[Federal Register Volume 65, Number 149 (Wednesday, August 2, 2000)]
[Rules and Regulations]
[Pages 47281-47284]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 00-19446]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 230, 231, and 271

[Release Nos. 33-7877; IC-24582; File No. S7-14-00]

RIN 3235-AH93


Exemption From Section 101(c)(1) of the Electronic Signatures in 
Global and National Commerce Act for Registered Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Interim final rule with request for comments.

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SUMMARY: The Securities and Exchange Commission is adopting, as an 
interim final rule, rule 160 under the Securities Act of 1933 to exempt 
from the consumer consent requirements of the Electronic Signatures in 
Global and National Commerce Act (``Electronic Signatures Act'') 
prospectuses of registered investment companies that are used for the 
sole purpose of permitting supplemental sales literature to be provided 
to prospective investors. Consistent with Commission interpretations of 
existing law, the rule permits a registered investment company to 
provide its prospectus and supplemental sales literature on its web 
site or by other electronic means without first obtaining investor 
consent to the electronic format of the prospectus. The Commission also 
is clarifying its interpretation on the responsibility of registered 
investment companies for hyperlinks to third-party web sites from their 
advertisements or sales literature.

DATES: Effective Date: October 1, 2000, except for the amendments to 
parts 231 and 271, which are effective July 27, 2000.
    Comment Date: We are publishing interim final regulations, rather 
than a notice of proposed rulemaking, for the reasons given below in 
the section entitled ``Waiver of Proposed Rulemaking and Request for 
Comments.'' We will, however, consider any comments received on or 
before September 1, 2000, and will revise rule 160 if necessary.

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. S7-14-00; this file number 
should be included on the subject line if E-mail is used. All comments 
received will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 5th Street, N.W., Washington, 
D.C. 20549-0102. Electronically submitted comment letters will be 
posted on the Commission's Internet site (http://www.sec.gov).\1\
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    \1\ We do not edit personal, identifying information, such as 
names or e-mail addresses, from electronic submissions. Submit only 
information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Maura S. McNulty, Senior Counsel, or 
Kimberly Dopkin Rasevic, Assistant Director, (202) 942-0721, Office of 
Disclosure Regulation, Division of Investment Management, Securities 
and Exchange Commission, 450 5th Street, N.W., Washington, D.C. 20549-
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0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission 
(``Commission'') is adopting rule 160 [17 CFR 230.160] under the 
Securities Act of 1933 [15 U.S.C. 77a et seq.] (``Securities Act'') as 
an interim final rule pursuant to Section 104(d)(2) of the Electronic 
Signatures Act.

I. Exemption from Consumer Consent Requirements of the Electronic 
Signatures Act

A. Discussion

    We are adopting, as an interim final rule, rule 160 under the 
Securities Act to exempt from the consumer consent requirements of the 
Electronic Signatures Act prospectuses of registered investment 
companies (``funds'') that are used for the sole purpose of permitting 
supplemental sales literature to be provided to prospective investors. 
The rule implements Section 104(d)(2) of the Electronic Signatures Act, 
which directs the Commission to provide this exemption within 30 days 
after the date of enactment.\2\ Rule 160, consistent with Commission 
interpretations of existing law, permits a fund to provide its 
prospectus and supplemental sales literature on its web site or by 
other electronic means without first obtaining

[[Page 47282]]

an investor's consent to the electronic format of the prospectus.\3\
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    \2\ Electronic Signatures in Global and National Commerce Act, 
Pub. L. 106-229, Sec. 104(d)(2).
    \3\ See Securities Act Release No. 7856 (April 28, 2000) [65 FR 
25843 (May 4, 2000)], at 25847 (the ``2000 Release''); Securities 
Act Release No. 7233 (Oct. 6, 1995) [60 FR 53458 (Oct. 13, 1995)], 
at 53463 and 53465, Ex. 14, Ex. 15, Ex. 34, and Ex. 35.
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The Electronic Signatures Act
    On June 30, 2000, President Clinton signed the Electronic 
Signatures Act into law. The Electronic Signatures Act is designed to 
facilitate the use of electronic records and signatures in interstate 
or foreign commerce.\4\ Among other things, the Act provides that if a 
statute or regulation requires that information relating to a 
transaction in interstate commerce be provided to a consumer in 
writing, the use of an electronic record to provide the information 
satisfies the ``writing'' requirement if the consumer consent 
requirements of the Electronic Signatures Act are met.\5\
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    \4\ Electronic Signatures Act preamble.
    \5\ Electronic Signatures Act Sec. 101(c)(1).
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    Section 104(d)(2) of the Electronic Signatures Act directs the 
Commission to issue a regulation or order, within 30 days after the 
date of enactment, exempting from the Act's consumer consent 
requirements ``any records that are required to be provided in order to 
allow advertising, sales literature, or other information concerning a 
security issued by [a registered] investment company * * * to be 
excluded from the definition of a prospectus under section 2(a)(10)(A) 
of the Securities Act * * *.'' The purpose of this exemption is ``to 
clarify that documents, such as sales literature, that appear on the 
same [w]eb site as, or which are hyperlinked to, the final prospectus 
required to be delivered under the federal securities laws, can 
continue to be accessed on a [w]eb site as they are today under 
[Commission] guidance for electronic delivery.'' \6\
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    \6\ See 146 Cong. Rec. H4359 (daily ed. June 14, 2000) 
(statement of Rep. Dingell).
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Section 5(b)(1) and Section 2(a)(10)(a) of the Securities Act
    Section 5(b)(1) of the Securities Act prohibits the use of 
interstate commerce to transmit any ``prospectus'' relating to a 
security with respect to which a registration statement has been filed 
unless the prospectus meets the requirements of Section 10 of the 
Securities Act.\7\ ``Prospectus'' is broadly defined in Section 
2(a)(10) of the Securities Act to include any advertisement or 
communication, ``written or by radio or television, which offers any 
security for sale.'' \8\ Because the term ``offer'' is defined and 
interpreted broadly under the Securities Act, written or broadcast 
communications that relate to a security or that aid in the selling 
effort with respect to a security generally must be in the form of a 
Section 10 prospectus to comply with Section 5(b)(1).\9\
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    \7\ 15 U.S.C. 77e(b)(1).
    \8\ 15 U.S.C. 77b(a)(10).
    \9\ Section 2(a)(3) of the Securities Act defines the term 
``offer'' to include ``every attempt or offer to dispose of, or 
solicitation of an offer to buy, a security or interest in a 
security, for value.'' 15 U.S.C. 77b(a)(3).
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    There is a limited exception to the general requirement that 
written or broadcast offers after the filing of a registration 
statement must be in the form of a Section 10 prospectus. So-called 
``supplemental sales literature'' may be used after the effective date 
of a registration statement if it is preceded or accompanied by a 
prospectus that meets the requirements of Section 10(a) of the 
Securities Act (``statutory prospectus'').\10\ Many investment 
companies, particularly mutual funds, continuously offer and sell their 
shares, and are continuously subject to the restrictions on 
communications imposed by Section 5(b)(1).\11\ As a result, investment 
companies frequently rely on the ``supplemental sales literature'' 
exception.
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    \10\ Under Section 2(a)(10)(a) of the Securities Act, 
supplemental sales literature that is preceded or accompanied by a 
prospectus meeting the requirements of Section 10(a) is not 
considered to be a prospectus and therefore is not subject to 
Section 5(b)(1) of the Securities Act.
    \11\ 15 U.S.C. 77e(b)(1). A ``mutual fund'' is a managed open-
end investment company that issues redeemable securities. Section 
5(a)(1) of the Investment Company Act of 1940, 15 U.S.C. 80a-
5(a)(1).
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Rule 160
    Commission interpretations of existing law permit a fund to provide 
its supplemental sales literature on its web site or by other 
electronic means without first obtaining an investor's consent to 
receive in electronic form the statutory prospectus that is required to 
precede or accompany the supplemental sales literature.\12\ Rule 160 
would clarify that a fund may continue this practice after the 
effective date of the Electronic Signatures Act. Specifically, the rule 
would provide that a prospectus for an investment company registered 
under the Investment Company Act of 1940 that is sent or given for the 
sole purpose of permitting a communication not to be deemed a 
prospectus under Section 2(a)(10)(a) of the Securities Act is exempt 
from the consumer consent requirements of the Electronic Signatures 
Act. We remind funds, however, that we do not consider supplemental 
sales literature that is electronically delivered to have been preceded 
or accompanied by an electronic statutory prospectus unless investors 
are provided with reasonably comparable access to both the prospectus 
and the supplemental sales literature.\13\
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    \12\ See 2000 Release, supra note 3.
    \13\ See 2000 Release, supra note 3, at 25846, n. 34.
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    The exemption provided by rule 160 is not available when a fund 
prospectus is provided to an investor for a purpose other than, or in 
addition to, permitting the fund's supplemental sales literature not to 
be deemed a prospectus under Section 2(a)(10)(a) of the Securities Act. 
For example, if an investor who views a fund's prospectus and 
supplemental sales literature on its web site subsequently purchases 
shares of the fund, rule 160 will not apply to the delivery of the 
prospectus that is required in connection with the purchase.\14\
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    \14\ See, e.g., Section 5(b)(2) of the Securities Act, 15 U.S.C. 
77e(b)(2) (statutory prospectus must precede or accompany securities 
delivered by mail or in interstate commerce).
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    Today we express no view regarding how the Electronic Signatures 
Act affects the federal securities laws. We are continuing to consider 
the implications of the Electronic Signatures Act on securities 
transactions.

B. Procedural Matters

Waiver of Proposed Rulemaking and Request for Comments
    Under the Administrative Procedure Act (``APA''), the Commission 
may issue a final rule without prior notice and comment upon a finding 
of good cause.\15\ We find that good cause exists for dispensing with 
the normal notice and comment requirements of the APA in connection 
with interim final rule 160.
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    \15\ Under section 553(b)(3)(B) of the APA, the Commission may 
dispense with prior notice and comment when it finds, for good 
cause, that such notice and public comment are ``impracticable, 
unnecessary, or contrary to the public interest.'' 5 U.S.C. 
553(b)(3)(B).
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    Congress directed the Commission to issue, within 30 days after the 
date of enactment of the Electronic Signatures Act, a rule exempting 
from the consumer consent requirements of the Act fund prospectuses 
that are used for the purpose of permitting sales literature to be 
provided to prospective investors. It is impracticable for the 
Commission to comply with the normal notice and comment requirements 
within the mandated 30-day period. In making the determination that 
good cause exists for waiving notice and comment, we also note that 
rule 160 will make no changes to Commission

[[Page 47283]]

interpretations of existing law or industry practice. Thus, the 
Commission finds that the Congressional directive and the absence of 
any negative effect of the rule on any interested parties render 
observation of the normal notice and comment requirements under the APA 
impracticable and unnecessary.
    Rule 160 will be effective October 1, 2000, the effective date for 
the consumer consent requirements of the Electronic Signatures Act. 
Although the Commission has dispensed with prior notice of proposed 
rulemaking, the Commission is interested in receiving written comments 
on the rule within 30 days after its publication in the Federal 
Register. The Commission will consider those comments and make changes 
to the rule if necessary.
Paperwork Reduction Act
    This interim final rule does not contain a collection of 
information.
Cost/Benefit Analysis
    The Commission is sensitive to the costs imposed by its rules. We 
anticipate that rule 160 will not impose any new regulatory costs on 
funds, since the rule would provide an exemption from the consumer 
consent requirements of the Electronic Signatures Act. Moreover, 
because the rule makes no changes to Commission interpretations of 
existing law or industry practice, it should not produce any new costs. 
However, we request that commenters address the costs and benefits of 
the rule, and provide supporting empirical data for any positions 
advanced.
Consideration of Burden on Promotion of Efficiency, Competition, and 
Capital Formation
    Rule 160 is being issued as an interim final rule. In accordance 
with its responsibilities under Section 2(b) of the Securities Act, the 
Commission, in determining whether rule 160 is consistent with the 
public interest, has considered, in addition to the protection of 
investors, whether the action will promote efficiency, competition, and 
capital formation.\16\ Because the rule makes no changes to prior 
Commission interpretations of existing law or industry practice, it 
should not affect efficiency, competition, or capital formation. The 
Commission is, however, interested in receiving any comments regarding 
rule 160's impact on efficiency, competition, and capital formation. We 
will consider those comments in making any changes to the rule if 
necessary. Likewise, for purposes of the Small Business Regulatory 
Enforcement Fairness Act of 1996,\17\ the Commission is interested in 
receiving 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.
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    \16\ Section 2(b) of the Securities Act, 15 U.S.C. 77b(b), 
requires the Commission, when determining whether a rule 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.
    \17\ Pub. L. No. 104-21, Title II, 110 Stat. 857 (1996).
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Regulatory Flexibility Act Certification
    Pursuant to Section 605(b) of the Regulatory Flexibility Act [5 
U.S.C. 605(b)], the Chairman of the Commission has certified that rule 
160 will not have a significant economic impact on a substantial number 
of small entities. Rule 160 provides an exemption from the consumer 
consent requirements of the Electronic Signatures Act, effective on the 
date the Act goes into effect. The rule will make no changes to 
Commission interpretations of existing law or industry practice. 
Moreover, all registered investment companies that are small entities 
will qualify for the exemptive relief provided by rule 160. 
Accordingly, the rule will not have a significant economic impact on a 
substantial number of small entities. We include the Certification in 
this release as Attachment A. Although rule 160 is being issued as an 
interim final rule, the Commission is interested in receiving written 
comments relating to the Certification. Commenters should describe the 
nature of any impact on small entities and provide empirical data to 
support the extent of the impact.

II. Clarification of Guidance on Responsibility for Hyperlinked 
Information

    In the Commission's April release on the use of electronic media 
(the ``2000 Release''), we expressed our view that when an issuer 
embeds a hyperlink to a web site within a document that is required to 
be filed or delivered under the federal securities laws, the issuer 
should always be deemed to be adopting the hyperlinked information for 
purposes of the antifraud provisions of the federal securities 
laws.\18\ We wish to clarify, effective immediately, that this view 
does not extend to a mutual fund's responsibility for hyperlinks to 
third-party web sites from fund advertisements or sales literature.\19\
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    \18\ See 200 Release, supra note 3, at 25847, n. 41 and 25849. 
In the 2000 Release, we indicated that an issuer could be liable for 
third-party information to which the issuer establishes a hyperlink 
under either an ``entanglement'' or ``adoption'' theory. Id. at 
25848-9. Here, we discuss the ``adoption'' theory only.
    \19\ Our references to mutual fund advertisements and sales 
literature include rule 482 advertisements, 17 CFR 230.482, 
tombstone advertisements, 17 CFR 230.134, supplemental sales 
literature, 15 U.S.C. 77b(a)(10)(a), and generic advertisements, 17 
CFR 230.135a.
    See Letter dated June 19, 2000, from the Investment Company 
Institute (``ICI Letter'') and Letter dated June 16, 2000, from 
Fidelity Investments (``Fidelity Letter''), available in SEC Public 
Reference File S7-11-00 (requesting clarification on responsibility 
of mutual funds for hyperlinks to third-party web sites from 
advertisements or sales literature).
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    Mutual funds, unlike operating companies, are required to file 
their advertisements and sales literature with the Commission.\20\ We 
do not believe, however, that it follows from this filing requirement 
that a mutual fund, unlike an operating company, should always be 
responsible for third-party information to which it establishes a 
hyperlink from an advertisement or sales literature, without regard to 
the specific facts and circumstances.
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    \20\ See Section 24(b) of the Investment Company Act, 15 U.S.C. 
80a-24(b). Pursuant to rule 24b-3 under the Investment Company Act, 
funds generally satisfy this requirement by filing advertisements 
and sales literature with NASD Regulation, Inc. 17 CFR 270.24b-3.
    The filing requirements of Section 24(b) apply to registered 
unit investment trusts and registered face-amount certificate 
companies, as well as to mutual funds. We have used the term 
``mutual fund'' in this section for simplicity, but we also intend 
our statements about mutual funds to apply to registered unit 
investment trusts and registered face-amount certificate companies. 
Closed-end investment companies are not subject to Section 24(b), 
and they are not covered by out statements about mutual funds.
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    The issue of whether a fund should be deemed to have adopted 
information on a third-party web site to which a fund advertisement or 
sales literature is hyperlinked should be resolved by reference to the 
factors set forth in the 2000 Release, as applied to the specific facts 
and circumstances.\21\ In addition, when a fund is in registration, if 
the fund establishes a hyperlink from its web site to information that 
meets the definition of an ``offer to sell,'' ``offer for sale,'' or 
``offer'' under Section 2(a)(3) of the Securities Act, a strong 
inference arises that the fund has adopted that information for 
purposes of Section 10(b) of the Securities Exchange Act of 1934 and 
rule 10b-5.\22\
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    \21\ These factors include the context of the hyperlink, the 
presence or absence of precautions against investor confusion about 
the source of the information, and the presentation of hyperlinked 
information. See 2000 Release, supra note 3, at 25848-9. As we 
stated in the 2000 Release, these factors form a useful framework 
for analysis, but they are not intended to be exclusive or 
exhaustive.
    \22\ See 2000 Release, supra note 3, at 25849.

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    A fund may hyperlink to third-party web sites for a variety of 
reasons in a variety of circumstances, including links to educational 
materials such as our Mutual Fund Cost Calculator and continuous links 
to independent third-party news and information sources.\23\ We wish to 
encourage mutual funds to provide information to investors that will 
educate them and assist them in making informed investment decisions. 
We also wish to discourage funds from providing information to 
investors that is inaccurate or misleading. Both goals are furthered by 
considering all the facts and circumstances in determining whether a 
fund has adopted information on a third-party web site to which a fund 
advertisement or sales literature is hyperlinked.\24\
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    \23\ Securities and Exchange Commission, The SEC Mutual Fund 
Cost Calculator (last modified December 6, 1999) http://www.sec.gov/mfcc/mfcc-int.htm>.
    \24\ Commenters on the 2000 Release have requested that we 
provide additional guidance for determining when a mutual fund is 
responsible for third-party information to which the fund 
establishes a hyperlink. See ICI Letter, supra note 19; Fidelity 
Letter, supra note 10. We have asked the Division of Investment 
Management to consider this suggestion.
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III. Statutory Authority

    The Commission is adopting rule 160 pursuant to authority set forth 
in Section 19(a) of the Securities Act [15 U.S.C. 77s(a)] and Section 
104(d) of the Electronic Signatures Act.

List of Subjects

17 CFR Part 230

    Advertising, Investment companies, Reporting and recordkeeping 
requirements, Securities.

17 CFR Part 231

    Securities.

17 CFR Part 271

    Investment companies, Securities.

Text of Rule

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

PART 230--GENERAL RULES AND REGULATIONS, SECURITIES ACT OF 1933

    1. The authority citation for part 230 is amended by adding the 
following citation:

    Authority: 15 U.S.C. 77b, 77f, 77g, 77h, 77j, 77r, 77s, 77sss, 
77z-3, 78c, 78d, 78l, 78m, 78n, 78o, 78w, 78ll(d), 79t, 80a-8, 80a-
24, 80a-28, 80a-29, 80a-30, and 80a-37, unless otherwise noted.


    Section 230.160 is also issued under Section 104(d) of the 
Electronic Signatures Act.
* * * * *
    2. Section 230.160 is added to read as follows:


Sec. 230.160.  Registered investment company exemption from Section 
101(c)(1) of the Electronic Signatures in Global and National Commerce 
Act.

    A prospectus for an investment company registered under the 
Investment Company Act of 1940 (15 U.S.C. 80a-1 et seq.) that is sent 
or given for the sole purpose of permitting a communication not to be 
deemed a prospectus under section 2(a)(10)(a) of the Act (15 U.S.C. 
77b(a)(10)(a)) shall be exempt from the requirements of section 
101(c)(1) of the Electronic Signatures in Global and National Commerce 
Act.

PART 231--INTERPRETATIVE RELEASES RELATING TO THE SECURITIES ACT OF 
1933 AND GENERAL RULES AND REGULATIONS THEREUNDER

    3. Part 231 is amended by adding Release No. 33-7877 and the 
release date of July 27, 2000, to the list of interpretative releases.

PART 271--INTERPRETATIVE RELEASES RELATING TO THE INVESTMENT 
COMPANY ACT OF 1940 AND GENERAL RULES AND REGULATIONS THEREUNDER

    4. Part 271 is amended by adding Release No. IC-24582 and the 
release date of July 27, 2000, to the list of interpretative releases.

    Dated: July 27, 2000.

    By the Commission.
Margaret H. McFarland,
Deputy Secretary.

    Note: Attachment A to the preamble will not appear in the Code 
of Federal Regulations.

Attachment A.--Regulatory Flexibility Act Certification

    I, Arthur Levitt, Chairman of the Securities and Exchange 
Commission, hereby certify, pursuant to 5 U.S.C. Section 605(b), that 
rule 160 under the Securities Act of 1933 [15 U.S.C. 77a et seq.] 
(Release No. 33-7877) would not have a significant economic impact on a 
substantial number of small entities. The rule would exempt from the 
consumer consent requirements of the Electronic Signatures in Global 
and National Commerce Act [Pub. L. No. 106-229] prospectuses of 
registered investment companies that are used for the sole purpose of 
permitting supplemental sales literature to be provided to prospective 
investors.
    The rule will make no changes to Commission interpretations of 
existing law or industry practice. Moreover, all registered investment 
companies that are small entities will qualify for the exemptive relief 
provided by rule 160. Accordingly, the rule will not have a significant 
economic impact on a substantial number of small entities.

    Dated: July 24, 2000.

Arthur Levitt,
Chairman

[FR Doc. 00-19446 Filed 8-1-00; 8:45 am]
BILLING CODE 8010-01-U