under the Investment Company Act of 1940 to 
require that, for investment companies that rely on those rules: 
independent directors constitute at least a majority of their board of 
directors; independent directors select and nominate other independent 
directors; and any legal counsel for the independent directors be an 
independent legal counsel. We also are proposing amendments to our 
rules and forms to improve the disclosure that investment companies 
provide about their directors. These proposed amendments are designed 
to enhance the independence and effectiveness of boards of directors of 
investment companies and to better enable investors to assess the 
independence of directors.

DATES: Comments must be received on or before January 28, 2000.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 5th Street, 
N.W., Washington, D.C. 20549-0609. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-23-99; this file number 
should be included on the subject line if E-mail is used. Comment 
letters will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 5th Street, N.W., Washington, 
D.C. 20549. Electronically submitted comment letters also will be 
posted on the Commission's Internet web site (http://www.sec.gov).

FOR FURTHER INFORMATION CONTACT: For information regarding the proposed 
substantive rule amendments, contact Jennifer B. McHugh, Attorney, 
Office of Regulatory Policy, (202) 942-0690, or regarding the 
disclosure amendments, contact Annette M. Capretta, Senior Counsel, or 
Heather A. Seidel, Senior Counsel, Office of Disclosure Regulation, 
(202) 942-0721, at the Division of Investment Management, Securities 
and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-
0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the 
``Commission'') today is proposing for public comment new rules 2a19-3 
[17 CFR 270.2a19-3], 10e-1 [17 CFR 270.10e-1], and 32a-4 [17 CFR 
270.32a-4] and amendments to rules 0-1 [17 CFR 270.0-1], 2a19-1 [17 CFR 
270.2a19-1], 10f-3 [17 CFR 270.10f-3], 12b-1 [17 CFR 270.12b-1], 15a-4 
[17 CFR 270.15a-4], 17a-7 [17 CFR 270.17a-7], 17a-8 [17 CFR 270.17a-8], 
17d-1 [17 CFR 270.17d-1], 17e-1 [17 CFR 270.17e-1], 17g-1 [17 CFR 
270.17g-1], 18f-3 [17 CFR 270.18f-3], 23c-3 [17 CFR 270.23c-3], 30d-1 
[17 CFR 270.30d-1], 30d-2 [17 CFR 270.30d-2], and 31a-2 [17 CFR 
270.31a-2] under the Investment Company Act of 1940 [15 U.S.C. 80a] 
(``Investment Company Act'' or ``Act''); amendments to Forms N-1A [17 
CFR 274.11A], N-2 [17 CFR 274.11a-1], and N-3 [17 CFR 274.11b] under 
the Investment Company Act and the Securities Act of 1933 [15 U.S.C. 
77a-aa] (``Securities Act''); and amendments to Schedule 14A [17 CFR 
240.14a-101] under the Securities Exchange Act of 1934 [15 U.S.C. 78a-
mm] (``Exchange Act'').

Table of Contents

Executive Summary

I. Background

II. Discussion

A. Enhancing the Independence of Fund Boards of Directors
    1. Independent Directors as a Majority of the Board
    (a) Proposed Board Composition Requirements
    (b) Suspension of Board Composition Requirements
    2. Selection and Nomination of Independent Directors
    3. Independent Legal Counsel
B. Limits on Coverage of Directors Under Joint Insurance Policies
C. Exemption from Ratification of Independent Public Accountant 
Requirement for Funds with Independent Audit Committees
D. Qualification as an Independent Director
    1. Affiliation with a Broker-Dealer
    2. Ownership of Index Fund Securities
E. Disclosure of Information about Fund Directors
    1. Basic Information about Directors
    (a) Location of Information
    (b) Required Information
    2. Ownership of Equity Securities in Fund Complex
    3. Conflicts of Interest
    (a) Statutory Scheme Governing Conflicts of Interest
    (b) Need for Disclosure Changes
    (c) General Approach to Disclosure
    (d) Specific Disclosure in the Proxy Rules and SAI
    4. Board's Role in Fund Governance
    5. Separate Disclosure
    6. Technical and Conforming Amendments
    7. Compliance Date
F. Recordkeeping Regarding Director Independence
G. General Request for Comments

III. Cost-Benefit Analysis

IV. Paperwork Reduction Act

V. Summary of Initial Regulatory Flexibility Analysis

VI. Statutory Authority

Text of Proposed Rules and Forms

Executive Summary

    The board of directors of an investment company (``fund'') has 
significant responsibilities to protect investors under state law, the 
Investment Company Act, and many of our exemptive rules. Independent 
directors, in particular, serve as ``independent watchdogs,'' guarding 
investor interests. These interests are paramount, for it is investors 
who own the funds and for whose benefit they must be operated.
    We recently hosted a Roundtable on the Role of Independent 
Investment Company Directors, which highlighted the significance of 
those directors in protecting the interests of fund shareholders. After 
reviewing corporate governance issues and the recommendations of 
participants at our Roundtable, we are proposing a number of rule and 
form changes to enhance the independence and effectiveness of fund 
boards of directors and provide investors with greater information 
about fund directors.
    First, we are proposing to require that, for funds relying on 
certain exemptive rules:
     Independent directors constitute either a majority or a 
super-majority (two-thirds) of the fund's board of directors;
     Independent directors select and nominate other 
independent directors; and
     Any legal counsel for the fund's independent directors be 
an independent legal counsel.
    Second, we are proposing rules and rule amendments that would:
     Prevent qualified individuals from being unnecessarily 
disqualified from serving as independent directors;
     Protect independent directors from the costs of legal 
disputes with fund management;
     Permit us to monitor the independence of directors by 
requiring

[[Page 59827]]

funds to keep records of their assessments of director independence;
     Temporarily suspend the independent director minimum 
percentage requirements if a fund falls below a required percentage due 
to an independent director's death or resignation; and
     Exempt funds from the requirement that shareholders ratify 
or reject the directors' selection of an independent public accountant, 
if the fund establishes an audit committee composed entirely of 
independent directors.
    Finally, we are proposing to require funds to provide better 
information about directors, including:
     Basic information about the identity and business 
experience of directors;
     Fund shares owned by directors;
     Information about directors' potential conflicts of 
interest; and
     The board's role in governing the fund's operations.
    In addition, today we are publishing a companion release that sets 
forth the views of the Commission and the Commission's staff on a 
number of interpretive matters.\1\ This release provides guidance on 
certain discrete issues related to independent directors.
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    \1\ Interpretive Matters Concerning Independent Directors of 
Investment Companies, Investment Company Act Release No. 24083 (Oct. 
14, 1999) [``Interpretive Release''].
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    Together, these initiatives are designed to reaffirm the important 
role that independent directors play in protecting fund investors, 
strengthen their hand in dealing with fund management, reinforce their 
independence, and provide investors with greater information to assess 
the directors' independence.

I. Background

    Today, millions of Americans rely on mutual funds to save and 
invest for their families' futures.\2\ More than 77 million individual 
investors own shares of mutual funds, which hold over $5.5 trillion in 
assets--an increase of over 580 percent from ten years ago.\3\ 
Investments in mutual funds are a significant part of retirement plans 
and college savings plans, as well as many traditional brokerage 
accounts.\4\ Money market funds, which alone have over $1 trillion in 
assets,\5\ often serve as a substitute for checking accounts and 
provide an important vehicle for cash management for individual 
investors as well as many institutions and businesses.\6\ International 
and global funds give investors easy access to foreign markets.\7\
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    \2\ For simplicity, this release focuses on mutual funds (i.e., 
open-end funds). Our proposed rule amendments, however, would apply 
to all management investment companies, except where noted.
    \3\ See Investment Company Institute, Mutual Fund Fact Book 3 
(1999) [``1999 Mutual Fund Fact Book'']. Total assets of mutual 
funds were $5.525 trillion at the end of 1998, compared to $809.4 
billion in 1988. In 1998, an estimated 44 percent of U.S. households 
owned mutual funds, up from 5.7 percent in 1980 and 24.4 percent in 
1988. Id. at 45. As of December 31, 1998, an estimated 77.3 million 
individuals owned shares of mutual funds. Id. at 41. At the end of 
1998, assets of all funds (open-end funds, closed-end funds, and 
unit investment trusts) totaled $5.778 trillion. See id. at 3 
(stating that assets of open-end funds totaled $5.525 trillion at 
the end of 1998); Lipper Inc., Lipper Closed-End Fund Performance 
Analysis 1-2 (Jan 1999) (stating that assets of closed-end funds 
totaled $158 billion at the end of 1998); Investment Company 
Institute, Release No. 99-36 (stating that assets of unit investment 
trusts totaled $94.54 billion at the end of 1998).
    \4\ At the end of 1998, assets totaling approximately $1.9 
trillion, or 35 percent of all mutual fund assets, were held in 
retirement accounts, up from $348 billion at the end of 1991. 1999 
Mutual Fund Fact Book, Supra note 3, at 47-48; see also Jennifer 
Karchmer, Planning for Retirement Has Given Mutual Fund Assets a 
Steady Boost, Bond Buyer, May 24, 1999, at 6.
    \5\ At the end of 1998, money market fund assets totaled 
approximately $1.352 trillion. See 1999 Mutual Fund Fact Book, supra 
note 3, at 4.
    \6\ See generally Investment Company Institute, Money Market 
Mutual Funds (1990).
    \7\ Assets in funds investing primarily in foreign securities 
totaled over $448.5 billion at the end of 1998. See Investment 
Company Institute, Release No.99-07 (stating that assets of open-end 
funds investing primarily in foreign securities totaled $416.5 
billion at the end of 1998); Lipper Inc., Lipper Closed-End Fund 
Performance Analysis--Fourth Quarter 1998 Report (stating that 
assets of closed-end funds investing primarily in foreign securities 
totaled $32 billion at the end of 1998).
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    Mutual funds are formed as corporations or business trusts under 
state law and, like other corporations and trusts, must be operated for 
the benefit of their shareholders.\8\ Mutual funds are unique, however, 
in that they are ``organized and operated by people whose primary 
loyalty and pecuniary interest lie outside the enterprise.'' \9\ As 
described below, this ``external management'' of virtually all mutual 
funds presents inherent conflicts of interest and potential for abuses.
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    \8\ See generally James M. Storey & Thomas M. Clyde, Mutual Fund 
Law Handbook Sec. 7.2 (1998); Allan S Mostoff & Oliver P. Adler, 
Organizing an Investment Company--Structural Considerations Sec. 2.4 
in The Investment Company Regulation Deskbook (Amy L. Goodman ed., 
1997).
    \9\ Division of Investment Management, SEC, Protecting 
Investors; A Half Century of Investment Company Regulation 251 
(``1992 Protecting Investors Report'']; see also 1 Tamar Frankel, 
Regulation of Money Managers 10 (1978).
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    An investment adviser typically organizes a mutual fund and is 
responsible for its day-to-day operations. The adviser generally 
provides the seed money, officers, employees, and office space, and 
usually selects the initial board of directors. In many cases, the 
investment adviser sponsors several funds that share administrative and 
distribution systems as part of a ``family of funds.'' As a result of 
this extensive involvement, and the general absence of shareholder 
activism, investment advisers typically dominate the funds they 
advise.\10\
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    \10\ See SEC. Report on the Public Policy Implications of 
Investment Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d. Sess. 
12 127, 148 (1966) [``Public Policy Report''] (stating that funds 
generally are formed by their advisers and remain under their 
control, and that advisers' influence permeates fund activities); 
Wharton School of Finance and Commerce, a Study of Mutual Funds, 
H.R. Rep. No. 2274, 87th Cong., 2d Sess. 463 (1962) [``Wharton 
Report''] (discussing the dominant position of advisers in the 
control of funds and the infrequency with which funds have a 
separate existence from their advisers); see also Clarke Randall, 
Fiduciary Duties of Investment Company Directors and Management 
Companies Under the Investment Company Act of 1940, 31 Okla. L. Rev. 
635, 636 (1978) (``The adviser's control and influence over the fund 
is very nearly total.''); In the Matter of Steadman Security 
Corporation, Investment Company Act Release No. 9830 [1977 Transfer 
Binder] Fed. Sec. L. Rep. (CCH) para. 81,243, at n.81 (Jun. 29, 
1977) (``[T]he investment adviser almost always controls the 
fund.'').
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    Investment advisers to mutual funds are generally organized as 
corporations, which have their own shareholders. These shareholders may 
have an interest in the mutual fund that is quite different from the 
interests of the fund's shareholders. For example, while fund 
shareholders ordinarily prefer lower fees (to achieve greater returns), 
shareholders of the fund's investment adviser might want to maximize 
profits through higher fees. And while fund shareholders might prefer 
that advisers use brokers that charge the lowest possible commissions, 
advisers might prefer to use brokers that are affiliates of the 
adviser. These types of conflicts (and others) resulted in the 
pervasive abuses that led Congress in 1940 to enact legislation 
regulating the activities of mutual funds.\11\
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    \11\ See section 1(b)(2) of the Act [15 U.S.C. 80a-1(b)(2)]; 
SEC, Report on Investment Trusts and Investment Companies, Part III 
(1939); see also Storey & Clyde, supra note 8, at Sec. 2.2 Joseph 
F,. Krupsky, The Role of Investment Company Directors, 32 Bus. Law. 
1733, 1737-40 (1977); William J. Nutt, A Study of Mutual Fund 
Independent Directors, 120 U. PA. L. Rev. 179, 181 (1971).
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    The Investment Company Act establishes a comprehensive regulatory 
scheme designed to protect fund investors by addressing the conflicts 
of interest between funds and their investment advisers or other 
affiliated persons. The Act strictly regulates some of the most serious 
conflicts. For example, the Act prohibits certain transactions between 
a fund and its affiliates, including the investment adviser, unless 
approved by the

[[Page 59828]]

Commission.\12\ The Act also relies on fund boards of directors to 
police conflicts of interest.
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    \12\ Section 17(a) of the Act [15 U.S.C. 80a-17(a)].
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    Under state law, directors are generally responsible for the 
oversight of all of the operations of a mutual fund.\13\ In addition, 
the Investment Company Act assigns many specific responsibilities to 
fund boards. For example, fund boards must evaluate and approve a 
fund's advisory contract and any assignment of the contract, and may 
unilaterally terminate the contract.\14\ Directors also approve the 
fund's principal underwriting contract,\15\ select the fund's 
independent accountant,\16\ and value certain securities held by the 
fund.\17\ In addition, under the Act and our rules, directors have 
responsibility for evaluating the reasonableness of advisory and 
distribution-related fees charged the fund \18\ and managing certain 
operational conflicts. Just recently, for example, we clarified that 
boards must assume oversight responsibility for personal securities 
transactions by employees of the fund and its adviser.\19\
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    \13\ See Jean Gleason Stromberg, Governance of Investment 
Companies, in The Investment Company Regulation Deskbook 
Secs. 4.1-.2 (Amy L. Goodman, ed. 1997).
    \14\ See section 15(a) of the Act [15 U.S.C. 80a-15a)] 
(requiring annual approval of the advisory contract by the funds's 
board of directors or shreholders and requiring that the contract 
empower the board to terminate the contract); section 15(c) of the 
Act [15 U.S.C. 80a-15(c)] (requiring that a fund's independent 
directors separately evaluate and approve any advisory contract with 
the fund).
    \15\ See Section 15(b) of the Act [15 U.S.C. 80a-15(b)] 
(requiring approval of the principal underwriting contract by the 
fund's board or shareholders); section 15(c) of the Act (requiring 
that a fund's independent directors separately evaluate and approve 
the fund's contract with its principal underwriter).
    \16\ See section 32(a)(1) of the Act [15 U.S.C. 80a-31(a)(1)] 
(requiring that a fund's independent directors select the fund's 
independent public accountant).
    \17\ See section 2(a)(41) of the Act [15 U.S.C. 80a-2(a)(41)] 
(requiring, in effect, that any security for which no market 
quotation is readily available be valued at fair value as determined 
in good faith by the board of directors).
    \18\ See sections 15 (a)-(c) of the Act (board review of fees 
paid to a fund's adviser and principal underwriter); rule 12b-1 
under the Act [17 CFR 270.12b-1] (board review of asset-based 
distribution fees paid pursuant to a ``rule 12b-1 plan'').
    \19\ See Personal Investment Activities of Investment Company 
Personnel, Investment Company Act Release No. 23958 (Aug. 20, 1999) 
[64 FR 46821 (Aug. 27, 1999)] (adopting amendments to rule 17j-1 
under the Act [17 CFR 270.17j-1]).
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    The Act requires that independent directors constitute at least 40 
percent of a fund's board,\20\ and sets the standards for when a person 
will be disqualified from being an independent director (i.e., will be 
considered an ``interested person'' under the Act).\21\ These 
independent directors play an important role in representing and 
guarding the interests of investors. As has been stated many times, 
Congress intended these directors to be the ``independent watchdogs'' 
\22\ for investors and to ``supply an independent check on 
management.'' \23\
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    \20\ Section 10(a) of the Act [15 U.S.C. 80a-10(a)] (prohibiting 
more than 60 percent of a fund's directors from being interested 
persons of the fund). We refer to directors who are not ``interested 
persons'' of the fund as ``independent directors.'' See also section 
10(b)(2) of the Act [15 U.S.C. 80a-10(b)(2)] (requiring, in effect, 
that independent directors comprise a majority of a fund's board if 
the fund's principal underwriter is an affiliate of the fund's 
investment adviser); section 15(f)(1) of the Act [15 U.S.C. 80a-
15(f)(1)] (providing a safe harbor for the sale of an advisory 
business if directors who are not interested persons of the 
investment adviser constitute at least 75 percent of a fund's board 
for at least three years following the assignment of the advisory 
contract).
    \21\ Section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)] 
(defining ``interested person''); see infra note 170 (discussing the 
elements of the definition of ``interested person'').
    \22\ See Burks v. Lasker, 441 U.S. 471, 484 (1979) (quoting 
Tannenbaum v. Zeller, 552 F.2d 402, 406 (2d Cir. 1977)).
    \23\ S. Rep. No. 184, 91st Cong., 2d Sess. 31 (1969).
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    Many requirements of the Act and our rules that protect investors 
from conflicts of interest specifically rely on action by these 
independent directors. The Act, for example, requires independent 
directors to separately evaluate and approve the fund's contract with 
an investment adviser or principal underwriter.\24\ Our rules have 
permitted innovative types of funds, more efficient fund operations, 
and new distribution arrangements by exempting funds from prohibitions 
related to conflicts of interest. While these rules have provided 
important flexibility to allow mutual funds to meet the changing needs 
of investors, they also rely on approval, oversight, and monitoring by 
independent directors to protect investors.\25\
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    \24\See section 15(c) of the Act.
    \25\See, e.g., rule 10f-3 [17 CFR 270.10f-3] (permitting funds 
to purchase securities in a primary offering when an affiliated 
broker-dealer is a member of the underwriting syndicate if the 
fund's board, including a majority of its independent directors, (i) 
approves procedures regulating purchases of these securities and 
(ii) determines at least quarterly that the purchases complied with 
the board-approved procedures). In addition, we have eliminated 
certain rule provisions that arguably required directors to ``micro-
manage'' fund operations. See Custody of Investment Company Assets 
Outside the United States, Investment Company Act Release No. 22658 
(May 12, 1997) [62 FR 26923 (May 16, 1997)] (amending rule 17f-5 to 
permit fund directors to delegate certain responsibilities related 
to foreign custody arrangements and eliminating the requirement that 
directors annually review those arrangements); Revision of Certain 
Annual Review Requirements of Investment Company Boards of 
Directors, Investment Company Act Release No. 19719 (Sept. 17, 1993) 
[58 FR 49919 (Sept. 24, 1993)] (eliminating certain annual board 
review requirements of rules 10f-3, 17a-7, 17e-1, 17f-4, and 22c-1). 
See also Investment Company Institute, SEC No-Action Letter (Jun. 
15, 1999) (revising the staff's previous position to permit a fund's 
adviser, rather than the fund's board, to evaluate the 
creditworthiness of repurchase agreement counterparties and 
otherwise assume primary responsibility for monitoring and 
evaluating the fund's use of repurchase agreements).
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    Earlier this year we held a two-day public Roundtable discussion on 
the role of independent directors of mutual funds.\26\ Participants in 
the Roundtable included independent directors, investor advocates, 
executives of fund advisers, academics, corporate governance experts, 
and experienced legal counsel. They examined the activities and 
responsibilities of independent directors and reviewed the nature of 
their independence. Participants also discussed various ways that the 
Commission might promote greater effectiveness of independent 
directors.
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    \26\ See SEC, Notice of Sunshine Act Meetings (Feb. 18, 1999) 
[64 FR 8632 (Feb. 22, 1999)]; see also Transcripts from the 
Roundtable on the Role of Independent Investment Company Directors, 
February 23-24, 1999 [``Roundtable Transcripts'']. The Roundtable 
Transcripts are available to the public in the Commission's public 
reference room and the Commission's Louis Loss Library. They also 
are available on the Commission's Internet web site <http://
www.sec.gov/offices/invmgmt/roundtab.htm>.
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    We endorse the sentiments of the Roundtable participants who favor 
enhancing the effectiveness and independence of fund boards of 
directors. While those sentiments can be fully achieved only through 
amendments to the Investment Company Act, we are impressed by the 
consensus of the participants concerning the importance of the role of 
independent directors and the conditions they believe are necessary to 
enhance the effectiveness of those directors. We therefore are 
proposing rule amendments designed to reaffirm the important role that 
independent directors play in protecting fund investors, strengthen 
their hand in dealing with fund management, reinforce their 
independence, and provide investors with better information to assess 
the independence of directors.

II. Discussion

A. Enhancing the Independence of Fund Boards of Directors

    Panelists at our recent Roundtable discussed a number of possible 
ways to enhance the independence and effectiveness of fund boards. Most 
participants agreed that independent directors can best fulfill their 
responsibilities when they constitute a substantial majority of the 
board.

[[Page 59829]]

Participants also recommended that the selection of new independent 
directors be entrusted to existing independent directors and that 
independent directors have independent legal counsel.\27\ An industry 
advisory group organized by the Investment Company Institute recently 
made similar recommendations in a ``best practices'' report (``ICI 
Advisory Group Report'').\28\
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    \27\ See infra notes 41, 63, and 76 (citing testimony of 
Roundtable participants). We discuss the merits of each of these 
recommendations below.
    \28\ Investment Company Institute, Report of the Advisory Group 
on Best Practices for Fund Directors: Enhancing A Culture of 
Independence and Effectiveness (June 24, 1999). On July 7, 1999, the 
Board of Governors of the Investment Company Institute unanimously 
endorsed the recommended ``best practices.'' See ``ICI Board Adopts 
Resolution Urging Fund Industry to Strengthen Governance,'' at 
<http://www.ici.org/issues/dtrs__best__prac.htm>.
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    The recommendations of the Roundtable participants have led us to 
review our exemptive rules that provide funds and advisers relief from 
various statutory prohibitions designed to prevent the most egregious 
conflicts of interest. Roundtable participants repeatedly noted that 
one of the most important functions of independent directors is to 
oversee conflicts of interest.\29\ Although the rules that we have 
adopted over the years have expanded the responsibilities of boards, 
the rules generally do not contain conditions designed to enhance the 
independence and effectiveness of fund boards, with two notable 
exceptions.\30\
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    \29\ See, e.g., Roundtable Transcript of Feb. 24, 1999 at 174 
(statement of John C. Coffee, Jr.) (stating that the need for 
activism by independent directors is most evident in the context of 
conflicts of interest); id. at 197 (statement of Richard M. 
Phillips) (``[T]he focal point of independent directors is conflicts 
of interest.'').
    \30\ Rule 12b-1, one of the exceptions, permits the use of fund 
assets to pay for distribution of fund shares, but only if the 
fund's independent directors select and nominate other independent 
directors. See rule 12b-1(c) under the Act [17 CFR 270.12b-1(c)]. In 
adopting this requirement, we stated our view that ``as a general 
proposition disinterested directors should not be entrusted with a 
decision on the use of fund assets for distribution without 
receiving the benefit of measures designed to enhance their ability 
to act independently.'' Bearing of Distribution Expenses by Mutual 
Funds, Investment Company Act Release No. 11414 (Oct. 28, 1980) [45 
FR 73898 (Nov. 7, 1980)] [''Rule 12b-1 Adopting Release''], at text 
following n.50. Rule 23c-3, the other exception, permits the 
creation of so-called ``interval funds'' (i.e., closed-end funds 
that periodically offer to repurchase their securities from 
investors), but only if independent directors constitute a majority 
of the board, and select and nominate other independent directors. 
Rule 23c-3(b)(8) under the Act [17 CFR 270.23c-3(b)(8)]. These 
requirements were included in the rule to ``ensure that the board of 
directors provides independent decisions or scrutiny for actions or 
decisions that may involve a conflict of interest between the 
adviser and [the fund's] shareholders.'' Repurchase Offers by 
Closed-End Management Investment Companies, Investment Company Act 
Release No. 19399 (Apr. 7, 1993) [58 FR 19330 (Apr. 14, 1993)] 
[``Rule 23c-3 Adopting Release''], at Section II.D.
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    Upon reflection, and in light of the recommendations of the 
Roundtable participants, we believe that our exemptive rules that rely 
on fund boards to approve and oversee arrangements or transactions that 
involve conflicts of interest and are otherwise prohibited by the Act 
also should contain provisions designed to enhance director 
independence and effectiveness. We therefore are proposing amendments 
to certain exemptive rules under the Investment Company Act to enhance 
the independence of fund directors who are charged with overseeing the 
fund's activities and transactions covered by those rules. These 
amendments would require, for funds that rely (or whose affiliated 
persons rely) on the rules, that: (i) independent directors constitute 
either a majority or a super-majority (two-thirds) of their boards; 
(ii) independent directors select and nominate other independent 
directors; and (iii) any legal counsel for the independent directors be 
an independent legal counsel.
    Our proposals to enhance board independence would amend ten rules 
under the Investment Company Act. We have selected those rules that (i) 
exempt funds or their affiliated persons from provisions of the Act, 
and (ii) have as a condition the approval or oversight of independent 
directors. For convenience, we will refer to these rules as the 
``Exemptive Rules.'' \31\ The Exemptive Rules typically relieve funds 
from statutory prohibitions that preclude certain types of transactions 
or arrangements that would involve serious conflicts of interest.\32\ 
In one case, a rule permits the board to approve an interim advisory 
agreement without a shareholder vote that otherwise would be 
required.\33\ Based on these criteria, we propose to amend the 
following rules:
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    \31\ A number of the Exemptive Rules exempt fund affiliates, 
rather than the fund, from certain statutory prohibitions. For ease 
of reference, this Release generally refers to funds that rely on 
the Exemptive Rules, rather than reiterating that funds or their 
affiliated persons may be relying on the rules.
    \32\ These rules also require boards of funds relying on the 
rules to exercise vigilance in protecting funds and their investors. 
See, e.g., Exemption for the Acquisition of Securities During the 
Existence of an Underwriting or Selling Syndicate, Investment 
Company Act Release No. 22775 (July 31, 1997) [62 FR 42401 (Aug. 7, 
1997)], at n.52 and accompanying text (the fund's board should be 
``vigilant'' not only in reviewing the fund's compliance with the 
procedures required by rule 10f-3, but also ``in conducting any 
additional reviews that it determines are needed to protect the 
interests of investors'').
    \33\ See rule 15a-4 [17 CFR 270.15a-4]. Under section 15(a) of 
the Act, shareholders generally must approve a fund's contract with 
its adviser.
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     Rule 10f-3 (permitting funds to purchase securities in a 
primary offering when an affiliated broker-dealer is a member of the 
underwriting syndicate);
     Rule 12b-1 (permitting use of fund assets to pay 
distribution expenses);
     Rule 15a-4 (permitting fund boards to approve interim 
advisory contracts without shareholder approval);
     Rule 17a-7 (permitting securities transactions between a 
fund and another client of the fund's adviser);
     Rule 17a-8 (permitting mergers between certain affiliated 
funds);
     Rule 17d-1(d)(7) (permitting funds and their affiliates to 
purchase joint liability insurance policies);
     Rule 17e-1 (specifying conditions under which funds may 
pay commissions to affiliated brokers in connection with the sale of 
securities on an exchange);
     Rule 17g-1(j) (permitting funds to maintain joint insured 
bonds);
     Rule 18f-3 (permitting funds to issue multiple classes of 
voting stock); and
     Rule 23c-3 (permitting the operation of interval funds by 
enabling closed-end funds to repurchase their shares from investors).
    The Commission requests comment on the criteria that we have used 
to select these rules. Are there additional rules that we should 
similarly amend? Conversely, should any of the Exemptive Rules not be 
amended?
    Although the Commission urges all funds to adopt these measures to 
strengthen the independence of their boards, we are not proposing to 
require all funds to adopt these measures. Funds that do not rely on 
any of the Exemptive Rules will not be subject to these requirements. 
They may continue, for example, to have only 40 percent of their boards 
consist of independent directors.
    As discussed above, an advisory group organized by the Investment 
Company Institute (``ICI Advisory Group'') has issued a report 
containing a set of ``best practices'' for ``enhancing a culture of 
independence and effectiveness'' of fund directors.\34\ These best 
practices generally include some of the practices that our proposed 
rule amendments would require boards to adopt in order to rely on the 
Exemptive Rules. We applaud the initiative, but, as the report 
acknowledges, many of the ``best practices'' may be impracticable or 
unnecessary for all funds to adopt. Moreover, it may not be appropriate 
for us to address many of the

[[Page 59830]]

recommendations through rulemaking.\35\ Thus, we are not at this time 
proposing to require that funds relying on the Exemptive Rules follow 
all of these practices. Nonetheless, we believe that fund boards should 
give serious consideration to the recommendations of the ICI Advisory 
Group. We request comment whether we should amend the Exemptive Rules, 
or other rules, to require funds relying on them to follow any of these 
``best practices.'' Commenters who favor any of these practices also 
should address the benefits and burdens of amending the Exemptive Rules 
in this manner.
---------------------------------------------------------------------------

    \34\ ICI Advisory Group Report, supra note 28.
    \35\ In addition, because our rules apply to all funds (or, in 
the case of the Exemptive Rules, all funds that rely on those 
rules), we have designed our amendments by considering, among other 
things, the costs, benefits, and paperwork burdens for funds and 
investors (including small entities) that may result from the 
changes. See, e.g., infra Section III (cost-benefit analysis); 
Section IV (Paperwork Reduction Act analysis); Section V (Regulatory 
Flexibility Act analysis). In each area of consideration, we have 
requested comment on the costs, benefits, and burdens of the 
proposed rule amendments.
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1. Independent Directors as a Majority of the Board
    (a) Proposed Board Composition Requirements. We believe that a fund 
board that has at least a majority of independent directors is better 
equipped to perform its responsibilities of monitoring potential 
conflicts of interests and protecting the fund and its 
shareholders.\36\ By virtue of its independence, and its ability to act 
without the approval of the investment adviser (whose employees often 
serve as interested, or ``inside,'' directors on fund boards), such a 
board is better able to exert a strong and independent influence over 
fund management.\37\ This is particularly important in circumstances 
where the fund's interests conflict with those of the adviser.\38\
---------------------------------------------------------------------------

    \36\ See 1992 Protecting Investors Report, supra note 9, at 267 
(``[A]n increased measure of independence is necessary to allow 
independent directors to perform these responsibilities 
appropriately.''). In the context of business development companies, 
Congress has recognized that having a majority of independent 
directors is particularly important ``where board approval is made 
expressly a substitute for Commission review or for a per se 
restriction.'' H.R. Rep. No. 1341, 96th Cong., 2d Sess. 25 (1980). 
See also S. Rep. No. 75, 94th Cong., 1st Sess. 71 (1975) (stating 
that the requirement in section 15(f) that 75 percent of a fund's 
board consist of directors who are not interested persons of the 
adviser for three years following the sale of an advisory contract 
is a ``safeguard [ ] to protect the investment company and its 
shareholders'').
    \37\ The original Senate bill that culminated in the Investment 
Company Act would have required a majority of a fund's directors to 
be independent from management. See S. 3580, 76th Cong., 3d Sess. 
Sec. 10(a) (1940). That requirement was changed to 40 percent out of 
concern that a board with an independent majority would repudiate 
the recommendations of the investment adviser, depriving fund 
shareholders of those recommendations. See Investment Trusts and 
Investment Companies: Hearings on H.R. 10065 Before the House 
Subcomm. on Interstate and Foreign Commerce, 76th Cong., 3d Sess. 
109-10 (1940) (statement of David Schenker). Experience has shown 
that this concern was unfounded. See 1992 Protecting Investors 
Report, supra note 9, at 267. Rather, we believe that an independent 
majority enhances board oversight without unnecessarily impeding 
fund operations or significantly increasing costs.
    \38\ We expressly recognized this when we adopted rule 23c-3. We 
included the requirements that independent directors constitute a 
majority of the board and select and nominate their successors to 
``ensure that the board of directors provides independent decisions 
or scrutiny for actions or decisions that may involve a conflict of 
interest between the adviser and [fund] shareholders.'' Rule 23c-3 
Adopting Release, supra note 30; cf. Peter Tufano & Matthew Sevick, 
Board Structure and Fee-setting in the U.S. Mutual Fund Industry, J. 
FiN. ECON. 321, 350 (1997) (``[T]he salutary benefits of * * * a 
higher fraction of independent directors [on a fund's board] should 
be most visible when management's and shareholders' interests are 
most at odds.'').
---------------------------------------------------------------------------

    Today most, but not all, mutual funds have boards with at least a 
simple majority of independent directors.\39\ When our Division of 
Investment Management studied mutual fund governance in 1992 it 
recommended that, as a requirement for all funds, independent directors 
constitute at least a majority of a fund's board.\40\ Many of the 
Roundtable participants stated that, based on their experience, a fund 
board generally is more effective if independent directors represent a 
substantial majority of the board.\41\ Similarly, the ICI Advisory 
Group Report recently endorsed boards having a ``super-majority'' of 
independent directors. The Report concluded that a two-thirds majority 
of independent directors on a board ``will be more effective than a 
simple majority in enhancing the authority of independent 
directors.''\42\
---------------------------------------------------------------------------

    \39\ See ICI Advisory Group Report, supra note 28, at 5 (``The 
vast majority of fund boards today consist of a majority of 
independent directors.''); Investment Company Institute, 
Understanding the Role of Mutual Fund Directors 5 (1998) (noting 
that most fund boards have a majority of independent directors). In 
some cases, fund boards have an independent majority in order to 
comply with certain requirements of the Act and our rules. See, 
e.g., section 10(b)(2) (requiring, in effect, that independent 
directors comprise a majority of a fund's board if the fund's 
principal underwriter is an affiliate of the fund's investment 
adviser); section 15(f)(1) (providing a safe harbor for the sale of 
an advisory business if directors independent of the adviser 
constitute at least 75 percent of a fund's board for at least three 
years following the assignment of the advisory contract); rule 6e-
3(T)(b)(15) [17 CFR 270.6e-3(T)(b)(15)] (exempting certain funds 
underlying insurance products from various Investment Company Act 
provisions provided that independent directors constitute a majority 
of the boards of those funds); rule 23c-3(b)(8) (permitting the 
operation of interval funds if, among other conditions, independent 
directors comprise a majority of the board).
    \40\ See 1992 Protecting Investors Report, supra note 9, at 267 
(Division recommended that Investment Company Act be amended to 
require that independent directors constitute more than 50 percent 
of a fund's board); see also Wharton Report, supra note 10, at 35 
(increasing the proportion of unaffiliated directors may enhance the 
value of those directors as a check on management).
    \41\ See Roundtable Transcript of Feb. 24, 1999 at 241 
(statement of Aulana L. Peters) (``My experience * * * dictates that 
for a board to have a chance of operating truly independently * * * 
there should be at least two independent [ ] [directors] to one 
[inside director].''); id. at 265 (statement of Gerald C. McDonough) 
(recommending that fund boards be required to have ``a certain 
majority, 60, 66 percent, * * * certainly a clear majority of truly 
independent [directors]''); Roundtable Transcript of Feb. 23, 1999 
at 136 (statement of Faith Colish) (endorsing a ``substantial 
majority'' of independent directors as a positive corporate 
governance feature for fund boards). See also Tufano & Sevick, supra 
note 38 (using empirical analysis to suggest that funds with boards 
that have a larger fraction of independent directors tend to have 
lower fees).
    \42\ See ICI Advisory Group Report, supra note 28, at 11.
---------------------------------------------------------------------------

    We take the conclusions of the ICI Report as a serious 
recommendation reflecting the collective experience and wisdom of the 
Advisory Group, which consisted of prominent members of the mutual fund 
industry.\43\ Although the Report did not address whether Congress or 
the Commission should adopt a two-thirds majority as a regulatory 
requirement, it recommended the standard as a ``best practice'' for all 
funds to consider.\44\ It is unclear, however, why a super-majority 
standard as a ``best practice'' would be appropriate for some fund 
boards and not others.
---------------------------------------------------------------------------

    \43\ As noted above, the Board of Governors of the ICI also 
unanimously endorsed the recommendations of the ICI Advisory Group 
Report. See supra note 28.
    \44\ The Report also noted that, while many funds already have a 
two-thirds majority of independent directors, the practice is ``far 
from universal.'' ICI Advisory Group Report, supra note 28, at 11.
---------------------------------------------------------------------------

    A simple majority requirement would permit, under state law, the 
independent directors to control the ``corporate machinery,'' i.e., to 
elect officers of the fund, call meetings, solicit proxies, and take 
other actions without the consent of the adviser. Such a provision 
would require few funds to change the current composition of their 
boards, but would bring those that must change into conformity with the 
better practice. A two-thirds requirement, on the other hand, could 
change the dynamics of board decision-making in favor of the interests 
of investors, but may require many funds to change the composition of 
their boards.
    In light of the potential benefits to funds, their boards, and 
shareholders, we are proposing to amend the Exemptive Rules to require 
funds relying on them to have boards with at

[[Page 59831]]

least a majority of independent directors. Comment is requested on 
whether we should adopt a simple majority requirement, as the staff 
recommended in 1992, or the two-thirds super-majority requirement 
recommended by the ICI Advisory Group Report. We also request comment 
whether we should adopt an even higher percentage requirement (e.g., 75 
percent or 100 percent).\45\
---------------------------------------------------------------------------

    \45\ See, e.g., section 15(f)(1) of the Act (providing a safe 
harbor for the sale of an advisory business if directors who are 
independent of the adviser constitute at least 75 percent of a 
fund's board for at least three years following the assignment of 
the advisory contract). The ICI Advisory Group Report discussed, but 
did not recommend at a best practice, having fund boards comprised 
exclusively of independent directors. See ICI Advisory Group Report, 
supra note 28, at 11-12. As a result of the Glass-Steagall Act, most 
bank-sponsored funds have boards comprised entirely of independent 
directors. See section 32 of the Glass Steagall Act [12 U.S.C. 78] 
(prohibiting directors of any entity issuing securities, such as a 
fund, from simultaneously serving as an officer, director, or 
employee of a national bank); see also Roundtable Transcript of Feb. 
24, 1999 at 111 (statement of Richard J. Herring, independent 
director of a family of bank-related mutual funds and business 
school professor of international banking) (noting that a bank-
related fund board comprised entirely on independent directors 
``works quite well'').
---------------------------------------------------------------------------

    We note that the charters \46\ of some funds may contain provisions 
that require the approval of greater than a majority of a fund's board 
for some matters, and, in light of our proposed amendments, other funds 
may amend their charters to provide that a board may act only upon the 
vote of greater than a simple (or two-thirds) majority of its members. 
Would the existence of these super-majority voting provisions in fund 
charters undercut the effectiveness of a board with a majority of 
independent directors by requiring the consent of the ``inside'' 
directors and thus, in many cases, give the adviser a veto over board 
votes? We request comment regarding the prevalence and potential effect 
of these voting provisions in fund charters.
---------------------------------------------------------------------------

    \46\ We use the term ``charters'' generally to include the 
organizational documents of a fund--typically articles of 
incorporation or declarations of trust, and corporate by-laws.
---------------------------------------------------------------------------

    If we adopt the proposed amendments, we expect to delay the 
compliance date for one year to allow funds to bring their boards into 
compliance with the majority independence condition to the Exemptive 
Rules.\47\ As of the compliance date, any fund relying on an Exemptive 
Rule would be required to have a board with the requisite percentage of 
independent directors. We request comment on this transition period.
---------------------------------------------------------------------------

    \47\ There are several methods by which funds could affect the 
transition to majority independent representation on their boards. 
For instance, funds could (i) increase the size of their boards and 
elect new independent board members; (ii) decrease the size of their 
boards and allow some inside directors to resign; or (ii) allow some 
inside directors to resign and replace them with independent board 
members. A fund's ability to alter the composition of its board 
without holding a shareholder vote will be determined by state law 
and by section 16(a) of the Act [15 U.S.C. 89a-16(a)], which states 
that a fund's board may fill a board vacancy without a shareholder 
vote if, after the new director takes officer, at least two-thirds 
of the board has been elected by shareholders. Section 16(a) further 
requires a shareholder meeting to elect directors if the number of 
shareholder-elected board members decreases to less than half of the 
board. Newly organized funds could begin operations during the one-
year transition period without a majority of independent directors 
and still rely on the Exemptive Rules, but they, like other funds, 
would be required to have boards with a majority of independent 
directors if they rely on any of the Exemptive Rules after the 
compliance date for the amendments.
---------------------------------------------------------------------------

    (b) Suspension of Board Composition Requirements. If the death, 
disqualification, or bona fide resignation of an independent director 
causes the representation of independent directors on the board to fall 
below that required under the Investment Company Act, section 10(e) of 
the Act suspends the percentage requirement for a short time to allow 
the vacancy to be filled.\48\ Under section 10(e), the relevant 
percentage requirement is suspended for 30 days if the board may fill 
the vacancy,\49\ or for 60 days if the vacancy must be filled by a 
shareholder vote.\50\ Section 10(e) also authorizes the Commission to 
set a longer period for filling a board vacancy in these 
circumstances.\51\
---------------------------------------------------------------------------

    \48\ Various provisions of the Investment Company Act require a 
particular percentage or minimum number of independent directors. 
See sections 10(a), 10(b)(2), 10(d) [15 U.S.C. 80a-10(d)], and 
15(f)(1); see also supra notes 20, 39, and 45 (discussing sections 
10(a), 10(b)(2), and 15(f)(1) and their percentage requirements). 
Section 10(e) [15 U.S.C. 80a-10(e)] similarly suspends the board 
composition requirements of sections 10(d)(1), 10(b)(3), and 10(c) 
[15 U.S.C. 80a-10(b)(1), -10(b)(3), and -10(c)]. For convenience, we 
refer to all of the above requirements as ``percentage 
requirements.''
    \49\ See section 16(a) of the Act (permitting directors to fill 
a board vacancy if, after the new director takes officer, at least 
two-thirds of the board has been elected by shareholders, but 
requiring a shareholder meeting to elect directors if the number of 
shareholder-elected board members decreases to less then half of the 
board).
    \50\ Section 10(e)(1) and (2) [15 U.S.C. 80a-10(e)(1) and (2)].
    \51\ Section 10(e)(3) [15 U.S.C. 80a-10(e)(3)].
---------------------------------------------------------------------------

    In our experience, the time provided by section 10(e) is 
insufficient for most funds to select and nominate qualified 
independent director candidates, and, if necessary, hold a shareholder 
election. Many funds address this problem by avoiding the need to rely 
on the section--they have a greater percentage of independent directors 
than is required by the Act. This approach may become more difficult 
if, as we propose, funds relying on the Exemptive Rules must have a 
majority or a super-majority of independent directors.\52\ Moreover, 
the consequence of a fund falling below the minimum required percentage 
of independent directors would be more severe and more immediate 
because the fund would lose the availability of the Exemptive 
Rules.\53\
---------------------------------------------------------------------------

    \52\ See supra Section II.A.1.a.
    \53\ Currently, the loss of an independent director that causes 
a fund to fall below a statutorily required percentage of 
independent directors does not result in immediate consequences for 
a fund. Issues arise only when the fund's next board vote is 
required. Under the proposed amendments to the Exemptive Rules, 
however, the fund would be unable, for example, to offer multiple 
classes of shares, pay distribution fees under rule 12b-1, engage in 
securities transactions with fund affiliates, or participate in a 
joint liability insurance policy from the date of the loss of the 
independent director until the fund replaces the independent 
director.
---------------------------------------------------------------------------

    The Commission is proposing new rule 10e-1 to address these 
concerns. Proposed rule 10e-1 would suspend the board composition 
requirements of the Act, and of the rules under the Act, for 60 days if 
the board of directors may fill the vacancy or 150 days if a 
shareholder vote is required.\54\ We believe these longer time periods 
are appropriate in light of the need to select, nominate, and elect 
qualified candidates for service as independent directors.\55\
---------------------------------------------------------------------------

    \54\ See proposed rule 10e-1.
    \55\ See infra Section II.A.2 (discussing the selection and 
nomination of independent directors by other independent directors); 
cf. Temporary Exemption for Certain Investment Advisers, Investment 
Company Act Release No. 23325 (July 22, 1998) [63 FR 40231 (July 28, 
1998)] (proposing amendments to rule 15a-4 in part to extend, from 
120 days to 150 days, the period of time funds are permitted to 
operate with an interim advisory contract that has not been approved 
by shareholders to allow funds more time to seek shareholder 
approval of an advisory contract).
---------------------------------------------------------------------------

    We request comment whether the proposed 60-day and 150-day periods 
are adequate to provide funds and their independent directors with the 
time needed to approve new independent directors. Commenters who 
believe that a longer or shorter period is appropriate should explain 
why, and specify the number of days they believe would be adequate.
2. Selection and Nomination of Independent Directors
    Independent directors who are truly independent are more effective 
in their roles as ``watchdogs'' for fund shareholders. While the 
Investment Company Act precludes independent directors from having 
certain affiliations or relationships with the fund's adviser or 
principal underwriter,\56\ no law can

[[Page 59832]]

guarantee that an independent director will be vigilant in protecting 
fund shareholders. Fund shareholders therefore must depend on the 
character, ability, and diligence of persons who serve as fund 
directors to protect their interests.\57\
---------------------------------------------------------------------------

    \56\ See section 2(a)(19)(B) [15 U.S.C. 80a-2(a)(19)(B)] 
(outlining the types of affiliations and relationships that render a 
director an ``interested person'' of a fund's adviser or principal 
underwriter).
    \57\ See Bearing of Distribution Expenses by Mutual Funds, 
Investment Company Act Release No. 10862 (Sept. 7, 1979) [44 FR 
54014 (Sept. 17, 1979)] (proposing rule 12b-1) (``[P]roper 
fulfillment of directors' duties depends primarily on the character, 
ability, and diligence of directors.''); William G. Bowen, Inside 
the Boardroom: Governance by Directors and Trustees 47 (1994) 
(``Effective governance by any board surely depends, most of all, on 
having an outstanding group of members.''); Roundtable Transcript of 
Feb. 23, 1999 at 14-15 (statement of Arthur Levitt, Chairman, SEC) 
(``[B]oard independence does not come from a specific legal 
structure * * * I believe passionately in boards made up of men and 
women of good, sound independent judgment. Board independence comes 
from directors who do their jobs aggressively.'').
---------------------------------------------------------------------------

    One recognized method of enhancing the independence of directors is 
to commit the selection and nomination of new independent directors to 
the incumbent independent directors.\58\ Independent directors who are 
selected and nominated by other independent directors, rather than by 
the fund's adviser, are more likely to have their primary loyalty to 
shareholders rather than the adviser.\59\ In addition, when independent 
directors are self-selecting and self-nominating, they are less likely 
to feel beholden to the adviser. Thus, they may be more willing to 
challenge the adviser's recommendations when the adviser's interests 
conflict with those of the shareholders.\60\
---------------------------------------------------------------------------

    \58\ Selection and nomination refers to the process by which 
board candidates are researched, recruited, considered, and formally 
named. Some funds establish a nominating committee of the board that 
is comprised entirely of independent directors to select and 
nominate directors.
    \59\ See ICI Advisory Group Report, supra note 28, at 14 
(``[I]ndependent directors are uniquely qualified to evaluate 
whether a present or prospective director is likely to contribute to 
the continuing independence and effectiveness of the independent 
directors as a group.'').
    \60\ See ICI Advisory Group Report, supra note 28, at 14 
(``[C]ontrol of the nominating process by the independent directors 
helps dispel any notion that the directors are `hand picked' by the 
adviser and therefore not in a position to function in a true spirit 
of independence.'')
---------------------------------------------------------------------------

    Two comprehensive studies that addressed mutual fund governance 
recognized that the selection and nomination of independent directors 
by other independent directors could enhance their independence.\61\ In 
its guidebook for fund directors, the American Bar Association's 
Section of Business Law has endorsed this practice,\62\ as did several 
participants at our Roundtable.\63\ The recent ICI Advisory Group 
report also recommended the self-selection and self-nomination of 
independent directors.\64\ As noted above, two of our rules currently 
require funds to have self-selecting and self-nominating independent 
directors,\65\ and many fund groups have adopted this practice.\66\
---------------------------------------------------------------------------

    \61\ See 1992 Protecting Investors Report, supra note 9, at 266-
67 (recommending that the Act be amended to require that independent 
directors be self-nominating); Wharton Report, supra note 10, at 
465-66 (noting that the selection of unaffiliated directors by 
management limits those directors' independence).
    \62\ See A.B.A., Section of Business Law, Fund Director's 
Guidebook 27 (1996) [``Fund Director's Guidebook''] (``The 
independence of a fund's independent directors is enhanced by 
providing that persons nominated by the board for election as 
independent directors be nominated by a committee of the fund's 
incumbent independent directors.'').
    \63\ See Roundtable Transcript of Feb. 24, 1999 at 182 
(statement of John C. Coffee, Jr.) (``[W]e should have'' independent 
nominating committees.); Roundtable Transcript of Feb. 23, 1999 at 
136 (statement of Faith Colish) (``a very good idea''); Roundtable 
Transcript of Feb. 24, 1999 at 63 (statement of Dawn-Marie Driscoll) 
(``I'm a great believer in independent directors choosing other 
independent directors who the adviser does not know. * * * The more 
ways you can ensure independence, the better the process will 
be.''); id. at 148 (statement of Ronald J. Gilson) (``A nominating 
committee made up of independent directors makes an enormous amount 
of sense.''); id. at 215 (statement of John R. Haire) (``[Self-
selection and self-nomination are] very helpful in the process of 
seeing that * * * independent directors * * * bring to the board a 
diversity of skills that are useful * * * in the role of overseeing 
management.''); id. at 243 (statement of Aulana L. Peters) (``[I]t 
is not a good idea to have the adviser or the CEO of the adviser * * 
* be the sole decisionmaker on who should serve as a disinterested 
member of the board.''). But see id. at 245 (statement of Aulana L. 
Peters) (stating that the involvement of a fund's adviser in the 
selection and nomination of independent directors may facilitate 
increasing diversity on a fund's board).
    \64\ See ICI Advisory Group Report, supra note 28, at 14-16.
    \65\ Rule 12b-1 permits the use of fund assets to pay for 
distribution of fund shares, but only if the fund's independent 
directors select and nominate other independent directors. See supra 
note 30 (discussing rule 12b-1). In discussing our decision to 
include this condition in the rule, we noted that ``the likelihood 
that a decision will be in the best interests of a fund and its 
shareholders will be increased if the disinterested directors are 
genuinely independent of management,'' and that ``formal 
independence will breed an atmosphere in which actual independence 
will develop.'' Rule 12b-1 Adopting Release, supra note 30, at 
discussion of ``Independence of Directors.'' See also supra note 30 
(discussing rule 23c-3, which permits the operation of interval 
funds if independent directors are self-selecting, self-nominating, 
and comprise a majority of the board). The Act also requires 
independent directors to select and nominate individuals to fill 
independent director vacancies for a period of three years following 
the sale of an investment advisory contract. Section 16(b) [15 
U.S.C. 80a-16(b)].
    \66\ See ICI Advisory Group Report, supra note 28, at 15 (noting 
that funds with rule 12b-1 plans, which are required to have self-
selecting and self-nominating independent directors, represent a 
majority of all mutual funds and that many funds without rule 12b-1 
plans also assign to independent directors the selection and 
nomination of other independent directors); Joel H. Goldberg & 
Gregory N. Bressler, Revisiting Rule 12b-1 Under the Investment 
Company Act, 31 Rev. Sec. & Commodities Reg. 147, 147 (1998) (since 
the adoption of rule 12b-1 in 1980, over 7,000 mutual funds have 
adopted rule 12b-1 plans).
---------------------------------------------------------------------------

    We are proposing to amend each of the Exemptive Rules to require 
that funds relying on those rules have boards whose independent 
directors select and nominate any other independent directors.\67\ 
Funds that have adopted distribution plans under rule 12b-1, which 
already contains this requirement, would be unaffected by the 
proposal.\68\ Funds whose independent directors were not nominated in 
this manner would not immediately lose their ability to rely on the 
Exemptive Rules. Rather, if we adopt the proposed amendments, these 
funds would be required to adopt the practice before the compliance 
date for the amendments, and the fund's incumbent independent directors 
subsequently would select and nominate all independent directors of the 
fund.\69\
---------------------------------------------------------------------------

    \67\ See proposed rules 10f-3(b)(11)(i); 15a-4(c)(1); 17a-
7(f)(1); 17a-8(c)(1); 17d-1(d)(7)(v)(A); 17e-1(c)(1); 17g-
1(j)(3)(i); 18f-3(e)(1). In addition, we are proposing to amend 
rules 12b-1 and 23c-3 to conform their current language regarding 
the self-selection and self-nomination of independent directors to 
the language of the proposed amendments. Proposed rules 12b-1(c)(1) 
and 23c-3(b)(8)(i).
    \68\ Our proposals to amend rules 12b-1 and 23c-3 to conform 
their language regarding self-selection and self-nomination to the 
language of our proposed amendments are not intended to have any 
substantive effect on the operation of those rules. See proposed 
rules 12b-1(c)(1), 23c-3(b)(8)(i).
    \69\ Our proposed amendments would have no impact on the initial 
selection of an organizing fund's directors because, at the time of 
organization, the fund would not yet be registered under the 
Investment Company Act and therefore would not be relying on our 
Exemptive Rules. Any organizing fund that intends to rely on the 
Exemptive Rules, however, should adopt a self-selection and self-
nomination practice, and once the fund begins operations, 
independent directors should select and nominate other independent 
directors as board vacancies occur.
---------------------------------------------------------------------------

    We understand that committing the selection and nomination of 
independent directors to a board committee composed entirely of 
independent directors might, in some cases, conflict with applicable 
state law.\70\ We believe that a fund could comply with our proposed 
amendments in those circumstances if the fund's independent directors 
choose the candidates and then present their recommendations to the 
full board. We

[[Page 59833]]

request comment whether this approach adequately addresses any 
potential conflicts between state law and our proposed amendments 
regarding self-selection and self-nomination of independent directors.
---------------------------------------------------------------------------

    \70\ See, e.g., ICI Advisory Group Report, supra note 28, at 
n.28 (discussing Md. Code Ann., Corps. & Ass'ns Sec. 2-411(a)(2), 
which prohibits the bylaws of a Maryland corporation from 
authorizing the board to delegate to a committee the power to 
recommend to stockholders any action that requires stockholder 
approval). Section 2-411(a)(2) may have a greater effect on closed-
end funds, which, unlike mutual funds, generally must hold annual 
meetings of shareholders at which shareholders elect directors.
---------------------------------------------------------------------------

    Moreover, our proposals regarding the self-selection and self-
nomination of independent directors are not intended to limit the 
abilities of public shareholders to nominate independent directors. To 
the extent permitted under state law, shareholders may participate in 
the nomination process.\71\
---------------------------------------------------------------------------

    \71\ See Item 7(e)(2) of Schedule 14A (requiring that any proxy 
sent to shareholders for the purpose of electing directors state 
whether a registrant's nominating committee will consider nominees 
recommended by shareholders and describe the procedures to be 
followed by shareholders submitting nominee recommendations); see 
also infra note 224 and accompanying text.
---------------------------------------------------------------------------

    We request comment whether we should further amend the Exemptive 
Rules to require that independent directors, rather than the entire 
board, elect other independent directors in those instances when a 
shareholder vote is not required.\72\ Commenters should discuss the 
effect state law would have on a fund board's ability to delegate its 
authority to elect directors to a subset of the board.
---------------------------------------------------------------------------

    \72\ The ICI Advisory Group Report recommends that, to the 
extent permitted by state law, fund boards delegate to a fund's 
incumbent independent directors the authority to elect independent 
directors in the absence of a shareholder vote. See Advisory Group 
Report, supra note 28, at 15-16; see also supra note 47 (discussing 
section 16(a) of the Act and the circumstances under which fund 
directors may elect a board member without holding a shareholders 
vote).
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3. Independent Legal Counsel
    Another recognized method of enhancing the independence and 
effectiveness of independent directors is to provide them with 
independent counsel.\73\ Because mutual funds are highly regulated and 
their boards frequently are called upon to protect fund shareholders 
from conflicts of interest, independent counsel can be particularly 
helpful to independent directors of funds.\74\ Experienced counsel can 
help to identify potential conflicts of interest and other compliance 
issues. They can assist directors in ``marshal[ling] arguments to 
balance those presented by management in matters involving conflicts of 
interest,'' and evaluating legal issues with an independent and 
critical eye.\75\ Often, independent counsel can draw on their 
experience and knowledge to identify best practices of other funds that 
might be appropriate for directors to adopt for their fund.
---------------------------------------------------------------------------

    \73\ See generally Grover C. Brown, Michael J. Maimone, and 
Joseph C. Schoell, Director and Advisor Disinterestedness and 
Independence Under Delaware Law, 23 Del. J. Corp. L. 1157 (1998).
    \74\ See ICI Advisory Group Report, supra note 28, at 18 
(``[Independent] counsel can help to ensure that the directors 
understand their responsibilities, ask the pertinent questions, and 
receive the information necessary to carry out those 
responsibilities.''); What's the Job of Your Fund Counsel?, Fund 
Directions, Nov. 1995, at 4, 5 (Independent directors ``look to 
their lawyer for assistance in resolving and acting upon any matters 
where the adviser potentially has a conflict of interest with the 
shareholders.' '') (quoting Edward T. O'Dell, partner, Goodwin, 
Procter & Hoar LLP).
    \75\ Joel H. Goldberg, Disinterested Directors, Independent 
Directors and the Investment Company Act of 1940, 9 Loy. U. Chi. 
L.J. 565, 585 (1978).
---------------------------------------------------------------------------

    We believe counsel who does not also represent the fund's adviser 
can best provide zealous representation of independent directors. 
Several of our Roundtable participants made this point,\76\ as have 
many legal commentators over the years.\77\ The recent ICI Advisory 
Group Report recommended that independent directors have qualified 
counsel who is independent from the fund's adviser and other service 
providers.\78\ Courts too have recognized that independent legal 
counsel improves the deliberative process of fund independent 
directors.\79\ As a result, independent directors of many funds retain 
legal counsel who does not also represent the adviser and, in some 
cases, does not represent the fund.
---------------------------------------------------------------------------

    \76\ See Roundtable Transcript of Feb. 24, 1999 at 178 
(statement of John C. Coffee, Jr.) (``[T]he central lesson from 
corporate governance generally is that independent directors can 
function well as a committee if an probably only if they have the 
effective assistance of a truly independent legal counsel who does 
not generally represent the investment adviser and who does not have 
any other conflict.''); id. at 190-97 (statement of Leslie L. Ogg) 
(discussing the important role of service providers, including 
separate counsel, to fund independent directors); id. at 52 
(statement of David M. Butowsky) (stating that independent directors 
should be counseled by someone ``who is completely independent of 
any affiliation with management when reviewing found reorganizations 
following the acquisition of an adviser); id. at 67 (statement of 
Joseph Hankin) (noting that retaining counsel separate from fund 
management is ``absolutely a prudent step'' when reviewing fund 
mergers and advisory contracts); see also id. at 222-23 (statement 
of David A. Sturms) (reviewing various structures of legal 
representation of a fund, its independent directors, and its 
adviser).
    \77\ See, e.g., Martin Lipton, Directors of Mutual Funds: 
Special Problems, 31 BUS. LAW. 1259, 1262 (1976) (``[M]utual funds 
should have separate counsel. Either the independent directors of a 
fund should have separate counsel or the fund itself should have 
separate counsel. That is, separate counsel from counsel for the 
management company. Independent counsel plays a very important 
role.''); Goldberg, supra note 75, at 585 (``[T]he value of 
[independent] counsel in helping to ensure independent consideration 
of issues by disinterested directors is beyond dispute * * *.''); 
Jean W. Gleason, Mutual Fund Governance: Independent Directors--
Their Role and Incentives and Tools for Fulfilling It, VI-A-9, VI-A-
16 (1994) (material prepared for the 1994 Mutual Funds and 
Investment Management Conference) (``Access to, and use of, outside 
experts [such as independent legal counsel] can provide increased 
independence and allow for informed judgments [by independent 
directors] * * *.''). See also Public Policy Report, supra note 10, 
at 130-31 (listing the absence of separate legal counsel as one of 
the factors contributing to the relative ineffectiveness of 
unaffiliated directors).
    \78\ See ICI Advisory Group Report, supra note 28, at 18-20. The 
Advisory Group concluded that ``[c]ounsel to the independent 
directors must be independent from the adviser and other fund 
service providers in order to render objective advice on areas of 
potential conflict between the fund and its service providers.'' Id. 
at 18. See also Fund Director's Guidebook, supra note 62, at 23 
(``[G]enerally it is important that the independent directors have 
ready access to counsel who views the board and the fund, not the 
adviser, as the client.'').
    \79\ See Tannenbaum v. Zeller, 552 F.2d 402, 428 (2d Cir. 1977) 
(stating that it would have been preferable if the fund's 
independent directors received advise from an independent counsel, 
rather than counsel who also represented the fund, the fund's 
adviser, and the fund's distributor); Fogel v. Chestnutt, 533 F.2d 
731, 750 (2d Cir. 1975) (``It would have been * * * better to have 
the investigation of recapture methods and their legal consequences 
performed by disinterested counsel furnished to the independent 
directors.''); Schuyt v. Rowe Price Prime Reserve Fund, Inc., 663 F. 
Supp. 962, 965, 982, 986 (S.D.N.Y.) (noting that ``[d]uring all 
relevant times, the independent directors * * * had their own 
counsel'' who was an ``important resource'' and who advice ``the 
record indicates the directors made every effort to keep in mind as 
they deliberated''), aff'd, 835 F.2d 45 (2d Cir. 1987); Cartenberg 
v. Merill Lynch Asset Management, Inc., 528 F. Supp. 1038, 1064 
(S.D.N.Y. 1981) (noting that the ``non-interested Trustees were 
represented by their own independent counsel * * * who acted to give 
them conscientious and competent advice''), aff'd, 694 F.2d 923 (2d 
Cir. 1982). See also Palilsky v. Berndt, [1976-1977 Transfer Binder] 
Fed. Sec. L. Rep. (CCH) para. 95,627, 15 90,133 (S.D.N.Y. June 24, 
1976) (noting that a law firm, in advising both a fund and the 
fund's adviser, ``was counseling people with contrary interests. * * 
* The effect of the inadequate advice was to discourage any 
independent inquiry by * * * [the] Board.'').
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    We are aware, however, that in some cases counsel has regularly 
represented the fund, the fund's adviser, and the independent 
directors. We have no doubt that such representation has been in 
conformity with applicable codes of legal ethics, which permit a lawyer 
to represent clients with conflicting interests after full disclosure 
and client consent.\80\ We nevertheless are troubled by such conflicts 
and how they affect the ability of independent directors to carry out 
their responsibilities under the Act and the Exemptive Rules. We are 
particularly concerned when lawyers represent both the independent 
directors and management organizations in the negotiation of the 
advisory contract, distribution arrangements (e.g., 12b-1 plans), and 
other matters of fundamental importance to a fund and its shareholders. 
Lawyers representing

[[Page 59834]]

fund management may not suggest courses of action to independent 
directors that are opposed by their management clients. Thus, we are 
proposing to amend the Exemptive Rules to require that counsel for a 
fund's independent directors not also act as counsel to the fund's 
adviser, principal underwriter, or administrator (or their control 
persons).\81\
---------------------------------------------------------------------------

    \80\ See American Bar Association, Center for Professional 
Responsibility, Model Rules of Professional Conduct [``ABA Model 
Rules''], Rule 1.7 (1998); see also Del. Prof. Cond. R. 1.7 (1998); 
MASS. SUP. JUD. CT.R. 3:07, R.P.C. 1.7 (1999); Md. Rule 1.7 (1998).
    \81\ Our proposals are not intended to regulate the practice of 
law, but rather to delimit the ability of independent fund directors 
to waive certain conflicts of interest. In other contexts, 
fiduciaries have been similarly restricted in their ability to waive 
conflicts. See, e.g., section 327 of the U.S. Bankruptcy Code [11 
U.S.C. 327] (bankruptcy trustee generally cannot employ a counsel 
who represents an interest adverse to the estate in bankruptcy, and 
any counsel employed by the trustee must be a disinterested person); 
Md. Regs. Code tit. 13 Sec. 105 (attorney to a receiver or assignee 
in bankruptcy must meet prescribed independence standards, including 
that the attorney does not represent an interest adverse to the 
estate). See also rule 116.5 of the Bureau of Indian Affairs [25 CFR 
116.5] (no person with a personal, financial, or business connection 
to a trustee of restricted Indian property may act as an appraiser 
of that property in connection with loans made from the trust).
---------------------------------------------------------------------------

    We are not, however, proposing at this time to require independent 
directors to retain legal counsel. Although we believe that independent 
directors are in the best position to fulfill the roles assigned to 
them by the Exemptive Rules if they have the assistance of independent 
counsel, the services of counsel do not come without cost.\82\ We are 
hesitant to propose a rule that might result in the engagement of legal 
counsel simply to fulfill a legal requirement. Moreover, we believe 
that a likely result of our proposed amendments would be that fund 
directors will seek independent counsel. Comment is requested whether 
we should amend the Exemptive Rules to require independent directors of 
funds relying on those rules to retain independent legal counsel. Would 
this requirement impose substantial costs on small fund groups? If we 
adopt this condition to the Exemptive Rules, should we provide for an 
exception for smaller fund groups? If so, what factors should determine 
which fund groups are small?
---------------------------------------------------------------------------

    \82\ In the 1992 Protecting Investors Report, the staff of the 
Division of Investment Management considered, but did not recommend, 
requiring funds to provide independent directors with their own 
counsel. While the staff recognized the benefits of separate counsel 
for independent directors, it was concerned about the costs 
associated with requiring separate counsel in all cases. See 1992 
Protecting Investors Report, supra note 9, at 268.
---------------------------------------------------------------------------

    Under the proposed amendments, reliance on each of the Exemptive 
Rules would be conditioned on any legal counsel for a fund's 
independent directors being an ``independent legal counsel.'' \83\ A 
person would be an ``independent legal counsel'' if the fund reasonably 
believes the person and his law firm, partners, and associates \84\ 
have not acted as legal counsel for the fund's investment adviser, 
principal underwriter, administrator \85\ (collectively, ``management 
organizations''), or any of their control persons \86\ at any time 
since the beginning of the fund's last two completed fiscal years.\87\ 
The independent directors could make an exception and permit a person 
to serve as independent legal counsel even if the person has a remote 
or minor conflict of interest because the person has provided legal 
advice to management organizations or their control persons.\88\
---------------------------------------------------------------------------

    \83\ See proposed rules 10f-3(b)(11)(ii); 12b-1(c)(2); 15a-
4(c)(2); 17a-7(f)(2); 17a-8(c)(2); 17d-1(d)(7)(v)(B); 17e-1(c)(2); 
17g-1(j)(3)(ii); 18f-3(e)(2); 23c-3(b)(8)(ii).
    \84\ The proposed definition of an independent legal counsel 
would apply to a ``person.'' See proposed rule 0-1(a)(6)(i). The 
term ``person'' would have the same meaning as in section 2(a)(28) 
of the Act [15 U.S.C. 80a-2(a)(28)] and, in addition, would include 
a partner, co-member, or employee of any person. See proposed rule 
0-1(a)(6)(ii)(A). The term ``co-member'' is intended to address law 
firms organized as limited liability companies. The interest-holders 
of limited liability companies generally are called ``members.''
    \85\ See infra note 89.
    \86\ See infra note 91 and accompanying text.
    \87\ See proposed rule 0-1(a)(6)(i)(A). We intend that the 
phrase ``act as legal counsel'' as used in the proposed definition 
of ``independent legal counsel'' will have the same meaning that it 
has for purposes of section 2(a)(19)(B)(iv) [15 U.S.C. 80a-
2(a)(19)(B)(iv)]. The staff has interpreted the phrase ``acts as 
legal counsel'' broadly. See 399 Fund, SEC No-Action Letter (Sept. 
2, 1973) (fund directors would be an ``interested person'' because 
his firm had entered an appearance on behalf of certain officers and 
directors of the fund's adviser in litigation unrelated to the 
fund); Alpha Investors Fund, Inc., SEC No-Action Letter (Jan. 9, 
1972) (fund director would be an ``interested person'' because his 
firm had performed two small legal projects for a company that owned 
a 50 percent share of an adviser to a fund).
    In some cases, ethics rules permit counsel to accept payment for 
legal services from a non-client third party. See ABA Model Rules, 
supra note 79, rule 1.8(f) (1998) (counsel may accept compensation 
from a third party if (i) the client consents after consultation, 
(ii) there is no interference with counsel's independence of 
professional judgment or with the attorney-client relationship, and 
(iii) counsel maintains client confidentiality); see also id. Rule 
1.7 cmt. 10 (``Interest of Person Paying for a Lawyer's Service''). 
Under our proposed amendments, we would not view a lawyer as 
``acting as legal counsel'' to a fund's investment adviser merely 
because the lawyer accepts payment of fees from the adviser for 
legal services performed on behalf of the fund or its independent 
directors as permitted by relevant professional ethics rules.
    \88\ See infra Section 11.A.3(d) ``Exception''; proposed rule 0-
1(a)(6)(i)(B).
---------------------------------------------------------------------------

    (a) Independent of Fund Management Organizations. The proposed 
amendments would treat as fund management organizations, fund advisers 
(including sub-advisers), principal underwriters, and fund 
administrators.\89\ We are proposing to include fund administrators 
because, in some fund complexes, an administrator performs many of the 
management functions traditionally performed by a fund's adviser, and 
thus may have the same types of conflicts as an investment adviser 
sponsoring a fund.\90\ The limitations on dual representation also 
would extend to control persons of fund management organizations: 
persons who directly or indirectly control, are controlled by, or are 
under common control with the adviser, principal underwriter, or fund 
administrator.\91\ Counsel to both a parent company of the fund's 
adviser and a fund's independent directors, for example, may face the 
same conflicts as those faced by counsel to the fund's adviser and the 
fund's independent directors.\92\ We request comment whether the 
amendments should extend to other types of service providers in 
addition to management organizations,\93\ and to persons other than 
control persons (e.g., affiliated persons of a management 
organization).
---------------------------------------------------------------------------

    \89\ We are proposing to define ``administrator'' as any person 
who provides significant administrative or business affairs 
management services to a fund. Proposed rule 0-1(a)(5). This 
definition is substantially similar to, and has the same meaning as, 
the definition of administrator contained in Item 22(a)(1)(i) of 
Schedule 14A and Item 15(h)(1) of Form N-1A.
    \90\ Funds are increasingly turning to third-party fund 
administrators to provide an array of services, including 
shareholder servicing, recordkeeping, accounting, and fund 
distribution. See Jackie Cohen, Priming the Pump for Better Mutual 
Fund Sales, Bank Tech. News, June 1998, at 43; Katharine Fraser, 
Fund Administrators Vie for Megabank Pacts, Am. Banker, May 27, 
1998, at 10. As of December 31, 1998, third-party fund 
administrators had approximately $527 billion in assets under 
administration. See generally Lipper Inc., Lipper Directors' 
Analytical Data: Executive Summary (1st ed. 1999) (providing 
estimates of fund assets administered by entities other than funds, 
from which estimates of fund assets administered by entities 
unaffiliated with the fund may be derived).
    \91\ The definition of ``control person'' would exclude funds. 
This exclusion enables the same counsel to represent a fund and its 
independent directors. See proposed rule 0-1(a)(6)(ii)(B); see also 
infra note 94 and accompanying text.
    \92\ This could be the case even if the legal work performed for 
the control person is unrelated to the fund or its operations.
    \93\ See ICI Advisory Group Report, supra note 28, at 19 
(recommending counsel for the independent directors who is 
independent from all of the fund's service providers).
---------------------------------------------------------------------------

    Under the proposed amendments, a person could be an independent 
legal counsel to a fund's independent directors regardless of the 
nature and amount of legal services he or she provides to the fund 
itself. A person acting as both fund counsel and independent director 
counsel ordinarily should not have the types of conflicts of interest 
that would diminish the counsel's ability to provide zealous

[[Page 59835]]

representation of independent directors.\94\ Similarly, our proposal 
would not preclude counsel from representing the independent directors 
of multiple funds affiliated with the same management organization. We 
request comment on this provision.
---------------------------------------------------------------------------

    \94\ See id. at 18-19 (`'The Adisory Group believes that counsel 
for the independent directors also may serve as fund counsel 
because, in virtually every situation except possibly litigation, 
the interests of the fund and its directors are aligned.''). But see 
Roundtable Transcript of Feb. 24, 1999 at 179 (statement of John C. 
Coffee, Jr.) (noting that counsel to a fund invariably works closely 
with, and generally receives work requests from, personnel of the 
adviser who manages the fund, and that the close association with 
the adviser that results from representing the fund could influence 
the counsel's representation of the independent directors).
---------------------------------------------------------------------------

    (b) Two-Year Period. Section 2(a)(19) of the Act prevents any 
person who has acted as legal counsel to a fund's adviser or principal 
underwriter during the last two years from serving as an independent 
director of the fund.\95\ This section reflects Congress's belief that 
acting as counsel to fund management organizations creates conflicts 
that may affect a person's ability to represent shareholder interests. 
Based upon similar considerations, the proposed amendments would 
(subject to the exception discussed below) preclude a person from 
acting as counsel for independent directors for two years after having 
acted as legal counsel to a fund management organization or its control 
person. As in section 2(a)(19), the disqualification would apply to any 
partner or employee of a person who acted as legal counsel to the 
management organization or its control person.\96\
---------------------------------------------------------------------------

    \95\ Section 2(a)(19)(B)(vi). Section 2(a)(19)(A)(iv) of the Act 
[15 U.S.C. 80a-2(a)(19)(A)(iv)] also precludes a person who has 
acted as fund counsel from serving as an independent director of 
that fund for at least two years. As discussed above, our proposal 
would not preclude counsel to a fund from serving as counsel to a 
fund's independent directors. See supra note 94 and accompanying 
text.
    \96\ See proposed rule 0-1(a)(6)(ii)(A); see also supra note 84.
---------------------------------------------------------------------------

    (c) Reasonable Belief. The proposed amendments would require the 
fund to have a ``reasonable belief'' that counsel to the independent 
directors meets the requirements of the independent legal counsel 
definition. If, despite the fund's reasonable belief, counsel does not 
actually meet the requirements, the fund would not lose the ability to 
rely on any of the Exemptive Rules. A fund could form a reasonable 
belief based on a representation from counsel. If the fund relies on 
counsel's representation, the fund also should obtain an undertaking 
that the counsel will inform the fund and the independent directors if 
it begins to act as legal counsel to the fund management organizations 
or any of their control persons.
    (d) Exception. As discussed above, these proposed amendments are 
intended to assure that independent directors have the benefit of 
counsel who is free from the types of conflicts that may affect the 
advice provided to independent directors. The scope of the proposed 
limitation, described above, is broad and covers direct and indirect 
conflicts. As a result, the proposed amendments might preclude a person 
from serving as counsel to a fund's independent directors because of a 
remote or minor conflict involving, for example, a law-firm partner who 
represented an affiliate of the fund's adviser in a minor real estate 
transaction. Therefore, the proposed definition of ``independent legal 
counsel'' includes an exception that would permit the independent 
directors to retain the counsel if they determine that the counsel's 
representation was ``so limited that it would not adversely affect the 
counsel's ability to provide impartial, objective, and unbiased legal 
counsel to the [independent] directors.'' \97\
---------------------------------------------------------------------------

    \97\ See proposed rule 0-1(a)(6)(i)(B).
---------------------------------------------------------------------------

    The exception would not permit waivers in all instances, but only 
in circumstances where the nature or extent of the conflict is minor. 
We would expect that the independent directors, in making a 
determination under the exception, would consider all relevant factors. 
These factors could include whether the representation presented a 
direct and ongoing conflict with the fund, the amount of legal fees 
generated by the representation, and the nature and the extent of the 
affiliation between a control person and a fund management 
organization. The basis for any determination under this provision also 
must be recorded in board meeting minutes.\98\
---------------------------------------------------------------------------

    \98\ See id.
---------------------------------------------------------------------------

    We request comment on the approach we have taken. Should 
independent directors who engage legal counsel under the exception to 
the general rule be required to make findings different from those 
proposed? For example, the Blue Ribbon Committee on Improving the 
Effectiveness of Corporate Audit Committees recommended that a director 
who does not meet proposed independence standards be allowed to serve 
as a member of a company's audit committee if the board, under 
exceptional and limited circumstances, determines that membership on 
the committee is required by the best interests of the company and its 
shareholders, and the board discloses, in the next annual proxy 
statement, the reasons why the director does not meet the independence 
standards and the reasons for the board's determination.\99\ Should we 
also require public disclosure of the independent directors' 
determination regarding their counsel's conflict and the nature of that 
conflict? If so, in what document should the disclosure be made?
---------------------------------------------------------------------------

    \99\ See Report and Recommendations of the Blue Ribbon Committee 
on Improving the Effectiveness of Corporate Audit Committees 11 
(1999) [``Blue Ribbon Committee Report''].
---------------------------------------------------------------------------

    (e) Transition Period. If we adopt the proposals after the comment 
period, counsel for the independent directors of funds relying on any 
of the Exemptive Rules would not be required to be ``independent legal 
counsel'' until the compliance date established in the adopting 
release. We believe that independent directors of most fund groups 
would not be required to seek new counsel. In some cases, however, they 
may. Comment is requested on the transition time that independent 
directors would need to hire new counsel.

B. Limits on Coverage of Directors Under Joint Insurance Policies

    The oversight responsibilities that the Act assigns to independent 
directors \100\ may create tensions between those directors and the 
fund's adviser \101\ that can lead to disputes.\102\ A dispute among 
these parties that escalates to the level of a lawsuit can result in 
significant legal expenses for the independent directors.\103\
---------------------------------------------------------------------------

    \100\ See supra notes 12-24 and accompanying text; see also 
section 36(a) of the Act [15 U.S.C. 80a-35(a)] (enabling federal 
lawsuits to be brought against fund directors for breaches of 
fiduciary duty involving personal misconduct).
    \101\ See Roundtable Transcript of Feb. 24, 1999 at 234 
(statement of Gerald C. McDonough) (``The adversarial role * * * of 
independent [directors] and fund advisers is a healthy and desirable 
one.'').
    \102\ See David A. Sturms, The Debate: The System is Broken--Fix 
It or Scrap It vs. The System Works--Don't Fix What Isn't Broken 4-7 
(materials prepared for SEC Roundtable on the Role of Independent 
Investment Company Directors, Feb. 23-24, 1999) (discussing recent 
disputes between independent directors of funds and the funds' 
advisers).
    \103\ See ICI Advisory Group Report, supra note 28, at 26 
(``[L]itigation [involving independent directors] can be extremely 
expensive and may even carry with it a potential for personal 
financial ruin.'').
---------------------------------------------------------------------------

    Funds typically purchase ``errors and omissions'' insurance 
policies (``D&O/E&O policies'') \104\ to cover expenses

[[Page 59836]]

incurred by directors and officers in the event of litigation.\105\ 
Often these policies are joint policies that cover numerous funds 
within a fund family as well as the adviser and principal underwriter 
of those funds. Although the Investment Company Act and our rules 
generally prohibit joint transactions and other joint arrangements 
involving a fund and its affiliates,\106\ rule 17d-1(d)(7) permits the 
purchase of joint D&O/E&O policies.\107\
---------------------------------------------------------------------------

    \104\ D&O/E&O policies generally insure directors and officers 
of an insured entity (e.g., a fund) for claims made against them for 
their designated acts, errors, or omissions. See generally Spiro K. 
Bantis, ``What Mutual Fund D&O/E&O Policies Don't Cover''; Ellen 
Metzger, Mutual Fund D&O/E&O Insurance: Considerations in Selecting 
and Maintaining a Policy; Natalie Shirley, Claims--What to Do When 
the Unthinkable Happens; Daniel T. Steiner, Selected Issues 
Regarding Basic Policy Forms (collected materials from 1995 Mutual 
Funds and Investment Management Conference, Mutual Fund D&O/E&O 
Insurance 101).
    \105\ Under the Act, a fund's organizational documents cannot 
contain any provision protecting a director or officer of the fund 
from any liability to the fund or its shareholders to which he is 
subject by reason of willful misfeasance, bad faith, gross 
negligence, or reckless disregard of the duties involved in the 
conduct of his office. See section 17(h) of the Act [15 U.S.C. 80a-
17(h)]; see also Interpretive Release, supra note 1, Section II.C 
(discussing section 17(h) and providing guidance regarding when a 
fund may pay an advance of legal fees to its directors).
    \106\ See section 17(d) [15 U.S.C. 80a-17(d)] (prohibiting an 
affiliated person of a fund from effecting a joint transaction with 
the fund in contravention of Commission rules); rule 17d-1 [17 CFR 
270.17d-1] (prohibiting a fund affiliate from participating in any 
joint enterprise, joint arrangement, or profit-sharing plan with a 
fund without first obtaining a Commission order, except in certain 
designated circumstances); see also Interpretive Release, supra note 
1, Section II.B (discussing section 17(d) and rule 17d-1 and 
explaining the view of the staff that actions taken by fund 
directors within the scope of their duties for the fund generally 
would not be joint transactions under section 17(d) and rule 17d-1).
    \107\ 17 CFR 270.17d-1(d)(7). Reliance on rule 17d-1(d)(7) 
currently is conditioned on a fund's board, and a majority of its 
independent directors, annually determining that the joint policy is 
in the best interests of the fund and that the proportion of the 
policy's premium allocated to the fund is fair and reasonable.
---------------------------------------------------------------------------

    Joint D&O/E&O policies historically have excluded claims in which 
the parties under the policy sue each other.\108\ A policy that insures 
both a fund's investment adviser and its independent directors 
therefore may not cover the independent directors' expenses of 
litigation with the fund's adviser. Without this coverage, independent 
directors face substantial personal legal expenses in the event of a 
lawsuit.\109\
---------------------------------------------------------------------------

    \108\ See ICA Advisory Group Report, supra 28, at 26. The 
general purpose of these standard ``insured versus insured'' 
exclusions is to prevent collusion among insureds.
    \109\ See Paul H. Dykstra and Paulita Pike-Bokhari, The Yacktman 
Battle: Manager Bites the Watchdogs, Investment Law., Nov./Dec. 
1998, at 1, 9-10 (discussing the effect of an ``insured versus 
insured'' exclusion of insurance coverage on independent directors 
of the Yacktman Fund).
---------------------------------------------------------------------------

    The exclusion of coverage under joint policies creates a potential 
threat to directors' personal assets, which can hamper directors' 
willingness to question management and weaken their resolve to protect 
fund shareholders in the event of a conflict with the adviser. Because 
we are concerned about the effect that these exclusions may have on the 
ability of independent directors to carry out their statutory 
responsibilities, we propose to amend rule 17d-1(d)(7) to make the rule 
available only for joint liability insurance policies that do not 
exclude coverage for litigation between the independent directors and 
the fund's adviser.\110\ These proposals are intended to allow 
independent directors to engage in the good faith performance of their 
statutory responsibilities without concern for their personal financial 
security.\111\
---------------------------------------------------------------------------

    \110\ Proposed rule 17d-1(d)(7)(iii). The proposed amendments 
would prohibit exclusions for bonafide (i.e., non-collusive) claims 
made against any independent director by another person insured 
under the joint insurance policy. The proposed amendments also would 
prohibit exclusion of coverage for the fund if it is a co-defendant 
with an independent director in a claim brought by a co-insured. We 
believe that the ability of fund directors to perform their duties 
may be further impaired if an adviser's lawsuit poses a threat to 
fund assets as well as to director's personal assets.
    \111\ Earlier this year, Chairman Levitt expressed concern about 
standard ``insured versus insured'' exclusions. See Arthur Levitt, 
Keeping Faith with the Shareholder Interest: Strengthening the role 
of Independent Directors of Mutual Funds (remarks at the Mutual 
Funds and Investment Management Conference, Palm Springs, CA, Mar. 
22, 1999), available at <http://www.sec.gov/news/speeches/
spch259.htm>. In response, the ICI Mutual Insurance Company (``ICI 
Mutual''), which insures funds representing approximately 70 percent 
of all mutual fund assets, recently announced that it has revised 
its D&O/E&O policies to clarify that these types of claims are 
covered under its standard insurance policy. See Aaron Lucchetti, 
Direct and Protect, Wall St. J., April 2, 1999, at C23. ICI Mutual 
now makes available a standard policy endorsement that permits 
independent directors to recover defense costs, settlements, and 
judgments in ``insured versus insured'' claims otherwise covered 
under the policy. This change by ICI Mutual is a significant step 
toward ensuring the ability of independent directors to vigorously 
fulfill their duties under the Act without concerns of personal 
liability. We believe, however, that all independent directors who 
serve on funds that obtain joint liability insurance policies should 
have the benefit of protections similar to those provided by ICI 
Mutual.
---------------------------------------------------------------------------

    We request comment on the proposed amendments to rule 17d-1(d)(7) 
concerning the purchase of joint D&O/E&O policies. The ICI Advisory 
Group Report recommended more broadly that fund boards should consider 
obtaining D&O/E&O insurance policies and/or indemnification from the 
fund ``that is adequate to ensure the independence and effectiveness of 
independent directors.'' \112\ The proposed amendments do not require 
that funds obtain insurance coverage or indemnification for independent 
directors, so that funds will have the latitude to determine which 
arrangements are appropriate for their circumstances. We request 
comment whether we should further amend rule 17d-1(d)(7) to require 
that joint insurance polices purchased under the rule be in an amount 
adequate to ensure that independent directors can perform their duties 
in an independent and effective manner, and what that amount might be.
---------------------------------------------------------------------------

    ICI Advisory Group Report, supra note 28, at 26. the Report also 
noted that independent directors may need to be covered by insurance 
after their service on the board has ended for claims involving 
their service as directors. Id. at 26-27.
---------------------------------------------------------------------------

C. Exemption From Ratification of Independent Public Accountant 
Requirement for Funds With Independent Audit Committees

    The Investment Company Act requires that a fund's independent 
directors select the fund's independent public accountant.\113\ The Act 
further requires that the selection of the fund's independent public 
accountant be submitted to shareholders for ratification or rejection 
at their next annual meeting.\114\
---------------------------------------------------------------------------

    \113\ Section 32(a)(1).
    \114\ Section 32(a)(2) [15 U.S.C. 80a-31(a)(2)].
---------------------------------------------------------------------------

    We have observed that shareholders rarely contest votes over the 
ratification of the selection of a fund's independent accountant. Many 
believe shareholder ratification has become perfunctory. This may have 
occurred because of the growth of funds,\115\ their organization into 
large complexes, the increased complexity of accounting issues, or the 
consolidation of accounting firms, which have made it impracticable for 
shareholders to evaluate the qualifications and independence of fund 
auditors. We are proposing, therefore, to exempt funds from the 
shareholder ratification requirement if the auditor is subject to the 
oversight and direction of an audit committee consisting entirely of 
independent directors.
---------------------------------------------------------------------------

    \115\ See supra note 3 and accompanying test.
---------------------------------------------------------------------------

    Today, in many corporations and fund complexes, audit committees 
play an important and growing role in assuring the integrity of 
financial statements.\116\ The current listing

[[Page 59837]]

requirements of the primary U.S. securities exchanges require publicly 
traded companies to have audit committees,\117\ and many commentators 
have recognized the value of independent audit committees and the 
significance of their function in a corporate governance 
structure.\118\ Recently, the Blue Ribbon Committee on Improving the 
Effectiveness of Corporate Audit Committees emphasized the important 
role of audit committees and recommended enhanced responsibilities, 
membership standards, and methods of operation designed to strengthen 
their oversight function.\119\ The ICI Advisory Group Report, 
furthermore, recommended that fund boards establish audit committees 
comprised entirely of independent directors.\120\
---------------------------------------------------------------------------

    \116\ See generally A.B.A., Section of Business Law, Corporate 
Director's Guidebook 27-32 (2d ed. 1994) [``1994 Corporate 
Director's Guidebook'']; See also Investment Company Institute, 
Understanding the Role of Mutual Fund Directors 7 (1998) (noting 
that although not required by law, it is common practice for mutual 
funds to have an audit committee oversee the financial reporting and 
internal controls of the fund and stating that the results of a 1998 
survey conducted by Management Practice Inc. indicated that 100 
percent of fund boards surveyed had an audit committee); Fund 
Director's Guidebook, supra note 62, at 26 (stating that the audit 
committees of many funds are comprised of all of the fund's 
independent directors).
    \117\ See e.g., New York Stock Exchange Listed Company Manual 
para. 303.00.
    \118\ See, e.g., Roundtable Transcript of Feb. 23, 1999 at 236 
(statement of Manuel H. Johnson) (noting that an audit committee 
comprised entirely of independent directors serves as a check and 
balance); 1994 Corporate Director's Guidebook, supra note 116, 27 
(``The Audit Committee should be composed solely of independent 
directors.''); Fund Director's Guidebook, supra note 62, at 25-26 
(noting that the boards of many public companies, including funds, 
have established audit committees at the urging of many governmental 
and non-governmental institutions that have determined that audit 
committees can play a meaningful role in ensuring corporate 
accountability), The Role and Composition of the Board of Directors 
of the Large Publicly Owned Corporation: Statement of the Business 
Roundtable, 33 Bus. Law. 2083, 2108, 2109 (1978) (``[W]e believe it 
highly desirable * * * that the board be served by an Audit 
Committee.'' THe audit committee should be ``composed entirely of 
non management directors.'') Report of the National Commission on 
Fraudulent Financial Reporting 12 (Oct. 1987) [``Treadway Report''] 
(``The audit committee on the board of directors plays a role 
critical to the integrity of the company's financial reporting. [We] 
recommend[] that all public companies be required to have audit 
committees composed entirely of independent directors.''); Advisory 
Panel on Auditor Independence, Strengthening the Professionalism of 
the Independent Auditor 14 (Sep. 13, 1994) (Special Report to the 
Oversight Board of the SEC Practice Section, AICPA [``Kirk Panel 
Report''] (noting that it is important that companies have audit 
committees of independent directors).
    \119\ Blue Ribbon Committee Report, supra note 99. With respect 
to independence of audit committee members, the Blue Ribbon 
Committee Report states:
    [I]t is widely recognized that each member of the audit 
committee should be an independent director. Several recent studies 
have produced a correlation between audit committee independence and 
two desirable outcomes: a higher degree of active oversight and a 
lower incident of financial statement fraud. In addition, common 
sense dictates that a director without any financial, family, or 
other material personal ties to management is more likely to be able 
to evaluate objectively the propriety of management's accounting 
internal control and reporting practices.
    Id. at 22.
    \120\ ICI Advisory Group Report, supra note 28, at 22-23.
---------------------------------------------------------------------------

    We believe that the ongoing oversight provided by an independent 
audit committee can provide greater protection to shareholders than the 
current requirement for shareholder ratification of a fund's 
independent auditors. We therefore are proposing a rule that would 
exempt a fund from the Act's requirement that shareholders ratify or 
reject the selection of the fund's independent public accountant if the 
fund has an audit committee comprised wholly of independent 
directors.\121\ In order for a fund to rely on the proposed exemption, 
(i) the audit committee must be responsible for overseeing the fund's 
accounting and auditing processes,\122\ (ii) the fund's board of 
directors must adopt an audit committee charter setting forth the 
committee's structure, duties, powers, and methods of operation,\123\ 
and (iii) the fund must maintain a copy of the charter.\124\
---------------------------------------------------------------------------

    \121\ See proposed rule 32a-4(b). A closed-end fund listed on a 
stock exchange also is subject to the exchange's listing 
requirements regarding audit committees. See, e.g., Supra note 117 
and accompanying text.
    \122\ Proposed rule 32a-4(a).
    \123\ Proposed rule 32a-4(c).
    \124\ Proposed rule 32a-4(d). Under the current requirements of 
rule 31a-1(b)(4) [17 CFR 270.31a-1(b)(4)], funds also would be 
required to maintain minute books of the audit committee's meetings.
---------------------------------------------------------------------------

    We request comment regarding the conditions of the proposed rule. 
Should the exemption require that the charter set forth certain 
specific responsibilities and methods of operation? Should funds 
relying on the exemption be required to provide a copy of their audit 
committee charter as an exhibit to their registration statement, and 
should the board be required to review the charter on an annual basis? 
Should the exemption require fund audit committees to obtain an annual 
representation from the fund's independent public accountant certifying 
its independence, as the ICI Advisory Group suggested? \125\ Should the 
exemption include other conditions that are similar to the 
recommendations of the ICI Advisory Group and Blue Ribbon Committee on 
Improving the Effectiveness of Corporate Audit Committees?
---------------------------------------------------------------------------

    \125\ See ICI Advisory Group Report, supra note 28, at 22-23. 
Cf. Independence Standards Board Standard No. 1: Independence 
Discussions with Audit Committees (Jan. 1999) (requiring, for all 
funds with fiscal years ending after July 19, 1999, that a fund's 
auditor provide an annual representation of the auditor's 
independence).
---------------------------------------------------------------------------

    The proposed rule assumes that the appropriate form for the 
instrument governing an audit committee is a charter. Should the rule 
explicitly recognize that the audit committee provisions could be 
included in a document other than the charter, such as the fund's by-
laws, articles of incorporation, or declaration of trust?

D. Qualification as an Independent Director

    In addition to the amendments to enhance the independence of fund 
boards, we are proposing amendments to prevent qualified individuals 
from being unnecessarily disqualified from serving as independent 
directors. The Investment Company Act sets standards for who may be 
considered an independent director.\126\ While these standards are 
meant to exclude individuals with affiliations or business interests 
that can impair their independence, there are circumstances in which 
the standards may cause certain individuals to be unnecessarily 
disqualified from serving as an independent director. For this reason, 
Congress directed the Commission to apply the standards ``in a flexible 
manner'' and adopt appropriate exemptions.\127\ Today we are proposing 
(i) to amend the rule that permits directors to be considered 
independent directors even if they are affiliated with a broker-dealer, 
and (ii) a new rule that would prevent directors from being 
disqualified as independent directors solely because they own shares of 
index funds that hold limited interests in their fund's adviser or 
principal underwriter.
---------------------------------------------------------------------------

    \126\ For example, the Act provides that no person can be an 
independent director to a fund if he is affiliated with the fund 
itself, or with the fund's investment adviser or principal 
underwriter. Section 2(a)(19)(A)(i), (A)(iii), (B)(i) [15 U.S.C. 
80a-2(a)(19)(A)(i), (A)(iii), (B)(i)]. See generally infra note 170.
    \127\ See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 15 (1970).
---------------------------------------------------------------------------

1. Affiliation With a Broker-Dealer
    Section 2(a)(19) of the Act provides that no person can be an 
independent director if he is, or is affiliated with, a registered 
broker-dealer.\128\ This provision is designed to prevent independent 
directors from being influenced by a business relationship with broker-
dealers.\129\ Rule 2a19-1 under the Act provides relief from this 
provision under certain conditions, but only if no more than a minority 
of a

[[Page 59838]]

fund's independent directors are broker-dealers or affiliated with 
broker-dealers.\130\ When we proposed this condition in 1984, we 
explained that allowing all of the fund's independent directors to be 
affiliated with broker-dealers would be inconsistent with Congress's 
intent to separate independent directors from the brokerage 
industry.\131\
---------------------------------------------------------------------------

    \128\ Section 2(a)(19)(A)(v), (B)(v) [15 U.S.C. 80a-
2(a)(19)(A)(v), (b) (v)].
    \129\ See The First Australia Fund, Inc., SEC No-Action Letter, 
at n.8 and accompanying text (Oct. 8, 1987) (``The broad scope of 
section 2(a)(19) with respect to brokers and dealers appears to have 
been prompted by the many subtle relationships that exist between 
persons who are active in the securities markets.'') (citing Public 
Policy Report, supra note 10, at 162-88). Congress also may have 
adopted this broad prohibition reaction to the nature of fund 
brokerage arrangements when fixed commission rates were prevalent. 
See Certain Persons Not Deemed Interested Persons; Definition of 
Regular Broker or Dealer, Investment Company Act Release No. 13920 
(May 2, 1984) [49 FR 19519 (May 8, 1984)] at n.1 [``Rule 2a19-1 
Proposing Release''].
    \130\ Rule 2a19-1(a)(3) [17 CFR 270.2a19-1(a)(3]. Rule 2a19-1 
also requires that the broker-dealer not execute any portfolio 
transactions for, engage in any principal transactions with, or 
distribute shares for, the fund's ``complex,'' and that the board 
determine that the fund and its shareholders will not be adversely 
affected if the broker-dealer does not perform those functions for 
the fund. Rule 2a19-1(a)(1), (2) [17 CFR 270.2a19-1(a)(1), (2)]. The 
rule defines ``complex'' to the fund on whose board the director 
serves, its investment adviser and principal underwriter, and other 
funds having the same adviser or principal underwriter. Rule 2a19-
1(b) [17 CFR 270.2a19-1(b).
    \131\ See Rule 2a19-1 Proposing, supra note 129, at n.36 and 
accompanying text.
---------------------------------------------------------------------------

    In recent years, some directors have been unable to qualify as 
independent directors due to the condition that no more than a minority 
of a fund's independent directors may be affiliated with a broker-
dealer. This condition has been especially troublesome for funds with 
small boards of directors. For example, if a three-member board has 
only two independent directors, neither director can rely on rule 2a19-
1 because it would result in more than a minority of the independent 
directors relying on the rule. In these types of circumstances, the 
Commission has granted exemptions from this condition of the rule.\132\
---------------------------------------------------------------------------

    \132\ See Bergstrom, Capital Corporation, Investment Company Act 
Release Nos. 23629 (Dec. 31, 1998) [64 FR 1035 (Jan. 7, 1999)] 
(notice) and 23666 (Jan. 26, 1999) [68 SEC Docket 3501 (Feb. 23 
1999)] (order); Counsellors Tandem Securities Fund, Inc. and 
Warburg, Pincus Counsellors, Inc., Investment Company Act Release 
Nos. 15636 (Mar. 24, 1987) [52 FR 10278 (Mar. 31, 1987)] (notice) 
and 15697 and 15697 (Apr. 22, 1987) [38 SEC Docket 318 (May 5, 
1987)] (order).
---------------------------------------------------------------------------

    We are proposing to amend rule 2a19-1 to provide that no more than 
one-half of a fund's independent directors may be broker-dealers or 
their affiliates.\133\ This condition should make the rule more 
flexible for funds with small boards of directors, while continuing to 
ensure that not all of a fund's independent directors are broker-
dealers or their affiliates.\134\ We seek comment on whether rule 2a19-
1 should be expanded further.
---------------------------------------------------------------------------

    \133\ Proposed amendment to rule 2a19-1(a)(3).
    \134\ We also are proposing to amend the title of rule 2a19-1 to 
refer specifically to broker-dealers, the subject of the rule.
---------------------------------------------------------------------------

2. Ownership of Index Fund Securities
    Section 2(a)(19) disqualifies an individual from being considered 
an independent director if he knowingly has any direct or indirect 
beneficial interest in a security issued by the fund's investment 
adviser or principal underwriter, or by a controlling person of the 
adviser or underwriter.\135\ A fund director, for example, who owns 
securities issued by the fund's adviser (or its parent company) could 
not be an independent director. This provision was designed to ensure 
that an independent director does not have a financial interest in the 
organizations that are closely associated with the fund or that would 
benefit from payments that the independent director is charged with 
scrutinizing.\136\
---------------------------------------------------------------------------

    \135\ Section 2(a)(19)(B)(iii) [15 U.S.C. 80a-2(a)(19)(B)(iii)].
    \136\ See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 13-14 (1970) 
(expressing policy concerns about the use of ``affiliated person'' 
in the Act because, among other things, it permitted a director to 
be classified as ``unaffiliated'' even though he had substantial 
business relationships with the fund, its adviser, or its 
underwriter); Public Policy Report, supra note 10, at 332-34 (same); 
see also section 15(c) of the Act (requiring independent directors 
to scrutinize and approve the fund's contracts with investment 
advisers and principal underwriters).
---------------------------------------------------------------------------

    If a director owns securities of an index fund \137\ that seeks to 
replicate a securities market index that includes securities of the 
fund's adviser (or principal underwriter or a controlling person of the 
adviser or principal underwriter), an issue could arise whether the 
director knowingly has an indirect beneficial interest in the 
securities of the adviser (or principal underwriter or controlling 
person).\138\ We believe that this attenuated interest in the adviser's 
or underwriter's securities is not the type of interest Congress 
intended to prohibit independent directors from owning when it adopted 
section 2(a)(19). An index fund's investment decision-making process is 
dictated by the goal of mirroring the performance of a market index, 
and thus is largely mechanical.\139\ Because index fund portfolios 
typically are spread among a large number of issuers, ownership of 
their shares is unlikely to have a material effect on the independent 
judgment of a fund director.
---------------------------------------------------------------------------

    \137\ An index fund is a type of fund that selects the 
securities in its portfolio in an effort to replicate the investment 
performance of the securities in a market index. Nearly 20 percent 
of the index funds registered with the Commission track the 
performance of the Standard & Poor's 500 Composite Stock Price 
Index. For a discussion of other types of indexes, see 
John Waggoner, Index Funds Race Into New Venues; Investors Can Track 
Europe or Racing Firms, USA Today, Nov. 27, 1998, at 3B.
    \138\ Cf. The Massachusetts Company, SEC No-Action Letter (Jan. 
29, 1972) (fund director who serves as a trustee of an irrevocable 
trust that holds shares of a controlling person of the fund's 
adviser and underwriter would be an interested person of the fund 
under section 2(a)(19)(B)(iii)).
    \139\ Cf., e.g., The Victory Stock Index Fund, SEC No-Action 
Letter (Feb. 7, 1995) (staff would not recommend enforcement action 
under section 12(d)(3) or rule 12d3-1 when an index fund purchased 
securities of an affiliated person of the fund's adviser or 
principal underwriter, because, among other things, the ``non-
volitional nature of the index fund's purchases'' made it unlikely 
that the fund's portfolio securities would be selected in the 
interest of the fund's adviser or principal underwriter, rather than 
the fund's shareholders).
---------------------------------------------------------------------------

    In order to resolve concerns that may have arisen about the status 
of independent directors who own index funds, we are proposing a new 
rule that would conditionally exempt an individual from being 
disqualified as an independent director merely because he owns shares 
of an index fund that invests in the adviser or underwriter of the 
fund, or their controlling persons.\140\ The exemption would be 
available if the value of securities issued by the adviser or 
underwriter (or controlling person) does not exceed five percent of the 
value of any index tracked by the index fund.\141\ The purpose of this 
condition is to assure that an independent director's indirect interest 
in the adviser's securities will not be substantial enough to impair 
his independence and create a conflict of interest.
---------------------------------------------------------------------------

    \140\ The proposed rule would not address an independent 
director's ownership of securities of an actively managed fund. The 
holdings of this type of fund can vary from day to day without the 
knowledge of the fund's shareholders, and periodic disclosure of 
fund holdings may be out of date by the time an investor receives 
them. We therefore believe it is clear that an independent director 
who owns shares of an actively managed fund ordinarily would not 
``knowingly'' have an indirect beneficial interest in the issuers of 
securities the fund holds.
    \141\ Proposed rule 2a19-3.
---------------------------------------------------------------------------

    The proposed rule would define an ``index fund'' as a fund with an 
investment objective to replicate the performance of a securities index 
or indices.\142\ We request comment on the proposed definition of index 
fund. Does it encompass the types of funds for which relief is 
appropriate? Should other types of investment vehicles be included in 
the proposed rule? We also request comment on the proposed limit on the 
percentage of the value of securities of the adviser or principal 
underwriter (or their controlling persons) represented in any index 
tracked by the fund. Should the rule allow an independent director to 
own index fund shares when the value of the securities issued by the 
adviser or underwriter (or their controlling persons) in the index 
constitutes more than five percent of the value of any index tracked by 
the fund? Should the limit be less than five percent?
---------------------------------------------------------------------------

    \142\ Id.

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

[[Page 59839]]

E. Disclosure of Information About Fund Directors

    Participants at the Roundtable agreed that independent directors 
can vigilantly represent the interests of mutual fund shareholders only 
when they are truly independent of those who operate and manage the 
fund.\143\ We agree with the Roundtable participants and believe that 
the effectiveness of fund boards of directors is enhanced by a high 
degree of independence of each independent director.
---------------------------------------------------------------------------

    \143\ See, e.g., statement of Bruce K. MacLaury, Roundtable 
Transcript of Feb. 23, 1999, at 42 (``It should be apparent that 
boards work best when the possibilities for conflict of interest are 
minimized so that truly independent directors can exercise their 
best judgment on behalf of the interest of the shareholders.''); 
statement of Dawn-Marie Driscoll, Roundtable Transcript of Feb. 24, 
1999, at 63 (``[I]ndependence is one of the most important 
characteristics of an independent director. The more ways that you 
can ensure independence the better the process will be.''); 
statement of Thomas R. Smith, Jr., Roundtable Transcript of Feb. 24, 
1999, at 253 (``There is something beyond what is in the statute 
that you consider when you pick new directors. You've got to look at 
material business relationships, and, quite frequently, in the 
selection process you will rule somebody out, although technically 
they are independent, because of relationships.'').
---------------------------------------------------------------------------

    We believe that shareholders have a significant interest in knowing 
who the independent directors are, whether the independent directors' 
interests are aligned with shareholders' interests, whether the 
independent directors have any conflicts of interest, and how the 
directors govern the fund. This information helps a mutual fund 
shareholder to evaluate whether the independent directors can, in fact, 
act as an independent, vigorous, and effective force in overseeing fund 
operations.
    The Commission has long recognized the importance of providing 
mutual fund shareholders with relevant information about fund directors 
and has required funds to provide shareholders with certain information 
about fund directors. Currently, information about directors is 
available in fund registration statements and proxy statements for the 
election of directors. Generally, funds are required to provide basic 
information about directors in the statement of additional information 
(``SAI'') and proxy statements, including name and age; positions with 
the fund; principal occupations during the past five years; and 
compensation from the fund and fund complex.\144\ Moreover, funds are 
required to disclose in proxy statements for the election of directors 
a director's positions with, interests in, and transactions with, the 
fund and certain persons related to the fund.\145\
---------------------------------------------------------------------------

    \144\ Items 13(b) and (d) of Form N-1A; Items 18.1 and 18.4 of 
Form N-2; Items 20(a) and (c) of Form N-3; Items 401(a) and (e) of 
Regulation S-K, through Item 22(b)(4) of Schedule 14A.
    Funds also are required to disclose for each director the 
positions held with affiliated persons or principal underwriters of 
the fund. Item 13(c) of Form N-1A; Item 18.2 of Form N-2; Item 20(b) 
of Form N-3. Funds also must provide the percentage of the fund's 
equity securities owned as a group by all officers, directors, and 
advisory board members. Item 14(c) of Form N-1A and Item 19.3 of 
Form N-2. See also Items 23(f) and 25 of Form N-1A; Items 24.2.i and 
29 of Form N-2; Items 21(a)(ii) and (f)(ii), 28(b)(10), and 32 of 
Form N-3.
    \145\ See Item 22(b)(1) of Schedule 14A (requiring disclosure of 
director's positions with the investment adviser and a director's 
securities holdings or material interest in the investment adviser 
and any person controlling, controlled by, or under common control 
with the investment adviser); Item 401 of Regulation S-K, through 
Item 22(b)(4) of Schedule 14A (requiring disclosure of director's 
positions with the fund); Item 22(b)(2) of Schedule 14A (requiring 
disclosure of any material interests of a director in the fund's 
principal underwriter or administrator); Item 22(b)(3) of Schedule 
14A (requiring disclosure of any material interests of a director in 
any material transactions with the fund, the investment adviser, the 
principal underwriter, or the administrator, and any person 
controlling, controlled by, or under common control with the 
investment adviser, principal underwriter, or administrator); Item 
404(a) of Regulation S-K, through Item 22(b)(4) of Schedule 14A 
(requiring disclosure of a director's material interests in 
transactions with the fund involving amounts over $60,000). Funds 
also must disclose in proxy statements a director's holdings in the 
fund. Item 403(b) of Regulation S-K, through Item 6(d) of Schedule 
14A. See also Items 5, 7(e), (f), and (g), and 22(b)(5) and (b)(6) 
of Schedule 14A (requiring other information about directors).
---------------------------------------------------------------------------

    For some time, however, we have been concerned that mutual fund 
investors do not in all cases have access to significant information 
about fund directors when they need it. When we adopted our recent 
comprehensive revisions to the mutual fund prospectus, we noted that 
mandating more information about fund directors than is available under 
our existing rules may be appropriate in light of independent 
directors' role as ``watchdogs'' for fund shareholders.\146\ Critics 
have charged that shareholders do not know the very people who are 
entrusted with safeguarding their interests.\147\ Some have complained 
that fund shareholders do not know whether the interests of independent 
directors are aligned with shareholders or with fund management.\148\
---------------------------------------------------------------------------

    \146\ Registration Form Used by Open-End Management Investment 
Companies, Investment Company Act Release No. 23064 (Mar. 13, 1998) 
[63 FR 13916, 13931 (Mar. 23, 1998)] (``1998 Form N-1A Release'').
    \147\ John Markese, president of the American Association of 
Individual Investors, discussed his view that there is a 
``disconnect'' between shareholders and the independent directors at 
our recent Roundtable. Roundtable Transcript of Feb. 23, 1999, at 
48-49. See also Paul J. Lim, Despite Plan to Fortify Independent 
Directors, Shareholders Must be Their Own Watchdogs, L.A. Times, Mar 
. 28, 1999, at C3; Russ Wiles, ``Fund Directors Losing Clout,'' The 
Arizona Republic D1 (Mar. 28, 1999).
    \148\ See, e.g., Edward Wyatt, Empty Suits In the Board Room; 
Under Fire, Mutual Fund Directors Seem Increasingly Hamstrung, N.Y. 
Times, June 7, 1998, at C1; Steven D. Kaye, Whose board is it?, U.S. 
News & World Rep., Feb. 2, 1998, at 64; Jason Zweig, How Funds Can 
Do Better, MONEY, Feb. 1998, at 42.
---------------------------------------------------------------------------

    We have reevaluated our disclosure requirements in light of these 
criticisms and have concluded that, while our fundamental approach is 
sound, there are several gaps in the information that shareholders 
currently receive about directors. Historically, the primary vehicle 
for providing information about mutual fund directors was the proxy 
statement prepared in connection with shareholder meetings. In recent 
years, the proxy statement has become an ineffective vehicle for 
communicating information to fund shareholders on a regular basis 
because funds generally are no longer required to hold annual 
meetings.\149\
---------------------------------------------------------------------------

    \149\ See John Nuveen & Co., Inc. SEC No-Action Letter (Nov. 18, 
1986) (``Nuveen Letter'') (annual meetings to elect directors not 
required by Investment Company Act). The Nuveen Letter took the 
position that annual meeting requirements generally are a question 
of state law.
    For historical and other reasons, most funds are organized under 
the laws of Massachusetts or Maryland. The organizational and 
operational requirements of Massachusetts business trusts are not 
specified by statute, and a fund's essential structure is contained 
in the trust agreement, which generally includes a provision 
eliminating the need for annual shareholder meetings to elect 
directors. See generally Jones, Moret and Storey, The Massachusetts 
Business Trust and Registered Investment Companies, 13 DEL. J. CORP. 
L. 421 (1988). Under Maryland corporate law, fund charters or by-
laws are not required to provide that annual meetings be held in any 
year in which election of directors is not required by the 
Investment Company Act. MD. CODE ANN., CORPS. & ASS'NS Code Sec. 2-
501(b) (1999). In addition, Delaware, Minnesota, and California also 
have business trust or special corporate law structures that have 
the effect of not requiring shareholder meetings other than those 
required by the Investment Company Act. DEL. CODE ANN. tit. 12, 
Sec. 3806 (1999); Minn. Stat. Sec. 302A.431 (1999); CAL. CORP. CODE 
Sec. 600(b) (West 1999).
    Closed-end funds registered on national securities exchanges, 
however, are required to hold an annual meeting to elect directors 
under the rules of the exchanges. See, e.g., American Stock Exchange 
Listing Standards, Policies, and Requirements Sec. 704; New York 
Stock Exchange Listed Company Manual Sec. 302.00. Closed-end fund 
shareholders therefore generally would receive annual proxy 
statements.
---------------------------------------------------------------------------

    In addition, although mutual funds are required to disclose certain 
information that bears on a director's potential conflicts, the SAI 
requirements and proxy rules do not require disclosure of other 
circumstances that could raise similar conflict of interest concerns, 
such as those involving a director's immediate family members. The 
current rules also do not require disclosure of information that may 
show

[[Page 59840]]

that a director's interests are aligned with shareholder interests, 
including a director's securities holdings in funds in the fund 
complex.
    Therefore, we are proposing amendments to our disclosure rules to 
close these gaps. Our proposals would require mutual funds to:
     Provide basic information about directors to shareholders 
annually so that shareholders will know the identity and experience of 
their representatives;
     Disclose to shareholders fund shares owned by directors to 
help shareholders evaluate whether directors' interests are aligned 
with their own;
     Disclose to shareholders information about directors that 
may raise conflict of interest concerns; and
     Provide information to shareholders on the board's role in 
governing the fund.
    These proposals would supplement the information that currently is 
available in the mutual fund SAI and in proxy statements. For ease of 
reference, we have attached as Appendix A a table cross-referencing the 
proposed disclosure requirements in the proxy rules and the SAI of Form 
N-1A with existing requirements.\150\
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    \150\ Form N-1A is the registration form used by open-end 
management investment companies to register under the Investment 
Company Act and to offer their shares under the Securities Act. We 
also are proposing parallel changes to Forms N-2 (closed-end funds) 
and N-3 (managed separate accounts offering variable annuity 
contracts).
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1. Basic Information About Directors
    (a) Location of Information. The Commission is proposing to require 
mutual funds to disclose basic information about directors in an easy-
to-read tabular format.\151\ We are proposing to combine in one table 
certain information currently required for directors in the SAI and 
proxy statements.\152\ This new table would be required in three 
places: the fund's annual report to shareholders, SAI, and proxy 
statement for the election of directors. This would ensure that the 
information is available to prospective investors upon request. It also 
would ensure that mutual fund shareholders receive basic information 
about the identity and experience of their directors both annually and 
whenever they are asked to vote to elect directors.
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    \151\ Proposed Item 22(b)(1) of Schedule 14A; proposed Items 
13(a)(1) and 22(b)(5) of Form N-1A; proposed Item 18.1 and 
Instruction 4.e. to Item 23 of Form N-2; proposed Item 20(a) and 
Instruction 4(v) to Item 27 of Form N-3. For convenience in 
discussing the proposed requirements, we are not specifically 
referring to nominees for election as directors. The proposed 
requirements, however, would be applicable to nominees in proxy 
solicitations for the election of directors. The disclosure 
requirements in Item 22 of Schedule 14A also are applicable to 
information statements prepared in accordance with Regulation 14C 
and Schedule 14C [17 CFR 240.14c-101].
    \152\ See Item 13(b) of Form N-1A; Item 18.1 to Form N-2; Item 
20(a) of Form N-3; Items 401(a) and (e) of Regulation S-K, through 
Item 22(b)(4) of Schedule 14A. As currently required, funds would 
continue to include in the table information about officers and 
advisory board members of the fund, as well as directors. See Items 
13(b) of Form N-1A; Item 18.1 of Form N-2; Item 20(a) of Form N-3; 
Items 401(b) and (e) of Regulation S-K, through Item 22(b)(4) of 
Schedule 14A.
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    We are not proposing to require that basic information about 
directors be included in the prospectus. We considered, and rejected, 
this idea during our recent top-to-bottom overhaul of the mutual fund 
prospectus.\153\ At the time of our prospectus overhaul, however, we 
directed the Division of Investment Management to consider whether 
information about directors should be included in fund annual reports, 
and we have now concluded that it should.\154\
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    \153\See 1998 Form N-1A Release, supra note 146, at 13930-13931.
    \154\ See Id.
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    Our proposals would, for the first time, require that basic 
information about mutual fund directors be included in the annual 
report to shareholders.\155\ Because the proxy statement is no longer 
received by most fund shareholders annually, we are proposing to 
include basic information about directors in the annual report to 
ensure that shareholders will receive it regularly. We also are 
proposing to require funds to include in the annual report a statement 
that the SAI includes additional information about fund directors and 
is available without charge upon request.\156\ The statement must 
include a toll-free (or collect) telephone number for shareholders to 
call for additional information.
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    \155\ Proposed Item 22(b)(5) of Form N-1A; proposed Instruction 
4.e. to Item 23 of Form N-2; proposed Instruction 4(v) to Item 27 of 
Form N-3.
    \156\ Proposed Item 22(b)(6) of Form N-1A; proposed Instruction 
4.e. to Item 23 of Form N-2; proposed Instruction 4(vi) to Item 27 
of Form N-3.
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    We request comment on the appropriate location for basic 
information about mutual fund directors. Please address whether basic 
information should be included in the prospectus, SAI, annual report, 
and/or proxy statement. Should we, for example, reconsider our decision 
not to include any of the basic information about directors in the 
prospectus?
    (b) Required Information. The proposed table would require for each 
director: (1) Name, address, and age; (2) current positions held with 
the fund; (3) term of office and length of time served; (4) principal 
occupations during the past five years; (5) number of portfolios 
overseen within the fund complex; and (6) other directorships held 
outside of the fund complex.\157\ The table also would require for each 
``interested'' director, as defined in section 2(a)(19) of the Act, a 
description of the relationship, events, or transactions by reason of 
which the director is an interested person.\158\
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    \157\ As is currently required, the fund also would be required 
to explain any family relationship between the persons listed in the 
table. See current Item 401(d) of Regulation S-K, through Item 
22(b)(4) of Schedule 14A; Item 13(b) of Form N-1A; Item 18.1 of Form 
N-2; Item 20(a) of Form N-3; proposed Item 22(b)(1) of Schedule 14A; 
proposed Item 13(a)(1) of Form N-1A; proposed Item 18.1 of Form N-2; 
proposed Item 20(a) of Form N-3.
    \158\ Proposed Instruction 4 to Item 22(b)(1) of Schedule 14A; 
proposed Instruction 2 to Item 13(a)(1) of Form N-1A; proposed 
Instruction 2 to Item 18.1 N-2; proposed Instruction 2 to Item 20(a) 
of Form N-3.
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    Currently, mutual funds must disclose the number of other 
registered investment companies in the fund complex that a director 
oversees.\159\ The Commission now is proposing to require disclosure of 
the total number of portfolios, rather than registered investment 
companies, that a director oversees.\160\ In today's environment, where 
a complex may choose between organizing a single series company with 
multiple portfolios or multiple investment companies each with a single 
portfolio, we believe that requiring disclosure of the number of 
portfolios that a director oversees would provide a more accurate 
picture of the director's responsibilities.
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    \159\ See Item 401(e)(2) and Instruction to Item 401(e)(2) of 
Regulation S-K, through Item 22(b)(4) of Schedule 14A; Item 13(c) 
and Instruction to Item 13(c) of Form N-1A; Item 18.2 and 
Instruction to Item 18.2 of Form N-2; Item 20(b) and Instruction to 
Item 20(b) of Form N-3.
    \160\ Proposed Item 22(b)(1) of Schedule 14A; proposed Item 
13(a)(1) of Form N-1A; proposed Item 18.1 of Form N-2; proposed Item 
20(a) of Form N-3.
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    The Commission seeks comment on whether the proposed basic 
information would provide shareholders with sufficient information 
about the directors who are charged with protecting shareholder 
interests. If the disclosure would not achieve this purpose, is there 
other basic information about directors that should be required? If 
proposed disclosure of any item is not necessary or useful to 
investors, please explain the reason why. Should the same basic 
information be included in the SAI, annual report, and proxy statement?
2. Ownership of Equity Securities in Fund Complex
    As discussed above, some have complained that shareholders do not 
know whether directors' interests are

[[Page 59841]]

aligned with those of shareholders.\161\ Although a director need not 
necessarily hold securities of funds in a fund complex to be an 
effective advocate for shareholders, the interests of a director who 
holds shares in the complex will tend to be aligned with the interests 
of other shareholders.\162\ We are therefore proposing to require 
disclosure of the aggregate dollar amount of equity securities of funds 
in the fund complex owned beneficially and of record by each 
director.\163\
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    \161\See supra note 148 and accompanying text.
    \162\ See Peter McKenna, Mutual Funds Are Built to Last With 
Embedded Checks, Balances, Investor's Business Daily, May 1, 1998, 
at B4 (quoting fund industry consultant Geoffrey H. Bobroff) (``It's 
useful to see how many shares are owned by members of the board. * * 
* Most investors like board members to share the fund's risk and 
possible reward.'').
    \163\ Proposed Item 22(b)(4) of Schedule 14A; proposed Item 
13(b)(4) of Form N-1A; proposed Item 18.7 of Form N-2; proposed Item 
20(f) of Form N-3.
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    We are not proposing to require separate disclosure of a director's 
holdings of equity securities in the fund itself. We are concerned that 
this information might have limited meaning because of the many reasons 
that a director could have for not holding shares of any specific fund, 
e.g., that its investment objective did not fill a need in the 
director's portfolio.
    Funds would provide information on director holdings in an easy-to-
read tabular format including: (1) Name of director; (2) identity of 
fund complex; and (3) aggregate dollar amount of equity securities 
owned of funds in the complex. The information, as of the most recent 
practicable date, would be provided in the fund's SAI and in any proxy 
statement relating to the election of directors. This would ensure that 
the information is available to prospective investors upon request and 
is provided to shareholders whenever they are asked to vote to elect 
directors.\164\
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    \164\ As noted earlier, supra note 149, closed-end funds are not 
required to update their registration statements annually; however, 
shareholders would receive the information annually in proxy 
statements for the election of directors.
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    ``Fund complex'' is currently defined in the proxy rules as two or 
more funds that (1) hold themselves out to investors as related 
companies for purposes of investment and investor services; or (2) have 
a common investment adviser or an investment adviser that is an 
affiliated person of the investment adviser of any of the other 
funds.\165\ The Commission is proposing to use this definition to 
determine a director's holdings in a fund complex.\166\
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    \165\See Item 22(a)(1)(v) of Schedule 14A.
    \166\ See proposed Instruction 1(a) to Item 13 of Form N-1A; 
proposed Instruction 1.b. to Item 18 of Form N-2; proposed 
Instruction 1.a. to Item 20 of Form N-3. The proposed definition of 
``fund complex'' also would apply to the proposed disclosure 
requirement for basic information about directors. See supra note 
157 and accompanying text (proposing to require disclosure for each 
director of the number of portfolios overseen within the fund 
complex and other directorships held outside of the fund complex).
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    We request comment on whether information on director holdings of 
shares in a fund complex would be useful to shareholders. If so, should 
the Commission use the definition of ``fund complex'' that is currently 
contained in the proxy rules? Or should the Commission use another 
definition, such as ``family of investment companies'' used in Form N-
SAR? \167\ Should disclosure of director holdings be limited to 
holdings in the fund itself, the group of funds overseen by a director, 
or some other group of funds? The Commission also requests comment on 
whether there is other information that bears on the alignment of 
interests of shareholders and directors and should be disclosed.
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    \167\ See Item H of Form N-SAR [17 CFR 274.101] (defining 
``family of investment companies'' to mean any two or more 
investment companies that share the same investment adviser or 
principal underwriter and hold themselves out to investors as 
related companies for purposes of investment and investor services); 
see also Rule 11a-3 under the Act [17 CFR 270.11a-3] (defining 
``group of investment companies'' to mean any two or more open-end 
investment companies that hold themselves out to investors as 
related companies for purposes of investment and investor services 
and that either (1) have a common investment adviser or principal 
underwriter or (2) the investment adviser or principal underwriter 
of one of the companies is an affiliated person of the investment 
adviser or principal underwriter of each of the other companies).
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3. Conflicts of Interest
    (a) Statutory Scheme Governing Conflicts of Interest. As described 
above, Congress provided that at least 40 percent of the board of 
directors of an investment company must be independent and assigned a 
special role to the independent directors--to supply a check on 
management and act as independent watchdogs for investors.\168\ Under 
the Investment Company Act, an independent director is an individual 
who is not an ``interested person'' of the fund.\169\
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    \168\ See supra notes 20, 22, and 23 and accompanying text.
    \169\ See section 10(a) of the Act.
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    In section 2(a)(19) of the Act, Congress enumerated individuals who 
are ``interested persons'' of a fund and who, therefore, are not 
considered independent directors. These individuals include: (1) Any 
affiliated person of the fund, (2) any member of the immediate family 
of any natural person who is an affiliated person of the fund, (3) any 
interested person of any investment adviser of or principal underwriter 
for the fund, (4) any person or partner or employee of any person who 
at any time since the beginning of the last two completed fiscal years 
of the fund has acted as legal counsel for the fund, and (5) any broker 
or dealer registered under the Exchange Act or any affiliated person of 
a broker or dealer.\170\
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    \170\ Sections 2(a)(19)(A)(i)-(v) of the Act [15 U.S.C. 80a-
2(a)(19)(A)(i)-(v)]. Section 2(a)(3) of the Act [15 U.S.C. 80a-
2(a)(3)] defines affiliated person of another person to mean: (1) 
any person directly or indirectly owning, controlling, or holding 
with power to vote, 5 per centum or more of the outstanding voting 
securities of such other person; (B) any person 5 per centum or more 
of whose outstanding voting securities are directly or indirectly 
owned, controlled, or held with power to vote, by such other person; 
(C) any person directly or indirectly controlling, controlled by, or 
under common control with, such other person; (D) any officer, 
director, partner, copartner, or employee of such other person; (E) 
if such other person is an investment company, any investment 
adviser thereof or any member of an advisory board thereof; and (F) 
if such other person is an unincorporated investment company not 
having a board of directors, the depositor thereof.
    Section 2(a)(19) of the Act [15 U.S.C. 80a-2(a)(19)] defines 
immediately family member to mean any parent, spouse of a parent, 
child, spouse of a child, spouse, brother, or sister, and includes 
step and adoptive relationships.
    Sections 2(a)(19)(B)(i)-(v) of the Act [15 U.S.C. 80a-
2(a)(19)(B)(i)-v] define an interested person of an investment 
adviser or principal underwriter of a fund to include: (1) Any 
affiliated person of the investment adviser or principal 
underwriter; (2) any member of the immediate family of any natural 
person who is an affiliated person of the investment adviser or 
principal underwriter; (3) any person who knowingly has any direct 
or indirect beneficial interest in, or who is designated as trustee, 
executor, or guardian of any legal interest in, any security issued 
either by the investment adviser or principal underwriter or by a 
controlling person of the investment adviser or principal 
underwriter; (4) any person or partner or employee of any person who 
at any time since the beginning of the last two completed fiscal 
years of the fund has acted as legal counsel for the investment 
adviser or principal underwriter; and (5) any broker or dealer 
registered under the Exchange Act or any affiliated person of a 
broker or dealer.
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    Congress also gave the Commission authority to determine by order 
that a director is an interested person even though he is not covered 
by the categories enumerated in the statute.\171\ The Commission may 
determine that a natural person is an interested person of a fund by 
reason of having had, at any time since the beginning of the last two 
completed fiscal years of the fund, a material business or professional 
relationship with the fund, the principal executive officer of the 
fund, any other investment company having the same investment adviser 
or principal underwriter, or the principal executive officer of the 
other investment

[[Page 59842]]

company.\172\ We also may determine that a natural person is an 
interested person of an investment adviser or principal underwriter of 
a fund (and therefore of the fund itself) by reason of having had, at 
any time since the beginning of the last two completed fiscal years of 
the fund, a material business or professional relationship with the 
investment adviser or principal underwriter or with the principal 
executive officer or any controlling person of the investment adviser 
or principal underwriter.\173\ For example, in appropriate 
circumstances, the Commission may find that a director who was an 
employee of a fund's investment adviser within the past two years is an 
``interested person'' under section 2(a)(19)(B)(vi) of the Act by 
reason of having a material business or professional relationship with 
the investment adviser.\174\
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    \171\ See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 14-15 (1970).
    \172\ Section 2(a)(19)(A)(vi) of the Act [15 U.S.C. 80a-
2(a)(19)(A)(vi)]. The statute also provides that no person shall be 
deemed an interested person of a fund solely by reason of being a 
member of its board of directors or advisory board or an owner of 
its securities, or his membership in the immediate family of any 
person who is a member of the fund's board of directors or advisory 
board or an owner of its securities. Id.
    \173\ Section 2(a)(19)(B)(vi) of the Act [15 U.S.C. 80a-
2(a)(19)(B)(vi)].
    Section 2(a)(9) of the Act [15 U.S.C. 80a-2(a)(9)] defines 
control to mean the power to exercise a controlling influence over 
the management or policies of a company, unless such power is solely 
the result of an official position with such company. Any person who 
owns beneficially, either directly or through one or more controlled 
companies, more than 25 percent of the voting securities of a 
company shall be presumed to control such company. Any person who 
does not own more than 25 percent of the voting securities of any 
company shall be presumed not to control such company.
    \174\ See Interpretive Release, supra note 1.
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    (b) Need for Disclosure Changes. The proxy rules currently require 
significant information about conflicts of interest of directors.\175\ 
The proxy rules require disclosure of positions held with the 
investment adviser and any securities holdings or material interests in 
the investment adviser and any person controlling, controlled by, or 
under common control with the investment adviser.\176\ A mutual fund 
also must disclose any material interests of a director in the fund's 
principal underwriter or administrator.\177\ In addition, a fund must 
disclose any material interests of a director in any material 
transactions with the fund, the investment adviser, the principal 
underwriter, the administrator, or any person controlling, controlled 
by, or under common control with the investment adviser, principal 
underwriter, or administrator.\178\
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    \175\ See supra note 145 and accompanying text.
    \176\ See Item 22(b)(1) of Schedule 14A.
    \177\ See Item 22(b)(2) of Schedule 14A.
    \178\ See Item 22(b)(3) of Schedule 14A, and Item 404(a) of 
Regulation S-K, through Item 22(b)(4) of Schedule 14A.
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    We are proposing to enhance the disclosure required in the proxy 
rules because we believe that there are other situations that could 
involve conflicts of interest. We also are proposing to include the 
proposed conflicts disclosure about directors in the SAI because mutual 
funds no longer prepare proxy statements on a regular basis.\179\
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    \179\ See supra note 149 and accompanying text.
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    We believe disclosure of directors' potential conflicts of interest 
would serve three purposes. First, this disclosure would bring to the 
attention of shareholders circumstances that may affect the directors' 
allegiance to shareholders. With this information, shareholders may 
decide for themselves whether an independent director has any potential 
conflicts of interest that could affect the director's ability to 
protect the interests of shareholders.
    Second, disclosure would provide the public, including the press 
and other third-party information providers, access to information 
about directors' potential conflicts of interest. The resulting public 
dissemination may discourage the selection of independent directors who 
have relationships or engage in activities that raise questions about 
their independence.
    Third, the information would assist the Commission in evaluating 
whether it should exercise its authority to determine that a director 
is ``interested'' under section 2(a)(19)(A)(vi) or (B)(vi) of the Act 
even though he is not within one of the categories of ``interested 
persons'' specifically enumerated by Congress in other provisions of 
section 2(a)(19).\180\ The legislative history of section 2(a)(19) 
states that the Commission could issue an order determining that a 
director is an interested person if the Commission found that a 
director's ``business or professional relationship [with certain 
related persons] was material in the sense that it might tend to impair 
the independence of such director.'' \181\ In providing the Commission 
with this authority, Congress contemplated that the Commission would 
look at each situation on a case-by-case basis.\182\ The proposed 
disclosure would assist the Commission in determining whether it would 
be appropriate to make a further inquiry into a director's 
independence.
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    \180\ See supra note 170 and accompanying text.
    \181\ See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 14-15 (1970). 
Ordinarily, a business or professional relationship would not be 
deemed to impair independence where the benefits flow from the 
director of an investment company to the other party to the 
relationship. Id.
    \182\ Id. Over the years, Division of Investment Management 
staff analyzed issues arising under sections 2(a)(19)(A)(vi) or 
(B)(vi) of the Act on the particular facts of each case to determine 
whether a director's relationships might tend to impair the 
independence of the director. See, e.g., Travelers Equities Fund 
Inc., SEC No-Action Letter (Jan. 11, 1982); Securities Groups, SEC 
No-Action Letter (Apr. 20, 1981); Equitable of Iowa Variable Annuity 
Account A, SEC No-Action Letter (Jan. 6, 1980); American Medical 
Association, SEC No-Action Letter (Dec. 5, 1979); American Medical 
Association Tax-Exempt Income Fund, Inc., SEC No-Action Letter (Jun. 
18, 1978); Cal-Western Separate Account A, SEC No-Action Letter 
(Mar. 8, 1976); Southwestern Investors, Inc., SEC No-Action Letter 
(Jun. 13, 1971).
    Beginning in 1984, the staff stated that it did not believe that 
it was appropriate for the staff to consider no-action requests 
under section 2(a)(19)(A)(vi) or (B)(vi) as a matter of policy. 
Capital Supervisors Helios Fund, Inc., SEC No-Action Letter (Jun. 
13, 1984); see also Daniel Calabria, SEC No-Action Letter (Sept. 12, 
1984). See also Interpretive Release, supra note 1.
---------------------------------------------------------------------------

    We believe that the proposed disclosure would give shareholders the 
tools to help determine how effectively the directors serve their 
interests and encourage the selection of directors that are independent 
in the spirit intended by Congress. We first discuss our general 
approach to the disclosure requirements and then discuss the specific 
requirements.
    (c) General Approach to Disclosure--(1) Circumstances Raising 
Potential Conflicts of Interest. The Commission is proposing to require 
disclosure of three types of circumstances that could affect the 
allegiance of mutual fund directors to their shareholders: positions, 
interests, and transactions and relationships of directors. In 
specifying the circumstances where disclosure is required, we have 
drawn on the current proxy rules, which require disclosure of 
positions, interests, and transactions of directors.\183\
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    \183\ See Items 22(b)(1) (positions with the interests in the 
investment adviser), 22(b)(2) (interests in the principal 
underwriter or administrator), 22(b)(3) (interests in transactions 
with the investment adviser, principal underwriter, or 
administrator), and 22(b)(4) (interests in transactions with the 
fund) of Schedule 14A.
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    The Commission is proposing to require disclosure of positions held 
by a director with the fund and persons related to the fund.\184\ A 
director who holds such a position may be influenced to act in the 
interest of persons related to the fund rather than the interest of 
fund shareholders. We also are proposing to require disclosure of 
directors' interests, including securities holdings, in entities 
related to the fund.\185\ A director who holds an

[[Page 59843]]

interest in an entity related to the fund may be tempted to place his 
financial interest in the entity ahead of shareholders' interests in 
the fund. Finally, we are proposing to require disclosure of directors' 
transactions and relationships with the fund and persons related to the 
fund.\186\ A director who is involved in a transaction or relationship 
with the fund or related persons may have financial or other interests 
that compete with those of fund shareholders.
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    \184\ Proposed Item 22(b)(3) of Schedule 14A; proposed Item 
13(b)(3) of Form N-1A; proposed Item 18.6 of Form N-2; proposed Item 
20(e) of Form N-3.
    \185\ Proposed Items 22(b)(5) and (6) of Schedule 14A; proposed 
Items 13(b)(5) and (6) of Form N-1A; proposed Items 18.8 and 18.9 of 
Form N-2; proposed Items 20(g) and (h) of Form N-3.
    \186\ Proposed Items 22(b)(7) and (8) of Schedule 14A; proposed 
Items 13(b)(7) and (8) of Form N-1A; proposed Items 18.10 and 18.11 
of Form N-2; proposed Items 20(i) and (j) of Form N-3.
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    The Commission requests comment on whether disclosure of directors' 
positions, interests, and transactions and relationships is 
appropriate. Are there other types of circumstances that also raise 
conflict of interest concerns and should be disclosed?
    (2) Persons Covered by Disclosure Requirements; Directors and 
Immediate Family Members. The Commission is proposing to follow the 
approach taken in the current proxy rules and require conflicts of 
interest disclosure about all directors, both interested and 
independent.\187\ The Commission requests comment on whether this 
approach is appropriate, or whether there are any proposed requirements 
that should apply only to independent directors. If so, which 
requirements should apply only to independent directors?
---------------------------------------------------------------------------

    \187\ See Items 22(b)(1) (positions and interests); 22(b)(2) 
(interests); 22(b)(3) (transactions); and 22(b)(4) (transactions) of 
Schedule 14A.
---------------------------------------------------------------------------

    The Commission also proposes to extend the disclosure requirements 
to the immediate family members of directors because the involvement of 
family members with the fund or persons related to the fund could raise 
the same conflicts of interest for a director as if the director was 
involved directly in the situation. The Commission proposes to define 
``immediate family member'' to mean any spouse, parent, child, sibling, 
mother- or father-in-law, son- or daughter-in-law, or sister- or 
brother-in-law, including step and adoptive relationships.\188\ This 
definition is similar to the definition of immediate family member in 
the current proxy rules.\189\ We are proposing to add step and adoptive 
relationships, based on the definition of ``immediate family member'' 
in section 2(a)(19) of the Act. Our proposed definition would be 
slightly broader than the definition in section 2(a)(19) of the Act, 
which does not include mother- or father-in-law or sister- or brother-
in-law relationships. We request comment on whether the proposed 
definition is appropriate, or whether it should be expanded or 
narrowed.
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    \188\ Proposed Item 22(a)(1)(vi) of Schedule 14A; proposed 
Instruction 1(b) to Item 13 of Form N-1A; proposed Instruction 1.b. 
to Item 18 of Form N-2; proposed Instruction 1.b. to Item 20 of Form 
N-3.
    \189\ See Instruction 2 to Item 404(a) of Regulation S-K, 
through Item 22(b)(4) of Schedule 14A.
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    Related Persons. The Commission is proposing to require disclosure 
about circumstances involving directors, on the one hand, and the fund 
and persons related to the fund, on the other. We looked to the Act for 
guidance in determining which related persons should be covered by our 
disclosure requirements. The Commission's statutory authority to 
determine that a director is an ``interested person'' is based on 
finding a relationship with the fund; its investment adviser, principal 
underwriter, or a person controlling the investment adviser or 
principal underwriter; another investment company with the same 
investment adviser or principal underwriter; or the principal executive 
officer of the fund, its investment adviser or principal underwriter, 
or another investment company with the same investment adviser or 
principal underwriter.\190\
---------------------------------------------------------------------------

    \190\ See sections 2(a)(19)(A)(vi) and (B)(vi) of the Act [15 
U.S.C. 80a-2(a)(19)(A)(vi) and (B)(vi)].
---------------------------------------------------------------------------

    We are proposing to require disclosure with respect to 
circumstances involving these persons and other persons that we have 
concluded may pose similar conflicts of interest. The additional 
persons include: (1) a fund's administrator or a person directly or 
indirectly controlling the administrator; (2) a person directly or 
indirectly controlled by or under common control with the fund's 
investment adviser, principal underwriter, or administrator; (3) any 
other investment company with the same administrator as the fund; (4) 
any other investment company with an investment adviser, principal 
underwriter, or administrator that directly or indirectly controls, is 
controlled by, or is under common control with an investment adviser, 
principal underwriter, or administrator of the fund; and (5) any 
officer of (i) the fund; (ii) the investment adviser, principal 
underwriter, or administrator of the fund; (iii) a person directly or 
indirectly controlling, controlled by, or under common control with the 
fund's investment adviser, principal underwriter, or administrator; 
(iv) an investment company with the same investment adviser, principal 
underwriter, or administrator as the fund; or (v) an investment company 
with an investment adviser, principal underwriter, or administrator 
that directly or indirectly controls, is controlled by, or is under 
common control with an investment adviser, principal underwriter, or 
administrator of the fund.\191\
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    \191\ Separate accounts offering variable insurance products 
that are registered as management companies also would be required 
to disclose circumstances involving the insurance company that 
sponsors the separate account. We are proposing to define 
``sponsoring insurance company'' in the proxy rules to mean the 
insurance company that establishes and maintains the separate 
account and that owns the assets of the separate account. Proposed 
Item 22(a)(1)(x) of Schedule 14A.
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    We are following the approach of the current proxy rules in 
proposing to require disclosure regarding directors' relationships with 
mutual fund administrators. As administrators take on an increasing 
role in the operations of funds, the relationships of independent 
directors with these entities may affect the directors' ability to 
safeguard the interests of fund shareholders.\192\
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    \192\ See supra notes 89-90 and accompanying text.
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    As in the current proxy rules, we are proposing to require mutual 
funds to disclose circumstances involving the director and persons 
controlling, controlled by, or under common control with some parties 
related to the fund.\193\ We believe that situations involving a 
director and persons controlled by or under common control with persons 
related to the fund could pose conflicts of interest that are similar 
to situations involving controlling persons, which are referenced in 
section 2(a)(19) of the Act. We are concerned that the burden on mutual 
funds of expanding disclosure beyond these persons, however, may 
outweigh the value of the information to investors. The Commission 
requests comment on whether it should extend the proposed disclosure 
requirements beyond persons controlling, controlled by, or under common 
control with parties related to the fund, or limit the proposed 
disclosure requirements to

[[Page 59844]]

controlling persons as specified in section 2(a)(19) of the Act.
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    \193\ See Items 22(b)(1) of Schedule 14A (requiring funds to 
disclose directors' ownership of any securities and any other 
material direct or indirect interest in the investment adviser or 
any person controlling, controlled by, or under common control with 
the investment adviser unless the director is a general partner or 
director of the investment adviser) and 22(b)(3) of Schedule 14A 
(requiring funds to disclose any material interest, direct or 
indirect, of any director or nominee for election as director in any 
material transactions or any proposed material transactions to which 
the investment adviser, principal underwriter, the administrator, or 
a person controlling, controlled by, or under common control with 
those entities (other than a fund) was or is to be a party).
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    As noted above, we also are proposing to require disclosure of 
circumstances involving any officer of (1) the fund; (2) the investment 
adviser, principal underwriter, or administrator of the fund; (3) a 
person directly or indirectly controlling, controlled by, or under 
common control with the fund's investment adviser, principal 
underwriter, or administrator; (4) an investment company with the same 
investment adviser, principal underwriter, or administrator as the 
fund; or (5) an investment company with an investment adviser, 
principal underwriter, or administrator that directly or indirectly 
controls, is controlled by, or is under common control with an 
investment adviser, principal underwriter, or administrator of the 
fund. We are proposing to require disclosure for all officers who 
perform policy-making functions, not only the principal executive 
officer as referred to in sections 2(a)(19)(A)(vi) and (B)(vi) of the 
Act, because we believe that situations involving a director and other 
officers may raise conflict of interest concerns that are similar to 
those involving a director and the principal executive officer. Form N-
1A defines ``officer'' to mean president, vice-president, secretary, 
treasurer, controller, or any other officer who performs policy-making 
functions.\194\ We are proposing to add this definition to the proxy 
rules.\195\
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    \194\ Instruction 1 to Item 13(b) of Form N-1A; see also 
Instruction 1 to Item 18.1 of Form N-2 and Instruction 1 to Item 
20(a) of Form N-3.
    \195\ Proposed Item 22(a)(1)(vii) of Schedule 14A; proposed 
Instruction 1(c) to Item 13 of Form N-1A; proposed Instruction 1.c. 
to Item 18 of Form N-2; proposed Instruction 1.c. to Item 20 of Form 
N-3.
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    The Commission requests comment on the scope of its general 
approach to disclosure outlined above, including whether there are any 
other circumstances that could raise potential conflicts of interest 
that should be disclosed, and whether the scope of persons covered by 
the disclosure requirements is appropriate. Having discussed the 
general concepts of our proposal, we now turn to the specific proposed 
requirements for disclosure in the SAI and proxy statements for the 
election of directors.
    (d) Specific Disclosure in the Proxy Rules and SAI--(1) Positions. 
The Commission is proposing to require disclosure of any positions, 
including as an officer, employee, director, or general partner, held 
during the past five years by directors and their immediate family 
members with: (1) the fund; (2) an investment company having the same 
investment adviser, principal underwriter, or administrator as the fund 
or an investment adviser, principal underwriter, or administrator that 
controls, is controlled by, or is under common control with the fund's 
investment adviser, principal underwriter, or administrator; \196\ (3) 
an investment adviser, principal underwriter, administrator, or 
affiliated person of the fund; or (4) any person controlling, 
controlled by, or under common control with the fund's investment 
adviser, principal underwriter, or administrator.\197\
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    \196\ This category would include a foreign fund (i.e., an 
investment company that is organized under the laws of a 
jurisdiction other than the United States). The proposed rule also 
would require disclosure of positions with a person that would be an 
investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) of the Investment Company Act. See proposed Item 
22(b)(3)(ii) of Schedule 14A; proposed Item 13(b)(3)(ii) of Form N-
1A; proposed Item 18.6(b) of Form N-2; proposed Item 20(e)(ii) of 
Form N-3.
    \197\ Proposed Item 22(b)(3) of Schedule 14A; proposed Item 
13(b)(3) of Form N-1A; proposed Item 18.6 of Form N-2; proposed Item 
20(e) of Form N-3. Cf. Item 13(b) of Form N-1A, Item 18.1 of Form N-
2, and Item 20(a) of Form N-3 (requiring disclosure of directors' 
positions with the fund); Item 13(c) of Form N-1A, Item 18.2 of Form 
N-2; and Item 20(b) of Form N-3 (requiring disclosure of directors' 
positions with affiliated persons of the fund and the principal 
underwriter); Item 22(b)(1) of Schedule 14A (requiring the fund to 
identify each director or nominee who is, or was during the past 
five years, an officer, employee, director, general partner, or 
shareholder of the investment adviser); and Item 401(a) and (b) of 
Regulation S-K, through Item 22(b)(4) of Schedule 14A (requiring 
disclosure of directors' and executive officers' positions and 
offices with the fund). We have proposed to include disclosure of 
positions with affiliated persons of the fund consistent with 
current SAI requirements.
    Separate accounts offering variable insurance products that are 
registered as management companies also would be required to 
disclose directors' positions with the insurance company that 
sponsors the separate account. See supra note 191.
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    We request comment on the proposed disclosure of director 
positions. Should we limit the disclosure required to certain 
positions, such as managerial or policy-making positions? Have we 
appropriately specified the entities with respect to which positions 
should be disclosed? Should any entities be added to or eliminated from 
the required disclosure? Should disclosure be required for five years 
as proposed consistent with the current proxy rules, or for a longer or 
shorter period? \198\
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    \198\ See Item 22(b)(1) of Schedule 14A.
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    (2) Interests. The Commission is proposing to require disclosure of 
securities currently owned, and material direct or indirect interests 
held during the past five years, by each director and his immediate 
family members in (i) an investment adviser, principal underwriter, or 
administrator of the fund; or (ii) a person (other than a registered 
investment company) directly or indirectly controlling, controlled by, 
or under common control with an investment adviser, principal 
underwriter, or administrator.\199\ Information about securities owned 
would be provided in a table, including the value of the securities and 
percent of each class owned.\200\ The value of the securities and 
percent of each class owned would be provided in the aggregate for each 
director and his immediate family members.\201\ This information would 
be provided as of the most recent practicable date.\202\
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    \199\ Separate accounts offering variable insurance products 
that are registered as management companies also would be required 
to disclose directors' interests in the insurance company that 
sponsors the separate account. See supra note 191.
    \200\ Proposed Items 22(b)(5) and (6) of Schedule 14A; proposed 
Items 13(b)(5) and (6) of Form N-1A; proposed Items 18.8 and 18.9 of 
Form N-2; proposed Items 20(g) and (h) of Form N-3. Cf. Item 
22(b)(1) of Schedule 14A (generally requiring disclosure of 
directors' current ownership of securities, and material interests 
during the past five years, in the investment adviser or any person 
controlling, controlled by, or under common control with the 
investment adviser); Item 22(b)(2) of Schedule 14A (requiring 
disclosure of director's material interests during the past five 
years in a fund's principal underwriter and administrator).
    \201\ Proposed Instruction 4 to Item 22(b)(5) of Schedule 14A; 
proposed Instruction 4 to Item 13(b)(5) of Form N-1A; proposed 
Instruction 4 to Item 18.8 of Form N-2; proposed Instruction 4 to 
Item 20(g) of Form N-3.
    \202\ Proposed Instruction 1 to Item 22(b)(5) of Schedule 14A; 
proposed Instruction 1 to Item 13(b)(5) of Form N-1A; proposed 
Instruction 1 to Item 18.8 of Form N-2; proposed Instruction 1 to 
Item 20(g) of Form N-3.
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    We request comment on the proposed disclosure of director 
interests. Have we appropriately defined the scope of the interests 
required to be disclosed? Should disclosure be required of current 
securities ownership, and of material interests for the past five 
years, as in the current proxy rules, or should longer or shorter 
periods be used? Should securities ownership be aggregated or presented 
separately for a director and his immediate family members? Should the 
Commission establish any de minimis threshold for the disclosure of 
material interests? If so, what should it be, e.g., interests exceeding 
$5,000, $10,000, $50,000, or some other amount?

(3) Transactions and Relationships

    Transactions and Relationships Generally. The Commission is 
proposing to require disclosure of transactions and relationships of 
directors with the fund and parties related to the fund. The parties 
related to the fund that would be covered by this requirement are: (i) 
an officer of the fund; (ii) an investment company

[[Page 59845]]

having the same investment adviser, principal underwriter, or 
administrator as the fund or having an investment adviser, principal 
underwriter, or administrator that directly or indirectly controls, is 
controlled by, or is under common control with an investment adviser, 
principal underwriter, or administrator of the fund; \203\ (iii) an 
officer of an investment company described in (ii); (iv) an investment 
adviser, principal underwriter, or administrator of the fund; (v) an 
officer of an investment adviser, principal underwriter, or 
administrator of the fund; (vi) a person directly or indirectly 
controlling, controlled by, or under common control with an investment 
adviser, principal underwriter, or administrator of the fund; or (vii) 
an officer of a person directly or indirectly controlling, controlled 
by, or under common control with an investment adviser, principal 
underwriter, or administrator of the fund (together ``Related 
Parties'').\204\
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    \203\ This category would include a foreign fund (i.e., an 
investment company that is organized under the laws of a 
jurisdiction other than the United States). The proposed rule also 
would require disclosure of transactions with a person that would be 
an investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) of the Investment Company Act. See proposed Item 
22(b)(7)(iii) of Schedule 14A; proposed Item 13(b)(7)(iii) of Form 
N-1A; proposed item 18.10(c) of Form N-2; proposed Item 20(i)(iii) 
of Form N-3.
    \204\ Proposed Items 22(b)(7) and (8) of Schedule 14A; proposed 
Items 13(b)(7) and (8) of Form N-1A; proposed Items 18.10 and 18.11 
of Form N-2; proposed Items 20(i) and (j) of Form N-3. Cf. Item 
22(b)(3) of Schedule 14A (generally requiring disclosure of 
directors' material interests in material transactions since the 
beginning of the most recently completed fiscal year, or proposed 
material transactions, to which the investment adviser, principal 
underwriter, administrator, or a person controlling, controlled by, 
or under common control with those entities was or is to be a 
party). See also Item 404(a) of Regulation S-K [17 CFR 229.404(a)], 
through Item 22(b)(4) of Schedule 14A (requiring disclosure of 
transactions since the beginning of the last fiscal year, or 
proposed transactions, to which the fund was or is to be a party, in 
which any director or immediate family member had, or will have, a 
material interest and which the amount involved exceeds $60,000).
    Separate accounts offering variable insurance products that are 
registered as management companies also would be required to 
disclose directors' transactions with the insurance company that 
sponsors the separate account. See supra note 191.
---------------------------------------------------------------------------

    We are proposing to require disclosure of any material interest, 
direct or indirect, of any director or his immediate family member in 
any material transaction, or material series of similar transactions, 
since the beginning of the last two completed fiscal years (or 
currently proposed), to which the fund or a Related Party was or is to 
be a party.\205\ Transactions would include loans, lines of credit, and 
other indebtedness.
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    \205\ Proposed Item 22(b)(7) of Schedule 14A; proposed Item 
13(b)(7) of Form N-1A; proposed Item 18.10 of Form N-2; proposed 
Item 20(i) of Form N-3.
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    For material interests in material transactions, a mutual fund 
would be required to state the name of the director or family member 
whose interest is described, the nature of the circumstances by reason 
of which the interest is required to be described, the nature of the 
interest, the approximate dollar amount involved in the transaction, 
and, where practicable, the approximate dollar amount of the 
interest.\206\ For indebtedness, a mutual fund would be required to 
indicate the largest aggregate amount of indebtedness outstanding at 
any time during the period, the nature of the indebtedness and the 
transaction in which it was incurred, the amount outstanding as of the 
latest practicable date, and the rate of interest paid or charged.\207\
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    \206\ Proposed Instructions 1 and 2 to Item 22(b)(7) of Schedule 
14A; proposed Instructions 1 and 2 to Item 13(b)(7) of Form N-1A; 
proposed Instructions 1 and 2 to Item 18.10 of Form N-2; proposed 
Instructions 1 and 2 to Item 20(i) of Form N-3.
    \207\ Proposed Instruction 9 to Item 22(b)(7) of Schedule 14A; 
proposed Instruction 9 to Item 13(b)(7) of Form N-1A; proposed 
Instruction 8 to Item 18.10 of Form N-2; proposed Instruction 8 to 
Item 20(i) of Form N-3.
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    We also are proposing to require disclosure of any material 
relationship, direct or indirect, of any director or his immediate 
family member that exists, or has existed at any time since the 
beginning of the last two completed fiscal years, or is currently 
proposed, with the fund or a Related Party. Relationships would include 
payments for property or services, provision of legal or investment 
banking services, and any consulting or other relationship that is 
substantially similar in nature and scope to any of the foregoing 
relationships.\208\
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    \208\ Proposed Item 22(b)(8) of Schedule 14A; proposed Item 
13(b)(8) of Form N-1A; proposed Item 18.11 of Form N-2; proposed 
Item 20(j) of Form N-3.
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    For material relationships, a fund would be required to state the 
name of the director or family member whose relationship is described, 
the nature of the circumstances by reason of which the relationship is 
required to be described, the nature of the relationship, and the 
amount of business done between the director or family member and the 
fund or Related Party since the beginning of the last two completed 
fiscal years or proposed to be done during the current fiscal 
year.\209\
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    \209\ Proposed Instructions 1 and 2 to item 22(b)(8) of Schedule 
14A; proposed Instructions 1 and 2 to Item 13(b)(8) of Form N-1A; 
proposed Instructions 1 and 2 to Item 18.11 of Form N-2; proposed 
Instructions 1 and 2 to item 20(j) of Form N-3.
---------------------------------------------------------------------------

    A fund would not be required to disclose routine, retail 
transactions and relationships between directors or immediate family 
members and the fund or Related Parties. For example, a mutual fund 
need not disclose that a director holds a credit card or bank or 
brokerage account with a fund or Related Party, unless the director is 
accorded special treatment, such as preferred access to initial public 
offerings.\210\
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    \210\ Proposed Instruction 10 to Item 22(b)(7) and Instruction 8 
to Item 22(b)(8) of Schedule 14A; proposed Instruction 10 to Item 
13(b)(7) and Instruction 8 to Item 13(b)(8) of Form N-1A; proposed 
Instruction 9 to Item 18.10 of and instruction 7 to Item 18.11 of 
Form N-2; proposed Instruction 9 to Item 20(i) and Instruction 7 to 
Item 20(j) of Form N-3. See H.R. Rep. No. 1382, 91st Cong., 2d Sess. 
14-15 (1970) (``[A] director ordinarily would not be considered to 
have a material business relationship with the investment adviser 
simply because he is a brokerage customer who is not accorded 
special treatment.''); Interpretive Release, supra note 1.
---------------------------------------------------------------------------

    Indirect, as well as direct, material interests in material 
transactions and material relationships would be required to be 
disclosed. A director or family member who has a position or a 
relationship with, or interest in, a company that engages in a 
transaction or has a relationship with a fund or Related Party may have 
an indirect interest in the transaction or an indirect relationship by 
reason of the position, relationship, or interest.\211\ The interest in 
the transaction or the relationship of the director or family member, 
however, would not be deemed material if the interest or the 
relationship arises solely from the holding of an equity interest 
(excluding a general partnership interest) or a creditor interest in a 
company that engages in a transaction or has a relationship with the 
fund or Related Party if the transaction or the relationship is not 
material to the company.
---------------------------------------------------------------------------

    \211\ Proposed Instruction 7 to Item 22(b)(7) and Instruction 5 
to Item 22(b)(8) of Schedule 14A; proposed Instruction 7 to Item 
13(b)(7) and Instruction 5 to Item 13(b)(8) of Form N-1A; proposed 
Instruction 6 to Item 18.10 and Instruction 4 to Item 18.11 of Form 
N-2; proposed Instruction 6 to Item 20(i) and Instruction 4 to Item 
20(j) of Form N-3.
---------------------------------------------------------------------------

    We request comment on the proposed disclosure of director 
transactions and relationships. Have we appropriately defined the scope 
of transactions and relationships to be disclosed? Should disclosure be 
required for the period since the beginning of the last two completed 
fiscal years, as proposed based on the time period specified in section 
2(a)(19) of the Act,\212\ or only since the beginning of the most 
recently completed fiscal year as required in the

[[Page 59846]]

current proxy rules, or for some other time period?
---------------------------------------------------------------------------

    \212\ See sections 2(a)(19)(A)(vi) and 2(a)(19)(B)(vi) of the 
Act.
---------------------------------------------------------------------------

    We also request comment on whether we should specify a minimum 
dollar amount involved in a transaction or relationship that would 
trigger the disclosure requirements rather than simply requiring 
disclosure of ``material'' transactions or relationships. If so, what 
should the threshold be, e.g., transactions exceeding $60,000, or some 
other amount?\213\ Similarly, should we require disclosure of 
transactions or relationships only when the interest of a director or 
his immediate family member is greater than a specified dollar amount? 
If so, what should the dollar amount be, e.g., interests exceeding 
$5,000, $10,000, $50,000, or some other amount?
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    \213\ Cf. Item 404(a) of Regulation S-K, through Item 22 (b)(4) 
of Schedule 14A (requiring disclosure of a director's or immediate 
family member's material interest in a transaction with the fund 
only when the amount involved in the transaction is greater than 
$60,000).
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    We also request comment on whether we should limit disclosure of 
transactions or relationships where the interest of a director or his 
immediate family member arises indirectly through ownership of an 
interest in a company that is involved in a transaction or relationship 
with a fund or Related Party. For example, should disclosure of a 
transaction or relationship not be required when a director and his 
immediate family members, in the aggregate, have less than a specified 
threshold interest in a company that is a party to the transaction or 
relationship with the fund or Related Party? \214\ If so, what should 
the threshold percentage be, e.g. 5%, 10%, or some other amount? Or 
should the Commission set a threshold dollar amount ownership interest 
in the company? If so, what should the dollar amount be, e.g., $5,000, 
$10,000, $50,000, or some other amount? In determining whether the 
threshold is exceeded, should a director's interests be aggregated with 
those of his immediate family members, other directors or nominees, 
executive officers, security holders who own more than 5% of any class 
of the registrant's voting securities, or any other persons? \215\
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    \214\ Currently, Instruction 8(A) of Item 404(a) of Regulation 
S-K states that a director's interest in a material transaction is 
not material when he and all other directors, nominees, executive 
officers, security holders who own more than 5% of any class of the 
registrant's voting securities, and immediate family members, in the 
aggregate, own less than a 10% equity interest in another person 
that is a party to the transaction.
    \215\ See supra note 214 (Instruction 8(A) of Item 404(a) of 
Regulation S-K.
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    Cross-Directorships. Finally, the Commission is proposing to 
require a mutual fund to disclose situations where an officer of an 
investment adviser, principal underwriter, or administrator of a fund, 
or an officer of a person directly or indirectly controlling, 
controlled by, or under common control with an investment adviser, 
principal underwriter, or administrator of the fund serves, or has 
served since the beginning of the last two completed fiscal years of 
the fund, as a director of a company of which a fund director or his 
immediate family member is, or was, an officer.\216\ The fund would be 
required to identify (i) the company involved; (ii) the individual who 
serves or has served as a director of the company and the period of 
service as director; (iii) the investment adviser, principal 
underwriter, or administrator, or person controlling, controlled by, or 
under common control with the investment adviser, principal 
underwriter, or administrator where the individual named in (ii) holds 
or held office and the office held; and (iv) the director of the fund 
or immediate family member who is or was an officer of the company, the 
office held, and the period of holding office.
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    \216\ Proposed Item 22(b)(9) of Schedule 14A; proposed Item 
13(b)(9) of Form N-1A; proposed Item 18.12 of Form N-2; proposed 
Item 20(k) of Form N-3.
    Separate accounts offering variable insurance products that are 
registered as management companies also would be required to 
disclose cross-directorships involving the insurance company that 
sponsors the separate account. See supra note 191.
---------------------------------------------------------------------------

    We believe that cross-directorships could potentially create a 
conflict of interest for a director because the position that he or his 
immediate family member holds in another company could be affected by 
an officer of the investment adviser, principal underwriter, or 
administrator, or an officer of a party controlling, controlled by, or 
under common control with the investment adviser, principal 
underwriter, or administrator.\217\ We request comment on the proposed 
disclosure of cross-directorships. Have we appropriately defined the 
scope of the circumstances to be disclosed? Should disclosure be 
required for a shorter or longer period than since the beginning of the 
last two completed fiscal years of the fund?
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    \217\ Cf. Report and Recommendations of the Blue Ribbon 
Committee on Improving the Effectiveness of Corporate Audit 
Committee at 11 (1999) (director not independent when he is employed 
as an executive of another company where any of the corporation's 
executives serves on that company's compensation committee).
---------------------------------------------------------------------------

4. Board's Role in Fund Governance
    The Commission is proposing to modify disclosure of matters related 
to the board's role in governing a fund currently required in the proxy 
rules and the SAI. We believe that this information would help 
shareholders more readily determine whether the directors are 
effectively representing shareholders' interests, independent of fund 
management.
    The proxy rules require a mutual fund to discuss in reasonable 
detail the material factors and conclusions that formed the basis for 
the board of directors' recommendation that the shareholders approve an 
investment advisory contract, including a discussion of any benefits 
derived or to be derived by the investment adviser from the 
relationship with the fund such as soft dollar arrangements by which 
brokers provide research to the fund or its investment adviser in 
return for allocating fund brokerage.\218\ We are proposing to require 
similar disclosure in the SAI so that investors will be able to 
evaluate the board's basis for approving the renewal of an existing 
investment advisory contract.\219\
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    \218\ Item 22(c)(11) of Schedule 14A.
    \219\ Proposed Item 13(b)(10) of Form N-1A; proposed Item 18.13 
of Form N-2; proposed Item 20(l) and Form N-3.
---------------------------------------------------------------------------

    Director responsibility for evaluating and approving a mutual 
fund's advisory contract is one of the most important fund governance 
obligations assigned to directors under the Investment Company 
Act.\220\ In approving an investment advisory contract, independent 
directors must review the level of fees charged to a fund by an 
investment adviser. Participants at the Roundtable discussed the 
important role of independent directors in negotiating these fees and 
expenses.\221\ We believe that a discussion of the factors considered 
by the board in retaining an investment adviser will help investors 
understand and evaluate the board's basis for that action.
---------------------------------------------------------------------------

    \220\ See sections 15 (a) and (c) of the Investment Company Act 
[15 U.S.C. 80a-15 (a) and (c)].
    \221\ See Negotiating Fees and Expenses Panel, Roundtable 
Transcript of Feb. 23, 1999 at 26-91.
---------------------------------------------------------------------------

    We also are proposing to modify disclosure in the proxy rules and 
the SAI relating to a fund's committees of the board of directors. The 
proxy rules currently require mutual funds to disclose information 
about standing audit, nominating, and compensation committees.\222\ In 
the SAI, mutual funds

[[Page 59847]]

are required to identify members of any executive or investment 
committee, and provide a concise statement of the duties and functions 
of each committee.\223\
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    \222\ The fund must state whether it has a standing audit, 
nominating, compensation, or similar committee, identify each 
committee member, state the number of committee meetings held by 
each committee during the last fiscal year, and describe briefly the 
functions performed by the committees. Item 7(e)(1) of Schedule 14A. 
If the fund has a nominating or similar committee, the fund must 
state whether the committee will consider nominees recommended by 
security holders and, if so, describe the procedures to be followed 
by security holders in submitting such recommendations. Item 7(e)(2) 
of Schedule 14A.
    \223\ Instruction 3 to Item 13(b) of Form N-1A; Instruction 3 to 
Item 18.1 of Form N-2; Instruction 3 to Item 20(a) of Form N-3.
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    We are proposing to modify this disclosure to require mutual funds 
to identify each standing committee of the board in the SAI and proxy 
statements for the election of directors. As in the current proxy 
rules, funds would be required to provide a concise statement of the 
functions of each committee; identify the members of the committee; 
indicate the number of committee meetings held during the last fiscal 
year; and state whether its nominating committee will consider nominees 
recommended by fund shareholders and, if so, describe the procedures 
for submitting recommendations.\224\
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    \224\ Proposed Item 22(b)(13) of Schedule 14A; proposed Item 
13(b)(2) of Form N-1A; proposed Item 18.5 of Form N-2; proposed Item 
20(d) of Form N-3. Cf. Item 7(e)(1) of Schedule 14A.
    Because this proposed disclosure requirement covers information 
that is similar to that already required for proxy statements in 
Item 7(e) of Schedule 14A, the Commission is proposing to amend Item 
7 to state that investment companies must furnish the information on 
committees proposed in Item 22(b)(13) in lieu of the information 
currently required in Item 7(e). See proposed Items 7 (d) and (e) of 
Schedule 14A. We also recently proposed to require additional 
information about a closed-end fund's audit committee. See Audit 
Committee Disclosure, Securities Exchange Act Release No. 41987 
(Oct. 7, 1999) [64 FR 55648 (Oct. 14, 1999)] (proposed Item 7(e)(3) 
of Schedule 14A).
---------------------------------------------------------------------------

5. Separate Disclosure
    Currently, mutual funds must indicate with an asterisk the 
directors who are interested persons of the fund within the meaning of 
section 2(a)(19) of the Act for certain disclosure items in the proxy 
statements and the SAI.\225\ To provide more prominent disclosure about 
independent directors, we are proposing to require funds to present all 
disclosure for independent directors separately from disclosure for 
interested directors in the SAI, proxy statements for the election of 
directors, and annual reports to shareholders.\226\ For example, when 
information is furnished in a table, funds should provide separate 
tables (or separate sections of a single table) for independent 
directors and for interested directors. When presenting information in 
narrative form, funds should clearly indicate, by heading or other 
means, which directors are interested and which are independent.
---------------------------------------------------------------------------

    \225\ See Instruction 1 to Item 22(b)(4) of Schedule 14A (table 
containing information about director's background and experience 
and table containing information about directors' transactions with 
the fund); Instruction 4 to Item 13(b) of Form N-1A (management 
information table).
    \226\ Proposed Instruction 3 to Item 22(b) of Schedule 14A; 
proposed Instruction 2 to Item 13 of Form N-1A; proposed Instruction 
2 to Item 18 of Form N-2; proposed Instruction 2 to Item 20 of Form 
N-3.
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6. Technical and Conforming Amendments
    The Commission is proposing to clarify that Item 22 of Schedule 14A 
applies to business development companies.\227\ This proposed change 
reflects current requirements.
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    \227\ Proposed Item 22(a)(1)(viii) of Schedule 14A. Business 
development companies are subject to special provisions under the 
Act designed to accommodate their venture capital investments. See 
sections 54-65 of the Investment Company Act [15 U.S.C. 80a-53 to 
80a-64]. Business development companies are required to have a 
majority of directors who are not ``interested persons.'' See 
section 56 of the Investment Company Act [15 U.S.C. 80a-55].
---------------------------------------------------------------------------

    The Commission is proposing changes to cross-references in Items 8 
and 10 of Schedule 14A to reflect the proposed amendments to Item 22 of 
Schedule 14A. We also are proposing to amend current Item 22(b)(4) of 
Schedule 14A. This item requires funds to provide the information 
required by Items 401, 404(a) and (c), and 405 of Regulation S-K. 
Because proposed Item 22(b)(7) of Schedule 14A requires much of the 
information now required by Item 401 of Regulation S-K, we are 
proposing to modify Item 22(b)(4) of Schedule 14A to require funds to 
provide the information required by Items 401(f) and (g), 404(a) and 
(c), and 405 of Regulation S-K.\228\
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    \228\ We also are proposing to redesignate Item 22(b)(4) as Item 
22(b)(10). Funds would not be required to provide information for 
directors, nominees, and their immediate family members as required 
by Items 404(a) and (c) of Regulation S-K, through Item 22(b)(10) of 
Schedule 14A, because we are proposing to require the information 
under Item 22(b)(7) of Schedule 14A. Proposed Instruction to Item 
22(b)(10) of Schedule 14A.
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    Because we have defined the term ``officer'' to mean the president, 
vice-president, secretary, treasurer, controller, or any other officer 
who performs policy-making functions, we are proposing to change the 
reference in the compensation table from ``executive officer'' to 
``officer.'' \229\ In addition, we are proposing to amend the 
definition of ``administrator'' in the proxy rules to conform to the 
proposed definition of ``administrator'' in rule 0-1(a)(5).\230\
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    \229\ Proposed Item 22(b)(12) of Schedule 14A; proposed Item 
13(c) of Form N-1A, proposed item 18.14 of Form N-2; proposed Item 
20(m) of Form N-3.
    \230\ See Proposed Item 22(a)(1) of Schedule 14A.
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    We also are proposing conforming changes to the SAI. Because we are 
proposing enhanced disclosure about directors' positions, we are 
proposing to require disclosure of officers' positions, which remains 
unchanged, as a separate item.\231\ We are proposing amendments to the 
SAI to conform to the proxy rules by requiring a brief description of 
any arrangement or understanding between a director or officer and any 
other person pursuant to which he was selected as a director or 
officer.\232\
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    \231\ See Item 13(c) of Form N-1A; Item 18.2 of Form N-2; Item 
20(b) of Form N-3; proposed Item 13(a)(2) of Form N-1A; proposed 
Item 18.2 of Form N-2; proposed Item 20(b) of Form N-3 (requiring 
disclosure of officers' positions with affiliated persons of the 
fund and the principal underwriter).
    \232\ Proposed Item 22(b)(2) of Schedule 14A; proposed Item 
13(a)(3) of Form N-1A; proposed Item 18.3 of Form N-2; proposed Item 
20(c) of Form N-3. See Items 401(a) and 401(b) of Regulation S-K and 
Instruction 1 to Items 401(a) and 401(b) of Regulation S-K, through 
Item 22(b)(4) of Schedule 14A.
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    We also are proposing changes to rule 30d-1 under the Investment 
Company Act.\233\ Rule 30d-1(d) allows a fund to send to shareholders a 
copy of its currently effective prospectus or SAI, or both, instead of 
a shareholder report required by the rule, provided that the prospectus 
or SAI, or both, include certain financial information and information 
about directors' compensation. We are proposing to amend the rule to 
require a prospectus or SAI, or both, serving as a shareholder report 
to include all the information that would otherwise be required in the 
shareholder report.\234\
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    \233\ 17 CFR 270.30d-1.
    \234\ Proposed rule 30c-1(d) under the Investment Company Act. 
We also are proposing to amend rule 30d-1(a) to require funds to 
include in their shareholder reports any information (not just 
financial statements) required to be included in those reports by 
the company's registration statement form under the Investment 
Company Act. Proposed rule 30e-1(a) under the Investment Company 
Act. We are redesignating rules 30d-1 and 30d-2 as rules 30e-1 and 
30e-2 respectively to reflect the National Securities Markets 
Improvement Act of 1996 amendments to section 30 of the Act. [Pub. 
L. No. 104-290, 110 Stat. 3416 (1996) (codified in various sections 
of the United States Code)].
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7. Compliance Date
    If we adopt the proposed disclosure requirements, we expect to 
require all new registration statements and post-effective amendments 
that are annual updates to effective registration statements, proxy 
statements for the election of directors, and reports to shareholders 
filed on or after the effective date of the amendments to comply with 
the proposed amendments. The Commission requests comment on this 
proposed compliance date.

F. Recordkeeping Regarding Director Independence

    To assure that independent directors are able to fully carry out 
the important

[[Page 59848]]

duties assigned to them, the Act and our rules establish standards 
concerning their financial and other interests.\235\ A fund must 
determine whether the individuals who serve as independent directors in 
fact satisfy these standards when it prepares certain disclosure 
documents for investors.\236\ The process that a fund uses to make 
these determinations should reflect diligent efforts to evaluate each 
director's relevant business and personal relationships that might 
affect his independent judgment.
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    \235\ See supra notes 21, 170 and accompanying text.
    \236\ A fund must indicate which individuals are independent 
directors in its registration statement, as well as in proxy 
statements for the election of directors. See supra note 225 and 
accompanying text.
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    We are proposing to amend our rule requiring funds to preserve 
certain records to enable the Commission to monitor funds' assessments 
of the independence of their directors. The proposed amendment would 
require funds to preserve any record of the initial determination that 
a director qualifies as an independent director, and each subsequent 
determination of whether the director continues to qualify as an 
independent director.\237\ We propose that funds preserve these 
documents for a period of six years, the first two years in an easily 
accessible place.\238\
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    \237\ Proposed rule 31a-2(a)(4). The proposed rule states that 
these records must include any questionnaire and any other document 
used to determine that a director qualifies as independent.
    \238\Id.
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    Because funds already should be collecting relevant information 
when they make and review their determinations of director 
independence,\239\ we believe that our proposed recordkeeping 
requirement would not impose substantial costs or other burdens on 
funds. Comment is requested on the necessity of this information, and 
on the costs of maintaining these records. We also request comment on 
the effects that this proposed recordkeeping requirement would have on 
funds' internal compliance policies and procedures. Are there feasible 
alternatives to the proposal that would enable the Commission to 
monitor funds' assessments of the independence of their directors, 
while minimizing the burdens imposed on funds? \240\
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    \239\ See, e.g., ICI Advisory Group Report, supra note 28, at 21 
(recommending that funds require independent directors to complete a 
questionnaire each year on business, financial, and family 
relationships that could affect their independence).
    \240\ See section 31(a)(2) of the Act [15 U.S.C. 80a-30(a)(2)] 
(requiring Commission to consider and request public comment on 
minimizing recordkeeping compliance burdens).
---------------------------------------------------------------------------

G. General Request for Comments

    The Commission requests comment on the new rules, rule amendments, 
and form amendments proposed in this Release, suggestions for 
additional provisions or changes to existing rules or forms, and 
comments on other matters that might have an effect on the proposals 
contained in this Release. We also request comment whether the 
proposals, if adopted, would promote efficiency, competition, and 
capital formation. We will consider those comments in satisfying our 
responsibilities under section 2(c) of the Investment Company Act, 
section 2(b) of the Securities Act, and section 3(f) of the Exchange 
Act.\241\ For purposes of the Small Business Regulatory Enforcement 
Fairness Act of 1996,\242\ we also request information regarding the 
potential effect of the proposals on the U.S. economy on an annual 
basis. Commenters are requested to provide empirical data to support 
their views.
---------------------------------------------------------------------------

    \241\ Section 2(c) of the Investment Company Act [15 U.S.C. 80a-
2(c)], section 2(b) of the Securities Act [15 U.S.C. 77b(b)], and 
section 3(f) of the Exchange Act [15 U.S.C. 78c(f)] require the 
Commission, when it engages in rulemaking and is required to 
consider whether an action is consistent with the public interest, 
to consider, in addition to the protection of investors, whether the 
action will promote efficiency, competition, and capital formation.
    \242\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

    As discussed above, the ICI Advisory Group Report recommended 
several measures that are similar to our proposed amendments as well as 
several additional practices and policies. We request comment whether 
we should adopt any of these ``best practices'' recommendations as 
further measures to enhance the effectiveness of independent 
directors.243
---------------------------------------------------------------------------

    \243\ See supra notes 34-35 and accompanying and following text.
---------------------------------------------------------------------------

III. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules.

A. Proposed Amendments to the Exemptive Rules

    The Commission is proposing to amend the Exemptive Rules 
244 to require that, for funds relying on those rules: (i) 
independent directors constitute either a majority or a super-majority 
(two-thirds) of their boards; (ii) independent directors select and 
nominate other independent directors; and (iii) any legal counsel for 
the fund's independent directors be an independent legal counsel. These 
proposals are designed to enhance the independence and effectiveness of 
fund directors who are charged with overseeing the fund's activities 
and transactions that are covered by the Exemptive Rules. Boards that 
meet these conditions should be more effective at exerting an 
independent influence over fund management. Their independent directors 
should be more likely to have their primary loyalty to the fund's 
shareholders rather than the adviser, and should be better able to 
evaluate the complex legal issues that are often faced by fund boards 
with an independent and critical eye. These proposed amendments, 
therefore, would provide substantial benefits to shareholders by 
helping to ensure that independent directors are better able to fulfill 
their role of representing shareholder interests and supplying an 
independent check on management.
---------------------------------------------------------------------------

    \244\ See supra text following note 33.
---------------------------------------------------------------------------

    The proposed amendments to the Exemptive Rules may impose some 
costs on funds that choose to rely on those rules. Funds that do not 
rely on an Exemptive Rule, however, will not be subject to the proposed 
conditions, or any costs associated with those conditions. These costs 
are discussed below.
    Independent directors as a majority of the board. First, the 
Commission is making two alternative proposals regarding the 
representation of independent directors on fund boards. Under one 
proposal, funds relying on the Exemptive Rules would be required to 
have independent directors constitute a simple majority of their 
boards. Because, as noted above, most mutual funds today have boards 
with independent majorities,245 it appears that this 
proposal would not impose substantial costs on funds as a group. Under 
the alternative proposal, funds relying on the Exemptive Rules would be 
required to have independent directors constitute two-thirds of their 
boards. Because fewer funds currently have boards of which two-thirds 
of the directors are independent, this alternative proposal could have 
higher costs for funds as a group.246
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    \245\ See supra note 39 and accompanying text.
    \246\ See supra note 44. As noted above, however, the ICI 
Advisory Group Report has recommended that independent directors 
constitute two-thirds of a fund's board. See supra note 42 and 
accompanying text. It is therefore likely that in the future the 
number of funds following this practice will increase, even absent 
the Commission's proposal.
---------------------------------------------------------------------------

    Under either of these alternative proposals, funds that currently 
do not have the required percentage of independent directors on their 
boards (whether a simple majority or two-

[[Page 59849]]

thirds) and that would like to rely on the Exemptive Rules may incur 
some costs. The Commission, however, has no reasonable basis for 
estimating those costs. Those funds could come into compliance with 
either alternative proposal in a number of ways. For example, funds 
could: (i) decrease the size of their boards and allow some inside 
directors to resign; (ii) maintain the current size of their boards and 
replace some inside directors with independent directors; or (iii) 
increase the size of their boards and elect new independent directors.
    Where new independent directors are elected, whether to replace 
inside directors or to fill new positions that expand the size of the 
board, the fund would incur the costs of preparing a proxy statement 
and holding a shareholder meeting to elect those independent directors, 
as well as the costs of compensating those directors.247 The 
Commission, however, has no reasonable basis for determining how many 
funds that currently do not have independent directors as a simple 
majority of their boards would choose to comply with either proposal 
through electing new independent directors. Similarly, we have no 
reasonable basis for determining how many funds that currently have 
independent directors as a simple majority, but not as a two-thirds 
majority, would choose to comply with the alternative proposal through 
electing new independent directors. We also have no reasonable basis 
for estimating the average compensation that would be paid to those 
newly elected independent directors, or the costs to those funds of 
preparing proxy statements and holding shareholder meetings to elect 
those directors.
---------------------------------------------------------------------------

    \247\ Under some circumstances a vacancy on the board may be 
filled by the board of directors. See section 16(a) of the Act. In 
those cases, the fund would only incur the costs of compensating the 
new independent directors.
---------------------------------------------------------------------------

    We request comment on the potential costs of each of these 
alternative proposals. Comment is specifically requested on the 
differences in costs to funds of the two alternatives.
    Independent director self-selection and self-nomination. Second, 
the proposed amendments to the Exemptive Rules would require that 
independent directors select and nominate any other independent 
directors. It appears that this proposal would not impose significant 
new costs on funds, because many funds already have adopted this 
practice.\248\ Although some funds do not currently follow this 
practice and would need to adopt it in order to rely on the Exemptive 
Rules, we are not aware of any costs that would result from requiring a 
fund's incumbent independent directors to select and nominate other 
independent directors. Comment is requested on the costs associated 
with independent director self-selection and self-nomination. Are those 
costs greater than the costs that would otherwise be incurred by a fund 
in selecting qualified independent directors?
---------------------------------------------------------------------------

    \248\ See supra note 66 and accompanying text.
---------------------------------------------------------------------------

    Independent legal counsel. Finally, the proposed amendments to the 
Exemptive Rules would require that any legal counsel to a fund's 
independent directors be an independent legal counsel.\249\ The 
proposal would not require independent directors to retain legal 
counsel, but only that any person that does act as counsel to the 
independent directors qualify as an independent legal counsel. 
Independent directors who are represented by counsel who does not meet 
the proposed definition of ``independent legal counsel'' thus would be 
required to retain different counsel if their fund chooses to rely on 
any of the Exemptive Rules. The Commission, however, has no reasonable 
basis for determining whether this substitution of counsel is likely to 
cause the independent directors' costs of legal counsel to increase. We 
request comment on the costs associated with this proposal. Do law 
firms frequently offer fee arrangements that include, for example, 
discounts for providing services to both a fund's independent directors 
and the fund's adviser, which could disqualify the firm from serving as 
an independent legal counsel?
---------------------------------------------------------------------------

    \249\ As discussed above, we are proposing to amend rule 0-1 to 
include a definition of ``independent legal counsel.'' See supra 
note 87 and accompanying text; see also infra notes 250-256 and 
accompanying text (discussing the costs and benefits of this 
proposed definition).
---------------------------------------------------------------------------

B. Definition of Independent Legal Counsel

    Rule 0-1 defines certain terms for purposes of the rules and 
regulations under the Investment Company Act. The Commission is 
proposing to amend this rule to add a definition of the term 
``independent legal counsel.'' Under the proposed definition, a person 
is an independent legal counsel if (i) a fund reasonably believes that 
the person has not acted as legal counsel to the fund's adviser, 
principal underwriter, administrator,\250\ or any of their control 
persons \251\ during the last two years, or (ii) a majority of the 
fund's independent directors determines that the person's 
representation of the fund's adviser, principal underwriter, 
administrator, or a control person is or was so limited that it would 
not adversely affect the person's ability to provide impartial, 
objective and unbiased legal counsel to the independent directors. The 
basis of the independent directors' determination must be recorded in 
the minutes of the directors' meeting.
---------------------------------------------------------------------------

    \250\ In connection with this proposal, we also are proposing to 
amend rule 0-1 to define an ``administrator'' as any person who 
provides significant administrative or business affairs management 
services to a fund. This definition is substantially similar to the 
definition of administrator that is currently contained in Item 
22(a)(1)(i) of Schedule 14A and Item 15(h)(1) of Form N-1A. Adding 
this definition to rule 0-1 should benefit funds by helping to 
clarify the scope of the proposed definition of independent legal 
counsel. We are not aware of any costs that would be associated with 
this definition of administrator.
    \251\ We are proposing to amend rule 0-1 to define ``control 
person'' as any person (other than a registered investment company) 
directly or indirectly controlling, controlled by or under common 
control with a fund's investment adviser, principal underwriter, or 
administrator. This definition should benefit funds by helping to 
clarify the scope of the proposed definition of independent legal 
counsel. We are not aware of any costs that would be associated with 
this definition.
---------------------------------------------------------------------------

    The proposed definition of ``independent legal counsel'' should 
help to ensure that independent directors' counsel is able to provide 
impartial legal advice concerning the complex legal issues faced by 
those directors. This proposal thus should benefit both shareholders 
and independent directors by helping those directors to better fulfill 
their role as shareholder representatives. Shareholders also would 
benefit from the requirement that the independent directors' 
determinations be recorded in the minute books of the fund, because 
this requirement would make it possible for the Commission staff to 
review independent directors' determinations that their counsel 
qualifies as independent legal counsel.
    The proposed definition would impose costs on some funds that rely 
on the Exemptive Rules and thus would be required to use this 
definition.\252\ We assume that approximately 3,200 funds rely on at 
least one of the Exemptive Rules annually.\253\ We further assume that 
the independent directors of approximately one-third of those funds 
(1,065) would be required to make the specified determination in order 
for their counsel to meet the definition of

[[Page 59850]]

``independent legal counsel.'' \254\ We estimate that each of these 
1,065 funds would be required to spend, on average, 0.75 hours annually 
to comply with the proposed requirement that this determination be 
recorded in the fund's minute books,\255\ for a total annual burden of 
approximately 799 hours. Based on this estimate, the total annual cost 
to funds of this proposed definition would be approximately 
$70,505.\256\ The Commission is not aware of any other costs that would 
be associated with this proposal. Comment is requested on these 
estimated costs.
---------------------------------------------------------------------------

    \252\ Among other things, the proposed amendments to the 
Exemptive Rules would require that, for funds relying on those 
rules, any legal counsel for the independent directors of the fund 
be an ``independent legal counsel.''
    \253\ Based on statistics compiled by Commission staff from 
January 1, 1997 through December 31, 1998, we estimate that there 
are approximately 3,560 funds that could rely on one or more of the 
Exemptive Rules. Of those funds, we assume that approximately 90 
percent (3,200) actually rely on at least on Exemptive Rule 
annually.
    \254\ We assume that the independent directors of the remaining 
two-thirds of those funds (2,135) either would not have legal 
counsel, or would have legal counsel who meets the requirements of 
the first part of the proposed definition, so that no determination 
by the independent directors would be necessary.
    \255\ This estimate is based on a staff assessment of the burden 
associated with this proposed recordkeeping requirement in light of 
the estimated hour burdens currently associated with other rules 
under the Act that impose similar collection of information 
requirements.
    \256\ To calculate this total annual cost, the Commission staff 
assumed that two-thirds of the total annual industry hour burden 
(532 hours) would be incurred by professionals with an average 
hourly wage rate of $125 per hour, and one-third of that annual hour 
burden (267 hours) would be incurred by clerical staff with an 
average hourly wage rate of $15 per hour ((532  x  $125/hour) + (267 
 x  $15/hour) = $70,505).
---------------------------------------------------------------------------

C. Suspension of Board Composition Requirements

    Proposed rule 10e-1 would increase the periods for which the 
independent director minimum percentage requirements of the Act, and of 
the rules under the Act, are temporarily suspended if the death, 
disqualification, or bona fide resignation of an independent director 
causes the representation of independent directors on the board to fall 
below that required by the Act or our rules. This proposal would 
benefit funds by helping to ensure that a fund that dips below the 
independent director minimum percentage requirements in these 
circumstances does not immediately face the severe consequences of 
losing the availability of the Exemptive Rules.
    We are not aware of any costs to funds that would result from this 
proposal. Because we believe that the periods for which the rule would 
suspend the independent director minimum percentage requirements are 
consistent with concerns for investor protection, it also appears that 
this proposal would not have any costs for investors.

D. Limits on Coverage of Directors Under Joint Insurance Policies

    Rule 17d-1(d)(7) under the Act permits funds to purchase joint 
liability insurance policies without first obtaining a Commission order 
permitting this joint arrangement, provided that certain conditions are 
met. The Commission is proposing amendments to this rule that would 
make the rule available only for joint liability insurance policies 
that do not exclude coverage for independent directors' litigation 
expenses in the event that they are sued by the fund's adviser. This 
proposal should benefit shareholders by making it possible for 
independent directors to engage in the good faith performance of their 
responsibilities under the Act and our rules without concern for their 
personal financial security. For the same reasons, the proposal also 
should benefit independent directors.
    Because obtaining this type of coverage may cause the premiums 
charged by some insurance providers for joint liability insurance 
policies to increase, this proposed amendment may have some costs for 
funds.\257\ The Commission, however, has no reasonable basis for 
estimating the possible increase in premiums that may result from this 
proposal. Comment is requested on these costs.
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    \257\ As discussed above, the ICI Mutual Insurance Company 
(``ICI Mutual''), which insures funds representing approximately 70 
percent of all open-end fund assets, recently announced that it is 
making available to funds a standard policy endorsement that permits 
independent directors to recover defense costs, settlements, and 
judgments in ``insured vs. insured'' claims otherwise covered under 
the policy. See supra note 111. According to an ICI Mutual 
representative, that company is not charging funds any additional 
premiums for this coverage. It is possible, however, that other 
insurance providers will charge funds additional premiums for 
providing this type of coverage.
---------------------------------------------------------------------------

E. Exemption From Ratification of Independent Public Accountant 
Requirement for Funds With Independent Audit Committees

    Section 32(a)(2) of the Act requires that the selection of a fund's 
independent public accountant be submitted to shareholders for 
ratification or rejection. Proposed rule 32a-4 would exempt a fund from 
this requirement if the fund has an audit committee consisting entirely 
of independent directors to oversee the fund's auditor. This proposed 
exemption could provide significant benefits to shareholders. Many 
believe shareholder ratification of a fund's independent auditor has 
become a perfunctory process, with votes that are rarely contested. As 
a consequence, we believe that the ongoing oversight provided by an 
independent audit committee can provide greater protection to 
shareholders than shareholder ratification of the choice of auditor.
    Proposed rule 32a-4 may impose certain costs on those funds that 
choose to rely on the exemption. It appears that these costs likely 
would be minimal and would be justified by the relief provided by the 
exemption. To rely on the exemption, among other things, a fund's board 
of directors must adopt an audit committee charter that sets forth the 
committee's structure, duties, powers, and methods of operation. The 
fund also must preserve that charter, and any modifications to the 
charter, permanently in an easily accessible place.\258\ We estimate 
that there are approximately 3,490 investment companies that may rely 
on the proposed rule.\259\ We assume that approximately 15 percent 
(524) of those funds are likely to rely on the exemption. For each of 
those funds, we estimate that the adoption of the audit committee 
charter would require, on average, 2 hours of director time and 2 hours 
of professional time,\260\ for a total one-time burden of approximately 
2,096 hours, and a total one-time cost of approximately $655,000.\261\ 
We also estimate that each of the funds relying on the rule would be 
required to spend approximately 0.2 hours annually to comply with the 
proposed requirement that they preserve permanently their audit 
committee charters,\262\ for an additional total annual hour burden of 
105 hours, and an additional total annual cost of approximately 
$5,425.\263\ We request comment on these estimated costs.
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    \258\ These conditions are designed to enable the Commission 
staff to monitor the duties and responsibilities of an independent 
audit committee formed by a fund relying on the exemption.
    \259\ This estimate is based on statistics compiled by 
Commission staff from January 1, 1997 through December 31, 1998.
    \260\ This estimate is based on a review of the estimated hour 
burdens currently associated with other rules under the Act that 
impose similar collection of information requirements.
    \261\ To calculate this one-time cost, the Commission staff used 
$500 per hour as the average cost of directors' time and $125 per 
hour as an average hourly wage for professionals ((2 hours  x  524 
funds  x  $500/hour) + (2 hours  x  524 funds  x  $125/hour) = 
$655,000).
    \262\ This estimate is based on a review of the estimated hour 
burdens associated with other rules under the Act that impose 
similar collection of information requirements.
    \263\ To calculate the total annual cost of the proposed rule, 
the Commission staff assumed that one-third of the total annual hour 
burden (35 hours) would be incurred by professionals with an hourly 
wage rate of $125 per hour, and two-thirds of that annual hour 
burden (70 hours) would be incurred by clerical staff with an hourly 
wage rate of $15 per hour ((35  x  $125/hour) + (70  x  $15/hour) = 
$5,425).
---------------------------------------------------------------------------

    In addition, some funds pay their directors an extra fee for each 
committee

[[Page 59851]]

on which they serve.\264\ Those funds may incur the additional costs of 
audit committee fees if they establish an audit committee in order to 
rely on the proposed exemption. Of those funds likely to rely on the 
exemption, however, we have no basis for determining the number that 
would pay their independent directors a separate fee for service on the 
audit committee, or the likely amount of those fees.\265\ Comment is 
requested on these additional costs that may be associated with this 
proposed exemption.
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    \264\ In some cases, funds pay these additional committee fees 
only if the committee meeting is held on a day when a board meeting 
is not scheduled.
    \265\ We also have no basis for determining how many funds would 
choose to avoid those fees by scheduling audit committee meetings 
for the same day as a board meeting.
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F. Qualifications as an Independent Director

    The proposed amendment to rule 2a19-1 and proposed new rule 2a19-3 
should benefit shareholders, funds, and independent directors by 
working to prevent qualified individuals from being unnecessarily 
disqualified from serving as independent directors. The proposed 
amendment to rule 2a19-1 would make the rule more flexible for all 
funds, particularly funds with small boards of directors. Proposed rule 
2a19-3 would benefit both funds and their independent directors by 
clarifying the status of independent directors who own shares of index 
funds.
    The Commission is not aware of any costs to funds that would result 
from these proposals. There also should be no costs to investors 
because, consistent with concerns for investor protection, these 
proposals would not permit individuals who have affiliations or 
business interests that could impair their independence to serve as 
independent directors.

G. Disclosure of Information About Fund Directors

    As discussed above, the purpose of the proposed amendments to the 
proxy rules and Forms N-1A, N-2, and N-3 is to provide fund investors 
with improved information about directors. Because independent 
directors are the shareholders' representatives and advocates, 
shareholders have a significant interest in knowing who the independent 
directors are, whether the independent directors' interests are aligned 
with shareholders' interests, whether the independent directors have 
any conflicts of interest, and how the directors govern the fund. This 
information would help a fund shareholder to evaluate whether his 
designated representatives can, in fact, act as independent, vigorous, 
and effective representatives.
    We believe that the proposed amendments would benefit investors in 
several ways. The proposed requirement that mutual funds disclose basic 
information about directors in an easy-to-read tabular format in the 
fund's annual report to shareholders, SAI, and proxy statements for the 
election of directors would benefit shareholders by ensuring that 
shareholders receive information about the identity and experience of 
their directors both annually and whenever they are asked to elect 
directors. Moreover, this information would benefit prospective 
investors who may obtain the information upon request.
    Our proposal to require disclosure in the SAI of the aggregate 
dollar amount of equity securities of funds in the fund complex owned 
beneficially and of record by each director will allow shareholders and 
prospective investors to better calculate whether the interests of 
directors are aligned with their interests. In addition, shareholders 
also would benefit by receiving this information in the proxy 
statements whenever they are asked to elect directors.
    Our proposal to improve the disclosure of possible conflict of 
interest circumstances for directors will enable investors to decide 
for themselves whether an independent director would be an effective 
advocate. Disclosure of this type of information also would result in 
its public dissemination, bring these circumstances to the attention of 
fund shareholders, and encourage the selection of independent directors 
who are independent in the spirit of the Act. Finally, this information 
would assist the Commission in determining whether to exercise its 
authority under section 2(a)(19) of the Act to find that a person is an 
interested person of a fund by reason of having had, at any time since 
the beginning of the last two completed fiscal years of the fund, a 
material business or professional relationship with the fund and 
certain persons related to the fund.
    The proposed modifications to the disclosure requirements of 
matters related to the board's role in governing a mutual fund would 
benefit shareholders by allowing them to determine more readily whether 
the directors are effectively representing shareholders' interests, 
independent of fund management.
    The proposed amendments would impose certain costs on the fund 
industry. The costs associated with the proposed amendments would 
include the resources expended by funds in determining what information 
needs to be disclosed about fund directors (in the case of proxy 
statements, also nominees) and preparing the disclosure documents.
    Proxy Statements. The current hour burden for preparing proxy 
statements is 96.2 hours per proxy statement, and we estimate that 
approximately \1/3\ of those hours--or 32 hours--are expended 
collecting and disclosing information about directors and 
nominees.\266\ We estimate the additional burden hours that would be 
imposed by the proposed disclosure requirements to be 10 hours per 
proxy statement.\267\
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    \266\ This estimate is based on Commission staff assessment of 
the different types of information currently required to be 
disclosed in proxy statements.
    \267\ This estimate is based upon a Commission staff assessment 
of the proposed amendments in light of the current hour burden and 
current reporting requirements. As stated above, the additional 
hours are based on the additional time funds would devote to 
determining what information needs to be disclosed and preparing the 
disclosure documents.
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    We estimate the annual industry cost of the proposed amendments to 
the proxy statements to be 10,000 hours, or $1.25 million, based on an 
estimated 1,000 proxy statements that are filed annually.\268\
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    \268\ The estimated number of proxy statements is based on the 
approximate number of proxy statements filed with the Commission in 
calendar year 1998. The total industry cost of the proposed 
amendments to the proxy statement is calculated by multiplying the 
annual number of proxy statements (1,000) by the additional hour 
burden imposed by the proposed amendments (10 hours) by the hourly 
wage rate ($125). The hourly wage rate is based upon consultations 
with a sample of filers and represents the Commission's estimate for 
an appropriate wage rate for the legal, financial, and accounting 
skills commonly used in preparation of registration statements, 
shareholder reports, and proxy statements.
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    Registration Statements. Because the information proposed to be 
disclosed in the registration statement would be the same as in the 
proxy statements, we believe the hour burden for the proposed 
amendments per registration statement would be approximately the 
current hour burden for collecting and disclosing director information 
under the current proxy rules plus the hour burden for the proposed 
amendments to the proxy rules. As stated above, we estimate the current 
hour burden for collecting and disclosing information about directors 
and nominees in proxy statements to be 32 hours per proxy statement and 
the burden hours for collecting and disclosing the enhanced information 
about directors and nominees to be 10 hours per proxy statement, for a 
total of 42 hours.

[[Page 59852]]

    Form N-1A. The hour burden for Form N-1A is on a per portfolio 
basis and not per registration statement filed with the Commission. 
Based on the Commission staff's experience with Form N-1A, we estimate 
that there are approximately 1.75 portfolios per registration statement 
filed on Form N-1A. The average hour burden per portfolio for 
disclosing the information about directors would be the hour burden per 
registration statement (42) divided by the average number of portfolios 
per registrant (1.75), or 24 hours per portfolio.\269\ Because mutual 
funds would only have to update information in post-effective 
amendments, we expect that the hour burden would be \1/6\ of the hours 
expended for the initial registration statement, or 4 hours per 
portfolio for post-effective amendments.\270\
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    \269\ Our estimated hour burden may significantly overstate the 
burden for those portfolios that are part of a fund complex in which 
multiple registered investment companies have the same board of 
directors because the burden of collecting and disclosing 
information about the common board would be spread over a larger 
number of portfolios.
    \270\ Although funds would only have to update the information 
about current directors and add information about new directors, we 
anticipate that funds would incur some burden hours in regularly 
collecting information from directors, determining what information 
needs to be disclosed, and preparing the updated disclosure.
    The hour burden for the post-effective amendment to a 
registration statement filed by an existing fund after the rules 
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and 
disclose the required information for the first time.
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    We estimate that 280 portfolios file initial registration 
statements and 7,875 portfolios file post-effective amendments annually 
on Form N-1A.\271\ Thus, we estimate the annual industry cost of the 
proposed amendments to Form N-1A to be 38,220 hours, or $4.78 
million.\272\
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    \271\ These estimates are based on filings received in calendar 
year 1998.
    \272\ The total annual industry cost is calculated by 
multiplying he total annual industry hour burden ((280 portfolios 
x  24 hours) + (7,875 portfolios  x  4 hours)) by the hourly wage 
rate of $125.
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    Form N-2. The hour burden for Form N-2 is on a per registration 
statement basis because funds registering on Form N-2 register one 
portfolio per registration statement. Because the proposed disclosure 
would be the same for Form N-2 as for Form N-1A, except that it would 
be for one portfolio per registration statement, we estimate the 
additional hour burden for the proposed amendments to be 42 hours for 
each initial registration statement. Because funds would only have to 
update information in post-effective amendments, we expect that the 
hour burden would be approximately \1/6\ of the hours expended for the 
initial registration statement, or 7 hours per post-effective 
amendment.\273\
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    \273\ Although funds would only have to update the information 
about current directors and add information about new directors, we 
anticipate that funds would incur some burden hours in regularly 
collecting information from directors, determining what information 
needs to be disclosed, and preparing the updated disclosure.
    The hour burden for the first post-effective amendment to a 
registration statement filed by an existing fund after the rules 
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and 
disclose the required information for the first time.
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    We estimate that 110 funds file initial registration statements and 
20 file post-effective amendments annually on Form N-2.\274\ Thus, we 
estimate annual industry cost of the proposed amendments to Form N-2 to 
be 4,760 hours, or $595,000.\275\
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    \274\ These estimates are based on filings received in calendar 
year 1998.
    \275\ The total annual industry cost is calculated by 
multiplying the total annual industry hour burden ((110 funds  x  42 
hours) + (20 funds  x  7 hours)) by the hourly wage rate of $125.
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    Form N-3. The hour burden for Form N-3 is on a per portfolio basis 
and not per registration statement filed with the Commission. Based on 
the Commission staff's experience with Form N-3, we estimate that there 
are approximately 4 portfolios per investment company registering on 
Form N-3. The average hour burden per portfolio for disclosing the 
information about directors would be the hour burden per registration 
statement (42) divided by the approximate number of portfolios per 
registrant (4), or 10.5 hours per portfolio. Because funds would only 
have to update information in post-effective amendments, we expect that 
the hour burden would be \1/6\ of the hours expended for the initial 
registration statement, or 1.75 hours per portfolio for post-effective 
amendments.\276\
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    \276\ Although funds would only have to update the information 
about current directors and add information about new directors, we 
anticipate that funds would incur some burden hours in regularly 
collecting information from directors, determining what information 
needs to be disclosed, and preparing the updated disclosure.
    The hour burden for the first post-effective amendment to a 
registration statement filed by an existing fund after the rules 
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and 
disclose the required information for the first time.
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    We estimate that 20 portfolios file initial registration statements 
and 40 portfolios file post-effective amendments annually on Form N-
3.\277\ Thus, we estimate the annual industry cost of the proposed 
amendments to Form N-3 to be 280 hours, or $35,000.\278\
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    \277\ These estimates are based on filings received in calendar 
year 1998.
    \278\ The total annual industry cost is calculated by 
multiplying the total annual industry hour burden ((20 portfolios 
x  10.5 hours) + (40 portfolios  x  1.75 hours)) by the hourly wage 
rate of $125.
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    Shareholder Reports. Because the disclosure of basic tabular 
information, which is proposed to be required in annual shareholder 
reports, is a subset of the information that would be required in the 
initial registration statement of a fund and any post-effective 
amendments, we expect that the annual burden for complying with the 
proposed amendments to the shareholder report requirements would be 
minimal. Based upon the amount of information proposed to be disclosed, 
we estimate that the hour burden would be one-half hour per investment 
company for each annual shareholder report. We estimate that there are 
3,490 management investment companies that are subject to the annual 
report requirements.\279\ Thus, we estimate the annual industry cost of 
the proposed amendments for annual shareholder reports to be 1,745 
hours, or $218,125.\280\
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    \279\ This estimate is based on statistics compiled by 
Commission staff from January 1, 1997 through December 31, 1998.
    \280\ The industry cost of the proposed annual shareholder 
reporting requirements is calculated by multiplying the total annual 
hour burden for the industry (0.5 hours  x  3,490 registered 
management investment companies) by the hourly wage rate of $125.
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H. Recordkeeping Regarding Director Independence

    The Commission also is proposing to amend rule 31a-2 under the Act, 
which requires funds to preserve certain records for specified periods 
of time. The proposed amendments to rule 31a-2 would require funds to 
preserve for a period of at least six years any record of: (i) the 
initial determination that a director qualifies as an independent 
director, and (ii) each subsequent determination of whether the 
director continues to qualify as an independent director. This proposal 
would benefit both shareholders and the Commission by enabling the 
Commission's staff to monitor a fund's assessments of the independence 
of its directors. This would make it possible for the Commission to 
ascertain whether a fund's assessments reflect diligent efforts to 
evaluate each director's relevant business and personal relationships 
that might affect the director's independent judgment. The proposed 
amendment would impose certain minimal costs on funds. The Commission 
staff estimates that each investment company currently spends

[[Page 59853]]

about 27.8 hours per year complying with the record preservation 
requirements of rule 31a-2.\281\ Approximately 3,490 investment 
companies would be affected by the proposal to amend the rule to 
require funds to preserve records regarding the independence of their 
directors.\282\ The Commission staff estimates that each of those 
investment companies would be required to spend an additional 0.2 hours 
annually to comply with the proposed amendment,\283\ for a total 
additional burden for all funds of approximately 698 hours. Based on 
this estimate, the total annual cost for all funds of the proposed 
amendment to rule 31a-2 would be $36,100.\284\ The Commission is not 
aware of any other costs that would result from the proposed amendments 
to rule 31a-2. Comment is requested on the costs associated with this 
proposal.
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    \281\ Commission staff surveyed representatives of several funds 
to determine the current burden hour estimate for rule 31a-2.
    \282\ This estimate is based on statistics compiled by 
Commission staff from January 1, 1997 through December 31, 1998.
    \283\ This estimate is based on a Commission staff assessment of 
the hour burden that would be imposed by the proposed amendment in 
light of the estimated hour burden currently imposed by the 
requirements of the rule.
    \284\ In calculating the total annual industry cost of the 
proposed amendment, the Commission staff assumed that one-third of 
the total annual industry hour burden (233 hours) would be incurred 
by professionals with an average hourly wage rate of $125 per hour, 
and two-thirds of that annual hour burden (465 hours) would be 
incurred by clerical staff with an average hourly wage rate of $15 
per hour ((233 x $125/hour)+(465 x $15/hour)=$36,100).
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    To assist in the evaluation of the costs and benefits that may 
result from the proposed rules and rule amendments, the Commission 
requests that commenters provide views and data relating to any costs 
and benefits associated with these proposals.

IV. Paperwork Reduction Act

    Certain provisions of Forms N-1A, N-2, and N-3, and rules 0-1, 20a-
1, 30e-1, 31a-2, and 32a-4 under the Investment Company Act, and 
Schedule 14A under the Exchange Act contain ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 [44 U.S.C. 3501-3520].\285\ The Commission has 
submitted those rules and forms to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11. The titles for the collections of information are: (1) ``Rule 
0-1 under the Investment Company Act of 1940, Definition of terms used 
in this part;'' (2) ``Rule 20a-1 under the Investment Company Act of 
1940, Solicitation of Proxies, Consents and Authorizations;'' (3) 
``Form N-1A under the Investment Company Act of 1940 and Securities Act 
of 1933, Registration Statement of Open-End Management Investment 
Companies;'' (4) ``Form N-2--Registration Statement of Closed-End 
Management Investment Companies;'' (5) ``Form N-3--Registration 
Statement of Separate Accounts Organized as Management Investment 
Companies;'' (6) ``Rule 30e-1 under the Investment Company Act of 1940, 
Reports to Stockholders of Management Companies;'' (7) ``Rule 31a-2 
under the Investment Company Act of 1940, Records to be preserved by 
registered investment companies, certain majority-owned subsidiaries 
thereof, and other persons having transactions with registered 
investment companies;'' and (8) ``Rule 32a-4 under the Investment 
Company Act of 1940, Exemption from ratification or rejection 
requirement of section 32(a)(2) for registered investment companies 
with independent audit committees.'' An agency may not sponsor, 
conduct, or require response to an information collection unless a 
currently valid OMB control number is displayed.
---------------------------------------------------------------------------

    \285\ Because we are proposing to redesignate rule 30d-1 as rule 
30e-1, were refer to the newly designated rule 30e-1 in this 
section.
---------------------------------------------------------------------------

    Forms N-1A (OMB Control No. 3235-0307), N-2 (OMB Control No. 3235-
0026), and N-3 (OMB Control No. 3235-0316) were adopted pursuant to 
section 8(a) of the Investment Company Act [15 U.S.C. 80a-8] and 
section 5 of the Securities Act [15 U.S.C. 77e]. Rule 0-1 was adopted 
pursuant to section 38(a) of the Investment Company Act [15 U.S.C. 80a-
37(a)]. Rule 20a-1 (OMB Control No. 3235-0158) and rule 30e-1 (OMB 
Control No. 3235-0025) were promulgated under sections 20(a) and 30(e) 
[15 U.S.C. 80a-20 and 80a-29], respectively, of the Investment Company 
Act. Rule 31a-2 (OMB Control No. 3235-0179) was adopted under sections 
31 [15 U.S.C. 80a-30] and 38(a) of the Investment Company Act. Rule 
32a-4 is proposed pursuant to sections 6(c) [15 U.S.C. 80a-6(c)] and 
38(a) of the Investment Company Act.

Rule 0-1

    The proposed amendments to rule 0-1 include collection of 
information requirements. Rule 0-1 defines certain terms for purposes 
of the rules and regulations under the Investment Company Act. The 
proposed amendments would add a definition of the term ``independent 
legal counsel'' to this rule. Under the proposed definition, a person 
is an independent legal counsel if (i) a fund reasonably believes that 
the person has not acted as legal counsel to the fund's adviser, 
principal underwriter, administrator, or any of their control persons 
\286\ during the last two years, or (ii) a majority of the fund's 
independent directors determines that the person's representation of 
the fund's adviser, principal underwriter, administrator, or a control 
person is or was so limited that it would not adversely affect the 
person's ability to provide impartial, objective, and unbiased legal 
counsel to the independent directors. The basis of the independent 
directors' determination must be recorded in the minutes of the fund. 
The purpose of this recordkeeping requirement is to make it possible 
for the Commission staff to review these determinations.
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    \286\ The term ``control person'' is defined as any person 
(other than a registered investment company) directly or indirectly 
controlling, controlled by, or under common control with a fund's 
investment adviser, principal underwriter, or administrator.
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    Any fund that relies on an Exemptive Rule would be required to use 
this proposed definition of independent legal counsel.\287\ We assume 
that approximately 3,200 funds rely on at least one of the Exemptive 
Rules annually.\288\ We further assume that the independent directors 
of approximately one-third (1,065) of those funds would need to make 
the required determination in order for their counsel to meet the 
definition of ``independent legal counsel.'' \289\ We estimate that 
each of these 1,065 funds would be required to spend, on average, 0.75 
hours annually to comply with the proposed recordkeeping requirement 
concerning this determination,\290\ for a total annual burden of 
approximately 799 hours.
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    \287\ Among other things, the proposed amendments to the 
Exemptive Rules would require that, for funds relying on those 
rules, any legal counsel for the independent directors of the fund 
be an independent legal counsel.
    \288\ See supra note 253.
    \289\ See supra note 254.
    \290\ See supra note 255 for the basis of this estimate.
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    Compliance with the proposed rule 0-1 definition of independent 
legal counsel would be necessary to obtain the benefit of relying on 
the Exemptive Rules. Responses will not be kept confidential.

Rule 20a-1

    Rule 20a-1 requires persons soliciting proxies regarding investment 
companies to comply with the proxy solicitation requirements of 
Regulation 14A under the Exchange Act, including Schedule 14A, which, 
with the proposed amendments, contains collection of information 
requirements. The likely respondents to this information

[[Page 59854]]

collection are investment companies and other persons filing proxy 
statements for investment companies. We estimate that 1,000 proxy 
statements are filed annually for investment companies and that the 
current hour burden for proxy statements is 96.2 hours per 
statement.\291\
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    \291\ The estimated number of proxy statements filed is based on 
the approximate number of proxy statements filed with the commission 
in calendar year 1998. The current approved Paperwork Reduction Act 
(``PRA'') hour burden for rule 20a-1 is 96.2 hours.
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    We estimate that the proposed amendments would increase the hour 
burden per filing of a proxy statement by 10 hours.\292\ Thus, we 
estimate the hour burden per proxy statement would be 106.2 hours, for 
a total industry annual hour burden of 106,200 hours.
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    \292\ This estimate is based upon a Commission staff assessment 
of the proposed amendments in light of the current hour burden and 
current reporting requirements.
    As stated above, the additional hours are based on the 
additional time funds would devote to determining what information 
needs to be disclosed and preparing the disclosure documents.
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    Compliance with the disclosure requirements of rule 20a-1 and 
Schedule 14A is mandatory. Responses to the disclosure requirements 
will not be kept confidential.

Form N-1A

    Form N-1A, including the proposed amendments, contains collection 
of information requirements. The likely respondents to this information 
collection are open-end funds registering with the Commission on Form 
N-1A. We estimate that 160 initial registration statements are filed 
annually on Form N-1A, registering 280 portfolios, and that the current 
hour burden per portfolio per filing is 800 hours, for an annual hour 
burden of 224,000 hours.\293\ We estimate that 4,500 post-effective 
amendments to registration statements are filed annually on Form N-1A, 
for 7,875 portfolios, and that the current hour burden per portfolio 
per post-effective amendment filing is 100 hours, for an annual hour 
burden of 787,500 hours.\294\ Thus, we estimate a current total annual 
hour burden of 1,011,500 hours for the preparation and filing of Form 
N-1A.
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    \293\ These estimates are based on filings received in calendar 
year 1998. The current approved PRA hour burden per portfolio for an 
initial Form N-1A is 800 hours.
    \294\ These estimates are based on filings received in calendar 
year 1998. The current approved PRA hour burden per portfolio for 
post-effectmens amendmends to Form N-1A is 100 hours.
---------------------------------------------------------------------------

    We estimate that the proposed amendments would increase the hour 
burden per portfolio per filing of an initial registration statement by 
24 hours and would increase the hour burden per portfolio per filing of 
a post-effective amendment to a registration statement by 4 hours.\295\ 
Thus, if the proposed amendments to Form N-1A are adopted, the total 
annual hour burden for all funds for preparation and filing of initial 
registration statements and post-effective amendments on Form N-1A 
would be 1,049,720 hours.\296\
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    \295\ See supra 269 and 270 and accompanying text. As stated 
above, the additional hours are based on the additional time funds 
would devote to determining what information needs to be dislosed 
and preparing the disclosure documents.
    For post-effective amendments, although funds would only have to 
update the information about current directors and add information 
about new directors, we anticipate that funds would incur some 
burden hours in regularly collecting information from directors, 
determining what information needs to be disclosed, and preparing 
the updated disclosure.
    The hour burden for the first post-effective amendment to a 
registration statement filed by an existing fund after the rules 
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and 
disclose the required information for the first time.
    \296\ This total annual hour burden is calculated by adding the 
hour burden for initial registration statements and the hour burden 
for post-effective amendments, based on the proposed amendments. The 
annual hour burden per portfolio for an initial filing would be 824 
hours (800 plus 24), for 280 portfolios, for a total of 230,720 
hours. The annual hour burden per portfolio for a post-effective 
amendment would be 104 hours (100 plus 4), for 7,875 portfolios, for 
a total of 819,000 hours. The total annual hour burden for all funds 
for preparing and filing of initial registration statements and 
post-effective amendments on Form N-1A would be 1,049,720 hours 
(230,720 plus 819,000).
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    Compliance with the disclosure requirements of Form N-1A is 
mandatory. Responses to the disclosure requirements will not be kept 
confidential.

Form N-2

    Form N-2, including the proposed amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are closed-end funds registering with the Commission on Form 
N-2. We estimate that 110 initial registration statements are filed 
annually on Form N-2, at a current hour burden per filing of 500 hours, 
for an annual hour burden of 55,000 hours.\297\ We estimate that 20 
post-effective amendments to registration statements are filed annually 
on Form N-2, at a current hour burden of 100 hours, for an annual hour 
burden of 2,000.\298\ Thus, we estimate a current total annual hour 
burden of 57,000 hours for the preparation and filing of Form N-2.
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    \297\ These estimates are based on filings received in calendar 
year 1998. The current approved PRA hour burden per initial Form N-2 
is 500 hours.
    \298\ These estimates are based on filings received in calendar 
year 1998. The current approved PRA hour burden per initial Form N-2 
is 100 hours.
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    We estimate that the proposed amendments would increase the hour 
burden per filing of an initial registration statement by 42 hours and 
would increase the hour burden per filing of a post-effective amendment 
to a registration statement by 7 hours.\299\ Thus, if the proposed 
amendments to Form N-2 are adopted, the total annual hour burden for 
all funds for preparation and filing of initial registration statements 
and post-effective amendments on Form N-2 would be 61,760 hours.\300\
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    \299\ See supra Section III.F. As states above, the additional 
hours are based on the additional time funds would devote to 
determining what information needs to be disclosed and preparing the 
disclosure documents.
    For post-effective amendments, although funds would only have to 
update the information about current directors and add information 
about new directors, we anticipate that funds would incur some 
burden hours in regularly collecting information from directors, 
determining what information needs to be disclosed, and preparing 
the updated disclosure.
    The hour burden for the first post-effective amendment to a 
registration statement filed by an existing fund after the rules 
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and 
disclose the required information for the first time.
    \300\ This total annual hour burden is calculated by adding the 
hour burden for initial registration statements and the hour burden 
for post-effective amendments, based on the proposed amendments. The 
annual hour burden per initial registration statement would be 542 
hours (500 plus 42), for 110 filings, for a total of 59,620 hours. 
The annual hour burden per post-effective amendment would be 107 
hours (100 plus 7), for 20 post-effective amendments, for a total of 
2,140 hours. The total annual hour burden for all funds for 
preparing and filing of initial registration statements and post-
effective amendments on Form N-2 would be 61.760 hours (59,620 plus 
2,140).
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    Compliance with the disclosure requirements of Form N-2 is 
mandatory. Responses to the disclosure requirements will not be kept 
confidential.

Form N-3

    Form N-3, including the proposed amendments, contains collection of 
information requirements. The likely respondents to this information 
collection are separate accounts organized as management investment 
companies registering with the Commission on Form N-3. We estimate that 
5 initial registration statements are filed annually on Form N-3, 
including approximately 20 portfolios, and that the current hour burden 
per portfolio in a filing is 900 hours, for an annual hour burden of 
18,000 hours.\301\ We estimate

[[Page 59855]]

that 10 post-effective amendments to registration statements are filed 
annually on Form N-3, including approximately 40 portfolios, at a 
current hour burden of 150 hours per portfolio in a filing, for an 
annual hour burden of 6,000.\302\ Thus, we estimate a current total 
annual hour burden of 24,000 hours for the preparation and filing of 
Form N-3.
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    \301\ These estimates are based on filings received in calendar 
year 1998. The previous Paperwork Reduction Act submission for Form 
N-3 did not differentiate the hour burden between initial filings 
and post-effective amendments. the approved hour burden at that time 
was 518.8 hours per filing based on 53 filings. Based upon 
experience with Form N-3, we have reevaluated the hour burden for 
Form N-3 and estimated that exclusive of the proposed amendments, 
the hour burden for initial filings is 900 hours.
    \302\ These estimates are based on filings received in calendar 
year 1998. The previous Paperwork Reduction Act submission for Form 
N-3 did not differentiate the hour burden between initial filings 
and post-effective amendments. The approved hour burden at that time 
was 518.8 hours per filing based on 53 filings. Based upon 
experience with Form N-3, we have reevaluated the hour burden for 
Form N-3 and estimated that exclusive of the proposed amendments, 
the hour burden for post-effective amendments is 150 hours.
---------------------------------------------------------------------------

    We estimate that the proposed amendments would increase the hour 
burden per portfolio per filing of an initial registration statement by 
10.5 hours and would increase the hour burden per portfolio per filing 
of a post-effective amendment to a registration statement by 1.75 
hours.\303\ Thus, if the proposed amendments to Form N-3 are adopted, 
the total annual hour burden for all funds for preparation and filing 
of initial registration statements and post-effective amendments on 
Form N-3 would be 24,280 hours.\304\
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    \303\ See supra Section III.F. As stated above, the additional 
hours are based on the additional time funds would devote the 
determining what information needs to be disclosed and preparing the 
disclosure documents.
    For post-effective amendments, although funds would only have to 
update the information about current directors and add information 
about new directors, we anticipate that funds would incur some 
burden hours in regularly collecting information from directors, 
determining what information needs to be disclosed, and preparing 
the updated disclosure.
    The hour burden for the first post-effective amendment to a 
registration statement filed by an existing fund after the rules 
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and 
disclose the required information for the first time.
    \304\ This total annual hour burden is calculated by adding the 
hour burden for initial registration statements and the hour burden 
for post-effective amendments, based on the proposed amendments. the 
annual hour burden per portfolio for an initial filing would be 
910.5 hours (900 plus 10.5), for 20 portfolios, for a total of 
18,210 hours. The annual hour burden per portfolio for a post-
effective amendment would be 151.75 hours (150 plus 1.75), for 40 
portfolios, for a total of 6,070 hours. The total annual hour burden 
for all funds for preparing and filing of initial registration 
statements and post-effective amendments on Form N-3 would be 24,280 
hours (18,210 plus 6,070).
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    Compliance with the disclosure requirements of Form N-3 is 
mandatory. Responses to the disclosure requirements will not be kept 
confidential.

Rule 30e-1 Shareholder Reports \305\

    Rule 30e-1, including the proposed amendments to Forms N-1A, N-2, 
and N-3, contains collection of information requirements.\306\ There 
are approximately 3,490 management investment companies subject to rule 
30e-1.\307\ We estimate that the current hour burden for preparing and 
filing semi-annual and annual shareholder reports in compliance with 
rule 30e-1 is 202 hours.\308\ With the proposed amendments, we estimate 
the hour burden to be 202.5 hours, for a total annual hour burden to 
the industry of 706,725 hours.\309\
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    \305\ Because we are proposing to redesignate rule 30d-1 as rule 
30e-1, we refer to the newly designated rule 30e-1 in this section.
    \306\ The proposed amendments are to Forms N-1A, N-2, and N-3. 
Rule 30e-1 requires funds to include in the shareholder reports the 
information that is required by the fund's registration statement 
form.
    \307\ This estimate is based on statistics compiled by 
Commission staff from January 1, 1997 through December 31, 1998.
    \308\ The current approved PRA hour burden for rule 30e-1 is 202 
hours per investment company.
    \309\ See Supra section III.F.
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    Compliance with the disclosure requirements of rule 30e-1 is 
mandatory. Responses to the disclosure requirements will not be kept 
confidential.

Rule 31a-2

    Rule 31a-2, including the proposed amendments, contains collection 
of information requirements. The rule requires funds and certain 
principal underwriters, broker-dealers, investment advisers and 
depositors of funds to preserve certain records for at least six years 
and other records permanently. Its purpose is to ensure that the 
Commission and the public have access to material business information 
about funds. The proposed amendments to rule 31a-2 would require funds 
to preserve for a period of at least six years any record of (i) The 
initial determination that a director qualifies as an independent 
director, and (ii) each subsequent determination of whether the 
director continues to qualify as an independent director. The purpose 
of this proposal is to enable the Commission to monitor funds' 
assessments of the independence of their directors.
    We estimate that approximately 3,490 management investment 
companies are likely respondents to rule 31a-2,\310\ and that each 
investment company currently spends about 27.8 hours per year complying 
with the rule, for a total industry burden of approximately 97,022 
hours.\311\
---------------------------------------------------------------------------

    \310\ The burdens associated with the rule's requirements that 
investment advisers, underwriters, brokers, dealers, and depositors 
preserve certain records have been addressed separately in 
connection with rules adopted under section 204 of the Investment 
Advisers Act [15 U.S.C. 80b-4] and section 17 of the exchange Act 
[15 U.S.C. 78q].
    \311\ The Commission staff surveyed representatives of several 
funds to determine the current burden hour estimate for rule 31a-2.
---------------------------------------------------------------------------

    Each of those 3,490 investment companies would be affected by the 
proposal to amend rule 31a-2 to require funds to preserve records 
regarding the independence of their directors. We estimate that each of 
these investment companies would be required to spend an additional 0.2 
hours annually to comply with the proposed amendment,\312\ for a total 
additional annual burden for all funds of approximately 698 hours. 
Thus, we estimate that the total annual burden for all funds of 
complying with rule 31a-2, as proposed to be amended, would be 
approximately 97,720 hours.
---------------------------------------------------------------------------

    \312\ See suprs note 283 for the basis of this estimate.
---------------------------------------------------------------------------

    Compliance with rule 31a-2 is mandatory for every registered fund. 
The Commission may not keep confidential any records preserved in 
reliance on the rule.

Rule 32a-4

    Proposed rule 32a-4 contains collection of information 
requirements. The rule provides an exemption from the requirement in 
section 32(a)(2) of the Act that the selection of a fund's independent 
public accountant be submitted to shareholders for ratification or 
rejection, if the fund establishes an audit committee consisting 
entirely of independent directors to oversee the fund's auditor. To 
rely on this exemption, among other things, the fund's board of 
directors must adopt an audit committee charter that sets forth the 
committee's structure, duties, powers and methods of operation. The 
fund also must preserve that charter, and any modifications to the 
charter, permanently in an easily accessible place. The purpose of 
these conditions is to ensure that the Commission staff will be able to 
monitor the duties and responsibilities of an independent audit 
committee formed by a fund relying on this exemption.
    We estimate that there are approximately 3,490 investment companies 
that could rely on the proposed rule. We assume that approximately 15 
percent (524) of those funds are likely to rely on the

[[Page 59856]]

exemption. For each of those funds, we estimate that the adoption of 
the audit committee charter would require, on average, 2 hours of 
director time and 2 hours of professional time,\313\ for a total one-
time burden of 2,096 hours. We also estimate that each of the funds 
relying on the rule would be required to spend approximately 0.2 hours 
annually to comply with the proposed requirement that they preserve 
permanently their audit committee charters,\314\ for an additional 
annual hour burden of 105 hours.
---------------------------------------------------------------------------

    \313\ See supra note 260 for the basis of this estimate.
    \314\ See supra note 262 for the basis of this estimate.
---------------------------------------------------------------------------

    Compliance with rule 32a-4 is voluntary. The Commission may not 
keep confidential the records preserved pursuant to the rule.

Request for Comments

    We request your comments on the accuracy of our estimates. Pursuant 
to 44 U.S.C. 3506(c)(2)(B), the Commission solicits comments to: (i) 
evaluate whether the proposed collection of information is necessary 
for the proper performance of the functions of the agency, including 
whether the information will have practical utility; (ii) evaluate the 
accuracy of the Commission's estimate of the burden of the proposed 
collection of information; (iii) determine whether there are ways to 
enhance the quality, utility, and clarity of the information to be 
collected; and (iv) evaluate whether there are ways to minimize the 
burden of the collection of information on those who are to respond, 
including through the use of automated collection techniques or other 
forms of information technology.
    Persons submitting comments on the collection of information 
requirements should direct the comments to the Office of Management and 
Budget, Attention: Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Washington, 
D.C. 20503, and should send a copy to Jonathan G. Katz, Secretary, 
Securities and Exchange Commission, 450 Fifth Street, N.W., Washington, 
D.C. 20549, with reference to File No. S7-23-99. The Office of 
Management and Budget is required to make a decision concerning the 
collection of information between 30 and 60 days after publication of 
this release. Consequently, a comment to OMB is best assured of having 
its full effect if OMB receives it within 30 days after publication of 
this Release.

V. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'' or ``analysis'') in accordance with 5 U.S.C. 603. 
The IRFA relates to proposed rules 2a19-3, 10e-1, and 32a-4, and the 
proposed amendments to rules 0-1, 2a19-1, 10f-3, 12b-1, 15a-4, 17a-7, 
17a-8, 17d-1, 17e-1, 17g-1, 18f-3, 23c-3, and 31a-2 (the ``substantive 
rule proposals''). The IRFA also relates to the proposed amendments to 
Schedule 14A, Forms N-1A, N-2, and N-3, and rules 30e-1 and 30e-2 (the 
``disclosure proposals'').\315\ The following summarizes the IRFA.
---------------------------------------------------------------------------

    \315\ Because we are proposing to redesignate rule 30d-1 as rule 
30e-1, and rule 30d-2 as 30e-2, we refer to the newly designated 
rules 30e-1 and 30e-2 in this section.
---------------------------------------------------------------------------

    The analysis explains that the substantive rule proposals contained 
in this Release include proposed amendments to the Exemptive Rules that 
are designed to enhance the independence and effectiveness of fund 
independent directors.\316\ The proposals also include new rules and 
rule amendments that would prevent qualified individuals from being 
unnecessarily disqualified from serving as independent directors, 
protect independent directors from the costs of legal disputes with 
fund management, permit the Commission to monitor the independence of 
directors by requiring funds to preserve records of their assessments 
of director independence, and temporarily suspend the independent 
director minimum percentage requirements if a fund falls below the 
required percentage due to an independent director's death or 
resignation. In addition, the Commission is proposing to exempt funds 
from the requirement that shareholders ratify or reject the directors' 
selection of an independent public accountant, if the fund establishes 
an audit committee composed entirely of independent directors.
---------------------------------------------------------------------------

    \316\ These proposals would require that, for funds relying on 
those exemptive rules, (i) independent directors constitute either a 
majority or a super-majority (two-thirds) of the fund's board of 
directors; (ii) independent directors select and nominate other 
independent directors; and (iii) any legal counsel for the 
independent directors be an independent legal counsel. In connection 
with these proposals, we also are proposing to amend rule 0-1 under 
the Act to add definitions of the terms ``independent legal 
counsel'' and ``administrator.''
---------------------------------------------------------------------------

    The analysis also explains that the proposals contained in this 
Release would require enhanced disclosure about directors that should 
allow a fund shareholder to evaluate whether his designated 
representatives can, in fact, act as independent, vigorous, and 
effective representatives. The analysis explains that the proposed 
amendments would impose enhanced disclosure requirements on all funds 
by requiring disclosure of basic information about directors to 
shareholders in the SAI, proxy solicitations for the election of 
directors, and annual reports to shareholders. The proposed amendments 
also would require improved disclosure in the SAI and proxy 
solicitations for the election of directors about fund shares owned by 
directors, information about directors that may raise conflict of 
interest concerns, and information on the board's role in governing the 
fund.
    The analysis discusses the impact of the proposed amendments on 
small entities. For purposes of the Regulatory Flexibility Act, a fund 
is a small entity if the fund, together with other funds in the same 
group of related funds, has net assets of $50 million or less as of the 
end of its most recent fiscal year.\317\
---------------------------------------------------------------------------

    \317\ 17 CFR 270.0-10.
---------------------------------------------------------------------------

    The analysis notes that as of December 1998, there were 
approximately 3,560 investment companies that may be affected by one or 
more of the substantive and disclosure rule proposals, including 320 
investment companies that are small entities. The proposed amendments 
to the Exemptive Rules would affect any of these funds, including those 
that are small entities, that rely on an Exemptive Rule and do not 
already meet the proposed new conditions to those rules. The analysis 
explains that although it appears that funds may incur certain costs in 
complying with those proposed conditions, the Commission does not have 
a reasonable basis for estimating those costs. The analysis also 
explains that the Commission believes that the other substantive rule 
proposals are not expected to have a significant economic impact on 
funds, including those that are small entities. The analysis states 
that the Commission believes that the disclosure changes may have a 
significant impact on small entities.
    The analysis also discusses the reporting, recordkeeping and other 
compliance requirements associated with the proposals contained in this 
Release. It notes that the proposed amendments to the Exemptive Rules 
would require that, for funds relying on those rules: (i) independent 
directors constitute either a majority or a super-majority (two-thirds) 
of the fund's board of directors; (ii) independent directors select and 
nominate other independent directors; and (iii) any legal counsel for

[[Page 59857]]

the independent directors be an independent legal counsel.
    The analysis explains that the proposed amendments to rule 0-1 
would add a definition of ``independent legal counsel.'' Under this 
proposed definition, a person is an independent legal counsel if (i) a 
fund reasonably believes that the person has not acted as legal counsel 
to the fund's adviser, principal underwriter, administrator, or any of 
their control persons during the last two years, or (ii) a majority of 
the fund's independent directors determines that the person's 
representation of the fund's adviser, principal underwriter, 
administrator, or a control person is or was so limited that it would 
not adversely affect the person's ability to provide impartial, 
objective, and unbiased legal counsel to the independent directors. The 
basis of the independent directors' determination must be recorded in 
the minutes of the fund. The analysis explains that each fund whose 
independent directors make a determination under the proposed 
definition would be required to spend approximately 0.75 hours annually 
to comply with the requirement that the determination be recorded in 
the minutes of the fund.\318\
---------------------------------------------------------------------------

    \318\ See supra note 255 for the basis of this estimate.
---------------------------------------------------------------------------

    Proposed rule 32a-4 would require any fund relying on the exemption 
provided by the rule to (i) establish an audit committee comprised 
solely of independent directors, (ii) adopt an audit committee charter, 
and (iii) preserve that charter, and any modifications to that charter, 
permanently in an easily accessible place. The analysis explains that 
the staff estimates that each fund relying on the proposed rule would 
be required to spend approximately 4 hours to comply with the 
requirement that it adopt an audit committee charter, and approximately 
0.2 hours annually to comply with the requirement that it preserve that 
charter in an easily accessible place.319
---------------------------------------------------------------------------

    \319\ See supra notes 260 and 262 for the basis of these 
estimates.
---------------------------------------------------------------------------

    In addition, the analysis notes that the proposed amendments to 
rule 31a-2 would require funds to preserve for a period of at least six 
years any record of (i) the initial determination that a director 
qualifies as an independent director, and (ii) each subsequent 
determination of whether the director continues to qualify as an 
independent director. The analysis explains the Commission staff 
estimates that each investment company that must comply with the rule 
would be required to spend 0.2 hours annually to comply with this new 
recordkeeping requirement.320
---------------------------------------------------------------------------

    \320\ See supra note 283 for the basis of this estimate.
---------------------------------------------------------------------------

    The disclosure proposals would require all funds subject to the 
amendments to provide enhanced disclosure about directors. As explained 
in the analysis, based upon staff assessment of the proposed amendments 
in light of the current hour burden and current reporting requirements, 
the Commission estimates it will take approximately 10 additional hours 
per proxy statement to include the proposed disclosure about directors; 
24 additional hours per portfolio to prepare an initial registration 
statement on Form N-1A and 4 additional hours per portfolio to prepare 
post-effective amendments to the registration statement on Form N-1A 
that include the proposed disclosure about directors; 42 additional 
hours per registrant to prepare an initial registration statement on 
Form N-2 and 7 additional hours per registrant to prepare post-
effective amendments to the registration statement on Form N-2 that 
include the proposed disclosure about directors; 10.5 additional hours 
per portfolio to prepare an initial registration statement on Form N-3 
and 1.75 additional hours per portfolio to prepare post-effective 
amendments to the registration statement on Form N-3 that include the 
proposed disclosure about directors; and 0.5 additional hours per 
investment company to include the proposed basic information about 
directors in the annual report to shareholders.321
---------------------------------------------------------------------------

    \321\ The hour burden for the first post-effective amendment to 
a registration statement filed by an existing fund after the rules 
take effect generally would be higher than for subsequent post-
effective amendments because the fund would need to compile and 
disclose the required information for the first time.
---------------------------------------------------------------------------

    As stated in the analysis, the Commission considered several 
alternatives to both the substantive rule proposals and the disclosure 
proposals, including establishing different compliance or reporting 
requirements for small entities or exempting them from all or part of 
the proposed amendments. The Commission believes that establishing 
different substantive or disclosure requirements applicable 
specifically to small entities is inconsistent with the protection of 
investors. The Commission also believes that adjusting the proposals to 
establish different compliance requirements for small entities could 
undercut the purpose of the proposals: to enhance the effectiveness of 
independent directors, and thus better enable those directors to 
fulfill their role of protecting shareholder interests.
    The Commission encourages the submission of comments on matters 
discussed in the IRFA. Comment specifically is requested on the number 
of small entities that would be affected by the proposals and the 
impact of the proposals on small entities. Commenters are asked to 
describe the nature of any impact and provide empirical data supporting 
the extent of the impact. These comments will be placed in the same 
public comment file as comments on the proposals. A copy of the IRFA 
may be obtained by contacting Jennifer B. McHugh or Heather A. Seidel, 
Securities and Exchange Commission, 450 5th Street, N.W., Washington, 
D.C. 20549-0506.

VI. Statutory Authority

    The Commission is proposing rules 2a19-3, 10e-1, and 32a-4, and 
amendments to rules 0-1, 2a19-1, 10f-3, 12b-1, 15a-4, 17a-7, 17a-8, 
17d-1, 17e-1, 17g-1, 18f-3, 23c-3, 30d-1, 30d-2, and 31a-2 pursuant to 
authority set forth in sections 6(c), 10(e), 30(e), 31, and 38(a) of 
the Investment Company Act [15 U.S.C. 80a-6(c), 80a-10(e), 80a-29(e), 
80a-30, 80a-37(a)]. The Commission is proposing amendments to Schedule 
14A pursuant to authority set forth in sections 14 and 23(a)(1) of the 
Exchange Act [15 U.S.C. 78n, 78w(a)(1)] and sections 20(a) and 38 of 
the Investment Company Act [15 U.S.C. 80a-20(a), 80a-37]. The 
Commission is proposing amendments to Forms N-1A, N-2, and N-3 pursuant 
to authority set forth in sections 5, 6, 7, 10, and 19(a) of the 
Securities Act of 1933 [15 U.S.C. 77e, 77f, 77g, 77j, 77s(a)] and 
sections 8, 24(a), 30, and 38 of the Investment Company Act [15 U.S.C. 
80a-8, 80a-24(a), 80a-29, 80a-37].

List of Subjects

17 CFR Parts 239 and 240

    Reporting and recordkeeping requirements, Securities.

17 CFR Parts 270 and 274

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rules and Forms

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

[[Page 59858]]

PART 240--GENERAL RULES AND REGULATIONS, SECURITIES EXCHANGE ACT OF 
1934

    1. The authority citation for part 240 continues to read, in part, 
as follows:

    Authority: 15 U.S.C. 77c, 77d, 77g, 77j, 77s, 77z-2, 77eee, 
77ggg, 77nnn, 77sss, 77ttt, 78c, 78d, 78f, 78i, 78j, 78j-1, 78k, 
78k-1, 78l, 78m, 78n, 78o, 78p, 78q, 78s, 78u-5, 78w, 78x, 78ll(d), 
78mm, 79q, 79t, 80a-20, 80a-23, 80a-29, 80a-37, 80b-3, 80b-4 and 
80b-11, unless otherwise noted.
* * * * *
    2. Section 240.14a-101 is amended by revising paragraphs (d) and 
(e) of Item 7 to read as follows:


Sec. 240.14a-101  Schedule 14A. Information required in proxy 
statement.

* * * * *

Item 7. Directors and executive officers.

* * * * *
    (d)(1) State whether or not the registrant has standing audit, 
nominating and compensation committees of the Board of Directors, or 
committees performing similar functions. If the registrant has such 
committees, however designated, identify each committee member, 
state the number of committee meetings held by each such committee 
during the last fiscal year and describe briefly the functions 
performed by such committees.
    (2) If the registrant has a nominating or similar committee, 
state whether the committee will consider nominees recommended by 
security holders and, if so, describe the procedures to be followed 
by security holders in submitting such recommendations.
    (e) In lieu of paragraphs (a) through (d) of this Item, 
investment companies registered under the Investment Company Act of 
1940 must furnish the information required by Item 22(b) of this 
Schedule 14A.
* * * * *
    3. In Sec. 240.14a-101 amend Item 8(d), before the Instruction, by 
revising ``Item 22(b)(6)'' to read ``Item 22(b)(12)''.
    4. In Sec. 240.14a-101 amend the Instruction following Item 
10(a)(2)(ii)(A) by revising ``Item 22(b)(6)'' to read ``Item 
22(b)(12)''.
    5. In Sec. 240.14a-101 amend the Instruction following Item 
10(b)(1)(ii) by revising ``Item 22(b)(6)(ii)'' to read ``Item 
22(b)(12)(ii)''.
    6. Item 22 of Sec. 240.14a-101 is amended by:
    A. Revising paragraph (a)(1)(i);
    B. Redesignating paragraphs (a)(1)(vi), (vii), and (viii) as 
paragraphs (a)(1)(viii), (ix), and (xi);
    C. Adding new paragraphs (a)(1)(vi), (vii), and (x); and
    D. Revising newly designated paragraph (a)(1) (ix).
    The revisions and additions read as follows:


Sec. 240.14a-101  Schedule 14A. Information required in proxy 
statement.

* * * * *
    Item 22. Information required in investment company proxy 
statement.
    (a) * * *
    (1) * * *
    (i) Administrator. The term ``Administrator'' shall mean any 
person who provides significant administrative or business affairs 
management services to a Fund.
* * * * *
    (vi) Immediate family member. The term ``Immediate Family 
Member'' shall mean a person's spouse, parent, child, sibling, 
mother- or father-in-law, son- or daughter-in-law, or brother- or 
sister-in-law, and includes step and adoptive relationships.
    (vii) Officer. The term ``Officer'' shall mean the president, 
vice-president, secretary, treasurer, controller, or any other 
officer who performs policy-making functions.
* * * * *
    (ix) Registrant. The term ``Registrant'' shall mean an 
investment company registered under the Investment Company Act of 
1940 or a business development company as defined by section 
2(a)(48) of the Investment Company Act of 1940.
    (x) Sponsoring Insurance Company. The term ``Sponsoring 
Insurance Company'' of a Fund that is a separate account shall mean 
the insurance company that establishes and maintains the separate 
account and that owns the assets of the separate account.
* * * * *
    7. Section 240.14a-101 is amended by revising paragraph (b) of Item 
22 to read as follows:


Sec. 240.14a-101  Schedule 14A. Information required in proxy 
statement.

* * * * *
    Item 22. Information required in investment company proxy 
statement.
* * * * *
    (b) Election of directors. If action is to be taken with respect 
to the election of directors of a Fund, furnish the following 
information in the proxy statement in addition to the information 
(and in the format) required by paragraphs (f) and (g) of Item 7 of 
Schedule 14A.
    Instructions to introductory text of paragraph (b). 1. Furnish 
information with respect to a prospective investment adviser to the 
extent applicable.
    2. If the solicitation is made by or on behalf of a person other 
than the Fund or an investment adviser of the Fund, provide 
information only as to nominees of the person making the 
solicitation.
    3. When providing information about directors and nominees for 
election as directors in response to this Item 22(b), furnish 
information for directors or nominees who are or would be 
``interested persons'' within the meaning of section 2(a)(19) of the 
Investment Company Act of 1940 separately from the information for 
directors or nominees who are not or would not be ``interested 
persons.'' For example, when furnishing information in a table, you 
should provide separate tables (or separate sections of a single 
table) for directors and nominees who are or would be interested 
persons and for directors or nominees who are not or would not be 
interested persons. When furnishing information in narrative form, 
indicate by heading or otherwise the directors or nominees who are 
or would be interested persons and the ones who are not or would not 
be interested persons.
    4. No information need be given about any director whose term of 
office as a director will not continue after the meeting to which 
the proxy statement relates.
    (1) Provide the information required by the following table for 
each director, nominee for election as director, Officer of the 
Fund, person chosen to become an Officer of the Fund, and, if the 
Fund has an advisory board, member of the board. Explain in a 
footnote to the table any family relationship between the persons 
listed.

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name, Address,     Position(s) Held   Term of Office     Principal          Number of          Other
 and Age            with Fund          and Length of      Occupation(s)      Portfolios in      Directorships
                                       Time Served        During Past 5      Fund Complex       Held by Director
                                                          Years              Overseen by        or Nominee for
                                                                             Director or        Director
                                                                             Nominee for
                                                                             Director
----------------------------------------------------------------------------------------------------------------

    Instructions to paragraph (b)(1). 1. For purposes of this 
paragraph, the term ``family relationship'' means any relationship 
by blood, marriage, or adoption, not more remote than first cousin.
    2. No nominee or person chosen to become a director or Officer 
who has not consented to act as such may be named in response to 
this Item. In this regard, see Rule 14a-4(d) under the Exchange Act 
(Sec. 240.14a-4(d) of this chapter).
    3. If fewer nominees are named than the number fixed by or 
pursuant to the governing instruments, state the reasons for this 
procedure and that the proxies cannot be voted for a greater number 
of persons than the number of nominees named.

[[Page 59859]]

    4. For each director or nominee for election as director who is 
or would be an ``interested person'' within the meaning of section 
2(a)(19) of the Investment Company Act of 1940, describe, in a 
footnote or otherwise, the relationship, events, or transactions by 
reason of which the director or nominee is or would be an interested 
person.
    5. State the principal business of any company listed under 
column (4) unless the principal business is implicit in its name.
    6. Include in column (5) the total number of separate portfolios 
that a nominee for election as director would oversee if he were 
elected.
    7. Indicate in column (6) directorships not included in column 
(5) that are held by a director or nominee for election as director 
in any company with a class of securities registered pursuant to 
section 12 of the Exchange Act or subject to the requirements of 
section 15(d) of the Exchange Act or any company registered as an 
investment company under the Investment Company Act of 1940, 15 
U.S.C. 80a, as amended, and name the companies in which the 
directorships are held. Where the other directorships include 
directorships overseeing two or more portfolios in the same Fund 
Complex, identify the Fund Complex and provide the number of 
portfolios overseen as a director in the Fund Complex rather than 
listing each portfolio separately.
    (2) Describe briefly any arrangement or understanding between 
any director, nominee for election as director, Officer, or person 
chosen to become an Officer, and any other person(s) (naming the 
person(s)) pursuant to which he was or is to be selected as a 
director, nominee, or Officer.
    Instruction to paragraph (b)(2). Do not include arrangements or 
understandings with directors or Officers acting solely in their 
capacities as such.
    (3) Unless disclosed in the table required by paragraph (b)(1) 
of this Item, describe any positions, including as an officer, 
employee, director, or general partner, held by a director, nominee 
for election as director, or Immediate Family Member of the director 
or nominee, during the past five years, with:
    (i) The Fund;
    (ii) An investment company, or a person that would be an 
investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 
80a-3(c)(1) and (c)(7)), having the same investment adviser, 
principal underwriter, Administrator, or Sponsoring Insurance 
Company as the Fund or having an investment adviser, principal 
underwriter, Administrator, or Sponsoring Insurance Company that 
directly or indirectly controls, is controlled by, or is under 
common control with an investment adviser, principal underwriter, 
Administrator, or Sponsoring Insurance Company of the Fund;
    (iii) An investment adviser, principal underwriter, 
Administrator, Sponsoring Insurance Company, or affiliated person of 
the Fund; or
    (iv) Any person directly or indirectly controlling, controlled 
by, or under common control with an investment adviser, principal 
underwriter, Administrator, or Sponsoring Insurance Company of the 
Fund.
    Instruction to paragraph (b)(3). When an individual holds the 
same position(s) with two or more portfolios that are part of the 
same Fund Complex, identify the Fund Complex and provide the number 
of portfolios for which the position(s) are held rather than listing 
each portfolio separately.
    (4) For each director or nominee for election as director, state 
the aggregate dollar amount of equity securities of Funds in the 
same Fund Complex as the Fund owned beneficially or of record by the 
director or nominee as required by the following table:

------------------------------------------------------------------------
          (1)                      (2)                      (3)
------------------------------------------------------------------------
Name of Director or      Identity of Fund         Aggregate Dollar
 Nominee                  Complex                  Amount of Equity
                                                   Securities in Fund
                                                   Complex
------------------------------------------------------------------------

    Instructions to paragraph (b)(4). 1. Information should be 
provided as of the most recent practicable date. Specify the 
valuation date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 
13d-3 under the Exchange (Sec. 240.13d-3 of this chapter).
    (5) For each director or nominee for election as director and 
his Immediate Family Members, furnish the information required by 
the following table as to each class of securities owned 
beneficially or of record in:
    (i) An investment adviser, principal underwriter, Administrator, 
or Sponsoring Insurance Company of the Fund; or
    (ii) a person (other than a registered investment company) 
directly or indirectly controlling, controlled by, or under common 
control with an investment adviser, principal underwriter, 
Administrator, or Sponsoring Insurance Company of the Fund:

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name of Director   Name of Owners     Company            Title of Class     Value of           Percent of Class
 or Nominee         and                                                      Securities
                    Relationships to
                    Director or
                    Nominee
----------------------------------------------------------------------------------------------------------------

    Instructions to paragraph (b)(5). 
    1. Information should be provided as of the most recent 
practicable date. Specify the valuation date by footnote or 
otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 
13d-3 under the Exchange Act (Sec. 240.13d-3 of this chapter).
    3. Identify the company in which the director, nominee, or 
Immediate Family Member of the director or nominee owns securities 
in column (3). When the company is a person directly or indirectly 
controlling, controlled by, or under common control with an 
investment adviser, principal underwriter, Administrator, or 
Sponsoring Insurance Company, describe the company's relationship 
with the investment adviser, principal underwriter, Administrator, 
or Sponsoring Insurance Company.
    4. Provide the information required by columns (5) and (6) on an 
aggregate basis for each director (or nominee) and his Immediate 
Family Members.
    (6) Unless disclosed in response to paragraph (b)(5) of this 
Item, describe any material interest, direct or indirect, of each 
director, nominee for election as director, or Immediate Family 
Member of a director or nominee, during the past five years, in:
    (i) An investment adviser, principal underwriter, Administrator, 
or Sponsoring Insurance Company of the Fund; or
    (ii) A person (other than a registered investment company) 
directly or indirectly controlling, controlled by, or under common 
control with an investment adviser, principal underwriter, 
Administrator, or Sponsoring Insurance Company of the Fund.
    Instruction to paragraph (b)(6). A director, nominee, or 
Immediate Family Member has an interest in a company if he is a 
party to a contract, arrangement, or understanding with respect to 
any securities of, or interest in, the company.
    (7) Describe briefly any material interest, direct or indirect, 
of any director, nominee for election as director, or Immediate 
Family Member of a director or nominee in any material transaction, 
or material series of similar transactions, since the beginning of 
the last two completed fiscal years of the Fund, or in any currently 
proposed material transaction, or material series of similar 
transactions, to which any of the following persons was or is to be 
a party:
    (i) The Fund;
    (ii) An Officer of the Fund;
    (iii) An investment company, or a person that would be an 
investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 
80a-3(c)(1) and (c)(7)), having the same investment adviser, 
principal underwriter, Administrator, or Sponsoring Insurance 
Company as the Fund or having an investment adviser, principal 
underwriter, Administrator, or Sponsoring Insurance Company that 
directly or indirectly controls, is controlled by, or is under 
common control with an investment adviser, principal underwriter, 
Administrator, or Sponsoring Insurance Company of the Fund;
    (iv) An Officer of an investment company, or a person that would 
be an investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) of the Investment Company Act of 1940 (15 U.S.C. 
80a-3(c)(1)

[[Page 59860]]

and (c)(7)), having the same investment adviser, principal 
underwriter, Administrator, or Sponsoring Insurance Company as the 
Fund or having an investment adviser, principal underwriter, 
Administrator, or Sponsoring Insurance Company that directly or 
indirectly controls, is controlled by, or is under common control 
with an investment adviser, principal underwriter, Administrator, or 
Sponsoring Insurance Company of the Fund;
    (v) An investment adviser, principal underwriter, Administrator, 
or Sponsoring Insurance Company of the Fund;
    (vi) An Officer of an investment adviser, principal underwriter, 
Administrator, or Sponsoring Insurance Company of the Fund;
    (vii) A person directly or indirectly controlling, controlled 
by, or under common control with an investment adviser, principal 
underwriter, Administrator, or Sponsoring Insurance Company of the 
Fund; or
    (viii) An Officer of a person directly or indirectly 
controlling, controlled by, or under common control with an 
investment adviser, principal underwriter, Administrator, or 
Sponsoring Insurance Company of the Fund.
    Instructions to paragraph (b)(7). 
    1. Include the name of each director, nominee, or Immediate 
Family Member whose interest in any transaction or series of similar 
transactions is described and the nature of the circumstances by 
reason of which the interest is required to be described.
    2. State the nature of the interest, the approximate dollar 
amount involved in the transaction, and, where practicable, the 
approximate dollar amount of the interest.
    3. In computing the amount involved in the transaction or series of 
similar transactions, include all periodic payments in the case of any 
lease or other agreement providing for periodic payments.
    4. Compute the amount of the interest of any director, nominee, or 
Immediate Family Member of the director or nominee without regard to 
the amount of profit or loss involved in the transaction(s).
    5. As to any transaction involving the purchase or sale of assets, 
state the cost of the assets to the purchaser and, if acquired by the 
seller within two years prior to the transaction, the cost to the 
seller. Describe the method used in determining the purchase or sale 
price and the name of the person making the determination.
    6. If the proxy statement relates to multiple portfolios of a 
series Fund with different fiscal years, then, in determining the date 
that is the beginning of the last two completed fiscal years of the 
Fund, use the earliest date of any series covered by the proxy 
statement.
    7. Disclose indirect, as well as direct, material interests in 
transactions. A person who has a position or relationship with, or 
interest in, a company that engages in a transaction with one of the 
persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this 
Item may have an indirect interest in the transaction by reason of the 
position, relationship, or interest. The interest in the transaction, 
however, will not be deemed ``material'' within the meaning of 
paragraph (b)(7) of this Item where the interest of the director, 
nominee, or Immediate Family Member arises solely from the holding of 
an equity interest (including a limited partnership interest, but 
excluding a general partnership interest) or a creditor interest in a 
company that is a party to the transaction with one of the persons 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item, 
and the transaction is not material to the company.
    8. No information need be given as to any transaction where the 
interest of the director, nominee, or Immediate Family Member arises 
solely from the ownership of securities of a person specified in 
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item and the 
director, nominee, or Immediate Family Member receives no extra or 
special benefit not shared on a pro rata basis by all holders of the 
class of securities.
    9. Transactions include loans, lines of credit, and other 
indebtedness. For indebtedness, indicate the largest aggregate amount 
of indebtedness outstanding at any time during the period, the nature 
of the indebtedness and the transaction in which it was incurred, the 
amount outstanding as of the latest practicable date, and the rate of 
interest paid or charged.
    10. No information need be given as to any routine, retail 
transaction. For example, the Fund need not disclose that a director 
holds a credit card or bank or brokerage account with a person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 
unless the director is accorded special treatment.
    (8) Describe briefly any material relationship, direct or indirect, 
of any director, nominee for election as director, or Immediate Family 
Member of a director or nominee that exists, or has existed at any time 
since the beginning of the last two completed fiscal years of the Fund, 
or is currently proposed, with any of the persons specified in 
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item. Relationships 
include:
    (i) Payments for property or services to or from any person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item;
    (ii) Provision of legal services to any person specified in 
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item;
    (iii) Provision of investment banking services to any person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item, 
other than as a participating underwriter in a syndicate; and
    (iv) Any consulting or other relationship that is substantially 
similar in nature and scope to the relationships listed in paragraphs 
(b)(8)(i) through (b)(8)(iii) of this Item.
    Instructions to paragraph (b)(8). 1. Include the name of each 
director, nominee, or Immediate Family Member whose relationship is 
described and the nature of the circumstances by reason of which the 
relationship is required to be described.
    2. State the nature of the relationship and the amount of business 
conducted between the director, nominee, or Immediate Family Member and 
the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of 
this Item as a result of the relationship since the beginning of the 
last two completed fiscal years of the Fund or proposed to be done 
during the Fund's current fiscal year.
    3. In computing the amount involved in a relationship, include all 
periodic payments in the case of any agreement providing for periodic 
payments.
    4. If the proxy statement relates to multiple portfolios of a 
series Fund with different fiscal years, then, in determining the date 
that is the beginning of the last two completed fiscal years of the 
Fund, use the earliest date of any series covered by the proxy 
statement.
    5. Disclose indirect, as well as direct, material relationships. A 
person who has a position or relationship with, or interest in, a 
company that has a relationship with one of the persons listed in 
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item may have an 
indirect relationship by reason of the position, relationship, or 
interest. The relationship, however, will not be deemed ``material'' 
within the meaning of paragraph (b)(8) of this Item where the 
relationship of the director, nominee, or Immediate Family Member 
arises solely from the holding of an equity interest (including a 
limited partnership interest, but excluding a general partnership 
interest) or a creditor interest in a company that has a relationship 
with one of the persons specified in paragraphs (b)(7)(i) through 
(b)(7)(viii) of this Item, and the relationship is not material to the 
company.
    6. In the case of an indirect interest, identify the company with 
which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) 
of this Item has a relationship; the name of the director,

[[Page 59861]]

nominee, or Immediate Family Member affiliated with the company and the 
nature of the affiliation; and the amount of business done between the 
company and the person specified in paragraphs (b)(7)(i) through 
(b)(7)(viii) of this Item since the beginning of the last two completed 
fiscal years of the Fund or proposed to be done during the Fund's 
current fiscal year.
    7. In calculating payments for property and services for purposes 
of paragraph (b)(8)(i) of this Item, the following may be excluded:
    A. Payments where the transaction involves the rendering of 
services as a common contract carrier, or public utility, at rates 
or charges fixed in conformity with law or governmental authority; 
or
    B. Payments that arise solely from the ownership of securities 
of a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) 
of this Item and no extra or special benefit not shared on a pro 
rata basis by all holders of the class of securities is received.
    8. No information need be given as to any routine, retail 
relationship. For example, the Fund need not disclose that a 
director holds a credit card or bank or brokerage account with a 
person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of 
this Item unless the director is accorded special treatment.
    (9) If an Officer of an investment adviser, principal 
underwriter, Administrator, or Sponsoring Insurance Company of the 
Fund, or an Officer of a person directly or indirectly controlling, 
controlled by, or under common control with an investment adviser, 
principal underwriter, Administrator, or Sponsoring Insurance 
Company of the Fund, serves, or has served since the beginning of 
the last two completed fiscal years of the Fund, on the board of 
directors of a company where a director of the Fund, nominee for 
election as director, or Immediate Family Member of a director or 
nominee is, or was since the beginning of the last two completed 
fiscal years of the Fund, an Officer, identify:
    (i) The company;
    (ii) The individual who serves or has served as a director of 
the company and the period of service as director;
    (iii) The investment adviser, principal underwriter, 
Administrator, or Sponsoring Insurance Company or person 
controlling, controlled by, or under common control with the 
investment adviser, principal underwriter, Administrator, or 
Sponsoring Insurance Company where the individual named in paragraph 
(b)(9)(ii) of this Item holds or held office and the office held; 
and
    (iv) The director of the Fund, nominee for election as director, 
or Immediate Family Member who is or was an Officer of the company; 
the office held; and the period of holding the office.
    Instruction to paragraph (b)(9). If the proxy statement relates 
to multiple portfolios of a series Fund with different fiscal years, 
then, in determining the date that is the beginning of the last two 
completed fiscal years of the Fund, use the earliest date of any 
series covered by the proxy statement.
    (10) Provide in tabular form, to the extent practicable, the 
information required by Items 401(f) and (g), 404(a) and (c), and 
405 of Regulation S-K (Secs. 229.401(f) and (g), 229.404(a) and (c), 
and 229.405 of this chapter).
    Instruction to paragraph (b)(10). Information provided under 
paragraph (b)(7) of this Item 22 is deemed to satisfy the 
requirements of Items 404(a) and (c) of Regulation S-K for 
information about directors, nominees for election as directors, and 
Immediate Family Members of directors and nominees, and need not be 
provided under this paragraph (b)(10).
    (11) Describe briefly any material pending legal proceedings, 
other than ordinary routine litigation incidental to the Fund's 
business, to which any director or nominee for director or 
affiliated person of such director or nominee is a party adverse to 
the Fund or any of its affiliated persons or has a material interest 
adverse to the Fund or any of its affiliated persons. Include the 
name of the court where the case is pending, the date instituted, 
the principal parties, a description of the factual basis alleged to 
underlie the proceeding, and the relief sought.
    (12) For all directors, and for each of the three highest-paid 
Officers that have aggregate compensation from the Fund for the most 
recently completed fiscal year in excess of $60,000 (``Compensated 
Persons''):
    (i) Furnish the information required by the following table for 
the last fiscal year:

                                               Compensation Table
----------------------------------------------------------------------------------------------------------------
         (1)                    (2)                    (3)                    (4)                    (5)
----------------------------------------------------------------------------------------------------------------
Name of Person,        Aggregate              Pension or Retirement  Estimated Annual       Total Compensation
 Position               Compensation From      Benefits Accrued as    Benefits Upon          From Fund and Fund
                        Fund                   Part of Fund           Retirement             Complex Paid to
                                               Expenses                                      Directors
----------------------------------------------------------------------------------------------------------------

    Instructions to paragraph (b)(12)(i). 1. For column (1), 
indicate, if necessary, the capacity in which the remuneration is 
received. For Compensated Persons that are directors of the Fund, 
compensation is amounts received for service as a director.
    2. If the Fund has not completed its first full year since its 
organization, furnish the information for the current fiscal year, 
estimating future payments that would be made pursuant to an 
existing agreement or understanding. Disclose in a footnote to the 
Compensation Table the period for which the information is 
furnished.
    3. Include in column (2) amounts deferred at the election of the 
Compensated Person, whether pursuant to a plan established under 
Section 401(k) of the Internal Revenue Code (26 U.S.C. 401(k)) or 
otherwise, for the fiscal year in which earned. Disclose in a 
footnote to the Compensation Table the total amount of deferred 
compensation (including interest) payable to or accrued for any 
Compensated Person.
    4. Include in columns (3) and (4) all pension or retirement 
benefits proposed to be paid under any existing plan in the event of 
retirement at normal retirement date, directly or indirectly, by the 
Fund or any of its Subsidiaries, or by other companies in the Fund 
Complex. Omit column (4) where retirement benefits are not 
determinable.
    5. For any defined benefit or actuarial plan under which 
benefits are determined primarily by final compensation (or average 
final compensation) and years of service, provide the information 
required in column (4) in a separate table showing estimated annual 
benefits payable upon retirement (including amounts attributable to 
any defined benefit supplementary or excess pension award plans) in 
specified compensation and years of service classifications. Also 
provide the estimated credited years of service for each Compensated 
Person.
    6. Include in column (5) only aggregate compensation paid to a 
director for service on the board and other boards of investment 
companies in a Fund Complex specifying the number of such other 
investment companies.
    (ii) Describe briefly the material provisions of any pension, 
retirement, or other plan or any arrangement other than fee 
arrangements disclosed in paragraph (b)(12)(i) of this Item pursuant 
to which Compensated Persons are or may be compensated for any 
services provided, including amounts paid, if any, to the 
Compensated Person under any such arrangements during the most 
recently completed fiscal year. Specifically include the criteria 
used to determine amounts payable under any plan, the length of 
service or vesting period required by the plan, the retirement age 
or other event that gives rise to payments under the plan, and 
whether the payment of benefits is secured or funded by the Fund.
    (iii) With respect to each Compensated Person, business 
development companies must include the information required by Items 
402(b)(2)(iv) and 402(c) of Regulation S-K (Secs. 229.402(b)(2)(iv) 
and 229.402(c) of this chapter).
    (13) Identify the standing committees of the Fund's board of 
directors, and provide the following information about each 
committee:
    (i) A concise statement of the functions of the committee;
    (ii) The members of the committee;
    (iii) The number of committee meetings held during the last 
fiscal year; and

[[Page 59862]]

    (iv) If the committee is a nominating or similar committee, 
state whether the committee will consider nominees recommended by 
security holders and, if so, describe the procedures to be followed 
by security holders in submitting recommendations.
* * * * *

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

    8. 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 270.10e-1 is also issued under 15 U.S.C. 80a-10(e).
* * * * *
    9. Section 270.0-1 is amended by adding paragraphs (a)(5) and 
(a)(6) to read as follows:


Sec. 270.0-1  Definition of terms used in this part.

* * * * *
    (a) * * *
    (5) The term administrator means any person who provides 
significant administrative or business affairs management services to 
an investment company.
    (6)(i) A person is an independent legal counsel with respect to the 
directors who are not interested persons of an investment company 
(``disinterested directors'') if:
    (A) The investment company reasonably believes that the person has 
not acted as legal counsel for the company's investment adviser, 
principal underwriter, administrator (collectively, ``management 
organizations''), or any of their control persons at any time since the 
beginning of the company's last two completed fiscal years; or
    (B) A majority of the disinterested directors determine (and record 
the basis for that determination in the minutes of their meeting) that 
the person's representation of any of the company's management 
organizations or any of their control persons is or was so limited that 
it would not adversely affect the person's ability to provide 
impartial, objective, and unbiased legal counsel to the disinterested 
directors.
    (ii) For purposes of paragraph (a)(6)(i) of this section:
    (A) The term person has the same meaning as in section 2(a)(28) of 
the Act (15 U.S.C. 80a-2(a)(28)) and, in addition, includes a partner, 
co-member, or employee of any person; and
    (B) The term control person means any person (other than an 
investment company) directly or indirectly controlling, controlled by, 
or under common control with any of the investment company's management 
organizations.
* * * * *
    10. The section heading for Sec. 270.2a19-1 is revised to read as 
follows:


Sec. 270.2a19-1  Certain investment company directors not considered 
interested persons because of broker-dealer affiliation.

* * * * *
    11. Section 270.2a19-1 is amended by removing the phrase ``a 
minority of the directors f'' in paragraph (a)(3) and adding in its 
place the phrase ``one-half of the directors of''.
    12. Section 270.2a19-3 is added to read as follows:


Sec. 270.2a19-3  Certain investment company directors not considered 
interested persons because of ownership of index fund securities.

    If a director of a registered investment company (``Fund'') owns 
shares of a registered investment company (including the Fund) with an 
investment objective to replicate the performance of one or more 
securities indices (``Index Fund''), ownership of the Index Fund shares 
will not cause the director to be considered an ``interested person'' 
of the Fund or of the Fund's investment adviser or principal 
underwriter (as defined by section 2(a)(19)(A)(iii) and (B)(iii) of the 
Act (15 U.S.C. 80a-2(a)(19)(A)(iii) and (B)(iii))), if the value of the 
securities of the Fund's investment adviser or principal underwriter 
(or a controlling person of the investment adviser or principal 
underwriter) in any of the securities indices constitutes no more than 
five percent of the value of that index.
    13. Section 270.10e-1 is added to read as follows:


Sec. 270.10e-1  Death, disqualification, or bona fide resignation of 
directors.

    If a registered investment company, by reason of the death, 
disqualification, or bona fide resignation of any director, does not 
meet any requirement of the Act or any rule or regulation regarding the 
composition of the company's board of directors, the operation of the 
relevant subsection of the Act, rule, or regulation will be suspended 
as to the company:
    (a) For 60 days if the vacancy may be filled by action of the board 
of directors; or
    (b) For 150 days if a vote of stockholders is required to fill the 
vacancy.
    14. Section 270.10f-3 is amended by redesignating paragraph (b)(11) 
as paragraph (b)(12) and adding new paragraph (b)(11) to read as 
follows:


Sec. 270.10f-3  Exemption for the acquisition of securities during the 
existence of an underwriting or selling syndicate.

* * * * *
    (b) * * *
    (11) Board Composition, Selection, and Representation. (i) [A 
majority/At least two-thirds] of the directors of the investment 
company are not interested persons of the company, and those directors 
select and nominate any other disinterested directors of the company; 
and
    (ii) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel.
* * * * *
    Section 270.12b-1 is amended by revising paragraph (c) to read as 
follows:


Sec. 270.12b-1  Distribution of shares by registered open-end 
management investment company.

* * * * *
    (c) A registered open-end management investment company may rely on 
the provisions of paragraph (b) of this section only if:
    (1) [A majority/At least two-thirds] of the directors of the 
company are not interested persons of the company, and those directors 
select and nominate any other disinterested directors of the company; 
and
    (2) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel;
* * * * *
    16. Section 270.15a-4 is amended by removing the word ``and'' at 
the end of paragraph (a), removing the period at the end of paragraph 
(b) and adding in its place ``; and'' and adding paragraph (c) to read 
as follows:


Sec. 270.15a-4  Temporary exemption for certain investment advisers.

* * * * *
    (c)(1) [A majority/At least two-thirds] of the directors of the 
investment company are not interested persons of the company, and those 
directors select and nominate any other disinterested directors of the 
company; and
    (2) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel.
    17. Section 270.17
    a-7 is amended by:
    A. Removing the ``and'' at the end of paragraph (e)(3), IPB. 
Redesignating paragraph (f) as paragraph (g), and

[[Page 59863]]

    C. Adding new paragraph (f) to read as follows:


Sec. 270.17a-7  Exemption of certain purchase or sale transactions 
between an investment company and certain affiliated persons thereof.

* * * * *
    (f)(1) [A majority/At least two-thirds] of the directors of the 
investment company are not interested persons of the company, and those 
directors select and nominate any other disinterested directors of the 
company; and
    (2) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel; and
* * * * *
    18. Section 270.17a-8 is amended by:
    A. Removing the ``, and'' at the end of paragraph (a)(2) and in its 
place adding a semi-colon,
    B. Removing the period at the end of paragraph (b) and adding in 
its place ``; and'', and
    C. Adding paragraph (c) to read as follows:


Sec. 270.17a-8  Mergers of certain affiliated investment companies.

* * * * *
    (c)(1) [A majority/At least two-thirds] of the directors of the 
investment company are not interested persons of the company, and those 
directors select and nominate any other disinterested directors of the 
company; and
    (2) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel.
    19. Section 270.17d-1 is amended by:
    A. Removing the word ``and'' at the end of paragraph (d)(7)(ii),
    B. Redesignating paragraph (d)(7)(iii) as paragraph (d)(7)(iv),
    C. Removing the period at the end of newly designated paragraph 
(d)(7)(iv) and adding in is place ``; and'', and
    D. Adding new paragraphs (d)(7)(iii) and (d)(7)(v) to read as 
follows:


Sec. 270.17d-1  Applications regarding joint enterprises or 
arrangements and certain profit-sharing plans.

* * * * *
    (d) * * *
    (7) * * *
    (iii) The joint liability insurance policy does not exclude 
coverage for bona fide claims made against any director who is not an 
interested person of the investment company, or against the investment 
company if it is a co-defendant in the claim with the disinterested 
director, by another person insured under the joint liability insurance 
policy;
* * * * *
    (v)(A) [A majority/At least two-thirds] of the directors of the 
investment company are not interested persons of the company, and those 
directors select and nominate any other disinterested directors of the 
company; and
    (B) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel.
* * * * *
    20. Section 270.17e-1 is amended by:
    Removing the word ``and'' at the end of paragraph (b)(3), 
redesignating paragraph (c) as paragraph (d), and adding new paragraph 
(c) to read as follows:


Sec. 270.17e-1  Brokerage transactions on a securities exchange.

* * * * *
    (c)(1) [A majority / At least two-thirds] of the directors of the 
investment company are not interested persons of the company, and those 
directors select and nominate any other disinterested directors of the 
company; and
    (2) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel; and
* * * * *
    21. Section 270.17g-1 is amended by revising paragraph (j) to read 
as follows:


Sec. 270.17g-1   Bonding of officers and employees of registered 
management investment companies.

* * * * *
    (j) Any joint insured bond provided and maintained by a registered 
management investment company and one or more other parties shall be a 
transaction exempt from the provisions of section 17(d) of the Act (15 
U.S.C. 80a-17(d)) and the rules thereunder, if:
    (1) The terms and provisions of the bond comply with the provisions 
of this section;
    (2) The terms and provisions of any agreement required by paragraph 
(f) of this section comply with the provisions of that paragraph; and
    (3)(i) [A majority / At least two-thirds] of the directors of the 
investment company are not interested persons of the company, and those 
directors select and nominate any other disinterested directors of the 
company; and
    (ii) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel.
* * * * *
    22. Section 270.18f-3 is amended by redesigning paragraph (e) as 
paragraph (f), and adding new paragraph (e) to read as follows:


Sec. 270.18f-3  Multiple class companies.

* * * * *
    (e)(1) [A majority / At least two-thirds] of the directors of the 
investment company are not interested persons of the company, and those 
directors select and nominate any other disinterested directors of the 
company; and
    (2) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel.
* * * * *
    23. Section 270.23c-3 is amended by revising paragraph (b)(8) to 
read as follows:


Sec. 270.23c-3  Repurchase offers by closed-end companies.

* * * * *
    (b) * * *
    (8)(i) [A majority / At least two-thirds] of the directors of the 
investment company are not interested persons of the company, and those 
directors select and nominate any other disinterested directors of the 
company; and
    (ii) Any person who acts as legal counsel for the disinterested 
directors of the company is an independent legal counsel.
* * * * *
    24. Redesignate Sec. 270.30d-1 as Sec. 270.30e-1; in newly 
designated Sec. 270.30e-1, in paragraph (a), revise ``financial 
statements'' to read ``information''; and revise paragraph (d) to read 
as follows:


Sec. 270.30e-1  Reports to stockholders of management companies.

* * * * *
    (d) An open-end company may transmit a copy of its current 
effective prospectus or Statement of Additional Information, or both, 
under the Securities Act, inplace of any report required to be 
transmitted to shareholders by this section, provided that the 
prospectus or Statement of Additional Information, or both, include all 
the information that would otherwise be required to be contained in the 
report by this section. Such prospectus or Statement of Additional 
Information, or both, shall be transmitted within 60 days after the 
close of the period for which the report is being made.
* * * * *


Sec. 270.30d-2  [Redesignated as Sec. 270.30e-2]

    25. Redesignate Sec. 270.30d-2 as Sec. 270.30e-2 and in newly 
designated Sec. 270.30e-2 revise ``Rule N-30D-1'' to read 
``Sec. 270.30e-1 of this chapter'' in the first and second sentence.
    26. Section 270.31a-2 is amended by removing the period at end of 
paragraph (a)(3) and in its place adding a semi-

[[Page 59864]]

colon, and adding paragraphs (a)(4) and (a)(5) to read as follows:


Sec. 270.31a-2  Records to be preserved by registered investment 
companies, certain majority-owned subsidiaries thereof, and other 
persons having transactions with registered investment companies.

    (a) * * *
    (4) Preserve for a period not less than six years, the first two 
years in an easily accessible place, any record of the initial 
determination that a director is not an interested person of the 
investment company, and each subsequent determination that the director 
is not an interested person of the investment company. These records 
must include any questionnaire and any other document used to determine 
that a director is not an interested person of the company; and
    (5) Preserve for a period not less than six years, the first two 
years in an easily accessible place, any document used by an investment 
company to establish a reasonable belief that any person who acts as 
legal counsel to the directors who are not interested persons of the 
company is an independent legal counsel and any document used by the 
disinterested directors to determine that any current or prior 
representation is or was so limited that it will not adversely affect 
the counsel's ability to provide impartial, objective, and unbiased 
legal advice.
* * * * *
    27. Section 270.32a-4 is added to read as follows:


Sec. 270.32a-4  Exemption from ratification or rejection requirement of 
section 32(a)(2) for certain registered investment companies with 
independent audit committees.

    A registered management investment company or a registered face-
amount certificate company is exempt from the requirement of section 
32(a)(2) of the Act (15 U.S.C. 80a-31(a)(2)) that the selection of the 
company's independent public accountant be submitted for ratification 
or rejection at the next succeeding annual meeting of shareholders, if:
    (a) The company's board of directors has established a committee 
that has responsibility for overseeing the fund's accounting and 
auditing processes (``audit committee'');
    (b) The audit committee is composed solely of directors who are not 
interested persons of the fund;
    (c) The company's board of directors has adopted a charter for the 
audit committee setting forth the committee's structure, duties, 
powers, and methods of operation; and
    (d) The company maintains and preserves permanently in an easily 
accessible place a copy of the audit committee's charter and any 
modification to the charter.

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

    28. 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.

* * * * *

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

    29. 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.

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

    30. Item 13 of Form N-1A (referenced in Secs. 239.15A and 274.11A) 
is amended by adding Instructions 1 and 2 before paragraph (a); 
removing paragraphs (a), (b), and (c) and adding paragraphs (a) and (b) 
in their place; redesignating paragraphs (d) and (e) as paragraphs (c) 
and (d); and removing ``executive'' from the first sentence of newly 
redesignated paragraph (c) to read as follows:

Form N-1A

* * * * *

Item 13. Management of the Fund

Instructions

    1. For purposes of this Item 13, the terms below have the following 
meanings:
    (a) The term ``fund complex'' means two or more registered 
investment companies that:
    (1) Hold themselves out to investors as related companies for 
purposes of investment and investor services; or (2) Have a common 
investment adviser or have an investment adviser that is an affiliated 
person of the investment adviser of any of the other registered 
investment companies.
    (b) The term ``immediate family member'' means a person's spouse, 
parent, child, sibling, mother- or father-in-law, son- or daughter-in-
law, or brother- or sister-in-law, and includes step and adoptive 
relationships.
    (c) The term ``officer'' means the president, vice-president, 
secretary, treasurer, controller, or any other officer who performs 
policy-making functions.
    2. When providing information about directors, furnish information 
for directors who are interested persons separately from the 
information for directors who are not interested persons. For example, 
when furnishing information in a table, you should provide separate 
tables (or separate sections of a single table) for directors who are 
interested persons and for directors who are not interested persons. 
When furnishing information in narrative form, indicate by heading or 
otherwise the directors who are interested persons and the ones who are 
not interested persons.
    (a) Management Information. (1) Provide the information required by 
the following table for each director and officer of the Fund, and, if 
the Fund has an advisory board, member of the board. Explain in a 
footnote to the table any family relationship between the persons 
listed.

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name, Address,     Position(s) Held   Term of Office     Principal          Number of          Other
 and Age            with Fund          and Length of      Occupation(s)      Portfolios in      Directorships
                                       Time Served        During Past 5      Fund Complex       Held by Director
                                                          Years              Overseen by
                                                                             Director
----------------------------------------------------------------------------------------------------------------

Instructions

    1. For purposes of this paragraph, the term ``family relationship'' 
means any relationship by blood, marriage, or adoption, not more remote 
than first cousin.
    2. For each director who is an interested person, describe, in a 
footnote or otherwise, the relationship, events, or transactions by 
reason of which the director is an interested person.
    3. State the principal business of any company listed under column 
(4) unless

[[Page 59865]]

the principal business is implicit in its name.
    4. Indicate in column (6) directorships not included in column (5) 
that are held by a director in any company with a class of securities 
registered pursuant to section 12 of the Securities Exchange Act (15 
U.S.C. 78l) or subject to the requirements of section 15(d) of the 
Securities Exchange Act (15 U.S.C. 78o(d)) or any company registered as 
an investment company under the Investment Company Act, and name the 
companies in which the directorships are held. Where the other 
directorships include directorships overseeing two or more portfolios 
in the same fund complex, identify the fund complex and provide the 
number of portfolios overseen as a director in the fund complex rather 
than listing each portfolio separately.
    (2) For each individual listed in column (1) of the table required 
by paragraph (a)(1) of this Item 13 who is not a director, describe any 
positions, including as an officer, employee, director, or general 
partner, held with affiliated persons or principal underwriters of the 
Fund.
    Instruction. When an individual holds the same position(s) with two 
or more registered investment companies that are part of the same fund 
complex, identify the fund complex and provide the number of registered 
investment companies for which the position(s) are held rather than 
listing each registered investment company separately.
    (3) Describe briefly any arrangement or understanding between any 
director or officer and any other person(s) (naming the person(s)) 
pursuant to which he was selected as a director or officer.
    Instruction. Do not include arrangements or understandings with 
directors or officers acting solely in their capacities as such.
    (b) Board of Directors.
    (1) Briefly describe the responsibilities of the board of directors 
with respect to the Fund's management.
    Instruction. A Fund may respond to this paragraph by providing a 
general statement as to the responsibilities of the board of directors 
with respect to the Fund's management under the applicable laws of the 
state or other jurisdiction in which the Fund is organized.
    (2) Identify the standing committees of the Fund's board of 
directors, and provide the following information about each committee:
    (i) A concise statement of the functions of the committee;
    (ii) The members of the committee;
    (iii) The number of committee meetings held during the last fiscal 
year; and
    (iv) If the committee is a nominating or similar committee, state 
whether the committee will consider nominees recommended by security 
holders and, if so, describe the procedures to be followed by security 
holders in submitting recommendations.
    (3) Unless disclosed in the table required by paragraph (a)(1) of 
this Item 13, describe any positions, including as an officer, 
employee, director, or general partner, held by a director or immediate 
family member of the director during the past five years with:
    (i) The Fund;
    (ii) An investment company, or a person that would be an investment 
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) 
(15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same investment adviser, 
principal underwriter, or administrator as the Fund or having an 
investment adviser, principal underwriter, or administrator that 
directly or indirectly controls, is controlled by, or is under common 
control with an investment adviser, principal underwriter, or 
administrator of the Fund;
    (iii) An investment adviser, principal underwriter, administrator, 
or affiliated person of the Fund; or
    (iv) Any person directly or indirectly controlling, controlled by, 
or under common control with an investment adviser, principal 
underwriter, or administrator of the Fund.
    Instruction. When an individual holds the same position(s) with two 
or more portfolios that are part of the same fund complex, identify the 
fund complex and provide the number of portfolios for which the 
position(s) are held rather than listing each portfolio separately.
    (4) For each director, state the aggregate dollar amount of equity 
securities of registered investment companies in the same fund complex 
as the Fund owned beneficially or of record by the director as required 
by the following table:

------------------------------------------------------------------------
          (1)                      (2)                      (3)
------------------------------------------------------------------------
Name of Director         Identity of Fund         Aggregate Dollar
                          Complex                  Amount of Equity
                                                   Securities in Fund
                                                   Complex
------------------------------------------------------------------------

Instructions

    1. Information should be provided as of the most recent practicable 
date. Specify the valuation date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 13d-3 
under the Exchange Act (Sec. 240.13d-3 of this chapter).
    (5) For each director and his immediate family members, furnish the 
information required by the following table as to each class of 
securities owned beneficially or of record in:
    (i) An investment adviser, principal underwriter, or administrator 
of the Fund; or
    (ii) A person (other than a registered investment company) directly 
or indirectly controlling, controlled by, or under common control with 
an investment adviser, principal underwriter, or administrator of the 
Fund:

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name of Director   Name of Owners     Company            Title of Class     Value of           Percent of Class
                    and                                                      Securities
                    Relationships to
                    Director
----------------------------------------------------------------------------------------------------------------

Instructions

    1. Information should be provided as of the most recent practicable 
date. Specify the valuation date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 13d-3 
under the Exchange Act (Sec. 240.13d-3 of this chapter).
    3. Identify the company in which the director or immediate family 
member of the director owns securities in column (3). When the company 
is a person directly or indirectly controlling, controlled by, or under 
common control with an investment adviser, principal underwriter, or 
administrator, describe the company's relationship with the investment 
adviser, principal underwriter, or administrator.
    4. Provide the information required by columns (5) and (6) on an 
aggregate

[[Page 59866]]

basis for each director and his immediate family members.
    (6) Unless disclosed in response to paragraph (b)(5) of this Item 
13, describe any material interest, direct or indirect, of each 
director or immediate family member of a director, during the past five 
years, in:
    (i) An investment adviser, principal underwriter, or administrator 
of the Fund; or
    (ii) A person (other than a registered investment company) directly 
or indirectly controlling, controlled by, or under common control with 
an investment adviser, principal underwriter, or administrator of the 
Fund.
    Instruction. A director or immediate family member has an interest 
in a company if he is a party to a contract, arrangement, or 
understanding with respect to any securities of, or interest in, the 
company.
    (7) Describe briefly any material interest, direct or indirect, of 
any director or immediate family member of a director in any material 
transaction, or material series of similar transactions, since the 
beginning of the last two completed fiscal years of the Fund, or in any 
currently proposed material transaction, or material series of similar 
transactions, to which any of the following persons was or is to be a 
party:
    (i) The Fund;
    (ii) An officer of the Fund;
    (iii) An investment company, or a person that would be an 
investment company but for the exclusions provided by sections 3(c)(1) 
and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same 
investment adviser, principal underwriter, or administrator as the Fund 
or having an investment adviser, principal underwriter, or 
administrator that directly or indirectly controls, is controlled by, 
or is under common control with an investment adviser, principal 
underwriter, or administrator of the Fund;
    (iv) An officer of an investment company, or a person that would be 
an investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) (15 U.S.C. 80a-3(c)(1) and (7)), having the same 
investment adviser, principal underwriter, or administrator as the Fund 
or having an investment adviser, principal underwriter, or 
administrator that directly or indirectly controls, is controlled by, 
or is under common control with an investment adviser, principal 
underwriter, or administrator of the Fund;
    (v) An investment adviser, principal underwriter, or administrator 
of the Fund;
    (vi) An officer of an investment adviser, principal underwriter, or 
administrator of the Fund;
    (vii) A person directly or indirectly controlling, controlled by, 
or under common control with an investment adviser, principal 
underwriter, or administrator of the Fund; or
    (viii) An officer of a person directly or indirectly controlling, 
controlled by, or under common control with an investment adviser, 
principal underwriter, or administrator of the Fund.

Instructions

    1. Include the name of each director or immediate family member 
whose interest in any transaction or series of similar transactions is 
described and the nature of the circumstances by reason of which the 
interest is required to be described.
    2. State the nature of the interest, the approximate dollar amount 
involved in the transaction, and, where practicable, the approximate 
dollar amount of the interest.
    3. In computing the amount involved in the transaction or series of 
similar transactions, include all periodic payments in the case of any 
lease or other agreement providing for periodic payments.
    4. Compute the amount of the interest of any director or immediate 
family member of the director without regard to the amount of profit or 
loss involved in the transaction(s).
    5. As to any transaction involving the purchase or sale of assets, 
state the cost of the assets to the purchaser and, if acquired by the 
seller within two years prior to the transaction, the cost to the 
seller. Describe the method used in determining the purchase or sale 
price and the name of the person making the determination.
    6. If the Registrant is a Series company whose Series have 
different fiscal years, then, in determining the date that is the 
beginning of the last two completed fiscal years of the Registrant, use 
the earliest date of any Series.
    7. Disclose indirect, as well as direct, material interests in 
transactions. A person who has a position or relationship with, or 
interest in, a company that engages in a transaction with one of the 
persons listed in paragraphs (b)(7)(i) through (b)(7)(viii) of this 
Item 13 may have an indirect interest in the transaction by reason of 
the position, relationship, or interest. The interest in the 
transaction, however, will not be deemed ``material'' within the 
meaning of paragraph (b)(7) of this Item 13 where the interest of the 
director or immediate family member arises solely from the holding of 
an equity interest (including a limited partnership interest, but 
excluding a general partnership interest) or a creditor interest in a 
company that is a party to the transaction with one of the persons 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13, 
and the transaction is not material to the company.
    8. No information need be given as to any transaction where the 
interest of the director or immediate family member arises solely from 
the ownership of securities of a person specified in paragraphs 
(b)(7)(i) through (b)(7)(viii) of this Item 13 and the director or 
immediate family member receives no extra or special benefit not shared 
on a pro rata basis by all holders of the class of securities.
    9. Transactions include loans, lines of credit, and other 
indebtedness. For indebtedness, indicate the largest aggregate amount 
of indebtedness outstanding at any time during the period, the nature 
of the indebtedness and the transaction in which it was incurred, the 
amount outstanding as of the latest practicable date, and the rate of 
interest paid or charged.
    10. No information need be given as to any routine, retail 
transaction. For example, the Fund need not disclose that a director 
holds a credit card or bank or brokerage account with a person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 
unless the director is accorded special treatment.
    (8) Describe briefly any material relationship, direct or indirect, 
of any director or immediate family member of a director that exists, 
or has existed at any time since the beginning of the last two 
completed fiscal years of the Fund, or is currently proposed, with any 
of the persons specified in paragraphs (b)(7)(i) through (b)(7)(viii) 
of this Item 13. Relationships include:
    (i) Payments for property or services to or from any person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13;
    (ii) Provision of legal services to any person specified in 
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13;
    (iii) Provision of investment banking services to any person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13, 
other than as a participating underwriter in a syndicate; and
    (iv) Any consulting or other relationship that is substantially 
similar in nature and scope to the relationships

[[Page 59867]]

listed in paragraphs (b)(8)(i) through (b)(8)(iii) of this Item 13.

Instructions

    1. Include the name of each director or immediate family member 
whose relationship is described and the nature of the circumstances by 
reason of which the relationship is required to be described.
    2. State the nature of the relationship and the amount of business 
conducted between the director or immediate family member and the 
person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this 
Item 13 as a result of the relationship since the beginning of the last 
two completed fiscal years of the Fund or proposed to be done during 
the Fund's current fiscal year.
    3. In computing the amount involved in a relationship, include all 
periodic payments in the case of any agreement providing for periodic 
payments.
    4. If the Registrant is a Series company whose Series have 
different fiscal years, then, in determining the date that is the 
beginning of the last two completed fiscal years of the Registrant, use 
the earliest date of any Series.
    5. Disclose indirect, as well as direct, material relationships. A 
person who has a position or relationship with, or interest in, a 
company that has a relationship with one of the persons listed in 
paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 may have an 
indirect relationship by reason of the position, relationship, or 
interest. The relationship, however, will not be deemed ``material'' 
within the meaning of paragraph (b)(8) of this Item 13 where the 
relationship of the director or immediate family member arises solely 
from the holding of an equity interest (including a limited partnership 
interest, but excluding a general partnership interest) or a creditor 
interest in a company that has a relationship with one of the persons 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13, 
and the relationship is not material to the company.
    6. In the case of an indirect interest, identify the company with 
which a person specified in paragraphs (b)(7)(i) through (b)(7)(viii) 
of this Item 13 has a relationship; the name of the director or 
immediate family member affiliated with the company and the nature of 
the affiliation; and the amount of business done between the company 
and the person specified in paragraphs (b)(7)(i) through (b)(7)(viii) 
of this Item 13 since the beginning of the last two completed fiscal 
years of the Fund or proposed to be done during the Fund's current 
fiscal year.
    7. In calculating payments for property and services for purposes 
of paragraph (b)(8)(i) of this Item 13, the following may be excluded:
    A. Payments where the transaction involves the rendering of 
services as a common contract carrier, or public utility, at rates or 
charges fixed in conformity with law or governmental authority; or
    B. Payments that arise solely from the ownership of securities of a 
person specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this 
Item 13 and no extra or special benefit not shared on a pro rata basis 
by all holders of the class of securities is received.
    8. No information need be given as to any routine, retail 
relationship. For example, the Fund need not disclose that a director 
holds a credit card or bank or brokerage account with a person 
specified in paragraphs (b)(7)(i) through (b)(7)(viii) of this Item 13 
unless the director is accorded special treatment.
    (9) If an officer of an investment adviser, principal underwriter, 
or administrator of the Fund, or an officer of a person directly or 
indirectly controlling, controlled by, or under common control with an 
investment adviser, principal underwriter, or administrator of the 
Fund, serves, or has served since the beginning of the last two 
completed fiscal years of the Fund, on the board of directors of a 
company where a director of the Fund or immediate family member of a 
director is, or was since the beginning of the last two completed 
fiscal years of the Fund, an officer, identify:
    (i) The company;
    (ii) The individual who serves or has served as a director of the 
company and the period of service as director;
    (iii) The investment adviser, principal underwriter, or 
administrator or person controlling, controlled by, or under common 
control with the investment adviser, principal underwriter, or 
administrator where the individual named in paragraph (b)(9)(ii) of 
this Item 13 holds or held office and the office held; and
    (iv) The director of the Fund or immediate family member who is or 
was an officer of the company; the office held; and the period of 
holding the office.
    Instruction. If the Registrant is a Series company whose Series 
have different fiscal years, then, in determining the date that is the 
beginning of the last two completed fiscal years of the Registrant, use 
the earliest date of any Series.
    (10) Discuss in reasonable detail the material factors and the 
conclusions with respect thereto that formed the basis for the board of 
directors approving the existing investment advisory contract. If 
applicable, include a discussion of any benefits derived or to be 
derived by the investment adviser from the relationship with the Fund 
such as soft dollar arrangements by which brokers provide research to 
the Fund or its investment adviser in return for allocating fund 
brokerage.
    Instruction. Conclusory statements or a list of factors will not be 
considered sufficient disclosure. The discussion should relate the 
factors to the specific circumstances of the Fund and the investment 
advisory contract.
* * * * *
    31. Item 22 of Form N-1A (referenced in Secs. 239.15A and 274.11A) 
is amended by adding paragraphs (b)(5) and (b)(6) to read as follows:

Form N-1A

* * * * *

Item 22. Financial Statements

* * * * *
    (b) * * *
    (5) The management information required by Item 13(a)(1).
    (6) A statement that the SAI includes additional information about 
Fund directors and is available, without charge, upon request, and a 
toll-free (or collect) telephone number for shareholders to call to 
request the SAI.
* * * * *
    Note: The text of Form N-2 does not and these amendments will 
not appear in the Code of Federal Regulations
    32. Item 18 of Form N-2 (referenced in Secs. 239.14 and 274.11a-1) 
is amended by adding Instructions 1 and 2 before paragraph 1; revising 
paragraphs 1 and 2; redesignating paragraphs 3 and 4 as paragraphs 4 
and 14; adding new paragraphs 3 and 5 through 13; and removing 
``executive'' from the first sentence of newly designated paragraph 14 
to read as follows:

Form N-2

* * * * *

Item 18. Management

Instructions

    1. For purposes of this Item 18, the terms below have the following 
meanings:
    a. The term ``fund complex'' means two or more registered 
investment companies that:
    (i) Hold themselves out to investors as related companies for 
purposes of investment and investor services; or
    (ii) Have a common investment adviser or have an investment adviser

[[Page 59868]]

that is an affiliated person of the investment adviser of any of the 
other registered investment companies.
    b. The term ``immediate family member'' means a person's spouse, 
parent, child, sibling, mother- or father-in-law, son- or daughter-in-
law, or brother- or sister-in-law, and includes step and adoptive 
relationships.
    c. The term ``officer'' means the president, vice-president, 
secretary, treasurer, controller, or any other officer who performs 
policy-making functions.
    2. When providing information about directors, furnish information 
for directors who are interested persons as defined in Section 2(a)(19) 
of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder 
separately from the information for directors who are not interested 
persons. For example, when furnishing information in a table, you 
should provide separate tables (or separate sections of a single table) 
for directors who are interested persons and for directors who are not 
interested persons. When furnishing information in narrative form, 
indicate by heading or otherwise the directors who are interested 
persons and the ones who are not interested persons.
    1. Provide the information required by the following table for each 
director and officer of the Registrant, and, if the Registrant has an 
advisory board, member of the board. Explain in a footnote to the table 
any family relationship between the persons listed.

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name, Address,     Position(s) Held   Term of Office     Principal          Number of          Other
 and Age            with Registrant    and Length of      Occupation(s)      Portfolios in      Directorships
                                       Time Served        During Past 5      Fund Complex       Held by Director
                                                          Years              Overseen by
                                                                             Director
----------------------------------------------------------------------------------------------------------------

Instructions

    1. For purposes of this paragraph, the term ``family relationship'' 
means any relationship by blood, marriage, or adoption, not more remote 
than first cousin.
    2. For each director who is an interested person as defined in 
Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules 
thereunder, describe, in a footnote or otherwise, the relationship, 
events, or transactions by reason of which the director is an 
interested person.
    3. State the principal business of any company listed under column 
(4) unless the principal business is implicit in its name.
    4. Indicate in column (6) directorships not included in column (5) 
that are held by a director in any company with a class of securities 
registered pursuant to section 12 of the Exchange Act (15 U.S.C. 78l) 
or subject to the requirements of section 15(d) of the Exchange Act (15 
U.S.C. 78o(d)) or any company registered as an investment company under 
the 1940 Act, and name the companies in which the directorships are 
held. Where the other directorships include directorships overseeing 
two or more portfolios in the same fund complex, identify the fund 
complex and provide the number of portfolios overseen as a director in 
the fund complex rather than listing each portfolio separately.
    2. For each individual listed in column (1) of the table required 
by paragraph 1 who is not a director, describe any positions, including 
as an officer, employee, director, or general partner, held with 
affiliated persons or principal underwriters of the Registrant.
    Instruction: When an individual holds the same position(s) with two 
or more registered investment companies that are part of the same fund 
complex, identify the fund complex and provide the number of registered 
investment companies for which the position(s) are held rather than 
listing each registered investment company separately.
    3. Describe briefly any arrangement or understanding between any 
director or officer and any other person(s) (naming the person(s)) 
pursuant to which he was selected as a director or officer.
    Instruction: Do not include arrangements or understandings with 
directors or officers acting solely in their capacities as such.
    4. For each non-resident director or officer of the Registrant 
listed in column (1) of the table required by paragraph 1, disclose 
whether he has authorized an agent in the United States to receive 
notice and, if so, disclose the name and address of the agent.
    5. Identify the standing committees of the Registrant's board of 
directors, and provide the following information about each committee:
    (a) A concise statement of the functions of the committee;
    (b) The members of the committee;
    (c) The number of committee meetings held during the last fiscal 
year; and
    (d) If the committee is a nominating or similar committee, state 
whether the committee will consider nominees recommended by security 
holders and, if so, describe the procedures to be followed by security 
holders in submitting recommendations.
    6. Unless disclosed in the table required by paragraph 1 of this 
Item 18, describe any positions, including as an officer, employee, 
director, or general partner, held by a director or immediate family 
member of the director during the past five years with:
    (a) The Registrant;
    (b) An investment company, or a person that would be an investment 
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) 
of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same 
investment adviser, principal underwriter, or administrator as the 
Registrant or having an investment adviser, principal underwriter, or 
administrator that directly or indirectly controls, is controlled by, 
or is under common control with an investment adviser, principal 
underwriter, or administrator of the Registrant;
    (c) An investment adviser, principal underwriter, administrator, or 
affiliated person of the Registrant; or
    (d) Any person directly or indirectly controlling, controlled by, 
or under common control with an investment adviser, principal 
underwriter, or administrator of the Registrant.
    Instruction: When an individual holds the same position(s) with two 
or more portfolios that are part of the same fund complex, identify the 
fund complex and provide the number of portfolios for which the 
position(s) are held rather than listing each portfolio separately.
    7. For each director, state the aggregate dollar amount of equity 
securities of registered investment companies in the same fund complex 
as the Registrant owned beneficially or of record by the director as 
required by the following table:

------------------------------------------------------------------------
          (1)                      (2)                      (3)
------------------------------------------------------------------------
Name of Director         Identity of Fund         Aggregate Dollar
                          Complex                  Amount of Equity
                                                   Securities in Fund
                                                   Complex
------------------------------------------------------------------------


[[Page 59869]]

Instructions

    1. Information should be provided as of the most recent practicable 
date. Specify the valuation date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 13d-3 
under the Exchange Act (Sec. 240.13d-3 of this chapter).
    8. For each director and his immediate family members, furnish the 
information required by the following table as to each class of 
securities owned beneficially or of record in:
    (a) An investment adviser, principal underwriter, or administrator 
of the Registrant; or
    (b) A person (other than a registered investment company) directly 
or indirectly controlling, controlled by, or under common control with 
an investment adviser, principal underwriter, or administrator of the 
Registrant:

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name of Director   Name of Owners     Company            Title of Class     Value of           Percent of Class
                    and                                                      Securities
                    Relationships to
                    Director
----------------------------------------------------------------------------------------------------------------

Instructions

    1. Information should be provided as of the most recent practicable 
date. Specify the valuation date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 13d-3 
under the Exchange Act (Sec. 240.13d-3 of this chapter).
    3. Identify the company in which the director or immediate family 
member of the director owns securities in column (3). When the company 
is a person directly or indirectly controlling, controlled by, or under 
common control with an investment adviser, principal underwriter, or 
administrator, describe the company's relationship with the investment 
adviser, principal underwriter, or administrator.
    4. Provide the information required by columns (5) and (6) on an 
aggregate basis for each director and his immediate family members.
    9. Unless disclosed in response to paragraph 8 of this Item 18, 
describe any material interest, direct or indirect, of each director or 
immediate family member of a director, during the past five years, in:
    (a) An investment adviser, principal underwriter, or administrator 
of the Registrant; or
    (b) A person (other than a registered investment company) directly 
or indirectly controlling, controlled by, or under common control with 
an investment adviser, principal underwriter, or administrator of the 
Registrant.
    Instruction: A director or immediate family member has an interest 
in a company if he is a party to a contract, arrangement, or 
understanding with respect to any securities of, or interest in, the 
company.
    10. Describe briefly any material interest, direct or indirect, of 
any director or immediate family member of a director in any material 
transaction, or material series of similar transactions, since the 
beginning of the last two completed fiscal years of the Registrant, or 
in any currently proposed material transaction, or material series of 
similar transactions, to which any of the following persons was or is 
to be a party:
    (a) The Registrant;
    (b) An officer of the Registrant;
    (c) An investment company, or a person that would be an investment 
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) 
of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same 
investment adviser, principal underwriter, or administrator as the 
Registrant or having an investment adviser, principal underwriter, or 
administrator that directly or indirectly controls, is controlled by, 
or is under common control with an investment adviser, principal 
underwriter, or administrator of the Registrant;
    (d) An officer of an investment company, or a person that would be 
an investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), 
having the same investment adviser, principal underwriter, or 
administrator as the Registrant or having an investment adviser, 
principal underwriter, or administrator that directly or indirectly 
controls, is controlled by, or is under common control with an 
investment adviser, principal underwriter, or administrator of the 
Registrant;
    (e) An investment adviser, principal underwriter, or administrator 
of the Registrant;
    (f) An officer of an investment adviser, principal underwriter, or 
administrator of the Registrant;
    (g) A person directly or indirectly controlling, controlled by, or 
under common control with an investment adviser, principal underwriter, 
or administrator of the Registrant; or
    (h) An officer of a person directly or indirectly controlling, 
controlled by, or under common control with an investment adviser, 
principal underwriter, or administrator of the Registrant.

Instructions

    1. Include the name of each director or immediate family member 
whose interest in any transaction or series of similar transactions is 
described and the nature of the circumstances by reason of which the 
interest is required to be described.
    2. State the nature of the interest, the approximate dollar amount 
involved in the transaction, and, where practicable, the approximate 
dollar amount of the interest.
    3. In computing the amount involved in the transaction or series of 
similar transactions, include all periodic payments in the case of any 
lease or other agreement providing for periodic payments.
    4. Compute the amount of the interest of any director or immediate 
family member of the director without regard to the amount of profit or 
loss involved in the transaction(s).
    5. As to any transaction involving the purchase or sale of assets, 
state the cost of the assets to the purchaser and, if acquired by the 
seller within two years prior to the transaction, the cost to the 
seller. Describe the method used in determining the purchase or sale 
price and the name of the person making the determination.
    6. Disclose indirect, as well as direct, material interests in 
transactions. A person who has a position or relationship with, or 
interest in, a company that engages in a transaction with one of the 
persons listed in paragraphs 10(a) through (h) of this Item 18 may have 
an indirect interest in the transaction by reason of the position, 
relationship, or interest. The interest in the transaction, however, 
will not be deemed ``material'' within the meaning of paragraph 10 of 
this Item 18 where the interest of the director or immediate

[[Page 59870]]

family member arises solely from the holding of an equity interest 
(including a limited partnership interest, but excluding a general 
partnership interest) or a creditor interest in a company that is a 
party to the transaction with one of the persons specified in 
paragraphs 10(a) through (h) of this Item 18, and the transaction is 
not material to the company.
    7. No information need be given as to any transaction where the 
interest of the director or immediate family member arises solely from 
the ownership of securities of a person specified in paragraphs 10(a) 
through (h) of this Item 18 and the director or immediate family member 
receives no extra or special benefit not shared on a pro rata basis by 
all holders of the class of securities.
    8. Transactions include loans, lines of credit, and other 
indebtedness. For indebtedness, indicate the largest aggregate amount 
of indebtedness outstanding at any time during the period, the nature 
of the indebtedness and the transaction in which it was incurred, the 
amount outstanding as of the latest practicable date, and the rate of 
interest paid or charged.
    9. No information need be given as to any routine, retail 
transaction. For example, the Registrant need not disclose that a 
director holds a credit card or bank or brokerage account with a person 
specified in paragraphs 10(a) through (h) of this Item 18 unless the 
director is accorded special treatment.
    11. Describe briefly any material relationship, direct or indirect, 
of any director or immediate family member of a director that exists, 
or has existed at any time since the beginning of the last two 
completed fiscal years of the Registrant, or is currently proposed, 
with any of the persons specified in paragraphs 10(a) through (h) of 
this Item 18. Relationships include:
    (a) Payments for property or services to or from any person 
specified in paragraphs 10(a) through (h) of this Item 18;
    (b) Provision of legal services to any person specified in 
paragraphs 10(a) through (h) of this Item 18;
    (c) Provision of investment banking services to any person 
specified in paragraphs 10(a) through (h) of this Item 18, other than 
as a participating underwriter in a syndicate; and
    (d) Any consulting or other relationship that is substantially 
similar in nature and scope to the relationships listed in paragraphs 
11(a) through (c) of this Item 18.

Instructions

    1. Include the name of each director or immediate family member 
whose relationship is described and the nature of the circumstances by 
reason of which the relationship is required to be described.
    2. State the nature of the relationship and the amount of business 
conducted between the director or immediate family member and the 
person specified in paragraphs 10(a) through (h) of this Item 18 as a 
result of the relationship since the beginning of the last two 
completed fiscal years of the Registrant or proposed to be done during 
the Registrant's current fiscal year.
    3. In computing the amount involved in a relationship, include all 
periodic payments in the case of any agreement providing for periodic 
payments.
    4. Disclose indirect, as well as direct, material relationships. A 
person who has a position or relationship with, or interest in, a 
company that has a relationship with one of the persons listed in 
paragraphs 10(a) through (h) of this Item 18 may have an indirect 
relationship by reason of the position, relationship, or interest. The 
relationship, however, will not be deemed ``material'' within the 
meaning of paragraph 11 of this Item 18 where the relationship of the 
director or immediate family member arises solely from the holding of 
an equity interest (including a limited partnership interest, but 
excluding a general partnership interest) or a creditor interest in a 
company that has a relationship with one of the persons specified in 
paragraphs 10(a) through (h) of this Item 18, and the relationship is 
not material to the company.
    5. In the case of an indirect interest, identify the company with 
which a person specified in paragraphs 10(a) through (h) of this Item 
18 has a relationship; the name of the director or immediate family 
member affiliated with the company and the nature of the affiliation; 
and the amount of business done between the company and the person 
specified in paragraphs 10(a) through (h) of this Item 18 since the 
beginning of the last two completed fiscal years of the Registrant or 
proposed to be done during the Registrant's current fiscal year.
    6. In calculating payments for property and services for purposes 
of paragraph 11(a) of this Item 18, the following may be excluded:
    a. Payments where the transaction involves the rendering of 
services as a common contract carrier, or public utility, at rates or 
charges fixed in conformity with law or governmental authority; or
    b. Payments that arise solely from the ownership of securities of a 
person specified in paragraphs 10(a) through (h) of this Item 18 and no 
extra or special benefit not shared on a pro rata basis by all holders 
of the class of securities is received.
    7. No information need be given as to any routine, retail 
relationship. For example, the Registrant need not disclose that a 
director holds a credit card or bank or brokerage account with a person 
specified in paragraphs 10(a) through (h) of this Item 18 unless the 
director is accorded special treatment.
* * * * *
    12. If an officer of an investment adviser, principal underwriter, 
or administrator of the Registrant, or an officer of a person directly 
or indirectly controlling, controlled by, or under common control with 
an investment adviser, principal underwriter, or administrator of the 
Registrant, serves, or has served since the beginning of the last two 
completed fiscal years of the Registrant, on the board of directors of 
a company where a director of the Registrant or immediate family member 
of a director is, or was since the beginning of the last two completed 
fiscal years of the Registrant, an officer, identify:
    (a) The company;
    (b) The individual who serves or has served as a director of the 
company and the period of service as director;
    (c) The investment adviser, principal underwriter, or administrator 
or person controlling, controlled by, or under common control with the 
investment adviser, principal underwriter, or administrator where the 
individual named in paragraph 12(b) of this Item 18 holds or held 
office and the office held; and
    (d) The director of the Registrant or immediate family member who 
is or was an officer of the company; the office held; and the period of 
holding the office.
    13. Discuss in reasonable detail the material factors and the 
conclusions with respect thereto that formed the basis for the board of 
directors approving the existing investment advisory contract. If 
applicable, include a discussion of any benefits derived or to be 
derived by the investment adviser from the relationship with the 
Registrant such as soft dollar arrangements by which brokers provide 
research to the Registrant or its investment adviser in return for 
allocating fund brokerage.
    Instruction: Conclusory statements or a list of factors will not be 
considered sufficient disclosure. The discussion should relate the 
factors to the specific circumstances of the Registrant and the 
investment advisory contract.
* * * * *

[[Page 59871]]

    33. Instruction 4 to Item 23 of Form N-2 (referenced in 
Secs. 239.14 and 274.11a-1) is amended by removing ``and'' from the end 
of paragraph c., removing the period at the end of paragraph d. and in 
its place adding a semi-colon, and adding paragraphs e. and f. to read 
as follows:

Form N-2

* * * * *

Item 23. Financial Statements

* * * * *

Instructions

* * * * *
    4. * * *
    e. the management information required by paragraph 1 of Item 18; 
and
    f. a statement that the SAI includes additional information about 
directors of the Registrant and is available, without charge, upon 
request, and a toll-free (or collect) telephone number for shareholders 
to call to request the SAI.
* * * * *
    Note: The text of Form N-3 does not and these amendments will 
not appear in the Code of Federal Regulations.

    34. Item 20 of Form N-3 (referenced in Secs. 239.17a and 274.11b) 
is amended by adding instructions 1 and 2 before paragraph (a); 
revising paragraphs (a) and (b); redesignating paragraph (c) as 
paragraph (m); adding paragraphs (c) through (l); and removing 
``executive'' from the first sentence of newly designated paragraph (m) 
to read as follows:

Form N-3

* * * * *

Item 20. Management

Instructions

    1. For purposes of this Item 20, the terms below have the following 
meanings:
    a. The term ``fund complex'' means two or more registered 
investment companies that:
    (i) Hold themselves out to investors as related companies for 
purposes of investment and investor services; or
    (ii) Have a common investment adviser or have an investment adviser 
that is an affiliated person of the investment adviser of any of the 
other registered investment companies.
    b. The term ``immediate family member'' means a person's spouse, 
parent, child, sibling, mother- or father-in-law, son- or daughter-in-
law, or brother or sister-in-law, and includes step and adoptive 
relationships.
    c. The term ``officer'' means the president, vice-president, 
secretary, treasurer, controller, or any other officer who performs 
policy-making functions.
    2. When providing information about directors, furnish information 
for directors who are interested persons as defined in Section 2(a)(19) 
of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder 
separately from the information for directors who are not interested 
persons. For example, when furnishing information in a table, you 
should provide separate tables (or separate sections of a single table) 
for directors who are interested persons and for directors who are not 
interested persons. When furnishing information in narrative form, 
indicate by heading or otherwise the directors who are interested 
persons and the ones who are not interested persons.
    (a) Provide the information required by the following table for 
each member of the board of managers (``director'') and officer of the 
Registrant, and, if the Registrant has an advisory board, member of the 
board. Explain in a footnote to the table any family relationship 
between the persons listed.

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name, Address,     Position(s) Held   Term of Office     Principal          Number of          Other
 and Age            with Registrant    and Length of      Occupation(s)      Portfolios in      Directorships
                                       Time Served        During Past 5      Fund Complex       Held by Director
                                                          Years              Overseen by
                                                                             Director
----------------------------------------------------------------------------------------------------------------

Instructions

    1. For purposes of this paragraph, the term ``family relationship'' 
means any relationship by blood, marriage, or adoption, not more remote 
than first cousin.
    2. For each director who is an interested person as defined in 
Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules 
thereunder, describe, in a footnote or otherwise, the relationship, 
events, or transactions by reason of which the director is an 
interested person.
    3. State the principal business of any company listed under column 
(4) unless the principal business is implicit in its name.
    4. Indicate in column (6) directorships not included in column (5) 
that are held by a director in any company with a class of securities 
registered pursuant to section 12 of the Exchange Act (15 U.S.C. 78l) 
or subject to the requirements of section 15(d) of the Exchange Act (15 
U.S.C. 78o(d)) or any company registered as an investment company under 
the 1940 Act, and name the companies in which the directorships are 
held. Where the other directorships include directorships overseeing 
two or more portfolios in the same fund complex, identify the fund 
complex and provide the number of portfolios overseen as a director in 
the fund complex rather than listing each portfolio separately.
    (b) For each individual listed in column (1) of the table required 
by paragraph (a) of this Item 20 who is not a director, describe any 
positions, including as an officer, employee, director, or general 
partner, held with affiliated persons or principal underwriters of the 
Registrant.
    Instruction: When an individual holds the same position(s) with two 
or more registered investment companies that are part of the same fund 
complex, identify the fund complex and provide the number of registered 
investment companies for which the position(s) are held rather than 
listing each registered investment company separately.
    (c) Describe briefly any arrangement or understanding between any 
director or officer and any other person(s) (naming the person(s)) 
pursuant to which he was selected as a director or officer.
    Instruction: Do not include arrangements or understandings with 
directors or officers acting solely in their capacities as such.
    (d) Identify the standing committees of the Registrant's board of 
managers, and provide the following information about each committee:
    (i) A concise statement of the functions of the committee;
    (ii) The members of the committee;
    (iii) The number of committee meetings held during the last fiscal 
year; and
    (iv) If the committee is a nominating or similar committee, state 
whether the committee will consider nominees recommended by security 
holders and, if so, describe the procedures to be followed by security 
holders in submitting recommendations.

[[Page 59872]]

    (e) Unless disclosed in the table required by paragraph (a) of this 
Item 20, describe any positions, including as an officer, employee, 
director, or general partner, held by a director or immediate family 
member of the director during the past five years with:
    (i) The Registrant;
    (ii) An investment company, or a person that would be an investment 
company but for the exclusions provided by sections 3(c)(1) and 3(c)(7) 
of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having the same 
Insurance Company, investment adviser, principal underwriter, or 
administrator as the Registrant or having an Insurance Company, 
investment adviser, principal underwriter, or administrator that 
directly or indirectly controls, is controlled by, or is under common 
control with the Insurance Company or an investment adviser, principal 
underwriter, or administrator of the Registrant;
    (iii) The Insurance Company or an investment adviser, principal 
underwriter, administrator, or affiliated person of the Registrant; or
    (iv) Any person directly or indirectly controlling, controlled by, 
or under common control with the Insurance Company or an investment 
adviser, principal underwriter, or administrator of the Registrant.
    Instruction: 
    When an individual holds the same position(s) with two or more 
portfolios that are part of the same fund complex, identify the fund 
complex and provide the number of portfolios for which the position(s) 
are held rather than listing each portfolio separately.
    (f) For each director, state the aggregate dollar amount of equity 
securities of registered investment companies in the same fund complex 
as the Registrant owned beneficially or of record by the director as 
required by the following table:

------------------------------------------------------------------------
        (1)                    (2)                        (3)
------------------------------------------------------------------------
Name of Director    Identity of fund Complex   Aggregate Dollar Amount
                                                of Equity Securities in
                                                Fund Complex
------------------------------------------------------------------------

Instructions:

    1. Information should be provided as of the most recent practicable 
date. Specify the valuation date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 13d-3 
under the Exchange Act (Sec. 240.13d-3 of this chapter).
    (g) For each director and his immediate family members, furnish the 
information required by the following table as to each class of 
securities owned beneficially or of record in:
    (i) The Insurance Company or an investment adviser, principal 
underwriter, or administrator of the Registrant; or
    (ii) A person (other than a registered investment company) directly 
or indirectly controlling, controlled by, or under common control with 
the Insurance Company or an investment adviser, principal underwriter, 
or administrator of the Registrant:

----------------------------------------------------------------------------------------------------------------
       (1)                (2)                (3)                (4)                (5)                (6)
----------------------------------------------------------------------------------------------------------------
Name of Director   Name of Owners     Company            Title of Class     Value of           Percent of Class
                    and                                                      Securities
                    Relationships to
                    Director
----------------------------------------------------------------------------------------------------------------

Instructions

    1. Information should be provided as of the most recent practicable 
date. Specify the valuation date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 13d-3 
under the Exchange Act (Sec. 240.13d-3 of this chapter).
    3. Identify the company in which the director or immediate family 
member of the director owns securities in column (3). When the company 
is a person directly or indirectly controlling, controlled by, or under 
common control with the Insurance Company or an investment adviser, 
principal underwriter, or administrator, describe the company's 
relationship with the Insurance Company, investment adviser, principal 
underwriter, or administrator.
    4. Provide the information required by columns (5) and (6) on an 
aggregate basis for each director and his immediate family members.
    (h) Unless disclosed in response to paragraph (g) of this Item 20, 
describe any material interest, direct or indirect, of each director or 
immediate family member of a director, during the past five years, in:
    (i) The Insurance Company or an investment adviser, principal 
underwriter, or administrator of the Registrant; or
    (ii) A person (other than a registered investment company) directly 
or indirectly controlling, controlled by, or under common control with 
the Insurance Company or an investment adviser, principal underwriter, 
or administrator of the Registrant.

Instruction

    A director or immediate family member has an interest in a company 
if he is a party to a contract, arrangement, or understanding with 
respect to any securities of, or interest in, the company.
    (i) Describe briefly any material interest, direct or indirect, of 
any director or immediate family member of a director in any material 
transaction, or material series of similar transactions, since the 
beginning of the last two completed fiscal years of the Registrant, or 
in any currently proposed material transaction, or material series of 
similar transactions, to which any of the following persons was or is 
to be a party:
    (i) The Registrant;
    (ii) An officer of the Registrant;
    (iii) An investment company, or a person that would be an 
investment company but for the exclusions provided by sections 3(c)(1) 
and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), having 
the same Insurance Company, investment adviser, principal underwriter, 
or administrator as the Registrant or having an Insurance Company, 
investment adviser, principal underwriter, or administrator that 
directly or indirectly controls, is controlled by, or is under common 
control with the Insurance Company or an investment adviser, principal 
underwriter, or administrator of the Registrant;

[[Page 59873]]

    (iv) An officer of an investment company, or a person that would be 
an investment company but for the exclusions provided by sections 
3(c)(1) and 3(c)(7) of the 1940 Act (15 U.S.C. 80a-3(c)(1) and (c)(7)), 
having the same Insurance Company, investment adviser, principal 
underwriter, or administrator as the Registrant or having an Insurance 
Company, investment adviser, principal underwriter, or administrator 
that directly or indirectly controls, is controlled by, or is under 
common control with the Insurance Company or an investment adviser, 
principal underwriter, or administrator of the Registrant;
    (v) The Insurance Company or an investment adviser, principal 
underwriter, or administrator of the Registrant;
    (vi) An officer of the Insurance Company or an investment adviser, 
principal underwriter, or administrator of the Registrant;
    (vii) A person directly or indirectly controlling, controlled by, 
or under common control with the Insurance Company or an investment 
adviser, principal underwriter, or administrator of the Registrant; or
    (viii) An officer of a person directly or indirectly controlling, 
controlled by, or under common control with the Insurance Company or an 
investment adviser, principal underwriter, or administrator of the 
Registrant.

Instructions

    1. Include the name of each director or immediate family member 
whose interest in any transaction or series of similar transactions is 
described and the nature of the circumstances by reason of which the 
interest is required to be described.
    2. State the nature of the interest, the approximate dollar amount 
involved in the transaction, and, where practicable, the approximate 
dollar amount of the interest.
    3. In computing the amount involved in the transaction or series of 
similar transactions, include all periodic payments in the case of any 
lease or other agreement providing for periodic payments.
    4. Compute the amount of the interest of any director or immediate 
family member of the director without regard to the amount of profit or 
loss involved in the transaction(s).
    5. As to any transaction involving the purchase or sale of assets, 
state the cost of the assets to the purchaser and, if acquired by the 
seller within two years prior to the transaction, the cost to the 
seller. Describe the method used in determining the purchase or sale 
price and the name of the person making the determination.
    6. Disclose indirect, as well as direct, material interests in 
transactions. A person who has a position or relationship with, or 
interest in, a company that engages in a transaction with one of the 
persons listed in paragraphs (i) through (viii) of paragraph (i) of 
this Item 20 may have an indirect interest in the transaction by reason 
of the position, relationship, or interest. The interest in the 
transaction, however, will not be deemed ``material'' within the 
meaning of paragraph (i) of this Item 20 where the interest of the 
director or immediate family member arises solely from the holding of 
an equity interest (including a limited partnership interest, but 
excluding a general partnership interest) or a creditor interest in a 
company that is a party to the transaction with one of the persons 
specified in paragraphs (i) through (viii) of paragraph (i) of this 
Item 20, and the transaction is not material to the company.
    7. No information need be given as to any transaction where the 
interest of the director or immediate family member arises solely from 
the ownership of securities of a person specified in paragraphs (i) 
through (viii) of paragraph (i) of this Item 20 and the director or 
immediate family member receives no extra or special benefit not shared 
on a pro rata basis by all holders of the class of securities.
    8. Transactions include loans, lines of credit, and other 
indebtedness. For indebtedness, indicate the largest aggregate amount 
of indebtedness outstanding at any time during the period, the nature 
of the indebtedness and the transaction in which it was incurred, the 
amount outstanding as of the latest practicable date, and the rate of 
interest paid or charged.
    9. No information need be given as to any routine, retail 
transaction. For example, the Registrant need not disclose that a 
director holds a credit card or bank or brokerage account with a person 
specified in paragraphs (i) through (viii) of paragraph (i) of this 
Item 20 unless the director is accorded special treatment.
    (j) Describe briefly any material relationship, direct or indirect, 
of any director or immediate family member of a director that exists, 
or has existed at any time since the beginning of the last two 
completed fiscal years of the Registrant, or is currently proposed, 
with any of the persons specified in paragraphs (i) through (viii) of 
paragraph (i) of this Item 20. Relationships include:
    (i) Payments for property or services to or from any person 
specified in paragraphs (i) through (viii) of paragraph (i) of this 
Item 20;
    (ii) Provision of legal services to any person specified in 
paragraphs (i) through (viii) of paragraph (i) of this Item 20;
    (iii) Provision of investment banking services to any person 
specified in paragraphs (i) through (viii) of paragraph (i) of this 
Item 20, other than as a participating underwriter in a syndicate; and
    (iv) Any consulting or other relationship that is substantially 
similar in nature and scope to the relationships listed in paragraphs 
(j)(i) through (j)(iii) of this Item 20.

Instructions

    1. Include the name of each director or immediate family member 
whose relationship is described and the nature of the circumstances by 
reason of which the relationship is required to be described.
    2. State the nature of the relationship and the amount of business 
conducted between the director or immediate family member and the 
person specified in paragraphs (i) through (viii) of paragraph (i) of 
this Item 20 as a result of the relationship since the beginning of the 
last two completed fiscal years of the Registrant or proposed to be 
done during the Registrant's current fiscal year.
    3. In computing the amount involved in a relationship, include all 
periodic payments in the case of any agreement providing for periodic 
payments.
    4. Disclose indirect, as well as direct, material relationships. A 
person who has a position or relationship with, or interest in, a 
company that has a relationship with one of the persons listed in 
paragraphs (i) through (viii) of paragraph (i) of this Item 20 may have 
an indirect relationship by reason of the position, relationship, or 
interest. The relationship, however, will not be deemed ``material'' 
within the meaning of paragraph (j) of this Item 20 where the 
relationship of the director or immediate family member arises solely 
from the holding of an equity interest (including a limited partnership 
interest, but excluding a general partnership interest) or a creditor 
interest in a company that has a relationship with one of the persons 
specified in paragraphs (i) through (viii) of paragraph (i) of this 
Item 20, and the relationship is not material to the company.
    5. In the case of an indirect interest, identify the company with 
which a person specified in paragraphs (i)

[[Page 59874]]

through (viii) of paragraph (i) of this Item 20 has a relationship; the 
name of the director or immediate family member affiliated with the 
company and the nature of the affiliation; and the amount of business 
done between the company and the person specified in paragraphs (i) 
through (viii) of paragraph (i) of this Item 20 since the beginning of 
the last two completed fiscal years of the Registrant or proposed to be 
done during the Registrant's current fiscal year.
    6. In calculating payments for property and services for purposes 
of paragraph (j)(i) of this Item 20, the following may be excluded:
    a. Payments where the transaction involves the rendering of 
services as a common contract carrier, or public utility, at rates or 
charges fixed in conformity with law or governmental authority; or
    b. Payments that arise solely from the ownership of securities of a 
person specified in paragraphs (i) through (viii) of paragraph (i) of 
this Item 20 and no extra or special benefit not shared on a pro rata 
basis by all holders of the class of securities is received.
    7. No information need be given as to any routine, retail 
relationship. For example, the Registrant need not disclose that a 
director holds a credit card or bank or brokerage account with a person 
specified in paragraphs (i) through (viii) of paragraph (i) of this 
Item 20 unless the director is accorded special treatment.
    (k) If an officer of the Insurance Company or an investment 
adviser, principal underwriter, or administrator of the Registrant, or 
an officer of a person directly or indirectly controlling, controlled 
by, or under common control with the Insurance Company or an investment 
adviser, principal underwriter, or administrator of the Registrant, 
serves, or has served since the beginning of the last two completed 
fiscal years of the Registrant, on the board of directors of a company 
where a director of the Registrant or immediate family member of a 
director is, or was since the beginning of the last two completed 
fiscal years of the Registrant, an officer, identify:
    (i) The company;
    (ii) The individual who serves or has served as a director of the 
company and the period of service as director;
    (iii) The Insurance Company, investment adviser, principal 
underwriter, or administrator or person controlling, controlled by, or 
under common control with the Insurance Company, investment adviser, 
principal underwriter, or administrator where the individual named in 
paragraph (k)(ii) of this Item 20 holds or held office and the office 
held; and
    (iv) The director of the Registrant or immediate family member who 
is or was an officer of the company; the office held; and the period of 
holding the office.
    (l) Discuss in reasonable detail the material factors and the 
conclusions with respect thereto that formed the basis for the board of 
managers approving the existing investment advisory contract. If 
applicable, include a discussion of any benefits derived or to be 
derived by the investment adviser from the relationship with the 
Registrant such as soft dollar arrangements by which brokers provide 
research to the Registrant or its investment adviser in return for 
allocating fund brokerage.
    Instruction: Conclusory statements or a list of factors will not be 
considered sufficient disclosure. The discussion should relate the 
factors to the specific circumstances of the Registrant and the 
investment advisory contract.
* * * * *
    35. Instruction 4 to Item 27 of Form N-3 (referenced in 
Secs. 239.17a and 274.11b) is amended by removing ``and'' from the end 
of paragraph (iii), removing the period at the end of paragraph (iv) 
and in its place adding a semi-colon, and adding paragraphs (v) and 
(vi) to read as follows:

Item 27. Financial Statements

* * * * *

Instructions

* * * * *
    4. * * *
    (v) The management information required by paragraph (a) of Item 
20; and
    (vi) A statement that the SAI includes additional information about 
members of the board of managers of the Registrant and is available, 
without charge, upon request, and a toll-free (or collect) telephone 
number for contract owners to call to request the SAI.
* * * * *
    Dated: October 14, 1999.

    By the Commission.
Jonathan G. Katz,
Secretary.
    Note: Appendix A to the preamble will not appear in the Code of 
Federal Regulations.

 Appendix A.--Analysis of Proposed Amendments to Schedule 14A under the
       Exchange Act and Form N-1A under the Investment Company Act
------------------------------------------------------------------------
                                                     Source of proposed
Proposed item 22 of Schedule    Proposed items 13     items in current
             14A               and 22 of Form N-1A     rules and forms
------------------------------------------------------------------------
Item 22. Information          Item 13. Management
 Required in Investment        Information.
 Company Proxy Statement
                              Instr. 1.a. to Item   Item 22(a)(v) of
                               13 (Defn. of fund     Schedule 14A.
                               complex).
22(a)(1)(i) (Defn. of         ....................  Item 15(h)(1) of
 Administrator)                                      Form N-1A.
22(a)(1)(vi) (Defn. of        Instr. 1.b. to Item   Instruction 2 to
 Immediate Family Member)      13.                   404(a) of Reg. S-K.
22(a)(1)(vii) (Defn. of       Instr. 1.c. to Item   Instruction 1 to
 Officer)                      13.                   Item 13(b) of Form
                                                     N-1A.
22(a)(1)(ix) (Defn. of        ....................  Item 22(a)(1)(vii)
 Registrant).                                        of Schedule 14A.
22(a)(1)(x) (Defn. of         ....................  Instruction D. of
 Sponsoring Insurance                                General
 Company.                                            Instructions to
                                                     Form N-3.
22(b) (Applies when there is
 an election of directors):
    Instr. 1................  ....................  Instruction 1 to
                                                     Item 22(b) of
                                                     Schedule 14A.
    Instr. 2................  ....................  Instruction 2 to
                                                     Item 22(b) of
                                                     Schedule 14A.
    Instr. 3................  Instr. 2 to Item 13.  New.
    Instr. 4................  ....................  Instruction 3 to
                                                     Item 401(a) of Reg.
                                                     S-K.

[[Page 59875]]

 
22(b)(1) (Table of core       Item 13(a)(1).......  Items 401(a), (b),
 information about each                              (d), and (e) of
 director, nominee, officer,                         Reg. S-K and Item
 and advisory board member)                          13 of Form N-1A.
    Instr. 1................  Instr. 1 to Item      Instruction to
                               13(a)(1).             401(d) of Reg. S-K
                                                     and Instruction 1
                                                     to Item 13(b) of
                                                     Form N-1A.
    Instr. 2................  ....................  Instruction 2 to
                                                     Item 401(a) and
                                                     Instruction 2 to
                                                     Item 401(b) to Reg.
                                                     S-K.
    Instr. 3................  ....................  Instruction 4 to
                                                     Item 401(a) of Reg.
                                                     S-K.
    Instr. 4................  Instr. 2 to Item      Instruction 1 to
                               13(a)(1).             Item 22(b)(4) of
                                                     Schedule 14A.
    Instr. 5................  Instr. 3 to Item      Instruction 2 to
                               13(a)(1).             Item 13(b) of Form
                                                     N-1A.
    Instr. 6................  ....................  New.
    Instr. 7................  Instr. 4 to Item      Item 401(e)(2) and
                               13(a)(1).             Instruction to Item
                                                     401(e)(2) of Reg. S-
                                                     K.
                              Item 13(a)(2)         Item 13(c) of Form N-
                               (Positions held by    1A.
                               officers):.
                              Instr. to Item        Instruction to Item
                               13(a)(2).             13(c) of Form N-1A.
22(b)(2) (Any agreement       Item 13(a)(3).......  Items 401(a) and
 regarding selection as                              401(b) of Reg. S-K.
 director, nominee, or
 officer).
Instr.......................  Instr. to Item        Instruction 1 to
                               13(a)(3).             Item 401(a) and
                                                     Instruction 1 to
                                                     Item 401(b) of Reg.
                                                     S-K.
                              Item 13(b)(1)         Item 13(a) of Form N-
                               (Description of       1A.
                               board
                               responsibilities).
                              Instr. to Item        Instruction to Item
                               13(b)(1).             13(a) of Form N-1A.
------------------------------------------------------------------------


  Appendix A--Analysis of Proposed Amendments to Schedule 14A Under the
       Exchange Act and Form N-1A Under the Investment Company Act
------------------------------------------------------------------------
                                                     Source of proposed
Proposed item 22 of Schedule    Proposed items 13     items in current
             14A               and 22 of Form N-1A     rules and forms
------------------------------------------------------------------------
22(b)(3) (Positions held by   Item 13(b)(3).......  Item 22(b)(1) of
 director, nominee, or                               Schedule 14A and
 immediate family members at                         Item 13(c) of Form
 fund and related persons                            N-1A.
 (i.e., other funds in fund
 complex, investment
 adviser, principal
 underwriter, administrator,
 or control-affiliates of
 adviser, underwriter, or
 administrator).
    Instr...................  Instr. to Item        Instruction to Item
                               13(b)(3).             13(c) of Form N-1A.
22(b)(4) (Ownership of funds  Item 13(b)(4).......  New.
 in fund complex).
    Instr. 1................  Instr. 1 to Item      Item 403(b) of Reg.
                               13(b)(4).             S-K.
    Instr. 2................  Instr. 2 to Item      Instruction 2 to
                               13(b)(4).             Item 403 of Reg. S-
                                                     K.
22(b)(5) (Ownership of        Item 13(b)(5).......  Item 22(b)(1) of
 securities of investment                            Schedule 14A.
 adviser, principal
 underwriter, administrator,
 and control-affiliates of
 adviser, underwriter, and
 administrator).
    Instr. 1................  Instr. 1 to Item      Item 403(b) of Reg.
                               13(b)(5).             S-K.
    Instr. 2................  Instr. 2 to Item      Instruction 2 to
                               13(b)(5).             Item 403 of Reg. S-
                                                     K.
    Instr. 3................  Instr. 3 to Item      New.
                               13(b)(5).
    Instr. 4................  Instr. 4 to Item      New.
                               13(b)(5).
22(b)(6) (Material interests  Item 13(b)(6).......  Items 22(b)(1) and
 in fund and related                                 (2) of Schedule
 persons).                                           14A.
    Instr...................  Instr. to Item        Item 5(b)(1)(viii)
                               13(b)(6).             of Schedule 14A.
------------------------------------------------------------------------


  Appendix A--Analysis of Proposed Amendments to Schedule 14A Under the
       Exchange Act and Form N-1A Under the Investment Company Act
------------------------------------------------------------------------
                                                     Source of proposed
Proposed item 22 of Schedule    Proposed items 13     items in current
             14A               and 22 of Form N-1A     rules and forms
------------------------------------------------------------------------
22(b)(7) (Material interests  Item 13(b)(7).......  Item 22(b)(3) of
 in material transactions                            Schedule 14A and
 involving fund and related                          Item 404(a) of Reg.
 persons).                                           S-K.
    Instr. 1................  Instr. 1 to Item      Instruction 1 to
                               13(b)(7).             Item 22(b)(3) of
                                                     Schedule 14A.
    Instr. 2................  Instr. 2 to Item      Item 404(a) of Reg.
                               13(b)(7).             S-K.
    Instr. 3................  Instr. 3 to Item      Instruction 3 of
                               13(b)(7).             Item 404(a) of Reg.
                                                     S-K.

[[Page 59876]]

 
    Instr. 4................  Instr. 4 to Item      Instruction 4 to
                               13(b)(7).             Item 404(a) of Reg.
                                                     S-K.
    Instr. 5................  Instr. 5 to Item      Instruction 2 to
                               13(b)(7).             Item 22(b)(3) of
                                                     Schedule 14A and
                                                     Instruction 5 to
                                                     Item 404(a) of Reg.
                                                     S-K.
    Instr. 6................  Instr. 6 to Item      New.
                               13(b)(7).
    Instr. 7................  Instr. 7 to Item      Instruction 8 to
                               13(b)(7).             Item 404(a) of Reg.
                                                     S-K.
    Instr. 8................  Instr. 8 to Item      Instruction 7.C to
                               13(b)(7).             Item 404(a) of Reg.
                                                     S-K.
    Instr. 9................  Instr. 9 to Item      New.
                               13(b)(7).
22(b)(8) (Material            Item 13(b)(8).......  New. Derived from
 relationships with fund and                         Item 404(b) of Reg.
 related persons).                                   S-K.
    Instr. 1................  Instr. 1 to Item      New. Derived from
                               13(b)(8).             Instruction 1 to
                                                     Item 22(b)(3) of
                                                     Schedule 14A.
    Instr. 2................  Instr. 2 to Item      New. Derived from
                               13(b)(8).             Item 404(b) of Reg.
                                                     S-K.
    Instr. 3................  Instr. 3 to Item      New. Derived from
                               13(b)(8).             Instruction 3 of
                                                     Item 404(a) of Reg.
                                                     S-K.
    Instr. 4................  Instr. 4 to Item      New.
                               13(b)(8).
    Instr. 5................  Instr. 5 to Item      New. Derived from
                               13(b)(8).             Instruction 8 of
                                                     Item 404(a) of Reg.
                                                     S-K.
    Instr. 6................  Instr. 6 to Item      New. Derived from
                               13(b)(8).             Item 404(b) of Reg.
                                                     S-K.
    Instr. 7................  Instr. 7 to Item      New. Derived from
                               13(b)(8).             Instructions 2.A
                                                     and B to 404(b) of
                                                     Reg. S-K.
22(b)(9) (Cross-              Item 13(b)(9).......  New.
 directorships).
    Instr...................  Instr. to Item        New.
                               13(b)(9).
22(b)(10) (Incorporates       ....................  Item 22(b)(4) of
 parts of Reg. S-K into Item                         Schedule 14A.
 22).
    Instr...................  ....................  New.
22(b)(11) (Material pending   ....................  Item 22(b)(5) of
 legal proceedings).                                 Schedule 14A.
22(b)(12) (Compensation       Item 13(c)..........  Item 22(b)(6) of
 table).                                             Schedule 14A and
                                                     Item 13(d) of Form
                                                     N-1A.
22(b)(13) (Board committees)  Item 13(b)(2).......  Item 7(e) (1) and
                                                     (2) of Schedule 14A
                                                     and Instruction 3
                                                     of Item 13(b) of
                                                     Form N-1A.
                              Item 13(b)(10)        Item 22(c)(11) of
                               (Basis for            Schedule 14A.
                               approving advisory
                               contract).
                              Item 22. Financial
                               Statements.
                              Item 22(b)(5)         New.
                               (Management
                               information
                               required by Item
                               13(a)(1).
                              Item 22(b)(6)         New.
                               (Reference to SAI).
------------------------------------------------------------------------

[FR Doc. 99-27442 Filed 11-2-99; 8:45 am]
BILLING CODE 8010-01-P