[Federal Register Volume 66, Number 10 (Tuesday, January 16, 2001)]
[Rules and Regulations]
[Pages 3734-3768]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-536]



[[Page 3733]]

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Part IV





Securities and Exchange Commission





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17 CFR Parts 239, 240, 270, and 274



Role of Independent Directors of Investment Companies; Final Rule

  Federal Register / Vol. 66, No. 10 / Tuesday, January 16, 2001 / 
Rules and Regulations  

[[Page 3734]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Parts 239, 240, 270 and 274

[Release Nos. 33-7932; 34-43786; IC-24816; File No. S7-23-99]
RIN 3235-AH75


Role of Independent Directors of Investment Companies

AGENCY: Securities and Exchange Commission.

ACTION: Final rule.

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SUMMARY: The Commission is adopting 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 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 adopting amendments to our rules and forms to 
improve the disclosure that investment companies provide about their 
directors. These 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 those directors.

DATES: Effective Date: February 15, 2001, except that the rescission of 
Sec. 270.2a19-1 under the Investment Company Act will become effective 
May 12, 2001.
    Compliance Date: Section III of this release contains information 
on compliance dates.

FOR FURTHER INFORMATION CONTACT: For information regarding the 
Investment Company Act rule amendments, contact Jaea F. Hahn, Attorney, 
Martha B. Peterson, Special Counsel, or C. Hunter Jones, Assistant 
Director, Office of Regulatory Policy, (202) 942-0690, or regarding the 
disclosure amendments, contact Kimberly Browning, Attorney, Peter M. 
Hong, Special Counsel, or Kimberly Dopkin Rasevic, Assistant Director, 
Office of Disclosure Regulation, (202) 942-0721, at the Division of 
Investment Management, Securities and Exchange Commission, 450 5th 
Street, NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Securities and Exchange Commission (the 
``Commission'') is adopting 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], 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''). The Commission also is 
rescinding rule 2a19-1 under the Investment Company Act [17 CFR 
270.2a19-1].

Table of Contents

Executive Summary

I. Background
II. Discussion
    A. Amendments to Exemptive Rules to Enhance Director 
Independence and Effectiveness
    1. Independent Directors as a Majority of the Board
    2. Selection and Nomination of Independent Directors
    3. Independent Legal Counsel
    B. Limits on Coverage of Directors under Joint Insurance 
Policies
    C. Independent Audit Committees
    D. Qualification as an Independent Director
    1. Ownership of Index Fund Securities
    2. Affiliation with a Broker-Dealer
    E. Disclosure of Information about Fund Directors
    1. Basic Information
    2. Ownership of Equity Securities in Fund Complex
    3. Conflicts of Interest
    4. Board's Role in Fund Governance
    5. Separate Disclosure
    6. Technical and Conforming Amendments
    F. Recordkeeping Regarding Director Independence
III. Effective Date; Compliance Dates
IV. Cost-Benefit Analysis
V. Effects on Efficiency, Competition and Capital Formation
VI. Paperwork Reduction Act
VII. Summary of Final Regulatory Flexibility Analysis
VIII. Statutory Authority
Text of Final Rules and Forms

Executive Summary

    The Commission is adopting new rules and amendments to rules and 
forms to enhance the independence and effectiveness of independent 
directors of investment companies (``funds''). First, we are adopting 
amendments to require, for funds relying on certain exemptive rules, 
that:
     Independent directors constitute a majority 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, the rules and amendments:
     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 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 requiring that funds provide better information 
about directors, including:
     Basic information about the identity and business 
experience of directors;
     Fund shares owned by directors;
     Information about directors that may raise conflict of 
interest concerns; and
     The board's role in governing the fund.
    Together, these new rules and amendments 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

    Mutual funds are organized as corporations, trusts, or limited 
partnerships under state laws, and thus are owned by their 
shareholders, beneficiaries, or partners.\1\ Like other types of 
corporations, trusts, or

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partnerships, a mutual fund must be operated for the benefit of its 
owners.\2\ Unlike most business organizations, however, mutual funds 
are typically organized and operated by an investment adviser that is 
responsible for the day-to-day operations of the fund. In most cases, 
the investment adviser is separate and distinct from the fund it 
advises, with primary responsibility and loyalty to its own 
shareholders.\3\ The ``external management'' of mutual funds presents 
inherent conflicts of interest and potential for abuses that the 
Investment Company Act and the Commission have addressed in different 
ways.\4\
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    \1\ For simplicity, this release focuses on mutual funds (i.e., 
open-end funds). The amendments we are adopting, however, apply to 
all management investment companies, except where noted.
    \2\ See generally James M. Storey & Thomas M. Clyde, Mutual Fund 
Law Handbook Sec. 7.2 (1998); Allan S. Mostoff & Olivia P. Adler, 
Organizing an Investment Company--Structural Considerations, in The 
Investment Company Regulation Deskbook Sec. 2.4 (Amy L. Goodman ed., 
1997).
    \3\ As a result of their extensive involvement, and the general 
absence of shareholder activism, investment advisers typically 
dominate the funds they advise. See Role of Independent Directors of 
Investment Companies, Investment Company Act Release No. 24082 (Oct. 
14, 1999) [64 FR 59826 (Nov. 3, 1999)] (``Proposing Release'') at 
n.10 and accompanying text.
    \4\ An investment adviser's shareholders often have an interest 
in a mutual fund that is quite different from the interests of the 
fund's own 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. See Proposing Release, supra note 3, at 
nn.11-25 and accompanying text, for a discussion of the 
comprehensive regulatory scheme established by the Act to address 
conflicts of interest between funds and their investment advisers.
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    One of the ways that the Act addresses conflicts between advisers 
and funds is by giving mutual fund boards of directors, and in 
particular the disinterested directors,\5\ an important role in fund 
governance.\6\ In relying on fund boards to represent fund investors 
and protect their interests, Congress avoided the more detailed 
regulatory provisions that characterize other regulatory schemes for 
collective investments.\7\ The Commission has similarly relied 
extensively on independent directors in rules we have adopted that 
exempt funds from provisions of the Act.\8\
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    \5\ We refer to directors who are not ``interested persons'' of 
the fund as ``independent directors'' or ``disinterested 
directors.'' See section 2(a)(19) of the Act [15 U.S.C. 80a-
2(a)(19)](defining ``interested person'').
    \6\ The Investment Company Act establishes a system of ``checks 
and balances,'' and relies on independent directors to ``oversee the 
fund's operations so as to prevent abuses of investors.'' James M. 
Storey & Thomas M. Clyde, The Uneasy Chaperone 34 (2000). Directors 
also have broad responsibilities to monitor compliance with 
securities, corporate and other laws. Robert A. Robertson, Board 
Oversight of Mutual Fund Compliance Operations, Rev. Sec. & Comm. 
Reg., Oct. 24, 2000, at 1.
    \7\ For example, in Japan, funds may be structured only in the 
form of securities investment trusts, which are primarily subject to 
regulation under the Securities Investment Trust Law. There is no 
board of directors or board of trustees, and under the Securities 
Investment Trust Law, a ``trustor company'' manages the trust assets 
on behalf of the beneficiaries of the trust. The Japanese Ministry 
of Finance approves the terms and conditions of securities 
investment trusts, and plays a supervisory role in the day-to-day 
operations of the trusts. See Yoshiki Shimada et al., Regulatory 
Frameworks for Pooled Investment Funds: A Comparison of Japan and 
the United States, 38 Va. J. Int'l L. 191 (1998).
    \8\ See Proposing Release, supra note 3, at nn.24-25 and 
accompanying text.
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    Millions of Americans are today invested in mutual funds, which 
have experienced a tremendous growth in popularity over the past twenty 
years.\9\ In light of this growth, and our growing reliance on 
independent directors to protect fund investors, last year we undertook 
a review of the governance of investment companies, the role of 
independent directors, our rules that rely on oversight by independent 
directors, and the information that funds are required to provide to 
shareholders about their independent directors.
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    \9\ Approximately 82.8 million individuals in 48.4 million 
households in the United States invest in funds. Investment Company 
Institute, Mutual Fund Fact Book 41 (2000).
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    We held a Roundtable discussion at which independent directors, 
investor advocates, executives of fund advisers, academics, and 
experienced legal counsel offered a variety of perspectives and 
suggestions.\10\ After evaluating the ideas and suggestions offered by 
Roundtable participants last year, we proposed a package of rule and 
form amendments that were 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.\11\
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    \10\ 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, 
Feb. 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 are 
also available on the Commission's Internet web site http://www.sec.gov/offices/invmgmt/rountab.htm>.
    \11\ See Proposing Release, supra note 3.
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    We received 142 comment letters on our proposals, including 86 
letters from independent directors.\12\ Commenters generally commended 
our efforts to enhance the independence and effectiveness of fund 
directors, although many offered recommendations for improving portions 
of the proposals. Many of these letters were helpful to us in 
formulating the final rules and amendments, which we are today 
adopting.
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    \12\ The comment letters and a summary of the comments prepared 
by Commission staff are available for public inspection and copying 
in the Commission's Public Reference Room, 450 Fifth Street, N.W., 
Washington, D.C. (File No. S7-23-99). The comment summary is also 
available on the Commission's Internet web site http://www.sec.gov/rules/extra/brownin1.htm>.
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    We have reason to believe that our efforts to improve the 
governance of mutual funds on behalf of mutual fund investors have 
already borne fruit. Our Roundtable discussions and proposed rules have 
provoked a great deal of discussion among directors, advisers, counsel, 
and investors about governance practices and policies. After our 
Roundtable, an advisory group organized by the Investment Company 
Institute (``ICI'') made recommendations regarding fund governance in a 
``best practices'' report (``ICI Advisory Group Report'').\13\ Many 
boards, we understand, have adopted the recommendations set forth in 
the ICI Advisory Group Report. Some groups of independent directors 
have hired independent counsel for the first time. Director nomination 
and selection procedures have been revised.
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    \13\ See Investment Company Institute, Report of the Advisory 
Group on Best Practices for Fund Directors: Enhancing a Culture of 
Independence and Effectiveness (June 24, 1999).
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    During the last year, Commissioners and members of the staff began 
meeting with independent directors and sharing ideas and concerns 
regarding the governance of mutual funds.\14\ Former Commission 
Chairman David Ruder established the Mutual Fund Directors Education 
Council, a broad-based group of persons interested in fund governance 
and operations,\15\ whose purpose is to foster the development of 
educational activities designed to promote the efficiency, 
independence, and accountability of independent fund directors. The 
American Bar Association formed a task force to examine the role of 
counsel to independent directors, and the task force released a report 
offering guidance to counsel and fund directors

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regarding standards of independence for counsel, and guidelines for 
reducing potential conflicts of interest (``ABA Task Force 
Report'').\16\ All of these initiatives have focused attention on the 
important role of independent directors, and their importance in 
promoting and protecting the interests of fund shareholders.
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    \14\ See, e.g., Arthur Levitt, Chairman, SEC, Remarks at the 
Mutual Fund Directors Education Council Conference (Feb. 17, 2000) 
(transcript available at http://www.sec.gov/news/speeches/spch346.htm>); Paul Roye, Director, Division of Investment 
Management, SEC, What Does It Take To Be an Effective Independent 
Director of a Mutual Fund?, Address at the ICI Workshop for New Fund 
Directors (Apr. 14, 2000) (transcript available at http://www.sec.gov/news/speeches/spch364.htm>).
    \15\ Members of the Council include independent directors, 
corporate governance experts, investor advocates, academics, 
industry members, and investment management attorneys.
    \16\ ABA, Report of the Task Force on Independent Director 
Counsel, Subcommittee of Investment Companies and Investment 
Advisers, Committee on Federal Regulation of Securities, Section of 
Business Law: Counsel to the Independent Directors of Registered 
Investment Companies (Sept. 8, 2000).
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II. Discussion

A. Amendments to Exemptive Rules To Enhance Director Independence and 
Effectiveness

    We are amending ten rules that exempt funds and their affiliates 
from certain prohibitions of the Act (the ``Exemptive Rules'').\17\ As 
discussed further below, the amendments add conditions to the Exemptive 
Rules to require that, for funds that rely on the rules, (i) 
independent directors constitute a majority of the board, (ii) 
independent directors select and nominate other independent directors, 
and (iii) any legal counsel for the independent directors be an 
independent legal counsel.\18\
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    \17\ The Exemptive Rules are:
    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(b)(2) (permitting fund boards to approve interim 
advisory contracts without shareholder approval where the adviser or 
a controlling person receives a benefit in connection with the 
assignment of the prior contract);
    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).
    \18\ We discuss each of these conditions below. See infra 
Sections II.A.1, II.A.2, and II.A.3.
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    Most commenters supported our goal of enhancing the independence 
and effectiveness of independent directors of funds that choose to rely 
on the Exemptive Rules.\19\ Some commenters questioned the need to 
amend the rules, because each rule already requires independent 
directors to separately approve some of the fund's activities under the 
rule. We selected these rules because they require the independent 
judgment and scrutiny of independent directors in overseeing activities 
that are beneficial to funds and investors, but involve inherent 
conflicts of interest between the funds and their managers.\20\ The 
amendments are designed to increase the ability of independent 
directors to perform their important responsibilities under each of 
these rules.
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    \19\ We have revised the amendments to rule 15a-4, which permits 
fund boards to approve interim advisory contracts without 
shareholder approval. Funds have relied on that rule when an 
advisory contract terminated in unforeseeable circumstances, such as 
the death of the fund's investment adviser. After we issued the 
Proposing Release, we amended rule 15a-4 to further permit interim 
advisory contracts in foreseeable circumstances, when an adviser or 
controlling person receives a benefit in connection with the 
termination of the prior advisory contract (e.g., in the context of 
an adviser merger). See Temporary Exemption for Certain Investment 
Advisers, Investment Company Act Release No. 24177 (Nov. 29, 1999) 
[64 FR 68019 (Dec. 6, 1999)]. Three commenters argued that the 
availability of the rule in unforeseeable circumstances should not 
depend on the fund's compliance with the conditions that we proposed 
to add to the Exemptive Rules. In addition, one commenter further 
argued that funds that do not comply with the new conditions could 
be constrained from terminating an adviser because they are unable 
to enter into an interim advisory contract without obtaining an 
exemptive order. In light of these comments, we have determined to 
amend only the paragraph of rule 15a-4 that permits interim advisory 
contracts in foreseeable circumstances. See rule 15a-4(b)(2).
    \20\ As we noted in the Proposing Release, the Exemptive Rules 
provide exemptive relief that affords funds increased flexibility, 
cost reductions, and the ability to operate for the maximum benefit 
of investors. At the same time, these rules involve inherent 
conflicts of interest between funds and their managers, and 
therefore rely on independent directors to monitor those conflicts. 
While the Exemptive Rules have greatly expanded the responsibilities 
of fund boards, most have not contained conditions to enhance 
director independence and effectiveness. See Proposing Release, 
supra note 3, at n.30 and accompanying text. In the future we will 
be reluctant to issue exemptive orders premised on the oversight of 
independent directors, if the fund does not meet the new conditions 
we are today adopting.
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1. Independent Directors as a Majority of the Board
(a) Board Composition Requirements
    We are amending the Exemptive Rules to require that the boards of 
funds relying on the rules have a majority of independent 
directors.\21\ A majority requirement will permit, under state law, the 
independent directors to control the fund's ``corporate machinery,'' 
i.e., to elect officers of the fund, call meetings, solicit proxies, 
and take other actions without the consent of the adviser.\22\ As a 
result, independent directors who comprise the majority of a board can 
have a more meaningful influence on fund management and represent 
shareholders from a position of strength.\23\ In short, a board with a 
majority of independent directors can be more effective in representing 
investors than a board with a majority of ``inside'' directors.\24\ 
Commenters were supportive of this proposal.\25\
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    \21\ The independent directors thus would need to comprise more 
than half of the membership of the board. The Investment Company Act 
generally requires that independent directors constitute at least 40 
percent of the board. Section 10(a) of the Act (15 U.S.C. 80a-
10(a)). Section 10(b)(2) of the Act (15 U.S.C. 80a-10(b)(2)) 
requires, 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 adviser. Section 15(f)(1) of the Act (15 
U.S.C. 80a-15(f)(1)) provides a safe harbor for the sale of an 
advisory business if directors who are not interested persons 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.
    \22\ See Proposing Release, supra note 3, at text following 
n.44.
    \23\ See Proposing Release, supra note 3, at nn.36-44 and 
accompanying text.
    \24\ See Burks v. Lasker, 441 U.S. 471, 484 (1979) (discussing 
the ``independent watchdog'' function of independent directors).
    \25\ In the Proposing Release, we proposed two alternative board 
composition standards: (i) a simple majority and (ii) a two-thirds 
supermajority, as recommended by the ICI Advisory Group Report. We 
are adopting a simple majority independence standard, which most 
commenters supported.
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    We are allowing funds ample time to implement the new majority 
independence condition. The compliance date for the majority 
independence condition is July 1, 2002. Although most funds already 
have a majority of independent directors, the transition period will 
allow sufficient time for those that do not, to carry out the 
selection, nomination, and election of new independent directors in 
accordance with the amended rules.\26\
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    \26\ See infra Section II.A.2 (Selection and Nomination of 
Independent Directors).
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(b) Suspension of Board Composition Requirements
    We are adopting new rule 10e-1, which temporarily suspends the 
board composition requirements of the Act and our rules, if a fund 
fails to meet those requirements because of the death, 
disqualification, or bona fide resignation of a director. For a fund 
that relies on one or more of the Exemptive Rules, rule 10e-1 will 
provide relief if the fund no longer has a majority of independent 
directors because of the sudden loss of one or more directors.\27\
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    \27\ Without the relief provided by rule 10e-1, the consequence 
of losing an independent director and failing to have a majority of 
independent directors would be significant and immediate because 
funds would lose the ability to rely on the Exemptive Rules.

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    Rule 10e-1 suspends the board composition requirements for 90 days 
if the board can fill a director vacancy, or 150 days if a shareholder 
vote is required to fill a vacancy.\28\ We have extended the time 
period when only board action is required (from the 60 day period we 
proposed) in response to comments that additional time would be needed 
for independent directors to select and nominate candidates, and for 
the board to elect new directors.\29\
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    \28\ Section 10(e) of the Act [15 U.S.C. 80a-10(e)] currently 
suspends the Act's board composition requirements for 30 days, if a 
fund's board may fill a director vacancy, or 60 days, if a 
shareholder vote is required to fill a vacancy. Section 10(e) also 
authorizes the Commission to issue rules or orders prescribing 
longer periods for filling board vacancies.
    \29\ The time periods begin to run when the fund no longer meets 
the applicable board composition requirement, even if the fund is 
not yet aware that it no longer meets the requirement. Funds and 
directors should be mindful of their responsibilities to maintain 
the required percentage of independent directors, and should monitor 
director independence (and other composition issues) accordingly. A 
fund also could avoid problems posed by the time constraints of rule 
10e-1 by maintaining a greater percentage of independent directors 
than the simple majority required by the Exemptive Rules. See ICI 
Advisory Group Report, supra note 13, at 10-12 (recommending as a 
best practice that funds have a two-thirds majority of independent 
directors).
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2. Selection and Nomination of Independent Directors
    We are adopting, as a condition of the Exemptive Rules, a 
requirement that the independent directors of funds relying on those 
rules select and nominate \30\ any other independent directors.\31\ 
Commenters supported the proposal, and many specifically agreed that 
the self-selection and self-nomination of independent directors fosters 
an independent-minded board that focuses primarily on the interests of 
a fund's investors rather than its adviser.\32\
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    \30\ Selection and nomination refers to the process by which 
board candidates are researched, recruited, considered, and formally 
named.
    \31\ Rules 12b-1 and 23c-3 already require funds relying on 
those rules to commit the selection and nomination of independent 
directors to the discretion of those directors. We are amending 
rules 12b-1 and 23c-3 to conform their language regarding self-
selection and nomination to the language of the other Exemptive 
Rules.
    \32\ See Kenneth E. Scott, What Role Is There for Independent 
Directors of Mutual Funds?, 2 Vill. J.L. & INV. MGMT. 1, 4 (2000) 
(``Independence [of a director] is a reflection of how you got on 
the board and how you can be taken off.''). The self-selection and 
self-nomination condition applies prospectively, i.e., to 
independent directors elected after the effective date of the rules. 
Thus, current independent directors who were not selected and 
nominated by other independent directors may continue to serve as 
independent directors until the end of their terms, but any new 
independent directors must be selected and nominated by the 
incumbent independent directors. See Proposing Release, supra note 
3, at n.69 and accompanying text.
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    Several commenters asked that we clarify the extent to which fund 
shareholders or a fund's adviser may participate in the selection and 
nomination process under the amendments. Control of the selection and 
nomination process at all times should rest with a fund's independent 
directors.\33\ These amendments are not intended to supplant or limit 
the ability of fund shareholders under state law to nominate 
independent directors. The adviser may suggest independent director 
candidates if the independent directors invite such suggestions, and 
the adviser may provide administrative assistance in the selection and 
nomination process. Independent directors, however, should not view 
participation by shareholders and investment advisers in this process 
as precluding or excusing the independent directors from the 
responsibility to canvass, recruit, interview, and solicit independent 
director candidates.
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    \33\See The Robinson Humphrey Co., Inc., SEC No-Action Letter 
(Sept. 4, 1976) (analyzing the term ``selected and proposed for 
election'' in section 16(b) of the Act (15 U.S.C. 80a-16(b)) and 
concluding that independent directors had not been properly selected 
by other independent directors).
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3. Independent Legal Counsel
    We are adopting amendments to each of the Exemptive Rules to 
require that any legal counsel for the fund's independent directors be 
an ``independent legal counsel.''\34\ We believe that the conflicts 
involved in the transactions and arrangements permitted by the 
Exemptive Rules make it critical that independent directors, when they 
seek legal counsel, be represented by persons who are free of 
significant conflicts of interest that might affect their legal 
advice.\35\
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    \34\ See amended rules 10f-3(b)(11)(ii); 12b-1(c)(2); 15a-
4(b)(2)(vii)(B); 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); and 23c-3(b)(8)(ii). We rely 
on the concept of ``independence'' both in this rule and in our 
auditor independence rule. See Revision of the Commission's Auditor 
Independence Requirements, Securities Act Release No. 7919 (Nov. 21, 
2000) (65 FR 76008 (Dec. 5, 2000)) (adopting release); Revision of 
the Commission's Auditor Independence Requirements, Securities Act 
Release No. 7870 (June 30, 2000) (65 FR 43148 (July 12, 2000)) 
(proposing release). It is important to note, however, that we use 
the concept in distinct ways in these two rules. In adopting 
amendments to the auditor independence rule, our goal was to reduce 
the potential for conflicts of interest that impair the auditor's 
ability to conduct an objective and impartial audit. Under rules of 
professional responsibility, attorneys have an obligation zealously 
to represent their clients. See Model Code of Professional 
Responsibility EC 7-1; see also Model Rules of Professional Conduct 
[``ABA Model Rules''] Rules 1.2(d), 1.3 and 3.1 (1998). With respect 
to the independent counsel provisions in this rule, we use 
``independence'' to refer to the limits on relationships with third 
parties that might affect counsel's capacity to provide zealous 
representation in advising and representing a fund's independent 
directors.
    \35\ The amendments we are today adopting do not require that 
independent directors retain an independent counsel, but only that 
any person who acts as legal counsel to the independent directors be 
an ``independent legal counsel.'' We requested comment on whether to 
require independent counsel for independent directors. Some 
commenters supported a requirement while others argued that 
independent directors should decide for themselves whether they need 
counsel. We have determined that not requiring independent counsel 
is the appropriate course at this time. We continue to believe, 
however, that a likely result of our rule amendments will be that 
many fund directors seek independent counsel. See ABA Task Force 
Report, supra note 16, at 3 (``The complexities of the Investment 
Company Act, the nature of the separate responsibilities of 
independent directors and the inherent conflicts of interest between 
a mutual fund and its managers effectively require that independent 
directors seek the advice of counsel in understanding and 
discharging their special responsibilities.'').
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    The Commission received many comments on this proposal. Most fund 
management companies, and a number of independent directors and their 
lawyers, opposed the proposed amendments. Many argued that the 
selection of counsel was a matter that should be left to independent 
directors. Some argued that the bar association rules of professional 
conduct are adequate to assure independence of counsel. Others argued 
that imposing the independent counsel requirement could deny 
independent directors competent counsel from larger law firms with many 
potential conflicts.
    Given the vital role of independent directors in the resolution of 
conflicts between the fund and its investment adviser, it is important 
that they have access to counsel who is free from conflicting 
loyalties. This is particularly true when directors are called upon to 
exercise judgment in certain key areas of their responsibilities such 
as approving the advisory contract or a distribution plan, approving a 
merger, monitoring the allocation of fund brokerage, or valuing fund 
securities.\36\ Yet, as we observed in the Proposing Release, some 
independent directors have relied on

[[Page 3738]]

counsel who has simultaneously represented the fund's adviser, or who 
does substantial legal work for the adviser or its affiliates.\37\ We 
continue to be concerned by these conflicts and how they affect the 
ability of directors to carry out their responsibilities under the Act 
and the Exemptive Rules.
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    \36\ We believe that independent directors' access to 
independent counsel is also of key importance when directors address 
questions of the appropriateness and legality (under sections 17(a) 
and 17(d) of the Act) of proposed transactions between the fund and 
its promoter, adviser, or principal underwriter (or any other 
affiliated person). These matters (and those described in the text 
above) go to the core of matters addressed by the Act and the 
relationship between the fund, its adviser, and shareholders and may 
require the directors to deny fund management's wishes. Independent 
counsel can assist directors in understanding management proposals, 
their legal implications, and the obligations of directors under the 
law. When a lawyer for the independent directors--however learned 
and well intentioned--also represents the fund's adviser, he may be 
reluctant to recommend courses of action to the directors that are 
opposed by the adviser.
    \37\ See Proposing Release, supra note 3, at n.80 and 
accompanying text.
---------------------------------------------------------------------------

    Funds also should be concerned when counsel to the independent 
directors have these types of conflicts of interest. The appearance of 
a conflict undermines the confidence investors have in the independence 
of their fund's directors to represent investors' interests. Directors 
who accept these conflicts strengthen the argument that more drastic 
changes are necessary in the way mutual funds are governed.\38\ Fund 
advisers also should be concerned when independent directors engage 
counsel with substantial conflicts, because the adviser and the funds 
may be denied a significant defense in any lawsuit charging that its 
advisory fee or other payments or transactions are excessive or 
inappropriate.\39\
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    \38\ See Letter from Phillip Goldstein, Independent Director, 
Clemente Strategic Value Fund, to Jonathan G. Katz, Secretary, SEC 
(Feb. 1, 2000), File No. S7-23-99 (``shareholders of open-end funds 
* * * derive no benefit from independent directors''); Letter from 
George W. Karpus, President, Karpus Investment Management, to Arthur 
Levitt, Chairman, SEC (Jan. 21, 2000), File No. S7-23-99 
(independent directors are not really independent, they are 
``house'' directors ``rubberstamping'' management decisions); Letter 
from Weschler, Harwood, Halebian & Feffer, to Jonathan G. Katz, 
Secretary, SEC, (Jan. 14, 2000), File No. S7-23-99 (``There does not 
appear to be any credible evidence to support the view that 
independent directors are cost effective from the standpoint of 
public investors.''). See also Samuel S. Kim, Note, Mutual Funds: 
Solving the Shortcomings of the Independent Director Response to 
Advisory Self-Dealing Through Use of the Undue Influence Standard, 
98 Colum. L. Rev. 474 (1998).
    \39\ When deciding excessive advisory fee cases, courts have 
cited directors' reliance on independent counsel as a factor 
evidencing director independence and conscientiousness. See 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 whose 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); Gartenberg v. 
Merrill 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).
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    While we are persuaded that Commission rulemaking is necessary, we 
appreciate the concerns that the independent directors expressed in 
their comment letters on the proposed amendments. Many were concerned 
that the proposal did not afford them sufficient flexibility in 
selecting counsel. Some misunderstood our proposal as permitting 
counsel to have conflicts that are only extremely small or remote. That 
was not our intention, which we have clarified in revising the proposed 
amendments.
    Under the final rule 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.'' \40\ A 
person \41\ is considered an independent legal counsel if (i) the 
independent directors determine that any representation of the fund's 
investment adviser, principal underwriter, administrator (collectively 
``management organizations'') or their control persons \42\ during the 
past two fiscal years is or was sufficiently limited \43\ that it is 
unlikely to adversely affect the professional judgment of the person in 
providing legal representation,\44\ and (ii) the independent directors 
have obtained an undertaking from the counsel to provide them 
information necessary for their determination, and to update promptly 
that information if the counsel begins, or materially increases, the 
representation of a management organization or control person.\45\
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    \40\ As noted above, the amendments as adopted do not require 
that independent directors retain legal counsel, but only that any 
person who acts as legal counsel to the independent directors be an 
``independent legal counsel.'' See supra note 35 and accompanying 
text. An attorney ``acts as legal counsel'' if an attorney-client 
relationship is established between counsel and the independent 
directors. We do not view a counsel as representing a fund's 
investment adviser merely because the counsel accepts payment of 
fees from the adviser for legal services performed on behalf of the 
fund or its independent directors as permitted by relevant legal 
ethics rules. See Proposing Release, supra note 3, at n.87.
    \41\ We are adopting as proposed the definition of ``person'' as 
any natural person or a company (including a partnership or other 
association) as well as a partner, co-member, or employee of any 
person. Rule 0-1(a)(6)(iv)(A) [17 CFR 270.0-1(a)(6)(iv)(A)]. Thus, 
the independent directors should examine any conflicting 
representations of their individual attorney, as well as conflicting 
representations of that attorney's law firm, partners, and 
employees.
    \42\ We are adopting as proposed the definition of ``control 
person--as any person--other than a fund--directly or indirectly 
controlling, controlled by, or under common control with any of the 
fund's management organizations. Rule 0-1(a)(6)(iv)(B) [17 CFR 
270.0-1(a)(6)(iv)(B)].
    \43\ We have used the phrase ``sufficiently limited'' instead of 
``so limited,'' which we used in the proposal, to provide directors 
somewhat greater latitude than the proposal. It is our intent, 
therefore, that the scope of the rule be construed by reference to 
our discussion in this release and not the Proposing Release.
    \44\ Rule 0-1(a)(6)(i)(A) [17 CFR 270.0-1(a)(6)(i)(A)]. As we 
stated in the Proposing Release, because the interests of a fund, 
its shareholders, and its independent directors are nearly always 
aligned, the independent legal counsel condition does not require 
independent directors to assess a counsel's representation of the 
fund itself. See Proposing Release, supra note 3, at n.94 and 
accompanying text. We do not consider counsel to the fund or to the 
fund's adviser to be legal counsel to the independent directors by 
virtue of the independent directors receiving and relying on advice 
from such counsel. However, the independent directors should be 
aware that they do not have their own counsel in those 
circumstances.
    \45\ Rule 0-1(a)(6)(i)(B) [17 CFR 270.0-1(a)(6)(i)(B)]. A lawyer 
generally has an obligation to inform his or her client of changes 
in the nature of conflicts. See ABA Model Rules, Rule 1.7 (stating 
that a client may waive a conflict of interest only after 
consultation); see also ABA Comm. on Ethics and Professional 
Responsibility, Formal Op. 93-372 (1993) (a client's generic waiver 
of future conflicts would be invalid if the circumstances of a 
representation change so that the client's previous waiver was not 
fully informed when given); ABA Task Force Report, supra note 16 
(providing specific guidance to independent directors of funds when 
selecting and using legal counsel, and to counsel who advise 
independent directors). However, a lawyer's obligations in this 
regard envision that the lawyer assess the effect of the potential 
conflict first before informing the client, see ABA Model Rules, 
Rule 1.7(a)(1), and in any event may vary among different 
jurisdictions. The provision in our final rule concerning counsel's 
undertaking is intended to enable the independent directors to 
obtain the information they need in order to make their own 
determination about the independence of their counsel.
---------------------------------------------------------------------------

    The final amendments rely on the independent directors to determine 
whether a person is an independent legal counsel. They must make this 
determination no less frequently than annually, and the basis for the 
determination must be recorded in the board's meeting minutes.\46\ If 
the independent directors obtain information that their counsel has 
begun to represent a management organization or control person, they 
must determine whether this new representation--together with any other 
representations of management organizations and control persons--is 
unlikely to adversely affect the counsel's professional judgment.\47\ 
In order to prevent the fund from losing the availability of the 
exemptions in these circumstances, the rule provides that counsel can 
still be considered ``independent legal counsel'' for up to three 
months, which will provide time for the independent directors to make a 
new determination about the counsel or to hire a new independent legal 
counsel.\48\
---------------------------------------------------------------------------

    \46\ We would not expect that the board meeting minutes would 
include detailed information such as law firm billing records. We 
would, however, expect the minutes to include material information 
the board considered and relied on in making its determination.
    \47\ Rule 0-1(a)(6)(iii). This provision also would apply when 
conflicts arise as a result of a law firm merger, the hiring of a 
new partner or associate, the merger of two financial services 
firms, or as a result of a material increase in the scope or nature 
of the legal counsel's representation of a management organization.
    \48\ Id.

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[[Page 3739]]

    In determining whether a counsel is an ``independent legal 
counsel'' under the rule, the judgment of the directors is not 
unbounded; it must be reasonable.\49\ The independent directors should 
consider all relevant factors in evaluating whether the conflicting 
representations are ``sufficiently limited. \50\ For example, 
independent directors should consider (i) whether the representation is 
current and ongoing; (ii) whether it involves a minor or substantial 
matter; (iii) whether it involves the fund, the adviser, or an 
affiliate, and if an affiliate, the nature and the extent of the 
affiliation; (iv) the duration of the conflicting representation; (v) 
the importance of the representation to counsel and his firm (including 
the extent to which counsel relies on that representation 
economically); (vi) whether it involves work related to mutual 
funds;\51\ and (vii) whether the individual who will serve as legal 
counsel was or is involved in the representation.\52\ Applying these 
factors, we do not believe that independent directors could ordinarily 
conclude that a lawyer whose firm simultaneously represents the fund's 
adviser and independent directors in connection with matters as 
important to fund shareholders as the negotiation of the advisory 
contract \53\ or distribution plan, or other key areas of conflict 
between the fund and its adviser, is an ``independent legal counsel.'' 
\54\
---------------------------------------------------------------------------

    \49\ Rule 0-1(a)(6)(i).
    \50\ By adopting these rules, we do not intend to regulate the 
legal profession or to suggest that the existence of a professional 
relationship between the independent directors' counsel and a 
management organization would necessarily violate applicable codes 
of legal ethics. Moreover, we do not intend to create a presumption 
that a lawyer having such a professional relationship did not 
provide proper, objective legal advice, or that the board's reliance 
on its counsel was improper, or that any determination the board 
made based on counsel's advice was itself improper.
    \51\ Whether counsel's representation of a management 
organization (or control person) is unrelated to a fund is a 
relevant factor for independent directors to consider when 
determining if the counsel may provide impartial advice to the 
independent directors. However, it is not a conclusive factor. Even 
if legal services are unrelated to a fund, those services may be so 
substantial, significant, or integral to the business of the 
management organization (or control person) that the independent 
directors could determine that the counsel is not an ``independent 
legal counsel.''
    \52\ We do not intend this list of factors to be an exhaustive 
or mandatory list of factors the directors must consider. See, e.g., 
ABA Task Force Report, supra note 16, at 5-9 (providing guidance on 
factors that boards may wish to consider when assessing the quality 
and independence of their counsel).
    \53\ After analyzing the factors, independent directors may, 
however, conclude that a counsel's representation of a fund's 
administrator or sub-adviser does not impede that counsel's ability 
to serve as an ``independent counsel'' to the independent directors. 
In evaluating whether representation of an administrator (or its 
control person) is ``sufficiently limited'' for the person to be an 
``independent counsel,'' we believe a board could differentiate 
between an administrator that merely performs ministerial tasks and 
one that has sponsored, organized, or promoted the fund. Independent 
directors could reach a similar conclusion regarding a sub-adviser. 
The Act does not distinguish an adviser from a sub-adviser. See 
section 2(a)(20) of the Act (15 U.S.C. 80a-2(a)(20)). However, we 
believe that independent directors, in evaluating a counsel's 
conflicts, could give consideration to the nature of a sub-advisory 
relationship.
    \54\ The ABA Task Force Report acknowledges that there are 
circumstances, such as litigation or other ``obvious adversarial 
situations,'' in which joint or multiple representations may never 
be appropriate. ABA Task Force Report, supra note 16, at 8. We 
agree, but believe that there are additional circumstances, due to 
the unique conflicts that are inherent in the structure of 
investment companies, in which independent directors should not 
accept joint and multiple representations.
---------------------------------------------------------------------------

    We admonish directors to consider that your decision in selecting 
an independent counsel is not merely a matter of personal preference 
(as some commenters suggested), but an important exercise of your 
business judgment as an independent director.\55\ The final rule makes 
it clear, however, that you are entitled to rely on information 
provided by counsel in forming your judgment.\56\
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    \55\ As discussed below, the compliance date for the legal 
counsel provision is July 1, 2002. See infra Section III.
    \56\ See rule 0-1(a)(6)(ii). The independent directors are 
entitled to rely on that information unless they know or have reason 
to believe that the information is materially false or incomplete. 
Id. As a result, if counsel begins or materially increases the 
representation of a fund management organization but does not inform 
the independent directors, the independent directors can rely on the 
previous representation they received so that counsel's change in 
representation will not trigger the requirement that the independent 
directors make a new determination within three months. See rule 0-
1(a)(6)(iii).
---------------------------------------------------------------------------

B. Limits on Coverage of Directors Under Joint Insurance Policies

    We are adopting an amendment to rule 17d-1(d), which permits funds 
to purchase ``errors and omissions'' joint insurance policies for their 
officers and directors.\57\ Currently, many of these policies contain 
exclusions when parties sue each other. As a result, independent 
directors of funds may not be covered against lawsuits by the adviser 
and consequently may be reluctant to take actions necessary to protect 
fund investors, out of concern for personal liability. Under the 
amendment, which we are adopting as proposed, rule 17d-1(d) is 
available only if the joint insurance policy does not exclude coverage 
for litigation between the adviser and the independent directors.\58\ 
Commenters supported the proposed amendments, and agreed that they 
would allow independent directors to faithfully carry out 
responsibilities without concern for personal financial security.
---------------------------------------------------------------------------

    \57\ Paragraph (d) of rule 17d-1 provides an exemption from 
paragraph (a) of the rule, which prohibits a fund affiliate from 
participating in any joint enterprise, joint arrangement, or profit 
sharing plan without first obtaining a Commission order.
    \58\ See rule 17d-1(d)(7)(iii). The amendments would prohibit 
exclusions for (i) bona fide (i.e., non-collusive) claims made 
against any independent director by another person insured under the 
joint insurance policy, and (ii) claims in which the fund is a co-
defendant with an independent director in a claim brought by a co-
insured.
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C. Independent Audit Committees

    We are adopting new rule 32a-4 exempting funds from the Act's 
requirement that shareholders vote on the selection of the fund's 
independent public accountant if the fund has an audit committee 
composed wholly of independent directors.\59\ The rule will permit 
continuing oversight of the fund's accounting and auditing processes by 
an independent audit committee, in place of the shareholder vote. 
Commenters agreed that the shareholder ratification has become largely 
perfunctory, and that an independent audit committee could exercise 
more meaningful oversight.
---------------------------------------------------------------------------

    \59\ See section 32(a)(2) of the Act [15 U.S.C. 80a--31(a)(2)].
---------------------------------------------------------------------------

    Under the new rule, a fund is exempt from having to seek 
shareholder approval of its independent public accountant, if (i) the 
fund establishes an audit committee composed solely of independent 
directors that oversees the fund's accounting and auditing 
processes,\60\ (ii) the fund's board of directors adopts an audit 
committee charter setting forth the committee's structure, duties, 
powers, and methods of operation, or sets out similar provisions in the 
fund's charter or bylaws,\61\ and (iii) the fund maintains a copy of 
such an audit committee charter.\62\ Some commenters questioned whether 
the proposed rule would require the audit committee to supervise a 
fund's day-to-day management and operations. The rule does not require, 
nor did we intend, that an audit committee perform daily management or 
supervision of a fund's operations.\63\
---------------------------------------------------------------------------

    \60\ Rule 32a-4(a).
    \61\ Rule 32a-4(b).
    \62\ Rule 32a-4(c). Commenters suggested that we permit the 
audit committee provisions to be set forth in the charter or bylaws 
of the fund. The final rule permits the fund either to adopt an 
audit committee charter or to set forth audit committee provisions 
in the fund's charter or bylaws. Rule 32a-4(b).
    \63\ See Audit Committee Disclosure, Exchange Act Release No. 
41987 (Oct. 7, 1999) [64 FR 55648 (Oct. 14, 1999)] at text following 
n.26 (``We recognize how audit committees function may vary from 
company to company, and companies need flexibility to determine all 
of the specific duties and functions of their audit committees.'').

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[[Page 3740]]

D. Qualification as an Independent Director

    In addition to the amendments to enhance the independence of fund 
boards, we are adopting a new rule to prevent qualified individuals 
from being unnecessarily disqualified from being considered an 
independent director. We are also rescinding a rule that has become 
unnecessary.
1. Ownership of Index Fund Securities
    We are adopting new rule 2a19-3, which conditionally exempts an 
individual from being disqualified as an independent director solely 
because he or she owns shares of an index fund that invests in the 
investment adviser or underwriter of the fund, or their controlling 
persons.\64\ As proposed, the exemption would have been available if 
the value of securities issued by the adviser or underwriter (or 
controlling person) did not exceed five percent of the value of any 
index tracked by the index fund. The purpose of this condition was to 
assure that an independent director's indirect interest in the 
adviser's securities would not be substantial enough to impair his or 
her independence and create a conflict of interest.\65\ In response to 
some commenters' concerns that monitoring the five percent limit would 
be very difficult, we revised the rule so that it provides relief if a 
fund's investment objective is to replicate the performance of one or 
more ``broad-based'' indices.\66\
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    \64\ Section 2(a)(19) of the Act disqualifies an individual from 
being considered an independent director if he or she 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. If a fund seeks to 
replicate the performance of 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). See Proposing Release, supra 
note 3, at n.138 and accompanying text.
    \65\ The new rule does not address an independent director's 
ownership of securities of an actively managed fund that owns shares 
of the fund's adviser, underwriter or any of their controlling 
persons. As we discussed in the Proposing Release, we do not believe 
an independent director who owns shares of an actively managed fund 
would ordinarily ``knowingly'' have an indirect beneficial interest 
in the issuers of securities the fund holds, and thus ownership of 
such fund would not cause a director to be an ``interested person'' 
as defined by section 2(a)(19) of the Act. See Proposing Release, 
supra note 3, at n.140.
    \66\ As we stated in the context of Form N-1A, a ``broad-based 
index'' is an index that ``provides investors with a performance 
indicator of the overall applicable stock or bond markets, as 
appropriate. An index would not be considered to be broad-based if 
it is composed of securities of firms in a particular industry or 
group of related industries.'' See Disclosure of Mutual Fund 
Performance and Portfolio Managers, Investment Company Act Release 
No. 19382 (Apr. 6, 1993) [58 FR 19050 (Apr. 12, 1993)] at n.21.
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2. Affiliation with a Broker-Dealer
    We are rescinding rule 2a19-1, which provides relief from the 
section of the Act that defines when a fund director is considered to 
be independent.\67\ We had proposed to amend that rule to permit a 
slightly greater percentage of fund independent directors to be 
affiliated with registered broker-dealers, under certain circumstances. 
After our proposal, however, Congress passed the Gramm-Leach-Bliley 
Act, which amended section 2(a)(19) of the Investment Company Act and 
established new standards for determining independence under the 
circumstances we addressed in our proposal.\68\ These amendments to the 
Act obviate the need for the exemptive relief provided by rule 2a19-1, 
and therefore we are rescinding the rule.\69\
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    \67\ Sections 2(a)(19)(A)(v) and (B)(v) of the Act provide that 
no person can be an independent director if he or she is, or is 
affiliated with, a registered broker-dealer.
    \68\ Section 213(a)(1) of the Gramm-Leach-Bliley Act 
incorporates the conditions of current rule 2a19-1(a)(1) under the 
Act. As amended, section 2(a)(19) now permits an independent 
director to be an affiliate of a broker-dealer, but not if the 
director or his or her affiliate has executed portfolio transactions 
for, engaged in principal transactions with, or distributed shares 
for the fund or certain related funds or accounts within the past 
six months. Pub. L. No. 106-102, Sec. 213, 113 Stat. 1338, 1397-98 
(1999), to be codified at 15 U.S.C. 80a-2(a)(19)(A)(v) and (B)(v).
    \69\ Under the Administrative Procedure Act [5 U.S.C. 553(b)], 
notice of proposed rulemaking is not required if the agency for good 
cause finds ``that notice and public procedure thereon are 
impracticable, unnecessary, or contrary to the public interest.'' 
Section 213 of the Gramm-Leach-Bliley Act established new standards 
for determining independence under the circumstances addressed by 
rule 2a19-1, and the rule is no longer necessary. The Commission 
therefore finds that proposing the rescission of rule 2a19-1 for 
public comment is unnecessary.
---------------------------------------------------------------------------

E. Disclosure of Information about Fund Directors

    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.
    In reevaluating our current disclosure requirements, we concluded 
that, while our fundamental approach has been sound, there are several 
gaps in the information that shareholders currently receive about 
directors. We therefore proposed amendments to close these gaps. The 
proposal would require 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.
    We are adopting the disclosure amendments with several 
modifications designed to tailor the amendments more closely to our 
goal of providing shareholders with better information to evaluate the 
independent directors.
1. Basic Information
    We are adopting the requirement to disclose basic information about 
directors in an easy-to-read tabular format, as proposed.\70\ The table 
will be required in three places: the fund's annual report to 
shareholders, SAI, and proxy statement for the election of directors. 
The table will 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.\71\ The table 
also requires for each interested director, as defined in Section 
2(a)(19) of the Investment Company Act, a description of the 
relationship, events, or transactions by reason of which the director 
is an interested person.
---------------------------------------------------------------------------

    \70\ Item 22(b)(1) of Schedule 14A; Items 13(a) and 22(b)(5) of 
Form N-1A; Item 18.1 and Instruction 4.e. to Item 23 of Form N-2; 
Item 20(a) and Instruction 4(v) to Item 27 of Form N-3. For 
convenience in discussing the requirements, we are not specifically 
referring to nominees for election as directors. The requirements, 
however, are applicable to nominees in proxy statements 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].
    \71\ In response to privacy concerns raised by several 
commenters, we wish to clarify that a director may provide the 
address of the fund or the fund's adviser in the table and need not 
provide his personal address.
---------------------------------------------------------------------------

    Commenters generally supported the proposal, although several 
commenters

[[Page 3741]]

opposed as unnecessary the requirement to describe in the table the 
relationships, events, or transactions that make certain directors 
``interested persons.'' Funds are currently required to disclose this 
information in the proxy statement for the election of directors, and 
we are adopting this requirement as proposed.\72\ We believe it is 
important that shareholders be provided with an explanation of why 
certain directors are ``interested persons.''\73\
---------------------------------------------------------------------------

    \72\ Instruction 4 to Item 22(b)(1) of Schedule 14A; Instruction 
2 to Item 13(a) of Form N-1A; Instruction 2 to Item 18.1 of Form N-
2; Instruction 2 to Item 20(a) of Form N-3.
    \73\ As discussed below, however, we are excluding interested 
directors from the new conflicts of interest disclosure requirements 
which we proposed in order to give shareholders better information 
about independent directors. See infra note 84 and accompanying 
text.
---------------------------------------------------------------------------

2. Ownership of Equity Securities in Fund Complex
    We are adopting with modifications the requirement to disclose the 
amount of equity securities of funds in a fund complex owned by each 
director.\74\ Commenters generally agreed with the Commission that 
disclosure of this information would be useful to shareholders in 
assessing whether directors' interests are aligned with those of 
shareholders.
---------------------------------------------------------------------------

    \74\ Item 22(b)(5) of Schedule 14A; Item 13(b)(4) of Form N-1A; 
Item 18.7 of Form N-2; Item 20(f) of Form N-3.
---------------------------------------------------------------------------

(a) Disclosure of Amounts Owned by Directors
    Many commenters expressed concern about the proposed requirement 
that funds disclose the exact dollar amount of securities directors own 
in a fund complex. These commenters argued that this disclosure would 
discourage potential directors from agreeing to serve, in order to 
avoid intrusions into their privacy, and might cause existing directors 
to reduce or sell their holdings to avoid publicity about their 
investments. As an alternative, many suggested that we require funds to 
disclose directors' equity ownership using specified dollar ranges, 
rather than exact dollar amounts. These commenters noted that using 
dollar ranges would provide shareholders with sufficient information to 
assess whether directors' interests were aligned with their own, making 
disclosure of exact dollar amounts unnecessary.
    We are persuaded by these comments and have modified the proposal 
to require disclosure of a director's holdings of securities using 
dollar ranges rather than an exact dollar amount. Funds will be 
required to disclose directors' equity ownership using the following 
ranges: None; $1-$10,000; $10,001-$50,000; $50,001-$100,000; or over 
$100,000. We believe that disclosure of directors' holdings using these 
dollar ranges will provide investors with significant information to 
use in evaluating whether directors' interests are aligned with their 
own, while protecting directors' legitimate privacy interests.
(b) ``Beneficial Ownership''
    We received a number of comments requesting clarification about the 
types of director holdings that would be disclosed under the proposal. 
Based on these comments, we reevaluated our proposal to require 
disclosure of securities owned beneficially and of record by each 
director. Under the proposal, ``beneficial ownership'' would have been 
determined in accordance with rule 13d-3 of the Exchange Act, which 
focuses on a person's voting and investment power.\75\ In light of our 
objective of providing information about the alignment of directors' 
and shareholders' interests, we believe that disclosure of record 
holdings should not be required and that the focus of ``beneficial 
ownership'' should be on whether a director's economic interests are 
tied to the securities, rather than his ability to exert voting power 
or to dispose of the securities. Therefore, we are modifying the 
proposal to require disclosure of ``beneficial ownership'' in 
accordance with the definition contained in rule 16a-1(a)(2) under the 
Exchange Act.\76\ This definition, consistent with our goal, emphasizes 
the economic incidence of ownership.
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    \75\ 17 CFR 240.13d--3.
    \76\ 17 CFR 240.16a-1(a)(2). We also have modified the proposal 
requiring disclosure of securities owned by an independent director 
and his immediate family members in an investment adviser or 
principal underwriter and persons controlling, controlled by, or 
under common control with an investment adviser or principal 
underwriter. This requirement is intended to illuminate potential 
conflicts of interest, and we therefore believe that any record or 
beneficial securities ownership in these entities should be 
disclosed, whether the beneficial ownership results from voting 
power, investment power, or economic interests. Therefore, we have 
revised the proposal to require disclosure of securities owned if 
covered by the definition of ``beneficial ownership'' contained in 
either rule 13d-3 or rule 16a-1(a)(2). Item 22(b)(6) and Instruction 
2 to Item 22(b)(6) of Schedule 14A; Item 13(b)(5) and Instruction 2 
to Item 13(b)(5) of Form N-1A; Item 18.8 and Instruction 2 of Item 
18.8 of Form N-2; Item 20(g) and Instruction 2 of Item 20(g) of Form 
N-3.
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(c) Disclosure of Ownership in the Funds the Director Oversees within 
the Same ``Family of Investment Companies''
    We proposed to require aggregate disclosure of a director's 
holdings in a fund complex, rather than separate disclosure of a 
director's holdings in a particular fund. We were concerned that fund-
specific 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. Several commenters recommended, however, 
that disclosure of a director's holdings should be made on a fund-by-
fund basis, rather than a complex-wide basis, arguing that it would be 
more relevant to disclose to shareholders a director's ownership of the 
specific funds on whose board the director serves. Other commenters, 
agreed that disclosure of a director's holdings should be on an 
aggregate basis as proposed, but recommended that the disclosure be 
limited to a director's aggregate ownership in the funds overseen by a 
director within a fund complex. These commenters argued that disclosure 
in this manner is more useful to investors than complex-wide disclosure 
in assessing whether a director's interests are aligned with their own.
    We are persuaded by these comments and have modified the proposal 
to require disclosure of: (1) Each director's ownership in each fund 
that he oversees; and (2) each director's aggregate ownership in any 
funds that he oversees within a fund family. We believe that a 
director's ownership in a particular fund provides the most direct 
indication of his alignment with the interests of shareholders in that 
fund. We continue to believe, however, that disclosure of a director's 
aggregate ownership will provide shareholders with relevant information 
about the director's alignment with shareholders. In addition, a 
director could have many reasons for not holding shares of a specific 
fund, e.g., that its investment objectives do not match the director's. 
Disclosure of aggregate ownership will help prevent any inappropriate 
negative inference about fund management that a fund shareholder could 
draw from the fact that a director does not hold shares of a particular 
fund.
    For purposes of determining a director's holdings in a fund 
complex, the Commission proposed to define ``fund complex'' 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

[[Page 3742]]

adviser of any of the other funds.\77\ Many commenters argued that this 
definition would result in disclosure of holdings in funds that are too 
remotely related to funds on whose board the director serves to 
demonstrate alignment with fund shareholders (e.g., for a director 
serving on the board of a fund with a sub-adviser, the director's 
ownership in any other funds that the sub-adviser serves would be 
disclosed, regardless of whether the funds are otherwise related). 
These commenters recommended that the Commission adopt a narrower 
definition of ``family of investment companies,'' which includes only 
funds 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.\78\ We agree with commenters that 
the proposed ``fund complex'' definition could result in disclosure of 
information having little bearing on a director's alignment with 
shareholders, and are adopting the narrower definition of ``family of 
investment companies.'' \79\
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    \77\ Cf. redesignated Item 22(a)(1)(vi) of Schedule 14A 
(definition of fund complex).
    \78\ Cf. Item H of Form N-SAR [17 CFR 274.101] (definition of 
``family of investment companies'').
    \79\ Item 22(a)(1)(iv) of Schedule 14A; Instruction 1(a) to Item 
13 of Form N-1A; Instruction 1.a to Item 18 of Form N-2; Instruction 
1.a to Item 20 of Form N-3.
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(d) Date of Disclosure
    The equity ownership information must be included in the SAI and 
any proxy statement relating to the election of directors. For the 
proxy statement, the equity ownership information must be provided as 
of the most recent practicable date, as proposed, in order to ensure 
that shareholders receive up-to-date information when they are asked to 
vote to elect directors.\80\ For the SAI, we have modified the proposal 
to require that the equity ownership information be provided as of the 
end of the last completed calendar year.\81\ We believe that this 
modified time period requirement facilitates our goal that investors 
receive equity ownership information to evaluate whether directors' 
interests are aligned with their own, while imposing less of a burden 
on directors, especially those who serve multiple funds with staggered 
fiscal years.
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    \80\ Instruction 1 to Item 22(b)(5) of Schedule 14A.
    \81\ Instruction 1 to Item 13(b)(4) of Form N-1A; Instruction 1 
to Item 18.7 of Form N-2; Instruction 1 to Item 20(f) of Form N-3.
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3. Conflicts of Interest
    We are adopting our proposals on conflicts of interest disclosure, 
with modifications that tailor the requirements more closely to our 
goals and address commenters' concerns that some aspects of the 
proposal were overbroad.\82\ We proposed to require funds to disclose 
in the proxy statement and SAI three types of circumstances that could 
affect the allegiance of fund directors to their shareholders: 
positions, interests, and transactions and relationships of directors 
and their immediate family members with the fund and persons related to 
the fund. The rules we adopt today follow this basic approach.
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    \82\ Items 22(b)(4), 22(b)(6), 22(b)(7), 22(b)(8), 22(b)(9), and 
22(b)(10) of Schedule 14A; Items 13(b)(3), 13(b)(5), 13(b)(6), 
13(b)(7), 13(b)(8), and 13(b)(9) of Form N-1A; Items 18.6, 18.8, 
18.9, 18.10, 18.11, and 18.12 of Form N-2; Items 20(e), 20(g), 
20(h), 20(i), 20(j), and 20(k) of Form N-3.
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    A number of commenters recommended alternatives to the proposed 
conflicts of interest disclosure requirements, including: (i) Requiring 
funds to maintain records of potential conflicts of interest of 
directors; (ii) permitting independent directors to determine for 
themselves whether or not conflicts of interest exist that affect the 
``independence'' of other independent directors; and (iii) limiting 
conflicts of interest disclosure to the proxy statement for the 
election of directors. After careful consideration of these 
alternatives, we have determined that they would not constitute an 
adequate substitute for disclosure to shareholders.
    We continue to believe that shareholders have a significant 
interest in information concerning circumstances that may affect the 
directors' allegiance to shareholders. None of the alternatives 
suggested by commenters would provide this information to shareholders 
on a regular basis. The first two alternatives would completely exclude 
shareholders from the process of evaluating the independence of 
directors. The third alternative, limiting conflicts of interest 
disclosure to the proxy statement for the election of directors, 
ignores the fact that 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.\83\
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    \83\ See Proposing Release, supra note 3, at n.149 and 
accompanying text.
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(a) Modifications to Persons Covered
(1) Interested Directors
    We are modifying our proposal to exclude interested directors from 
the conflicts of interest disclosure requirements in both the SAI and 
proxy statement.\84\ We are persuaded by the commenters' arguments that 
if the purpose of the conflicts of interest disclosure is to allow 
investors and the Commission staff to better evaluate the true 
independence of independent directors, this goal will not be achieved 
by requiring disclosure of interested directors' potential conflicts of 
interest. As previously discussed, however, funds will be required to 
describe the relationships, events, or transactions that make a 
director an interested person.\85\
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    \84\ Items 22(b)(4), 22(b)(6), 22(b)(7), 22(b)(8), 22(b)(9), and 
22(b)(10) of Schedule 14A; Items 13(b)(3), 13(b)(5), 13(b)(6), 
13(b)(7), 13(b)(8), and 13(b)(9) of Form N-1A; Items 18.6, 18.8, 
18.9, 18.10, 18.11, and 18.12 of Form N-2; Items 20(e), 20(g), 
20(h), 20(i), 20(j), and 20(k) of Form N-3.
    \85\ See supra 73 note and accompanying text. In addition, we 
are retaining the existing requirement that funds disclose positions 
held by interested directors with affiliated persons or principal 
underwriters of the fund. Item 22(b)(2) of Schedule 14A; Item 
13(a)(2) of Form N-1A; Item 18.2 of Form N-2; Item 20(b) of Form N-
3.
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(2) Immediate Family Members
    We are narrowing the scope of ``immediate family members'' covered 
by the disclosure requirements to a director's spouse, children 
residing in the director's household, and dependents of the 
director.\86\ As proposed, ``immediate family members'' also included 
the director's parents, siblings, children not residing with the 
director, and in-laws.\87\
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    \86\ Item 22(a)(1)(vii) of Schedule 14A; Instruction 1(c) to 
Item 13 of Form N-1A; Instruction 1.c to Item 18 of Form N-2; 
Instruction 1.c to Item 20 of Form N-3. The term ``children'' 
includes step and adoptive children. We are using the term 
``dependent'' as defined in section 152 of the Internal Revenue 
Code. I.R.C. 152.
    \87\ Proposed Item 22(a)(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.
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    We received many comments on this definition, with the overwhelming 
majority of commenters arguing that the proposed extension of conflicts 
of interest disclosure to include a director's immediate family 
members, as defined in the proposal, was overly broad and too 
burdensome. Commenters noted that the definition, as proposed, would 
require directors to seek financial information from remote family 
members with whom they have little or no contact, and that the 
requirement could impose liabilities on directors without providing the 
means to enable directors to obtain the required information from 
reluctant relatives. We are persuaded by the commenters and have 
addressed their concerns by limiting the definition of ``immediate 
family members'' along the lines suggested by many commenters. The

[[Page 3743]]

narrower definition ensures that disclosure will only be required with 
respect to family members from whom directors can reasonably be 
expected to obtain the required information.\88\
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    \88\ A number of commenters recommended that if the Commission 
adopted the proposed definition of ``immediate family members,'' 
disclosure of potential conflicts of interest should be limited to 
those of which the director had actual knowledge. Since we are 
narrowing the definition of ``immediate family member,'' 
incorporation of an actual knowledge standard is unnecessary.
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(3) Related Persons
    The Commission proposed to require disclosure about circumstances 
involving directors, on the one hand, and the fund and persons related 
to the fund, on the other. We are modifying the proposal to exclude 
administrators from the persons related to the fund that are covered by 
the requirements. Several commenters expressed concern that inclusion 
of administrators that are not affiliated with the fund's adviser or 
principal underwriter would produce irrelevant and unnecessary 
information for shareholders because interactions between directors and 
unaffiliated administrators would not create conflicts of interest that 
could affect an independent director's judgment. We are persuaded by 
these commenters and note that administrators that control, are 
controlled by, or are under common control with the adviser or 
principal underwriter will be covered by the conflicts of interest 
disclosure.\89\
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    \89\ Items 22(b)(4)(iv), 22(b)(6)(ii), 22(b)(7)(ii), 
22(b)(8)(vii), 22(b)(9), and 22(b)(10)(iii) of Schedule 14A; Items 
13(b)(3)(iv), 13(b)(5)(ii), 13(b)(6)(ii), 13(b)(7)(vii), 13(b)(8), 
and 13(b)(9)(iii) of Form N-1A; Items 18.6(d), 18.8(b), 18.9(b), 
18.10(g), 18.11, and 18.12(c) of Form N-2; Items 20(e)(iv), 
20(g)(ii), 20(h)(ii), 20(i)(vii), 20(j), and 20(k)(iii) of Form N-3.
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    While some commenters also recommended excluding entities ``under 
common control'' with the adviser or principal underwriter, we believe 
that disclosure of interests, positions, and transactions and 
relationships with entities under common control is important and could 
highlight circumstances that potentially could affect the judgment of 
independent directors. We also note that the current proxy rules 
require disclosure with respect to commonly controlled entities.\90\
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    \90\ See Item 22(b)(1) of Schedule 14A (requiring independent 
directors to disclose direct or indirect securities interests in any 
person under common control with fund's adviser); Item 22(b)(3) 
(requiring all directors to disclose material transactions to which 
the adviser, principal underwriter, administrator, any parent or 
subsidiary of such entities (other than another fund), or any 
subsidiary of the parent of such entities was or is to be a party).
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    Although we are narrowing the scope of immediate family members and 
related persons in recognition of the overbreadth of our proposal in 
certain circumstances, we wish to emphasize that a fund's independent 
directors can vigilantly represent the interests of shareholders only 
when they are truly independent of those who operate and manage the 
fund. To that end, we encourage funds to examine any circumstances that 
could potentially impair the independence of independent directors, 
whether or not they fall within the scope of our disclosure 
requirements. There may, for example, be circumstances where an 
interest of a family member outside the ambit of our rules, or a 
director's interest in an administrator, impairs the director's ability 
to represent the interests of shareholders vigilantly.
(b) Other Modifications
(1) Threshold for Disclosure of Interests, Transactions, and 
Relationships
    We are adopting a $60,000 threshold for disclosure of interests, 
transactions, and relationships.\91\ Many commenters requested that the 
Commission establish a specific dollar threshold that would trigger the 
disclosure requirements to eliminate the need to make subjective 
``materiality'' determinations. We are persuaded by these comments and 
are adopting the $60,000 threshold, a level recommended by many 
commenters and contained in the existing proxy rules.\92\
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    \91\ Items 22(b)(7), 22(b)(8), and 22(b)(9) of Schedule 14A; 
Items 13(b)(6), 13(b)(7), and 13(b)(8) of Form N-1A; Items 18.9, 
18.10, and 18.11 of Form N-2; Items 20(h), 20(i), and 20(j) of Form 
N-3. In the case of transactions, the $60,000 threshold applies to 
the size of a transaction, and a materiality standard applies to the 
director's or immediate family member's interest in the transaction. 
Item 22(b)(8) of Schedule 14A; Item 13(b)(7) of Form N-1A; Item 
18.10 of Form N-2; Item 20(i) of Form N-3. The materiality of the 
interest is to be determined based on the significance of the 
information to investors in light of all the circumstances. 
Instruction 8 to Item 22(b)(8) of Schedule 14A; Instruction 7 to 
Item 13(b)(7) of Form N-1A; Instruction 7 to Item 18.10 of Form N-2; 
Instruction 7 to Item 20(i) of Form N-3. This is similar to a 
provision of the current proxy rules. Item 404(a) of Regulation S-K.
    \92\ Cf. redesignated Item 22(b)(11) of Schedule 14A; Item 
404(a) of Regulation S-K. In determining whether the $60,000 
threshold is exceeded for interests and relationships, a director's 
interest is to be aggregated with those of his immediate family 
members. Instruction 2 to Item 22(b)(7) and Instruction 6 to Item 
22(b)(9) of Schedule 14A; Instruction 2 to Item 13(b)(6) and 
Instruction 5 to Item 13(b)(8) of Form N-1A; Instruction 2 to Item 
18.9 and Instruction 5 to Item 18.11 of Form N-2; Instruction 2 to 
Item 20(h) and Instruction 5 to Item 20(j) of Form N-3.
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    We have replaced a materiality test with the $60,000 threshold in 
order to facilitate compliance with the disclosure requirements that we 
adopt today. This change does not, however, reflect a determination 
that the $60,000 threshold may be equated with ``materiality.'' We note 
that the antifraud provisions of the federal securities laws may 
obligate funds to disclose a material conflict of interest between a 
director and the fund or its shareholders without regard to the $60,000 
threshold. For example, a transaction between a director and a fund's 
adviser may constitute a material conflict of interest with the fund or 
its shareholders that is required to be disclosed, regardless of the 
amount involved, if the terms and conditions of the transaction are not 
comparable to those that would have been negotiated at ``arms-length'' 
in similar circumstances.
(2) Time Periods
    We are adopting, as proposed, a five-year time period for 
disclosure of positions and interests of directors and immediate family 
members in the proxy statement for the election of directors.\93\ We 
are, however, reducing the time period for disclosure of positions and 
interests in the SAI to two calendar years.\94\ We believe that, when a 
shareholder is asked to vote to elect directors, he is entitled to 
information about potential conflicts covering a significant period of 
time.\95\ We recognize, however, that providing five years of 
information annually in the SAI, would, as suggested by commenters, 
increase fund compliance burdens without commensurate benefits to 
shareholders.
---------------------------------------------------------------------------

    \93\ Items 22(b)(4) and 22(b)(7) of Schedule 14A.
    \94\ Items 13(b)(3) and 13(b)(6) of Form N-1A; Items 18.6 and 
18.9 of Form N-2; Items 20(e) and 20(h) of Form N-3.
    \95\ Several commenters recommended that the Commission limit 
all conflicts of interest disclosure to a two-year period. These 
commenters argued that a two-year time period is consistent with the 
time limit for material business or professional relationships in 
section 2(a)(19) of the Act. We note, however, that the five-year 
time period for disclosure of positions and interests is currently 
required in the proxy rules. In fact, when the amendments to the 
proxy rules were adopted in 1994, most of the commenters that 
addressed the issue of time periods recommended limiting the 
disclosure of past relationships to the preceding five-year period. 
See Investment Company Act Rel. No. 20614 (Oct. 13, 1994) [59 FR 
52689 (October 19, 1994)].
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    We are adopting, as proposed, the requirement to disclose material 
transactions and relationships since the beginning of the last two 
completed fiscal years in the proxy statement for the election of 
directors.\96\ In the SAI, however, we have modified the proposal to 
require disclosure of transactions and relationships during the two 
most recently completed calendar years, rather than the last two

[[Page 3744]]

fiscal years as proposed.\97\ Many commenters noted that a director may 
serve multiple funds with staggered fiscal years and that a requirement 
to disclose transactions and relationships for fiscal year time periods 
could require funds to obtain the information from directors as 
frequently as monthly, which would be overly burdensome. We have 
revised the proposal to require two calendar years of disclosure, 
rather than two fiscal years, in order to reduce this burden for funds 
with staggered fiscal years, while maintaining the requirement to 
include two years of disclosure.\98\
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    \96\ Items 22(b)(8) and 22(b)(9) of Schedule 14A.
    \97\ Items 13(b)(7) and 13(b)(8) of Form N-1A; Items 18.10 and 
18.11 of Form N-2; Items 20(i) and 20(j) of Form N-3.
    \98\ We also have modified the proposal to require funds to 
disclose in the SAI cross-directorships held by independent 
directors and their immediate family members during the last two 
most recently completed calendar years, rather than the last two 
fiscal years as proposed. Item 13(b)(9) of Form N-1A; Item 18.12 of 
Form N-2; Item 20(k) of Form N-3.
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(3) Routine, Retail Transactions and Relationships
    As proposed, the conflicts of interest disclosure provisions would 
not have required a fund to disclose routine, retail transactions and 
relationships, such as a credit card or bank or brokerage account, 
unless the director is accorded special treatment. At the request of 
commenters, we are clarifying that the exception for routine, retail 
transactions and relationships extends to residential mortgages and 
insurance policies.\99\ We also note that the exception for routine, 
retail transactions and relationships is not limited to the specific 
transactions and relationships enumerated (credit cards, bank or 
brokerage accounts, residential mortgages, and insurance policies), but 
extends to other routine, retail transactions and relationships where 
the director is not accorded special treatment.
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    \99\ Instruction 11 to Item 22(b)(8) and Instruction 9 to Item 
22(b)(9) of Schedule 14A; Instruction 10 to Item 13(b)(7) and 
Instruction 8 to Item 13(b)(8) of Form N-1A; Instruction 10 to Item 
18.10 and Instruction 8 to Item 18.11 of Form N-2; Instruction 10 to 
Item 20(i) and Instruction 8 to Item 20(j) of Form N-3. We also note 
that sales load waivers granted to fund directors generally would 
not be required to be disclosed as ``material'' transactions or 
relationships, provided that such waivers are disclosed as otherwise 
required. See Instruction 3 to Item 18(c) of Form N-1A; Instruction 
3 to Item 5.2 of Form N-2; Instruction to Item 23(b) of Form N-3 
(requiring funds to provide explanations for any differences in the 
price at which securities are offered generally to the public and 
the prices at which securities are offered to any class of 
individuals).
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4. Board's Role in Fund Governance
    We are adopting, as proposed, disclosure requirements in the proxy 
rules and the SAI relating to a fund's committees of the board of 
directors, which commenters generally supported.\100\ We are also 
adopting, as proposed, the requirement to disclose in the SAI the 
board's basis for approving an existing investment advisory 
contract.\101\
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    \100\ Items 7(e) and 22(b)(14) of Schedule 14A; Item 13(b)(2) of 
Form N-1A; Item 18.5 of Form N-2; Item 20(d) of Form N-3.
    \101\ Item 13(b)(10) of Form N-1A; Item 18.13 of Form N-2; Item 
20(l) of Form N-3.
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    A number of commenters argued that information about the board's 
basis for approving an existing advisory contract is not relevant to an 
investment decision and disclosure of this information will be 
``boilerplate'' in nature. After careful consideration of these 
comments, we continue to believe that shareholders should receive 
information in the SAI to help them evaluate the board's basis for 
approving the renewal of an existing investment advisory contract. In 
approving an investment advisory contract, independent directors must 
review the level of fees charged. Mutual funds fees and expenses, 
including advisory fees, are extremely important to shareholders. We 
note that the United States General Accounting Office (``GAO''), in a 
recent report to Congress on mutual fund fees, stressed the importance 
of heightening ``investors'' awareness and understanding of the fees 
they pay.\102\ We believe that the rules we adopt today, which will 
ensure that shareholders receive specific information on how directors 
evaluate and approve fees on a regular basis, will help to address the 
GAO's concerns. In implementing this disclosure requirement, we remind 
funds that ``boilerplate'' disclosure is not appropriate. Funds are 
required to provide appropriate detail regarding the board's basis for 
approving an existing investment advisory contract, including the 
particular factors forming the basis of this determination.
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    \102\ United States General Accounting Office, Mutual Fund Fees: 
Additional Disclosure Could Encourage Price Competition (June 2000) 
at 97.
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5. Separate Disclosure
    We are adopting, as proposed, the requirement that funds 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.\103\ While several 
commenters argued that this requirement would confuse shareholders by 
overemphasizing the differences between independent and interested 
directors, we believe that the new disclosure format will assist 
shareholders in understanding information about directors, particularly 
in evaluating whether the independent directors can, in fact, act as an 
independent, vigorous, and effective force in overseeing fund 
operations.\104\
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    \103\ Instruction 3 to Item 22(b) of Schedule 14A; Instruction 2 
to Item 13 of Form N-1A; Instruction 2 to Item 18 of Form N-2; 
Instruction 2 to Item 20 of Form N-3.
    \104\ We reiterate that funds may present information regarding 
independent and interested directors in a single table or chart, so 
long as the information for independent and interested directors is 
provided in separate sections within the table or chart. See 
Proposing Release, supra note, at text accompanying and following 
n.226.
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6. Technical and Conforming Amendments
    The Commission is adopting, as proposed, the technical and 
conforming amendments to its schedules, forms, and rules.

F. Recordkeeping Regarding Director Independence

    We are adopting as proposed the amendments to rule 31a-2, to 
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, (ii) each subsequent determination of whether the 
director continues to qualify as an independent director, and (iii) the 
determination that any person who is acting as legal counsel to the 
independent directors is an independent legal counsel.\105\ The rule 
amendments, which commenters supported, are designed to permit the 
Commission staff to monitor a fund's assessment of the independence of 
directors, and to ascertain whether a fund's assessment reflects 
diligent efforts to evaluate relevant business and personal 
relationships that might affect each director's independent 
judgment.\106\
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    \105\ See rule 31a-2(a)(4), (5).
    \106\ For a discussion of the Commission staff's views on the 
types of professional and business relationships that may be 
considered material for purposes of sections 2(a)(19)(A)(vi) and 
(B)(vi) of the Act, see Interpretive Matters Concerning Independent 
Directors of Investment Companies, Investment Company Act Release 
No. 24083 (Oct. 14, 1999) [64 FR 59877 (Nov. 3, 1999)].
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III. Effective Date; Compliance Dates

A. Effective Date

    The new rules and amendments to rules and forms that the Commission 
is adopting today will become effective February 15, 2001. The 
rescission of rule 2a19-1 will become effective on May 12, 2001, the 
effective date of section 213 of the Gramm-Leach-Bliley Act.

[[Page 3745]]

B. Compliance Dates for Investment Company Act Rule Amendments

    1. February 15, 2001. Persons may begin to rely upon new rules 
2a19-3, 10e-1 and 32a-4 on February 15, 2001, the effective date of 
these rules.
    2. July 1, 2002. After July 1, 2002: (i) persons may rely upon any 
of the Exemptive Rules (rules 10f-3, 12b-1, 15a-4(b)(2), 17a-7, 17a-8, 
17d-1(d)(7), 17e-1, 17g-1(j), 18f-3, and 23c-3) only if they comply 
with each of the three new conditions for use of each rule; (ii) 
persons may rely upon rule 17d-1(d)(7) only if any joint insurance 
policy then in effect does not exclude coverage of litigation between 
the independent directors and another insured person under the amended 
rule;\107\ and (iii) funds must begin to comply with the recordkeeping 
requirements of amended rule 31a-2.
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    \107\ See rule 17d-1(d)(7)(iii).
---------------------------------------------------------------------------

C. Compliance Date for Disclosure Amendments

    January 31, 2002. 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 January 31, 2002 must comply with the 
disclosure amendments. Based on the comments, we believe that this will 
provide funds with sufficient time to make the necessary changes to 
disclosure documents. We note that a post-effective amendment that is 
filed for any purpose other than those specifically enumerated in 
paragraph (b)(1) of rule 485 is required to be filed pursuant to rule 
485(a).\108\ We would not, however, object if existing funds file their 
first annual update complying with the amendments pursuant to rule 
485(b), unless information is included in response to the new conflicts 
of interest disclosure requirements, provided that the post-effective 
amendment otherwise meets the conditions for immediate effectiveness 
under the rule.\109\ Thereafter, funds must make their own 
determination as to whether their annual updates should be filed 
pursuant to rule 485(a) or may be filed pursuant to rule 485(b) under 
the Securities Act.\110\
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    \108\ 17 CFR 230.485.
    \109\ 17 CFR 230.485(b). This also would apply to closed-end 
interval funds filing post-effective amendments pursuant to rule 
486(b) under the Securities Act. 17 CFR 230.486(b).
    \110\ 17 CFR 230.485(a) and 230.485(b). Likewise, closed-end 
interval funds filing future post-effective amendments must 
determine whether they must file pursuant to rule 486(a) or may file 
pursuant to rule 486(b) of the Securities Act. 17 CFR 230.486(a) and 
230.486(b).
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III. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. In the Proposing Release, we requested comments and specific 
data regarding the costs and benefits of the proposed amendments to the 
Exemptive Rules \111\ and the proposed new rules. Six commenters 
responded to our request for comments on the cost-benefit analysis. The 
commenters focused on a number of issues, particularly the independent 
counsel proposal and the disclosure proposals. These comments are 
addressed below.
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    \111\ See Proposing Release, supra note , at text following 
n.33.
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A. Amendments to the Exemptive Rules

    The Commission is adopting the proposed amendments to the Exemptive 
Rules and the proposed new rules, with certain changes (together, the 
``Amendments''). The Amendments require that, for funds relying on 
those rules: (i) independent directors constitute a majority 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. The Amendments 
are designed to enhance the independence and effectiveness of 
independent directors, who are charged with overseeing the fund's 
activities and transactions under 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. The Amendments, therefore, should 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. While these benefits are not easily quantifiable in 
terms of dollars, we believe that they are real, and that the 
Amendments will strengthen the hand of independent directors to the 
advantage of shareholders.
    The Amendments may impose some costs on funds that choose to rely 
on the Exemptive Rules. These costs are discussed below. Funds that do 
not rely on an Exemptive Rule, however, will not be subject to the new 
conditions and should not incur any costs associated with those 
conditions.\112\
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    \112\ One commenter stated that the Commission's proposed 
amendments and rules will increase the costs of relying on the 
Exemptive Rules, and that the ``financial impact of the 
[Commission's] Proposal is underestimated.'' The commenter did not 
provide specific dollar figures to quantify what it believed were 
more accurate reflections of the possible costs of the Amendments. 
Moreover, whether a particular fund incurs additional costs, and the 
amount of those costs, will depend upon a number of factors specific 
to the fund.
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    Independent directors as a majority of the board. The Amendments 
require funds to have independent directors constitute a simple 
majority of their boards in order to rely on the Exemptive Rules. 
Because, as noted above, most mutual funds today have boards with 
independent majorities,\113\ it appears that the Amendments will not 
impose substantial costs on funds as a group.
---------------------------------------------------------------------------

    \113\ See Proposing Release, supra note , at n.39 and 
accompanying text.
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    Funds that currently do not have a majority of independent 
directors on their boards 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 the majority requirement of the Amendments 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.
    If new independent directors are elected in order to comply with 
the Amendments, 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.\114\ 
The Commission, however, has no reasonable basis for determining how 
many funds that currently do not have independent directors as a 
majority of their boards will choose to comply with the Amendments by 
electing new independent directors.
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    \114\ 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 not incur the costs of the proxy 
statement and shareholder meeting.
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    Independent director self-selection and self-nomination. The 
Amendments require independent directors to select and nominate any 
other independent directors. This change should not impose significant 
new costs on funds, because many funds already have adopted this 
practice.\115\ Although some

[[Page 3746]]

funds do not currently follow this practice and will 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.
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    \115\ See Proposing Release, supra note 3, at n.66 and 
accompanying text.
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    Independent legal counsel. Lastly, the Amendments require any legal 
counsel to a fund's independent directors to be an independent legal 
counsel.\116\ The Amendments do not require independent directors to 
retain legal counsel, but do require any person that acts as counsel to 
the independent directors to qualify as an independent legal counsel. 
Independent directors who are represented by counsel who does not meet 
the new definition of ``independent legal counsel'' thus may have to 
retain different counsel if their fund chooses to rely on any of the 
Exemptive Rules. If a substitution of counsel is necessary, it may lead 
to an increase in costs as described below.
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    \116\ As discussed above, we are amending rule 0-1 to include a 
definition of ``independent legal counsel.'' See Proposing Release, 
supra note 3, at n.87 and accompanying text; see also infra notes 
120-125 and accompanying text (discussing the costs and benefits of 
this proposed definition).
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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 
amending this rule to add a definition of the term ``independent legal 
counsel.'' Under the new definition, a person is an independent legal 
counsel if a majority of the fund's independent directors determine, in 
the exercise of their business judgment, based on information obtained 
from such person, that any representation of the fund's adviser, 
principal underwriter, administrator,\117\ or any of their control 
persons \118\ since the beginning of the fund's last two completed 
fiscal years is unlikely to adversely affect the professional judgment 
of the person in providing legal representation to the independent 
directors. The basis of the independent directors' determination is 
required to be recorded in the minutes of the directors' meeting.
    The new definition of ``independent legal counsel'' should help to 
ensure that independent directors' counsel is able to provide objective 
legal advice concerning the complex legal issues faced by those 
directors. This change thus should benefit both shareholders and 
independent directors by helping those directors to better carry out 
their responsibilities as shareholder representatives. Shareholders 
also will benefit from the requirement that the independent directors' 
determinations be recorded in the minute books of the fund, because 
this requirement will enable the Commission staff to review independent 
directors' determinations that their counsel qualifies as independent 
legal counsel.
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    \117\ In connection with this new definition, we also are 
amending 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 definition of independent legal counsel. We 
are not aware of any costs that would be associated with this 
definition of administrator.
    \118\ We are amending 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 definition of independent legal counsel. We 
are not aware of any costs that would be associated with this 
definition.
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    The new definition will impose costs on some funds that rely on the 
Exemptive Rules.\119\ We assume that approximately 3,200 funds rely on 
at least one of the Exemptive Rules annually.\120\ 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 ``independent legal 
counsel.'' \121\ 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,\122\ for a total annual burden of approximately 799 
hours. Based on this estimate, the total annual cost to funds of this 
new definition would be approximately $70,505.\123\ We estimated in the 
Proposing Release that the cost of the new definition would be 
approximately $70,505, and one commenter argued that the actual cost of 
the proposed definition would ``far exceed'' that amount.\124\ Another 
commenter stated that ``there are likely to be substantial costs 
incurred by funds if they are forced to hire new counsel to independent 
directors because counsel has also represented the adviser.'' \125\ We 
do not believe the cost will ``far exceed'' the estimated amount. The 
rule relies solely on the independent directors to make a good faith 
determination that a person is an

[[Page 3747]]

independent counsel. We are unable to predict with any certainty how 
many independent directors will obtain new counsel because they 
determine that their current counsel is not ``independent.'' Each 
evaluation of counsel will be fact-specific, and each board will have 
to make its own determination with respect to its counsel. Some 
independent directors may choose not to hire their own legal counsel. 
The costs of obtaining new counsel also may be partially offset by 
savings generated by reductions in payment to current counsel, once 
they cease providing their services to the independent directors.
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    \119\ Among other things, the Amendments require that, for funds 
relying on those rules, any legal counsel for the independent 
directors of the fund be an ``independent legal counsel.''
    \120\ 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 one Exemptive Rule 
annually.
    \121\ We assume that the independent directors of the remaining 
two-thirds of those funds (2,135) will choose not to have counsel 
(but instead rely in some circumstances on counsel who does not 
represent them), so that no determination by the independent 
directors would be necessary.
    \122\ 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.
    \123\ 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).
    \124\ The commenter argued that, using the Commission's 
estimate, if the 1,065 funds that make a specific determination 
regarding ``independent legal counsel'' retain separate new counsel 
to represent them, the ``total annual cost of the Commission's 
proposal will exceed $26 million'' (assuming the average annual 
retainer for each separate counsel will be $25,000). While we agree 
that there may be additional costs imposed by rule 0-1 if a board 
finds its current counsel is not independent and wishes to retain 
new counsel, it is also likely that the cost of new counsel would be 
partially offset by the lower amount of fees to be paid to prior 
counsel. Some boards may decide against appointing counsel. 
Moreover, the amended rule is different from the proposed rule, and 
gives the independent directors sole discretion to determine whether 
their counsel is independent. Thus, the overall additional costs 
should be far less than those suggested by the commenter.
    \125\ This commenter suggested that there would be additional 
costs associated with new counsel, which would need to familiarize 
itself with the fund, its charter documents, its contracts, the 
service providers, and other information in order to effectively 
represent the fund's independent directors. Similarly, the commenter 
stated that as mergers and acquisitions of fund advisers accelerate, 
many fund boards will increasingly have to look to outside counsel 
as one of the few, if not the only, source of continuity and 
institutional knowledge. We agree that costs may be incurred if the 
independent directors retain new counsel. However, the Commission 
cannot predict with any certainty how often this will occur, or the 
fees charged by the new counsel. Moreover, as law firms experience 
their own mergers, acquisitions, and turnover of attorneys, new 
lawyers frequently must familiarize themselves with the fund and its 
operations. These are costs that law firms would and might pass on 
to funds whether or not we adopt the new rule.
    The same commenter also expressed concern that the Proposing 
Release did not factor the costs of law firms to initially screen 
and thereafter continuously monitor legal work performed to ensure 
continued independence. Most law firms already screen and monitor 
any new matters for conflicts of interest. We do not believe that 
our rules will affect this screening and monitoring, nor do we 
believe law firms will have to establish new systems for the initial 
screening and continued monitoring of conflicts.
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C. Suspension of Board Composition Requirements

    New rule 10e-1 will 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. The new rule will benefit 
funds by helping to ensure that if a fund's board falls below the 
independent director minimum percentage requirements in these 
circumstances, the fund will not immediately face the severe 
consequences of losing the availability of the Exemptive Rules.
    One commenter stated its opinion that there will be significant 
costs imposed on funds if the time periods suggested in the Proposing 
Release were not increased. We extended one of the proposed time 
periods for rule 10e-1 in response to concerns voiced by commenters, 
and we believe that the periods for which the rule would suspend the 
independent director minimum percentage requirements are consistent 
with concerns for investor protection. As amended, the new rule appears 
not to have any costs for investors or funds.

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 amending this rule to make it 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 change 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 rule change 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 amendment may have some costs for 
funds.\126\ The Commission, however, has no reasonable basis for 
estimating the possible increase in premiums that may result from this 
proposal.
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    \126\ The ICI Mutual Insurance Company (``ICI Mutual''), which 
insures funds representing approximately 70 percent of all open-end 
fund assets, announced last year that it was 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 Proposing Release, supra note , at n.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 might charge funds additional premiums for 
providing this type of coverage.
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E. 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. New rule 32a-4 exempts a fund from this 
requirement if the fund has an audit committee consisting entirely of 
independent directors to oversee the fund's auditor. The new rule 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. In addition, funds 
that rely on section 32(a)(2) will no longer have to obtain shareholder 
ratification or rejection of their auditor on an annual basis, and this 
change should save some printing costs with respect to proxy materials.
    New rule 32a-4 may impose certain costs on those funds that choose 
to rely on the exemption. It appears that these costs will likely be 
minimal and will 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, or 
similar audit committee provisions must appear in the fund's charter or 
bylaws. The fund also must preserve that charter, and any modifications 
to the charter, permanently in an easily accessible place.\127\ We 
estimate that there are approximately 3,490 investment companies that 
may rely on the proposed rule.\128\ 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,\129\ for a total one-time burden of 
approximately 2,096 hours, and a total one-time cost of approximately 
$655,000.\130\ 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,\131\ for an additional total annual 
hour burden of 105 hours, and an additional total annual cost of 
approximately $5,425.\132\
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    \127\ 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.
    \128\ This estimate is based on statistics compiled by 
Commission staff from January 1, 1997 through December 31, 1998.
    \129\ 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.
    \130\ 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).
    \131\ 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.
    \132\ 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).
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    In addition, some funds pay their directors an extra fee for each 
committee on which they serve.\133\ 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

[[Page 3748]]

their independent directors a separate fee for service on the audit 
committee, or the likely amount of those fees.\134\
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    \133\ 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.
    \134\ 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

    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. New 
rule 2a19-3 will 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 the new rule. There also should be no costs to investors because, 
consistent with concerns for investor protection, the new rule will not 
permit individuals who have affiliations or business interests that 
could impair their independence to serve as independent directors. The 
new rule applies to funds that replicate a broad-based index or 
indices, and does not include the five percent threshold of the 
proposed rule, and therefore funds will not have to monitor the 
percentage of an index that is made up of the securities of the fund's 
adviser, lead underwriter, or their controlling persons.\135\
---------------------------------------------------------------------------

    \135\ See supra Section I.E.2.
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G. Disclosure of Information about Fund Directors

    In the Proposing Release, we analyzed the costs and benefits of our 
proposals and requested comment and data regarding the costs and 
benefits of the disclosure amendments. A few commenters specifically 
addressed the Commission's estimates, and they generally argued that 
the Proposing Release underestimated the costs to be incurred in 
connection with the proposed amendments. The commenters, however, did 
not provide specific cost or benefit data in response to the Proposing 
Release. As discussed above, after careful consideration of the 
comments we received in response to our Proposing Release, we have 
tailored the disclosure requirements to better achieve our goals and 
also addressed the concerns of commenters by modifying the scope of the 
proposed disclosure amendments.
    The amendments to the proxy rules and Forms N-1A, N-2, and N-3 will 
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 will help a fund shareholder evaluate 
whether his designated representatives can, in fact, act as 
independent, vigorous, and effective representatives.
    We believe that the amendments benefit investors in several ways. 
The 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 benefits shareholders by ensuring that shareholders receive 
information about the identity and experience of their directors both 
annually and whenever they are asked to vote to elect directors. 
Moreover, this information benefits prospective investors who may 
obtain the information, without charge, upon request.
    The amendments require that funds disclose: (1) Each director's 
ownership in each fund that he oversees; and (2) each director's 
aggregate ownership in any funds that he oversees within a fund family. 
This information benefits shareholders and prospective investors by 
making available in the SAI information that may show the alignment of 
director interests with those of shareholders. In addition, 
shareholders also benefit by receiving this information in the proxy 
statements whenever they are asked to vote to elect directors.
    Our amendments regarding circumstances that may raise conflict of 
interest concerns for directors benefit investors by enabling investors 
to decide for themselves whether an independent director would be an 
effective advocate for shareholders. Disclosure of this type of 
information also results in its public dissemination, bringing these 
circumstances to the attention of fund shareholders, and encouraging 
the selection of independent directors who are independent in the 
spirit of the Act. Finally, this information assists 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 years of the fund, a material business or professional 
relationship with the fund and certain persons related to the fund.
    The modifications to the disclosure requirements of matters related 
to the board's role in governing a mutual fund benefit shareholders by 
allowing them to determine more readily whether the directors are 
effectively representing shareholders' interests, independent of fund 
management.
    The amendments impose certain costs on the fund industry. The costs 
associated with the proposed amendments include the resources expended 
by funds in collecting the information and preparing the disclosure 
documents.\136\ Although we have tailored the proposal to better 
achieve our goals and to address the concerns of commenters, we do not 
believe that the overall cost burden of the amendments was materially 
affected.
---------------------------------------------------------------------------

    \136\ One commenter argued that the Commission failed to account 
for the costs to funds when potential and existing directors are 
discouraged from serving on fund boards due to the burdens of the 
proposed disclosure amendments. The commenter, however, failed to 
provide any quantifiable data to support the commenter's argument. 
Moreover, in tailoring the disclosure amendments to better achieve 
our goals, we have addressed the concerns of commenters regarding 
the scope of the disclosure requirements.
    Another commenter noted that the Commission failed to account 
for the legal costs associated with increased litigation that would 
arise from the new disclosure requirements. Again, the commenter 
failed to provide any data for us to consider.
---------------------------------------------------------------------------

Proxy Statements
    The hour burden for preparing proxy statements at the time of the 
Proposal Release was 96.2 hours per proxy statement, and we estimated 
that approximately \1/3\ of those hours--or 32 hours--are expended 
collecting and disclosing information about directors and 
nominees.\137\ We estimated the additional burden hours that would be 
imposed by the proposed disclosure requirements to be 10 hours per 
proxy statement.\138\
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    \137\ This estimate was based on a staff assessment of the 
different types of information required in proxy statements.
    \138\ This estimate was based upon a staff assessment of the 
proposed amendments in light of the hour burden and reporting 
requirements at the time of the Proposal Release.
    As stated above, the additional hours were based on the 
additional time funds would devote to determining what information 
needs to be disclosed, formulating queries for directors, and 
preparing the disclosure documents.
---------------------------------------------------------------------------

    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.\139\
---------------------------------------------------------------------------

    \139\ The estimated number of proxy statements was 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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[[Page 3749]]

Registration Statements
    Because the information to be disclosed in the registration 
statements is the same as in the proxy statements, we believe that the 
hour burden for the amendments per registration statement will 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 
estimated 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.
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 
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 will be the hour burden per registration 
statement (42) divided by the average number of portfolios per 
registrant (1.75), or 24 hours per portfolio.\140\ Because mutual funds 
only have to update information in post-effective amendments, we expect 
the hour burden to be \1/6\ of the hours expended for the initial 
registration statement, or 4 hours per portfolio for post-effective 
amendments.\141\
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    \140\ Our estimated hour burden would be high 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.
    \141\ Although funds only have to update the information about 
current directors and add information about new directors, we 
anticipate that funds will incur some burden hours in regularly 
collecting information from directors, determining what information 
needs to be disclosed, and preparing the updated disclosure 
information.
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    In the Proposing Release, we estimated that 280 portfolios file 
initial registration statements and 7,875 portfolios file post-
effective amendments annually on Form N-1A.\142\ Thus, we estimate the 
annual industry cost of the amendments to Form N-1A to be 38,220 hours, 
or $4.78 million.\143\
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    \142\ These estimates were based on filings received in calendar 
year 1998.
    \143\ The total annual industry cost is calculated by 
multiplying the total annual industry hour burden ((280 portfolios x 
24 hours) + (7,875 portfolios x 4 hours)) by the hourly wage rate of 
$125.
---------------------------------------------------------------------------

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 disclosure will be the same for 
Form N-2 as for Form N-1A, except that it would be for one portfolio 
per registration statement, we estimated the additional hour burden for 
the proposed amendments to be 42 hours for each initial registration 
statement. Because funds only have to update information in post-
effective amendments, we expect that the hour burden to be 
approximately \1/6\ of the hours expended for the initial registration 
statement, or 7 hours per post-effective amendment.\144\
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    \144\ Although funds only have to update the information about 
current directors and add information about new directors, we 
anticipate that funds will incur some burden hours in regularly 
collecting information from directors, determining what information 
needs to be disclosed, and preparing the updated disclosure 
information.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that 110 funds file initial 
registration statements and 20 file post-effective amendments annually 
on Form N-2.\145\ Thus, we estimate the annual industry cost of the 
amendments to Form N-2 to be 4,760 hours, or $595,000.\146\
---------------------------------------------------------------------------

    \145\ These estimates were based on filings received in calendar 
year 1998.
    \146\ 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.
---------------------------------------------------------------------------

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 will 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 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.\147\
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    \147\ 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 
information.
---------------------------------------------------------------------------

    In the Proposing Release, we estimated that 20 portfolios file 
initial registration statements and 40 portfolios file post-effective 
amendments annually on Form N-3.\148\ Thus, we estimate the annual 
industry cost of the amendments to Form N-3 to be 280 hours, or 
$35,000.\149\
---------------------------------------------------------------------------

    \148\ These estimates were based on filings received in calendar 
year 1998.
    \149\ 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.
---------------------------------------------------------------------------

Shareholder Reports
    Because the disclosure of basic tabular information, which is 
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 to 
be disclosed, we estimate that the hour burden would be one-half hour 
per investment company for each annual shareholder report. In the 
Proposing Release, we estimated that there were 3,490 management 
investment companies that are subject to the annual report 
requirements.\150\ Thus, we estimate the annual industry cost of the 
proposed amendments for annual shareholder reports to be 1,745 hours, 
or $218,125.\151\
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    \150\ This estimate was based on statistics compiled by Division 
staff from January 1, 1997 through December 31, 1998.
    \151\ 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.
---------------------------------------------------------------------------

H. Recordkeeping Regarding Director Independence

    The Commission also is amending rule 31a-2 under the Act, which 
requires funds to preserve certain records for specified periods of 
time. The amendments to rule 31a-2 require funds to preserve for a 
period of at least six years any record of: (i) The initial 
determination that a director qualifies as

[[Page 3750]]

an independent director; (ii) each subsequent determination of whether 
the director continues to qualify as an independent director; and (iii) 
the determination that any person who is acting as legal counsel to the 
independent directors is an independent legal counsel. These amendments 
should benefit both shareholders and the Commission by enabling the 
Commission's staff to monitor the independent directors' determination 
of whether their counsel is independent.
    The amendments will impose certain minimal costs on funds. The 
Commission staff estimates that each fund currently spends about 27.8 
hours per year complying with the record preservation requirements of 
rule 
31a-2.\152\ Approximately 3,490 funds would be affected by the proposal 
to amend the rule to require funds to preserve records regarding the 
independence of their directors.\153\ The Commission staff estimates 
that each of those funds would be required to spend an additional 0.2 
hours annually to comply with the proposed amendment,\154\ 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.\155\ The estimated costs 
related to the determination of counsel's independence are discussed 
above in section IV.B. The Commission is not aware of any other costs 
that would result from the proposed amendments to rule 31a-2.
---------------------------------------------------------------------------

    \152\ Commission staff surveyed representatives of several funds 
to determine the current burden hour estimate for rule 31a-2.
    \153\ This estimate is based on statistics compiled by 
Commission staff from January 1, 1997 through December 31, 1998.
    \154\ 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.
    \155\ 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).
---------------------------------------------------------------------------

V. Effects on Efficiency, Competition and Capital Formation

    Section 2(c) of the Investment Company Act, section 2(b) of the 
Securities Act, and section 3(f) of the Exchange Act require the 
Commission, when engaging in rulemaking that requires it to consider or 
determine 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.\156\ 
The Commission has considered these factors.
---------------------------------------------------------------------------

    \156\ 15 U.S.C. 80a-2(c), 77b(b), and 78c(f).
---------------------------------------------------------------------------

    Independent directors have significant responsibilities under the 
Investment Company Act and the Exemptive Rules. The new rules and 
amendments are intended to enhance the independence and effectiveness 
of independent directors so that they can perform these 
responsibilities capably and well. The new rules and rule amendments 
should promote capital formation by bolstering investors' confidence in 
the ability of independent directors to represent their interests 
effectively. When investors are confident that their interests are duly 
considered by those responsible for the operation of the mutual funds 
in which they invest, they are more likely to continue to rely on 
mutual funds as a vehicle for savings and investment. The new rules and 
rule amendments should promote efficiency and competition by enhancing 
the ability of fund independent directors to scrutinize fund operations 
and protect funds from inefficiencies inherent when a fund is operated 
to promote the interests of persons other than those who have invested 
in the fund.
    As discussed above, 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 fund shareholder to 
evaluate whether the independent directors can, in fact, act as an 
independent, vigorous, and effective force in overseeing fund 
operations. The disclosure amendments were designed to ensure that 
shareholders have the information necessary to make such evaluations.
    It is unclear whether the disclosure amendments will promote the 
efficiency of funds since the disclosure amendments do not change the 
operation of funds. The disclosure amendments, however, may promote 
competition among funds since shareholders will now be better equipped 
to evaluate the effectiveness of fund boards among various funds before 
making their investment decisions. The disclosure amendments also may 
promote capital formation as the disclosure amendments may provide 
potential investors greater confidence to invest in funds knowing that 
the interests of the independent directors overseeing the funds are 
aligned with their own.

VI. Paperwork Reduction Act

    As explained in the Proposing Release, 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.]. We 
published notice soliciting comments on the collection of information 
requirements in the Proposing Release and submitted these requirements 
to the Office of Management and Budget (``OMB'') for review in 
accordance with 44 U.S.C. 3507(d) and 5 CFR 1320.11.
    As discussed above, we are adopting the disclosure amendments with 
several modifications designed to tailor the amendments more closely to 
our goal of providing shareholders with better information to evaluate 
the independent directors. Specifically, we are adopting disclosure 
amendments that will require funds to disclose: (1) Basic information 
about directors in an easy-to-read tabular format; (2) fund shares 
owned by directors; (3) conflicts of interest information regarding 
independent directors; and (4) information on the board's role in 
governing the fund.
    A few commenters specifically addressed the burden hours the 
Commission estimated funds would incur to satisfy the proposed 
disclosure requirements, generally stating that these estimates were 
too low. These commenters, however, did not provide the Commission with 
any specific quantitative data regarding burden hours.\157\ As 
discussed in the Proposing Release, the Commission staff estimated the 
burden hours that would be necessary under the proposed disclosure 
amendments by assessing a variety of factors.\158\ After careful

[[Page 3751]]

consideration of these comments, as well as the modifications made to 
the amendments as proposed, we continue to believe that our estimates 
are appropriate.\159\
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    \157\ One commenter did assert that an additional 250 hours 
would be required to convert the new disclosure requirements into 
``plain English'' in order for funds to obtain accurate information 
from directors. In light of the modifications to the disclosure 
requirements discussed above, which simplified the disclosure 
requirements, we believe that our estimates remain appropriate.
    \158\ For example, in determining the burden hour for preparing 
proxy statements, we explained that the then current hour burden for 
preparing proxy statements was 96.2 hours per proxy statement, and 
we estimated that approximately \1/3\ of those hours--or 32 hours--
were expended collecting and disclosing information about directors 
and nominees. We estimated that an additional 10 burden hours per 
proxy statement would be imposed by the proposed disclosure 
requirements. This estimate was based upon a Commission staff 
assessment of the proposed amendments in light of the then current 
hour burden and current reporting requirements. We explained that 
the additional hours were based on the additional time funds would 
devote to determining what information needs to be disclosed and 
preparing the disclosure documents.
    \159\ We note that since issuing the Proposing Release, the 
Commission issued a proposal on Disclosure of Mutual Fund After-Tax 
Returns, Investment Company Act Release No. 24339 (March 15, 2000) 
[65 FR 15500 (March 22, 2000)]. The proposal would result in an 
increase in burden hours of 109,591 for Form N-1A and 17,100 burden 
hours for rule 30e-1 due to the proposed amendments relating to 
after-tax disclosure.
---------------------------------------------------------------------------

    The rule amendments we are adopting in this Release include 
amendments to the Exemptive Rules that are designed to enhance the 
independence and effectiveness of fund independent directors.\160\ The 
changes also include new rules and rule amendments that will 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 
exempting 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.
---------------------------------------------------------------------------

    \160\ These amendments require that, for funds relying on any of 
the Exemptive Rules, (i) independent directors constitute a majority 
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 amendments, we also are amending 
rule 0-1 under the Act to add definitions of the terms ``independent 
legal counsel'' and ``administrator.''
---------------------------------------------------------------------------

    In the Proposing Release, the Commission estimated the burden hours 
that would be necessary for the collection of information requirements 
under the proposed amendments to the rules under the Act. Although no 
commenters specifically addressed the burden estimates for the 
collection of information requirements, a few commenters responding to 
the cost-benefit analysis in the Proposing Release generally stated 
that we had underestimated the burden hours. These commenters, however, 
did not provide an estimate of the burden hours associated with the 
proposed rule changes. We continue to believe that the estimates of the 
burden hours contained in the Proposing Release are appropriate.\161\
---------------------------------------------------------------------------

    \161\ The Commission continues to estimate that the addition of 
the definition of the term ``independent legal counsel'' to rule 0-1 
will require the independent directors of approximately 1,065 funds 
to spend, on average, 0.75 hours annually to determine whether their 
counsel meets the definition of ``independent legal counsel,'' for a 
total annual burden of approximately 799 hours. See Proposing 
Release, supra note 3, at nn.287-290 and accompanying text.
    In addition, the Commission estimates that the amendments to 
rule 31a-2, which require funds to preserve records regarding the 
independence of their directors and counsel, will require 
approximately 3,490 investment companies to spend an additional 0.2 
hours annually to comply with the collection of information 
requirements of rule 31a-2, for a total additional burden for all 
funds of approximately 698 hours. See Proposing Release, supra note 
3, at nn.310-312 and accompanying text.
    The Commission also estimates that new rule 32a-4, which 
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, will be 
relied upon by approximately 524 funds, for a total one-time burden 
of 2,096 hours and an additional annual hour burden of 105 hours. 
See Proposing Release, supra note 3, at nn.313-314 and accompanying 
text.
---------------------------------------------------------------------------

    OMB approved the collection requirements contained in the forms and 
rules. 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 (Control No. 3235-0530) was adopted under sections 6(c) [15 
U.S.C. 80a-6(c)] and 38(a) of the Investment Company Act.
    An agency may not conduct or sponsor, and a person is not required 
to respond to, a collection of information unless it displays a 
currently valid control number. Compliance with the disclosure 
requirements is mandatory. Responses to the disclosure requirements 
will not be kept confidential.

VII. Summary of Final Regulatory Flexibility Analysis

    A Final Regulatory Flexibility Analysis (``FRFA'') has been 
prepared in accordance with 5 U.S.C. 604. The Commission proposed new 
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, and requested comments on the new rules and 
amendments in the Proposing Release. The Commission prepared an Initial 
Regulatory Flexibility Analysis (``IRFA'') in accordance with 5 U.S.C. 
603 in conjunction with the Proposing Release, which was made available 
to the public. The Proposing Release summarized the IRFA and solicited 
comments on it. No comments specifically addressed the IRFA.

A. Need for the Rules and Rule Amendments

1. Amendments to Exemptive Rules
    Fund boards of directors have significant responsibilities to 
protect investors under state law, the Investment Company Act, and many 
of our rules. Independent directors, in particular, represent the 
interests of fund shareholders. They serve as ``independent 
watchdogs,'' guarding investor interests. We are amending certain 
Exemptive Rules to require that, for funds relying on those rules:
     Independent directors constitute a majority 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.''\162\
---------------------------------------------------------------------------

    \162\ In connection with the adoption of this requirement, we 
also are defining the term ``independent legal counsel.''
---------------------------------------------------------------------------

    We also are adopting rules and rule amendments that will 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 funds to keep 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, we are exempting funds from the requirement 
that shareholders ratify or reject the directors' selection of an 
independent public accountant, if the fund

[[Page 3752]]

establishes an audit committee composed entirely of independent 
directors.
2. Disclosure Requirements
    In reevaluating our current disclosure requirements about fund 
directors, we concluded that, while our fundamental approach has been 
sound, there are several gaps in the information that shareholders 
currently receive about directors. We are, therefore, requiring that 
funds provide better information about directors, including:
     Basic information about the identity and business 
experience of directors;
     Fund shares owned by directors;
     Information about directors that may raise conflict of 
interest concerns; and
     The board's role in governing the fund.
    We are adopting the disclosure amendments with several 
modifications designed to tailor the amendments more closely to our 
goal of providing shareholders with better information to evaluate the 
independent directors.

B. Significant Issues Raised by Public Comment

    The Commission requested comment on the IRFA, but we received no 
comments specifically addressing the analysis. Several commenters, 
however, asserted that the financial costs of the amendments to the 
rules under the Act would have a greater impact on funds that are small 
entities. Those commenters did not, however, provide an estimate of the 
costs to small entities. A few commenters stated that the disclosure 
amendments, as proposed, would disadvantage smaller funds.
    Two commenters argued that the proposed fund ownership disclosure 
would disadvantage directors of smaller funds as these funds are more 
likely to be stand-alone funds or part of a fund complex with fewer 
funds, thereby reducing the likelihood that such funds would meet 
directors' particular investment objectives. We have addressed this 
concern by modifying the proposal to require that funds disclose each 
director's ownership in each fund that he oversees and each director's 
aggregate ownership in any funds that he oversees within a his fund 
family. Although we understand that directors of smaller funds will 
still have fewer funds from which to choose, limiting fund ownership 
disclosure to those funds that a director oversees within the same 
complex should help reduces the disadvantage to directors of smaller 
funds and still provide investors with information to assess whether a 
director's interests are aligned with their own..
    We also narrowed the scope of immediate family members and related 
persons in recognition of the overbreadth of our proposal in certain 
circumstances, which should alleviate concerns that the conflicts of 
interest disclosure requirements would discourage directors from 
serving on fund boards.

C. Small Entities Subject to the Rules

    As of December 1999, approximately 299 funds met the Commission's 
definition of small entity for purposes of the Investment Company 
Act.\163\
---------------------------------------------------------------------------

    \163\ We note that few, if any, insurance company separate 
accounts registered on Form N-3 have assets of less than $50 million 
when separate account assets are aggregated with the assets of the 
sponsoring insurance company.
---------------------------------------------------------------------------

    The amendments to the Exemptive Rules will affect funds, including 
any small entities that rely on the Exemptive Rules and do not already 
meet the new conditions to those rules. Although it appears that funds 
may incur certain costs in complying with those conditions, the 
Commission does not have a reasonable basis for estimating those costs. 
Other rule amendments are not expected to have a significant economic 
impact on funds, including those that are small entities.
    As discussed above, we are adopting the disclosure amendments with 
several modifications designed to tailor the amendments more closely to 
our goal of providing shareholders with better information to evaluate 
the independent directors. In doing so, we have narrowed the scope of 
the disclosure requirements that were proposed and that would have 
applied to small entities.

D. Projected Reporting, Recordkeeping, and Other Compliance 
Requirements

1. Investment Company Act Rule Amendments
    The amendment to rule 17d-1(d)(7), and new rules 10e-1 and 2a19-3, 
will not impose any new reporting, recordkeeping or compliance 
requirements. The amendments to the Exemptive Rules also will not 
impose any new reporting or recordkeeping requirements, but will impose 
three new compliance requirements. For funds relying on the Exemptive 
Rules, the amendments require that: (i) Independent directors 
constitute a majority of the fund's board of directors; (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. Although it appears that there may be 
certain costs to funds, including those that are small entities, 
associated with complying with these requirements, the Commission does 
not have a reasonable basis for estimating those costs.
2. Disclosure Amendments
    As noted in our Paperwork Reduction Act Analysis, a few commenters 
argued that we had underestimated the costs of complying with the 
proposed rules and amendments.\164\ In addition, several commenters 
stated that compliance with the proposed rules and amendments would 
have a greater impact on small entities. However, none of the 
commenters provided an estimate of the impact on small entities, and 
how it would differ from the impact on larger entities.
---------------------------------------------------------------------------

    \164\ See supra note and accompanying text.
---------------------------------------------------------------------------

E. Agency Action to Minimize Effects on Small Entities

1. Investment Company Act Rule Amendments
    With respect to the amendments to the rules under the Act, we 
believe that establishing different requirements that are applicable 
specifically to small entities is inconsistent with the protection of 
investors. We also believe that adjusting the new rules and rule 
amendments to establish different compliance requirements for small 
entities could undercut the purpose of the changes: to enhance the 
effectiveness of independent directors of all funds, and thus better 
enable those directors to fulfill their role of protecting shareholder 
interests.
2. Disclosure Amendments
    With respect to the disclosure requirements, the Commission 
believes that special compliance or reporting requirements for small 
entities would not be appropriate or consistent with investor 
protection. The disclosure amendments give shareholders and the public 
greater access to information about directors. Different disclosure 
requirements for small entities, such as reducing the level of 
disclosure that small entities would have to provide shareholders, 
would create the risk that shareholders would not receive adequate 
information about their independent directors. The Commission believes 
it is important for shareholders and the public to receive this 
information about directors for all funds, not just for funds that are 
not considered small entities. Shareholders in small funds should have 
information about their directors and would benefit

[[Page 3753]]

from this information as much as shareholders in larger funds.
    Consolidating or simplifying compliance requirements for small 
entities or exempting small entities from any or all of the disclosure 
requirements would be inconsistent with the Securities Act, the 
Exchange Act, the Investment Company Act, and investor protection. If 
we do not require certain information for small entities, this could 
create the risk that investors in small funds might not receive 
important information about their directors. The Commission also notes 
that current disclosure requirements in the proxy statements and 
registration statements do not distinguish between small entities and 
other funds. In addition, the Commission believes it would be 
inappropriate to impose a different timetable on small entities for 
complying with the requirements.
    The Commission believes that the amendments will not adversely 
affect small entities. The new disclosure requirements modify the 
existing disclosure requirements in proxy statements and registrations 
statements. In addition, the Commission believes that any additional 
impact on small entities will be outweighed by the benefits to 
shareholders and the public of having greater access to the 
information. Further consolidation or simplification of disclosure 
requirements for small entities, or use of performance standards to 
specify different requirements for small entities would not be 
consistent with the objectives of the Investment Company Act.
    The FRFA is available for public inspection in File No. S7-23-99, 
and a copy may be obtained by contacting Peter M. Hong, Special 
Counsel, at (202) 942-0721, Office of Disclosure Regulation, Division 
of Investment Management, Securities and Exchange Commission, 450 5th 
Street, N.W., Washington, D.C. 20549-0506.

VIII. Statutory Authority

    The Commission is adopting 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 adopting 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 adopting 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 [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 Final Rules and Forms

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

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 as follows:
    a. Redesignating paragraphs (e) and (d) of Item 7 as paragraphs (d) 
and (e) of Item 7;
    b. In newly redesignated paragraph (d)(1) of Item 7, removing the 
third and fourth sentence;
    c. In newly redesignated paragraph (d)(3)(iv)(A)(2) of Item 7, 
revise the phrase ``paragraph (e)(3)(iv)(A)(2)'' to read ``paragraph 
(d)(3)(iv)(A)(2)'';
    d. In newly redesignated paragraphs (d)(3)(v), (d)(3)(vi) and 
(d)(3)(vii) of Item 7, revise the phrase ``paragraph (e)(3)'' to read 
``paragraph (d)(3)'';
    e. Revising newly redesignated paragraph (e) of Item 7;
    f. Revising Item 8(d), before the Instruction, revising ``Item 
22(b)(6)'' to read ``Item 22(b)(13)'';
    g. In the Instruction following Item 10(a)(2)(ii)(A), revising 
``Item 22(b)(6)'' to read ``Item 22(b)(13)'';
    h. In the Instruction following Item 10(b)(1)(ii), revising ``Item 
22(b)(6)(ii)'' to read ``Item 22(b)(13)'';
    i. Revising paragraph (a)(1)(i) of Item 22;
    j. In Item 22, redesignating paragraphs (a)(1)(iv), (v), (vi), 
(vii), and (viii) as paragraphs (a)(1)(v), (vi), (ix), (x), and (xii);
    k. In Item 22, adding new paragraphs (a)(1)(iv), (vii), (viii), and 
(xi);
    l. In Item 22, revising newly designated paragraph (a)(1)(x); and
    m. Revising paragraph (b) of Item 22.
    These additions and revisions read as follows:


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

* * * * *

Item 7. Directors and executive officers

* * * * *
    (e) In lieu of paragraphs (a) through (d)(2) of this Item, 
investment companies registered under the Investment Company Act of 
1940 (15 U.S.C. 80a) must furnish the information required by Item 
22(b) of this Schedule 14A.
* * * * *

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.
* * * * *
    (iv) Family of Investment Companies. The term ``Family of 
Investment Companies'' shall mean any two or more registered 
investment companies that:
    (A) Share the same investment adviser or principal underwriter; 
and
    (B) Hold themselves out to investors as related companies for 
purposes of investment and investor services.
* * * * *
    (vii) Immediate Family Member. The term ``Immediate Family 
Member'' shall mean a person's spouse; child residing in the 
person's household (including step and adoptive children); and any 
dependent of the person, as defined in section 152 of the Internal 
Revenue Code (26 U.S.C. 152).
    (viii) Officer. The term ``Officer'' shall mean the president, 
vice-president, secretary, treasurer, controller, or any other 
officer who performs policy-making functions.
* * * * *
    (x) Registrant. The term ``Registrant'' shall mean an investment 
company registered under the Investment Company Act of 1940 (15 
U.S.C. 80a) or a business development company as defined by section 
2(a)(48) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(48)).
    (xi) 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.
* * * * *
    (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

[[Page 3754]]

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'' of the Fund within the meaning of section 
2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(19)) separately from the information for directors or nominees 
who are not or would not be interested persons of the Fund. 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 directors or nominees 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, and Age.............  Position(s) Held with   Term of Office and      Principal              Number of Portfolios   Other Directorships
                                      Fund.                   Length of Time Served.  Occupation(s) During   in Fund Complex        Held by Director or
                                                                                      Past 5 Years.          Overseen by Director   Nominee for Director
                                                                                                             or 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)).
    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.
    4. For each director or nominee for election as director who is 
or would be an ``interested person'' of the Fund within the meaning 
of section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 
80a-2(a)(19)), 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 (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 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) For each individual listed in column (1) of the table 
required by paragraph (b)(1) of this Item, except for any director 
or nominee for election as director who is not or would not be an 
``interested person'' of the Fund within the meaning of section 
2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(19)), describe any positions, including as an officer, 
employee, director, or general partner, held with affiliated persons 
or principal underwriters of the Fund.
    Instruction to paragraph (b)(2). 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, 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)(3). Do not include arrangements or 
understandings with directors or Officers acting solely in their 
capacities as such.
    (4) 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 any director or 
nominee for election as director, who is not or would not be an 
``interested person'' of the Fund within the meaning of section 
2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(19)), 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, or Sponsoring Insurance Company as the Fund 
or having an investment adviser, principal underwriter, or 
Sponsoring Insurance Company that directly or indirectly controls, 
is controlled by, or is under common control with an investment 
adviser, principal underwriter, or Sponsoring Insurance Company of 
the Fund;
    (iii) An investment adviser, principal underwriter, 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, or Sponsoring Insurance Company of the Fund.
    Instruction to paragraph (b)(4). 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.
    (5) For each director or nominee for election as director, state 
the dollar range of equity securities beneficially owned by the 
director or nominee as required by the following table:
    (i) In the Fund; and
    (ii) On an aggregate basis, in any registered investment 
companies overseen or to be overseen by the director or nominee 
within the same Family of Investment Companies as the Fund.

[[Page 3755]]



------------------------------------------------------------------------
               (1)                        (2)                 (3)
------------------------------------------------------------------------
Name of Director or Nominee.....  Dollar Range of     Aggregate Dollar
                                   Equity Securities   Range of Equity
                                   in the Fund.        Securities in All
                                                       Funds Overseen or
                                                       to be Overseen by
                                                       Director or
                                                       Nominee in Family
                                                       of Investment
                                                       Companies
------------------------------------------------------------------------

    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 
16a-1(a)(2) under the Exchange Act (Sec. 240.16a-1(a)(2)).
    3. If action is to be taken with respect to more than one Fund, 
disclose in column (2) the dollar range of equity securities 
beneficially owned by a director or nominee in each such Fund 
overseen or to be overseen by the director or nominee.
    4. In disclosing the dollar range of equity securities 
beneficially owned by a director or nominee in columns (2) and (3), 
use the following ranges: none, $1-$10,000, $10,001-$50,000, 
$50,001-$100,000, or over $100,000.
    (6) For each director or nominee for election as director who is 
not or would not be an ``interested person'' of the Fund within the 
meaning of section 2(a)(19) of the Investment Company Act of 1940 
(15 U.S.C. 80a-2(a)(19), 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 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, or 
Sponsoring Insurance Company of the Fund:

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

    Instructions to paragraph (b)(6). 1. Information should be 
provided as of the most recent practicable date. Specify the 
valuation date by footnote or otherwise.
    2. An individual is a ``beneficial owner'' of a security if he 
is a ``beneficial owner'' under either rule 13d-3 or rule 16a-
1(a)(2) under the Exchange Act (Secs. 240.13d-3 or 240.16a-1(a)(2)).
    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, or Sponsoring Insurance 
Company, describe the company's relationship with the investment 
adviser, principal underwriter, 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.
    (7) Unless disclosed in response to paragraph (b)(6) of this 
Item, describe any direct or indirect interest, the value of which 
exceeds $60,000, of each director or nominee for election as 
director who is not or would not be an ``interested person'' of the 
Fund within the meaning of section 2(a)(19) of the Investment 
Company Act of 1940 (15 U.S.C. 80a-2(a)(19)), or Immediate Family 
Member of the director or nominee, during the past five years, in:
    (i) An investment adviser, principal underwriter, 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, or 
Sponsoring Insurance Company of the Fund.
    Instructions to paragraph (b)(7). 1. 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.
    2. The interest of the director (or nominee) and the interests 
of his Immediate Family Members should be aggregated in determining 
whether the value exceeds $60,000.
    (8) Describe briefly any material interest, direct or indirect, 
of any director or nominee for election as director who is not or 
would not be an ``interested person'' of the Fund within the meaning 
of section 2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 
80a-2(a)(19)), or Immediate Family Member of the director or 
nominee, in any transaction, or series of similar transactions, 
since the beginning of the last two completed fiscal years of the 
Fund, or in any currently proposed transaction, or series of similar 
transactions, in which the amount involved exceeds $60,000 and 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, or Sponsoring Insurance Company as the Fund 
or having an investment adviser, principal underwriter, or 
Sponsoring Insurance Company that directly or indirectly controls, 
is controlled by, or is under common control with an investment 
adviser, principal underwriter, 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) and (c)(7)), having the same investment adviser, 
principal underwriter, or Sponsoring Insurance Company as the Fund 
or having an investment adviser, principal underwriter, or 
Sponsoring Insurance Company that directly or indirectly controls, 
is controlled by, or is under common control with an investment 
adviser, principal underwriter, or Sponsoring Insurance Company of 
the Fund;
    (v) An investment adviser, principal underwriter, or Sponsoring 
Insurance Company of the Fund;
    (vi) An Officer of an investment adviser, principal underwriter, 
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, 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, or Sponsoring Insurance 
Company of the Fund.
    Instructions to paragraph (b)(8). 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

[[Page 3756]]

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)(8)(i) through (b)(8)(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)(8) 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)(8)(i) through 
(b)(8)(viii) of this Item, and the transaction is not material to 
the company.
    8. The materiality of any interest is to be determined on the 
basis of the significance of the information to investors in light 
of all the circumstances of the particular case. The importance of 
the interest to the person having the interest, the relationship of 
the parties to the transaction with each other, and the amount 
involved in the transaction are among the factors to be considered 
in determining the significance of the information to investors.
    9. 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)(8)(i) through (b)(8)(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.
    10. 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.
    11. No information need be given as to any routine, retail 
transaction. For example, the Fund need not disclose that a director 
has a credit card, bank or brokerage account, residential mortgage, 
or insurance policy with a person specified in paragraphs (b)(8)(i) 
through (b)(8)(viii) of this Item unless the director is accorded 
special treatment.
    (9) Describe briefly any direct or indirect relationship, in 
which the amount involved exceeds $60,000, of any director or 
nominee for election as director who is not or would not be an 
``interested person'' of the Fund within the meaning of section 
2(a)(19) of the Investment Company Act of 1940 (15 U.S.C. 80a-
2(a)(19)), or Immediate Family Member of the 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)(8)(i) 
through (b)(8)(viii) of this Item. Relationships include:
    (i) Payments for property or services to or from any person 
specified in paragraphs (b)(8)(i) through (b)(8)(viii) of this Item;
    (ii) Provision of legal services to any person specified in 
paragraphs (b)(8)(i) through (b)(8)(viii) of this Item;
    (iii) Provision of investment banking services to any person 
specified in paragraphs (b)(8)(i) through (b)(8)(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)(9)(i) through (b)(9)(iii) of this Item.
    Instructions to paragraph (b)(9). 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)(8)(i) 
through (b)(8)(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, 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)(8)(i) through (b)(8)(viii) of this Item may have an indirect 
relationship by reason of the position, relationship, or interest.
    6. In determining whether the amount involved in a relationship 
exceeds $60,000, amounts involved in a relationship of the director 
(or nominee) should be aggregated with those of his Immediate Family 
Members.
    7. In the case of an indirect interest, identify the company 
with which a person specified in paragraphs (b)(8)(i) through 
(b)(8)(viii) of this Item has a relationship; the name of the 
director, nominee, or Immediate Family Member affiliated with the 
company and the nature of the affiliation; and the amount of 
business conducted between the company and the person specified in 
paragraphs (b)(8)(i) through (b)(8)(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.
    8. In calculating payments for property and services for 
purposes of paragraph (b)(9)(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)(8)(i) through (b)(8)(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.
    9. No information need be given as to any routine, retail 
relationship. For example, the Fund need not disclose that a 
director has a credit card, bank or brokerage account, residential 
mortgage, or insurance policy with a person specified in paragraphs 
(b)(8)(i) through (b)(8)(viii) of this Item unless the director is 
accorded special treatment.
    (10) If an Officer of an investment adviser, principal 
underwriter, 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, 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 or nominee for election as director who is not 
or would not be an ``interested person'' of the Fund within the 
meaning of section 2(a)(19) of the Investment Company Act of 1940 
(15 U.S.C. 80a-2(a)(19)), or Immediate Family Member of the 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, or 
Sponsoring Insurance Company or person controlling, controlled by, 
or under common control with the investment adviser, principal 
underwriter, or Sponsoring Insurance Company where the individual 
named in paragraph (b)(10)(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)(10). 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.
    (11) 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)(11). Information provided under 
paragraph (b)(8) 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)(11).

[[Page 3757]]

    (12) 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.
    (13) 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, Position........  Aggregate           Pension or          Estimated Annual    Total Compensation
                                   Compensation From   Retirement          Benefits Upon       From Fund and
                                   Fund.               Benefits Accrued    Retirement.         Complex Paid to
                                                       as Part of Fund                         Directors
                                                       Expenses.
----------------------------------------------------------------------------------------------------------------

    Instructions to paragraph (b)(13)(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)(13)(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).
    (14) 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.
* * * * *

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

    3. The authority citation for Part 270 is amended by adding the 
following citations 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);
    Section 270.17a-8 is also issued under 15 U.S.C. 80a-6(c) and 
80a-37(a);
    Section 270.17d-1 is also issued under 15 U.S.C. 80a-6(c), 80a-
17(d), and 80a-37(a);
    Section 270.17e-1 is also issued under 15 U.S.C. 80a-6(c), 80a-
30(a), and 80a-37(a);
    Section 270.17g-1 is also issued under 15 U.S.C. 80a-6(c), 80a-
17(d), 80a-17(g), and 80a-37(a);
    Section 270.30e-1 is also issued under 15 U.S.C. 77f, 77g, 77h, 
77j, 77s, 78l, 78m, 78n, 78o(d), 78w(a), 80a-8, 80a-29, and 80a-37;
    Section 270.31a-2 is also issued under 15 U.S.C. 80a-30.
* * * * *


Secs. 270.17a-8, 270.17d-1, 270.17e-1  [Amended]

    4. The authority citations following Secs. 270.17a-8, 270.17d-1, 
270.17e-1, 270.17g-1, 270.30d-1, and 270.31a-2 are removed.

    5. 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) A majority of the disinterested directors reasonably determine 
in the exercise of their judgment (and record the basis for that 
determination in the minutes of their meeting) that any representation 
by the person of the company's investment adviser, principal 
underwriter, administrator (``management organizations''), or any of 
their control persons, since the beginning of the fund's last two 
completed fiscal years, is or was sufficiently limited that it is 
unlikely to adversely affect the professional judgment of the person in 
providing legal representation to the disinterested directors; and
    (B) The disinterested directors have obtained an undertaking from 
such person to provide them with information necessary to make their 
determination and to update promptly that information when the person 
begins to represent, or materially increases his representation of, a 
management organization or control person.

[[Page 3758]]

    (ii) The disinterested directors are entitled to rely on the 
information obtained from the person, unless they know or have reason 
to believe that the information is materially false or incomplete. The 
disinterested directors must re-evaluate their determination no less 
frequently than annually (and record the basis accordingly), except as 
provided in paragraph (iii) of this section.
    (iii)After the disinterested directors obtain information that the 
person has begun to represent, or has materially increased his 
representation of, a management organization (or any of its control 
persons), the person may continue to be an independent legal counsel, 
for purposes of paragraph (a)(6)(i) of this section, for no longer than 
three months unless during that period the disinterested directors make 
a new determination under that paragraph.
    (iv) For purposes of paragraphs (a)(6)(i)-(iii) 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.
* * * * *


Sec. 270.2a19-1  [Removed and reserved]

    6. Section 270.2a19-1 is removed and reserved.

    7. 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 broad-
based 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)).

    8. 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 thereunder 
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 90 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.

    9. 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 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.
* * * * *

    10. 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 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;
* * * * *

    11. Section 270.15a-4 is amended by:
    a. Removing the word ``and'' at the end of paragraph (b)(2)(v);
    b. Removing the period at the end of paragraph (b)(2)(vi)(C)(2) and 
adding in its place ``; and''; and
    c. Adding paragraph (b)(2)(vii) to read as follows:


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

* * * * *
    (b) * * *
    (2) * * *
    (vii)(A) A majority 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.

    12. Section 270.17a-7 is amended by:
    a. Removing the ``and'' at the end of paragraph (e)(3);
    b. Redesignating paragraph (f) as paragraph (g); and
    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 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
* * * * *
    13. 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 new paragraph (c) to read as follows:


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

* * * * *
    (c)(1) A majority 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.
    14. 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 its place ``; and''; and

[[Page 3759]]

    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 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.
* * * * *

    15. Section 270.17e-1 is amended by:
    a. Removing the word ``and'' at the end of paragraph (b)(3);
    b. Redesignating paragraph (c) as paragraph (d); and
    c. Adding new paragraph (c) to read as follows:


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

* * * * *
    (c)(1) A majority 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
* * * * *

    16. 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 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.
* * * * *

    17. Section 270.18f-3 is amended by redesignating 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 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.
* * * * *

    18. 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 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.
* * * * *


Sec. 270.30d-1  [Redesignated as Sec. 270.30e-1]

    19. a. Redesignate Sec. 270.30d-1 as Sec. 270.30e-1;
    b. In newly designated Sec. 270.30e-1, in paragraph (a), revise 
``financial statements'' to read ``information''; and
    c. 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 currently 
effective prospectus or Statement of Additional Information, or both, 
under the Securities Act, in place 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]

    20. Redesignate Sec. 270.30d-2 as Sec. 270.30e-2, and in newly 
designated Sec. 270.30e-2:
    a. Revise ``Sec. 270.30d-1'' in the first and second sentences of 
paragraph (a) to read ``Sec. 270.30e-1''; and
    b. Revise ``Sec. 270.30d-1(f)'' in paragraph (b) to read 
``Sec. 270.30e-1(f)''.

    21. Section 270.31a-2 is amended by removing the period at end of 
paragraph (a)(3) and in its place adding a semi-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 materials used by the 
disinterested directors of an investment company to determine that a 
person who is acting as legal counsel to those directors is an 
independent legal counsel.
* * * * *

    22. Section 270.32a-4 is added to read as follows:


Sec. 270.32a-4  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-32(a)(2)) that the selection of the 
company's independent public accountant be submitted for

[[Page 3760]]

ratification or rejection at the next succeeding annual meeting of 
shareholders, if:
    (a) The company's board of directors has established a committee, 
composed solely of directors who are not interested persons of the 
company, that has responsibility for overseeing the fund's accounting 
and auditing processes (``audit committee'');
    (b) 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 or set forth such provisions in the 
fund's charter or bylaws; and
    (c) 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

    23. 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

    24. 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.


    25. Form N-1A (referenced in Secs. 239.15A and 274.11A), is amended 
by:
    a. In Item 13 by adding Instructions 1 and 2 before paragraph (a).
    b. In Item 13 by removing paragraphs (a), (b), and (c) and adding 
paragraphs (a) and (b) in their place.
    c. In Item 13 by redesignating paragraphs (d) and (e) as paragraphs 
(c) and (d).
    d. In Item 13 by removing ``executive'' from the first sentence of 
newly redesignated paragraph (c).
    e. In Item 22 by adding paragraphs (b)(5) and (b)(6).
    These additions and revisions 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 ``family of investment companies'' means any two or 
more registered investment companies that:
    (1) Share the same investment adviser or principal underwriter; 
and
    (2) Hold themselves out to investors as related companies for 
purposes of investment and investor services.
    (b) 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.
    (c) The term ``immediate family member'' means a person's 
spouse; child residing in the person's household (including step and 
adoptive children); and any dependent of the person, as defined in 
section 152 of the Internal Revenue Code (26 U.S.C. 152).
    (d) 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 of the Fund 
separately from the information for directors who are not interested 
persons of the Fund. 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 directors 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, and age.............  Position(s) held with   Term of office and      Principal              Number of portfolios   Other directorships
                                      fund.                   length of time served.  occupation(s) during   in fund complex        held by director.
                                                                                      past 5 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 of the Fund, 
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 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, except for any 
director who is not an interested person of the Fund, 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;

[[Page 3761]]

    (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 any director who is 
not an interested person of the Fund, or immediate family member of 
the director, during the two most recently completed calendar 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 or principal underwriter as the Fund or 
having an investment adviser or principal underwriter that directly 
or indirectly controls, is controlled by, or is under common control 
with an investment adviser or principal underwriter of the Fund;
    (iii) An investment adviser, principal underwriter, or 
affiliated person of the Fund; or
    (iv) Any person directly or indirectly controlling, controlled 
by, or under common control with an investment adviser or principal 
underwriter 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 dollar range of equity 
securities beneficially owned by the director as required by the 
following table:
    (i) In the Fund; and
    (ii) On an aggregate basis, in any registered investment 
companies overseen by the director within the same family of 
investment companies as the Fund.

------------------------------------------------------------------------
             (1)                       (2)                   (3)
------------------------------------------------------------------------
Name of director............  Dollar range of       Aggregate dollar
                               equity securities     range of equity
                               in the fund.          securities in all
                                                     registered
                                                     investment
                                                     companies overseen
                                                     by director in
                                                     family of
                                                     investment
                                                     companies.
------------------------------------------------------------------------

    Instructions. 1. Information should be provided as of the end of 
the most recently completed calendar year. Specify the valuation 
date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 
16a-1(a)(2) under the Exchange Act (17 C.F.R. 240.16a-1(a)(2)).
    3. If the SAI covers more than one Fund or Series, disclose in 
column (2) the dollar range of equity securities beneficially owned 
by a director in each Fund or Series overseen by the director.
    4. In disclosing the dollar range of equity securities 
beneficially owned by a director in columns (2) and (3), use the 
following ranges: none, $1-$10,000, $10,001-$50,000, $50,001-
$100,000, or over $100,000.
    (5) For each director who is not an interested person of the 
Fund, 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 or principal underwriter 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 or principal underwriter of the 
Fund:

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

    Instructions. 1. Information should be provided as of the end of 
the most recently completed calendar year. Specify the valuation 
date by footnote or otherwise.
    2. An individual is a ``beneficial owner'' of a security if he 
is a ``beneficial owner'' under either rule 13d-3 or rule 16a-
1(a)(2) under the Exchange Act (17 C.F.R. 240.13d-3 or 240.16a-
1(a)(2)).
    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 or 
principal underwriter, describe the company's relationship with the 
investment adviser or principal underwriter.
    4. Provide the information required by columns (5) and (6) on an 
aggregate basis for each director and his immediate family members.
    (6) Unless disclosed in response to paragraph (b)(5) of this 
Item 13, describe any direct or indirect interest, the value of 
which exceeds $60,000, of each director who is not an interested 
person of the Fund, or immediate family member of the director, 
during the two most recently completed calendar years, in:
    (i) An investment adviser or principal underwriter 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 or principal underwriter of the 
Fund.
    Instructions. 1. 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.
    2. The interest of the director and the interests of his 
immediate family members should be aggregated in determining whether 
the value exceeds $60,000.
    (7) Describe briefly any material interest, direct or indirect, 
of any director who is not an interested person of the Fund, or 
immediate family member of the director, in any transaction, or 
series of similar transactions, during the two most recently 
completed calendar years, in which the amount involved exceeds 
$60,000 and to which any of the following persons was 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 or principal underwriter as the Fund or 
having an investment adviser or principal underwriter that directly 
or indirectly controls, is controlled by, or is under common control 
with an investment adviser or principal underwriter 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 (c)(7)), having the 
same investment adviser or principal underwriter as the Fund or 
having an investment adviser or principal underwriter that directly 
or indirectly controls, is controlled by, or is under common control 
with an investment adviser or principal underwriter of the Fund;
    (v) An investment adviser or principal underwriter of the Fund;
    (vi) An officer of an investment adviser or principal 
underwriter of the Fund;
    (vii) A person directly or indirectly controlling, controlled 
by, or under common control with an investment adviser or principal 
underwriter of the Fund; or
    (viii) An officer of a person directly or indirectly 
controlling, controlled by, or under common control with an 
investment adviser or principal underwriter of the Fund.

[[Page 3762]]

    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 (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.
    7. The materiality of any interest is to be determined on the 
basis of the significance of the information to investors in light 
of all the circumstances of the particular case. The importance of 
the interest to the person having the interest, the relationship of 
the parties to the transaction with each other, and the amount 
involved in the transaction are among the factors to be considered 
in determining the significance of the information to investors.
    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 end of the most recently 
completed calendar year, 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 
has a credit card, bank or brokerage account, residential mortgage, 
or insurance policy 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 direct or indirect relationship, in 
which the amount involved exceeds $60,000, of any director who is 
not an interested person of the Fund, or immediate family member of 
the director, that existed at any time during the two most recently 
completed calendar years 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 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 during 
the two most recently completed calendar years.
    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, 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.
    5. In determining whether the amount involved in a relationship 
exceeds $60,000, amounts involved in a relationship of the director 
should be aggregated with those of his immediate family members.
    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 conducted 
between the company and the person specified in paragraphs (b)(7)(i) 
through (b)(7)(viii) of this Item 13 during the two most recently 
completed calendar years.
    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 has a credit card, bank or brokerage account, residential 
mortgage, or insurance policy 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 or principal 
underwriter of the Fund, or an officer of a person directly or 
indirectly controlling, controlled by, or under common control with 
an investment adviser or principal underwriter of the Fund, served 
during the two most recently completed calendar years, on the board 
of directors of a company where a director of the Fund who is not an 
interested person of the Fund, or immediate family member of the 
director, was during the two most recently completed calendar years, 
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 or principal underwriter or person 
controlling, controlled by, or under common control with the 
investment adviser or principal underwriter 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.
    (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.
* * * * *

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

[[Page 3763]]

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.

    26. Form N-2 (referenced in Secs. 239.14 and 274.11a-1) is 
amended by:
    a. In Item 18 by adding Instructions 1 and 2 before paragraph 1.
    b. In Item 18 by revising paragraphs 1 and 2.
    c. In Item 18 by redesignating paragraphs 3 and 4 as paragraphs 
4 and 14.
    d. In Item 18 by adding paragraphs 3 and 5 through 13.
    e. In Item 18, in newly designated paragraph 14, removing 
``executive'' from the first sentence.
    f. In Instruction 4 to Item 23 by removing ``and'' from the end 
of paragraph c.
    g. In Instruction 4 to Item 23 by removing the period at the end 
of paragraph d. and in its place adding a semi-colon.
    h. In Instruction 4 to Item 23 by adding paragraphs e. and f.
    These additions and revisions 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 ``family of investment companies'' means any two or 
more registered investment companies that:
    (i) Share the same investment adviser or principal underwriter; 
and
    (ii) Hold themselves out to investors as related companies for 
purposes of investment and investor services.
    b. 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.
     c. The term ``immediate family member'' means a person's 
spouse; child residing in the person's household (including step and 
adoptive children); and any dependent of the person, as defined in 
section 152 of the Internal Revenue Code (26 U.S.C. 152).
    d. 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 of the 
Registrant, 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 of the 
Registrant. 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 directors 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, and Age.............  Position(s) Held with   Term of Office and      Principal              Number of Portfolios   Other Directorships
                                      Registrant.             Length of Time Served.  Occupation(s) During   in Fund Complex        Held by Director.
                                                                                      Past 5 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 of the 
Registrant, 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 (15 U.S.C. 80a), 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 of this Item 18, except for any director who 
is not an interested person of the Registrant, as defined in Section 
2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules 
thereunder, 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 any director who is not an 
interested person of the Registrant, as defined in Section 2(a)(19) 
of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder, 
or immediate family member of the director, during the two most 
recently completed calendar 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 or principal underwriter 
as the Registrant or having an investment adviser or principal 
underwriter that directly or indirectly controls, is controlled by, 
or is under common control with an investment adviser or principal 
underwriter of the Registrant;
    (c) An investment adviser, principal underwriter, or affiliated 
person of the Registrant; or

[[Page 3764]]

    (d) Any person directly or indirectly controlling, controlled 
by, or under common control with an investment adviser or principal 
underwriter 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 dollar range of equity 
securities beneficially owned by the director as required by the 
following table:
    (i) In the Registrant; and
    (ii) On an aggregate basis, in any registered investment 
companies overseen by the director within the same family of 
investment companies as the Registrant.

------------------------------------------------------------------------
               (1)                        (2)                 (3)
------------------------------------------------------------------------
Name of Director................  Dollar Range of     Aggregate Dollar
                                   Equity Securities   Range of Equity
                                   in the Registrant.  Securities in All
                                                       Registered
                                                       Investment
                                                       Companies
                                                       Overseen by
                                                       Director in
                                                       Family of
                                                       Investment
                                                       Companies
------------------------------------------------------------------------

    Instructions: 1. Information should be provided as of the end of 
the most recently completed calendar year. Specify the valuation 
date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 
16a-1(a)(2) under the Exchange Act (17 CFR 240.16a-1(a)(2)).
    3. In disclosing the dollar range of equity securities 
beneficially owned by a director in columns (2) and (3), use the 
following ranges: none, $1-$10,000, $10,001-$50,000, $50,001-
$100,000, or over $100,000.
    8. For each director who is not an interested person of the 
Registrant, as defined in Section 2(a)(19) of the 1940 Act (15 
U.S.C. 80a-2(a)(19)) and the rules thereunder, 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 or principal underwriter 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 or principal underwriter of the 
Registrant:

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

    Instructions: 1. Information should be provided as of the end of 
the most recently completed calendar year. Specify the valuation 
date by footnote or otherwise.
    2. An individual is a ``beneficial owner'' of a security if he 
is a ``beneficial owner'' under either rule 13d-3 or rule 16a-
1(a)(2) under the Exchange Act (17 CFR 240.13d-3 or 240.16a-
1(a)(2)).
    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 or 
principal underwriter, describe the company's relationship with the 
investment adviser or principal underwriter.
    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 direct or indirect interest, the value of which exceeds 
$60,000, of each director who is not an interested person of the 
Registrant, as defined in Section 2(a)(19) of the 1940 Act (15 
U.S.C. 80a-2(a)(19)) and the rules thereunder, or immediate family 
member of the director, during the two most recently completed 
calendar years, in:
    (a) An investment adviser or principal underwriter 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 or principal underwriter of the 
Registrant.
    Instructions: 1. 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.
    2. The interest of the director and the interests of his 
immediate family members should be aggregated in determining whether 
the value exceeds $60,000.
    10. Describe briefly any material interest, direct or indirect, 
of any director who is not an interested person of the Registrant, 
as defined in Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-
2(a)(19)) and the rules thereunder, or immediate family member of 
the director, in any transaction, or series of similar transactions, 
during the two most recently completed calendar years, in which the 
amount involved exceeds $60,000 and to which any of the following 
persons was 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 or principal underwriter 
as the Registrant or having an investment adviser or principal 
underwriter that directly or indirectly controls, is controlled by, 
or is under common control with an investment adviser or principal 
underwriter 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 or principal underwriter 
as the Registrant or having an investment adviser or principal 
underwriter that directly or indirectly controls, is controlled by, 
or is under common control with an investment adviser or principal 
underwriter of the Registrant;
    (e) An investment adviser or principal underwriter of the 
Registrant;
    (f) An officer of an investment adviser or principal underwriter 
of the Registrant;
    (g) A person directly or indirectly controlling, controlled by, 
or under common control with an investment adviser or principal 
underwriter of the Registrant; or
    (h) An officer of a person directly or indirectly controlling, 
controlled by, or under common control with an investment adviser or 
principal underwriter 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.

[[Page 3765]]

    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 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. The materiality of any interest is to be determined on the 
basis of the significance of the information to investors in light 
of all the circumstances of the particular case. The importance of 
the interest to the person having the interest, the relationship of 
the parties to the transaction with each other, and the amount 
involved in the transaction are among the factors to be considered 
in determining the significance of the information to investors.
    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 
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.
    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 end of the most recently 
completed calendar year, and the rate of interest paid or charged.
    10. No information need be given as to any routine, retail 
transaction. For example, the Registrant need not disclose that a 
director has a credit card, bank or brokerage account, residential 
mortgage, or insurance policy 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 direct or indirect relationship, in 
which the amount involved exceeds $60,000, of any director who is 
not an interested person of the Registrant, as defined in Section 
2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules 
thereunder, or immediate family member of the director, that existed 
at any time during the two most recently completed calendar years, 
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 during the two most recently 
completed calendar years.
    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, 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.
    5. In determining whether the amount involved in a relationship 
exceeds $60,000, amounts involved in a relationship of the director 
should be aggregated with those of his immediate family members.
    6. 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 conducted between the 
company and the person specified in paragraphs 10(a) through (h) of 
this Item 18 during the two most recently completed calendar years.
    7. 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.
    8. No information need be given as to any routine, retail 
relationship. For example, the Registrant need not disclose that a 
director has a credit card, bank or brokerage account, residential 
mortgage, or insurance policy 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 or principal 
underwriter of the Registrant, or an officer of a person directly or 
indirectly controlling, controlled by, or under common control with 
an investment adviser or principal underwriter of the Registrant, 
served during the two most recently completed calendar years, on the 
board of directors of a company where a director of the Registrant 
who is not an interested person of the Registrant, as defined in 
Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the 
rules thereunder, or immediate family member of the director, was 
during the two most recently completed calendar years, 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 or principal underwriter or person 
controlling, controlled by, or under common control with the 
investment adviser or principal underwriter 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.
* * * * *

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.

    27. Form N-3 (referenced in Secs. 239.17a and 274.11b) is 
amended by:
    a. In Item 20 adding instructions 1 and 2 before paragraph (a).
    b. In Item 20 by revising paragraphs (a) and (b).
    c. In Item 20 by redesignating paragraph (c) as paragraph (m).
    d. In Item 20 by adding paragraphs (c) through (l).

[[Page 3766]]

    e. In Item 20 by removing ``executive'' from the first sentence 
of newly designated paragraph (m).
    f. In Instruction 4 to Item 27 by removing ``and'' from the end 
of paragraph (iii).
    g. In Instruction 4 to Item 27 by removing the period at the end 
of paragraph (iv) and in its place adding a semi-colon.
    h. In Instruction 4 to Item 27 by adding paragraphs (v) and 
(vi).
    These additions, and revisions 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 ``family of investment companies'' means any two or 
more registered investment companies that:
    (i) Share the same investment adviser or principal underwriter; 
and
    (ii) Hold themselves out to investors as related companies for 
purposes of investment and investor services.
    b. 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.
    c. The term ``immediate family member'' means a person's spouse; 
child residing in the person's household (including step and 
adoptive children); and any dependent of the person, as defined in 
section 152 of the Internal Revenue Code (26 U.S.C. 152).
    d. 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 of the 
Registrant, 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 of the 
Registrant. 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 directors 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, and age.............  Position(s) held with   Term of office and      Principal              Number of portfolios   Other directorships
                                      registrant.             length of time served.  occupation(s) during   in fund complex        held by director.
                                                                                      past 5 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 of the 
Registrant, 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 (15 U.S.C. 80a-2(a)(19)), 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, except for any director 
who is not an interested person of the Registrant, as defined in 
Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the 
rules thereunder, 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.
    (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 any director who is 
not an interested person of the Registrant, as defined in Section 
2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules 
thereunder, or immediate family member of the director, during the 
two most recently completed calendar 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, or 
principal underwriter as the Registrant or having an Insurance 
Company, investment adviser, or principal underwriter that directly 
or indirectly controls, is controlled by, or is under common control 
with the Insurance Company or an investment adviser or principal 
underwriter of the Registrant;
    (iii) The Insurance Company or an investment adviser, principal 
underwriter, 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 or principal underwriter 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 dollar range of equity 
securities beneficially owned by the director as required by the 
following table:
    (i) In the Registrant; and
    (ii) On an aggregate basis, in any registered investment 
companies overseen by the director within the same family of 
investment companies as the Registrant.

[[Page 3767]]



------------------------------------------------------------------------
               (1)                        (2)                 (3)
------------------------------------------------------------------------
Name of Director................  Dollar Range of     Aggregate Dollar
                                   Equity Securities   Range of Equity
                                   in the Registrant.  Securities in All
                                                       Registered
                                                       Investment
                                                       Companies
                                                       Overseen by
                                                       Director in
                                                       Family of
                                                       Investment
                                                       Companies.
------------------------------------------------------------------------

    Instructions: 1. Information should be provided as of the end of 
the most recently completed calendar year. Specify the valuation 
date by footnote or otherwise.
    2. Determine ``beneficial ownership'' in accordance with rule 
16a-1(a)(2) under the Exchange Act (17 CFR 240.16a-1(a)(2)).
    3. If the SAI covers more than one sub-account, disclose in 
column (2) the dollar range of equity securities beneficially owned 
by a director in each sub-account overseen by the director.
    4. In disclosing the dollar range of equity securities 
beneficially owned by a director in columns (2) and (3), use the 
following ranges: none, $1-$10,000, $10,001-$50,000, $50,001-
$100,000, or over $100,000.
    (g) For each director who is not an interested person of the 
Registrant, as defined in Section 2(a)(19) of the 1940 Act (15 
U.S.C. 80a-2(a)(19)) and the rules thereunder, 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 or principal 
underwriter 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 or 
principal underwriter of the Registrant:

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

    Instructions: 1. Information should be provided as of the end of 
the most recently completed calendar year. Specify the valuation 
date by footnote or otherwise.
    2. An individual is a ``beneficial owner'' of a security if he 
is a ``beneficial owner'' under either rule 13d-3 or rule 16a-
1(a)(2) under the Exchange Act (17 C.F.R. 240.13d-3 or 240.16a-
1(a)(2)).
    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 or principal underwriter, describe the 
company's relationship with the Insurance Company, investment 
adviser, or principal underwriter.
    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 direct or indirect interest, the value of which 
exceeds $60,000, of each director who is not an interested person of 
the Registrant, as defined in Section 2(a)(19) of the 1940 Act (15 
U.S.C. 80a-2(a)(19)) and the rules thereunder, or immediate family 
member of the director, during the two most recently completed 
calendar years, in:
    (i) The Insurance Company or an investment adviser or principal 
underwriter 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 or 
principal underwriter of the Registrant.
    Instructions: 1. 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.
    2. The interest of the director and the interests of his 
immediate family members should be aggregated in determining whether 
the value exceeds $60,000.
    (i) Describe briefly any material interest, direct or indirect, 
of any director who is not an interested person of the Registrant, 
as defined in Section 2(a)(19) of the 1940 Act (15 U.S.C. 80a-
2(a)(19)) and the rules thereunder, or immediate family member of 
the director, in any transaction, or series of similar transactions, 
during the two most recently completed calendar years, in which the 
amount involved exceeds $60,000 and to which any of the following 
persons was 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, or 
principal underwriter as the Registrant or having an Insurance 
Company, investment adviser, or principal underwriter that directly 
or indirectly controls, is controlled by, or is under common control 
with the Insurance Company or an investment adviser or principal 
underwriter of the Registrant;
    (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, or 
principal underwriter as the Registrant or having an Insurance 
Company, investment adviser, or principal underwriter that directly 
or indirectly controls, is controlled by, or is under common control 
with the Insurance Company or an investment adviser or principal 
underwriter of the Registrant;
    (v) The Insurance Company or an investment adviser or principal 
underwriter of the Registrant;
    (vi) An officer of the Insurance Company or an investment 
adviser or principal underwriter of the Registrant;
    (vii) A person directly or indirectly controlling, controlled 
by, or under common control with the Insurance Company or an 
investment adviser or principal underwriter 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 or principal underwriter 
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

[[Page 3768]]

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. The materiality of any interest is to be determined on the 
basis of the significance of the information to investors in light 
of all the circumstances of the particular case. The importance of 
the interest to the person having the interest, the relationship of 
the parties to the transaction with each other, and the amount 
involved in the transaction are among the factors to be considered 
in determining the significance of the information to investors.
    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 
(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.
    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 end of the most recently 
completed calendar year, and the rate of interest paid or charged.
    10. No information need be given as to any routine, retail 
transaction. For example, the Registrant need not disclose that a 
director has a credit card, bank or brokerage account, residential 
mortgage, or insurance policy 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 direct or indirect relationship, in 
which the amount involved exceeds $60,000, of any director who is 
not an interested person of the Registrant, as defined in Section 
2(a)(19) of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules 
thereunder, or immediate family member of the director, that existed 
at any time during the two most recently completed calendar years, 
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 during 
the two most recently completed calendar years.
    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, 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.
    5. In determining whether the amount involved in a relationship 
exceeds $60,000, amounts involved in a relationship of the director 
should be aggregated with those of his immediate family members.
    6. In the case of an indirect interest, identify the company 
with which a person specified in paragraphs (i) 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 conducted 
between the company and the person specified in paragraphs (i) 
through (viii) of paragraph (i) of this Item 20 during the two most 
recently completed calendar years.
    7. 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.
    8. No information need be given as to any routine, retail 
relationship. For example, the Registrant need not disclose that a 
director has a credit card, bank or brokerage account, residential 
mortgage, or insurance policy 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 or principal underwriter 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 
or principal underwriter of the Registrant, served during the two 
most recently completed calendar years, on the board of directors of 
a company where a director of the Registrant who is not an 
interested person of the Registrant, as defined in Section 2(a)(19) 
of the 1940 Act (15 U.S.C. 80a-2(a)(19)) and the rules thereunder, 
or immediate family member of the director, was during the two most 
recently completed calendar years, 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, or principal 
underwriter or person controlling, controlled by, or under common 
control with the Insurance Company, investment adviser, or principal 
underwriter 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.
* * * * *

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.
* * * * *

    By the Commission.

    Dated: January 2, 2001.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-536 Filed 1-12-01; 8:45 am]
BILLING CODE 8010-01-P