[Federal Register Volume 66, Number 221 (Thursday, November 15, 2001)]
[Proposed Rules]
[Pages 57602-57612]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 01-28583]



[[Page 57601]]

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Part V





Securities and Exchange Commission





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17 CFR Part 270



Investment Company Mergers; Proposed Rule

  Federal Register / Vol. 66, No. 221 / Thursday, November 15, 2001 / 
Proposed Rules  

[[Page 57602]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release No. IC-25259, File No. S7-21-01]
RIN 3235-AH81


Investment Company Mergers

AGENCY: Securities and Exchange Commission (``Commission'').

ACTION: Proposed rule.

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SUMMARY: The Commission is proposing amendments to the rule under the 
Investment Company Act of 1940 that permits mergers and other business 
combinations between certain affiliated investment companies. The 
proposed amendments would expand the types of business combinations 
exempted by the rule, codifying the relief provided in Commission 
exemptive orders. The amendments also would make the rule, for the 
first time, available for mergers between registered investment 
companies and certain unregistered entities. The proposed amendments 
are designed to reduce burdens on investment companies by eliminating 
the need to obtain Commission approval while protecting investors in 
these companies.

DATES: Comments must be received on or before January 18, 2002.

ADDRESSES: Comments should be submitted in triplicate to Jonathan G. 
Katz, Secretary, Securities and Exchange Commission, 450 5th Street, 
NW, Washington, DC 20549-0609. Comments also may be submitted 
electronically to the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-21-01; this file number 
should be included on the subject line if E-mail is used. Comment 
letters will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 5th Street, NW, Washington, DC 
20549. Electronically submitted comment letters also will be posted on 
the Commission's Internet web site (http://www.sec.gov).\1\
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    \1\ We do not edit personal, identifying information, such as 
names or E-mail addresses, from electronic submissions. Submit only 
information you wish to make publicly available.

FOR FURTHER INFORMATION CONTACT: Hester M. Peirce, Senior Counsel, or 
Martha B. Peterson, Special Counsel, at (202) 942-0690, Office of 
Regulatory Policy, Division of Investment Management, Securities and 
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Exchange Commission, 450 5th Street, NW, Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Commission today is requesting public 
comment on proposed amendments to rule 17a-8 [17 CFR 270.17a-8] under 
the Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment 
Company Act'' or the ``Act'').

Table of Contents

Executive Summary

I. Introduction
II. Discussion
    A. Mergers Between Registered Investment Companies
    1. Board Determinations
    2. Shareholder Voting
    a. Shareholder Approval
    b. Echo Voting
    3. Recordkeeping
    B.Mergers of Registered Investment Companies and Certain 
Unregistered Entities
    C. Prohibition of Reliance on Rule 17a-8 for Certain 
Transactions
III. General Request for Comment
IV. Cost-Benefit Analysis
    A. Benefits
    B. Costs
    C. Request for Comment
V. Consideration of Promotion of Efficiency, Competition, and 
Capital Formation
VI. Paperwork Reduction Act
VII. Summary of Initial Regulatory Flexibility Analysis
VIII. Statutory Authority

Text of Proposed Rule

Executive Summary

    The Commission is proposing amendments to rule 17a-8 under the 
Investment Company Act, the rule that permits affiliated registered 
investment companies and series or portfolios of registered investment 
companies (``funds'') to merge without first obtaining an exemptive 
order from the Commission. Currently, rule 17a-8 permits such a merger 
only when the participating funds are affiliated solely because they 
have a common investment adviser, common directors, and/or common 
officers.\2\ The amendments that we propose today would expand the 
availability of the rule to include the merger of funds that are 
affiliated for other reasons, such as when the funds have common large 
shareholders. The amendments also would permit a fund and an affiliated 
bank common trust fund or collective trust fund to merge under the 
rule. Under the proposed amendments, funds would have to comply with 
certain new conditions for relief.
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    \2\ Unless otherwise noted, all references to ``rule 17a-8'' or 
any paragraph of the rule will be to 17 CFR 270.17a-8.
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I. Introduction

    Section 17(a) of the Investment Company Act prohibits an affiliated 
person \3\ of a fund \4\ from selling any security or other property 
(``assets'') to or buying assets from the fund (``affiliated 
transactions''). This prohibition was intended to prevent self-dealing 
and other forms of overreaching of a fund by its affiliates.\5\ Section 
17(a) protects investors by prohibiting a purchase or sale transaction 
when a party to the transaction has both the ability and the pecuniary 
incentive to influence the actions of the fund.\6\
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    \3\ The Act defines an ``affiliated person'' of another person 
as:
    (A) any person directly or indirectly owning, controlling, or 
holding with power to vote, 5 per centum or more of the outstanding 
voting securities of such other person; (B) any person 5 per centum 
or more of whose outstanding voting securities are directly or 
indirectly owned, controlled, or held with power to vote, by such 
other person; (C) any person directly or indirectly controlling, 
controlled by, or under common control with, such other person; (D) 
any officer, director, partner, copartner, or employee of such other 
person; (E) if such other person is an investment company, any 
investment adviser thereof or any member of an advisory board 
thereof; and (F) if such other person is an unincorporated 
investment company not having a board of directors, the depositor 
thereof.
    15 U.S.C. 80a-2(a)(3). Unless otherwise noted, in this release, 
we will use the term ``affiliate'' to include both affiliated 
persons of the fund (sometimes referred to as ``first-tier 
affiliates'') and affiliated persons of those affiliated persons 
(sometimes referred to as ``second-tier affiliates''). Section 17(a) 
also reaches transactions with a promoter of or a principal 
underwriter for a fund and affiliated persons of a fund's promoter 
or principal underwriter. In this release, we will use the term 
``affiliates'' to encompass these persons also.
    \4\ Unless otherwise noted, we use the term ``fund'' in this 
release to refer to both registered investment companies and series 
or portfolios of registered investment companies.
    \5\ 15 U.S.C. 80a-17(a). This purpose is clear from section 
17(b), which directs the Commission to grant an application for an 
exemption from section 17(a) if, along with other factors, the terms 
of the transaction at issue ``are reasonable and fair, and do not 
involve overreaching on the part of any person concerned.'' See also 
Adoption of Rules and a Related Form Applicable to Small Business 
Investment Companies Licensed by the Small Business Administration 
to Provide Exemption From Certain Requirements of Sections 17(a), 
17(d) and 18(c) of the Investment Company Act of 1940, Investment 
Company Act Release No. 3361 (Nov. 17, 1961) [26 FR 11238 (Nov. 29, 
1961)] (``One of the basic purposes of Section 17(a) is to protect 
investment companies against overreaching by affiliated persons.''); 
In the Matter of Union Securities Corporation, Investment Company 
Act Release No. 136 (May 28, 1941) [6 FR 2638 (May 29, 1941)] (``The 
general purpose of Section 17(a) . . . is of course to eliminate 
dealings by ``insiders'' and intercompany transactions of the type 
which have too often, in the past served to facilitate `unloading', 
`bail-outs', `milking', and similar abuses.'').
    \6\ See Mergers and Consolidations Involving Registered 
Investment Companies, Investment Company Act Release No. 10886 at 
text accompanying n.8 (Oct. 2, 1979) [44 FR 58521 (Oct. 10, 1979)] 
(``1979 Proposing Release'') (citing Hearings on S. 3580 Before a 
Subcommittee of the Senate Committee on Banking and Currency, 76th 
Cong., 3d Sess., at 256-59 (1940) (testimony by David Schenker, 
Chief Counsel of the Commission's Investment Trust Study, which 
served as the basis for the Investment Company Act)).

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[[Page 57603]]

    Mergers \7\ of affiliated funds \8\ involve the purchase or sale of 
fund assets from or to an affiliated person and thus are prohibited by 
section 17(a).\9\ Section 17(b) of the Investment Company Act 
authorizes the Commission to issue orders permitting affiliated 
transactions, including affiliated mergers, if (i) The terms of the 
proposed transaction are reasonable and fair and do not involve 
overreaching on the part of any person concerned, (ii) the proposed 
transaction is consistent with the policy of each fund, and (iii) the 
proposed transaction is consistent with the general purposes of the 
Act.\10\
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    \7\ We use the term ``merger'' in the proposed amendments to 
rule 17a-8 and this release to include a merger, consolidation, or 
purchase or sale of substantially all of an entity's assets. 
Proposed rule 17a-8(b)(1). A fund merger typically occurs in one of 
three ways, each of which involves the purchase or sale of fund 
assets: (i) One fund purchases the portfolio assets of the other; 
(ii) one fund purchases all securities issued by the other; or (iii) 
securities issued by one fund are exchanged for all or substantially 
all of the portfolio assets of the other fund.
    \8\ Funds may be affiliated with one another in a number of 
different ways, including through: (i) A common investment adviser 
that controls both funds; (ii) a shareholder that owns five percent 
or more of both funds; (iii) ownership by one fund of more than five 
percent of the other, for example, in the master-feeder context; or 
(iv) the funds' status as series or portfolios of the same 
registered investment company that are controlled by the same 
investment adviser and officers and directors. See Marco Adelfio and 
Melissa Ivers, Consolidations of Bank Proprietary Funds--Dealing 
with Additional Affiliations, The Investment Lawyer, Nov. 1999, at 
13-14; Philip H. Newman and Edward T. O'Dell, Master-Feeder Funds, 
ALI-ABA Course of Study, June 11, 1998, 37 at 41; Philip H. Newman 
and Edward T. O'Dell, Series Companies, ALI-ABA Course of Study, 
June 11, 1998, 51 at 55. See also infra note 20.
    \9\ Congress intended the Act to cover mergers. See 15 U.S.C. 
80a-1(b)(6) (``the national public interest and the interest of 
investors are adversely affected--* * * when investment companies 
are reorganized, become inactive, or change the character of their 
business, or when the control or management thereof is transferred, 
without the consent of their security holders'').
    \10\ 15 U.S.C. 80a-17(b).
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    After issuing numerous exemptive orders under the statute, we 
adopted rule 17a-8 in 1980 to permit mergers between funds if they are 
affiliated solely because they have common investment advisers, 
officers, and/or directors.\11\ We concluded that investors in 
affiliated funds merging under the rule would be protected because 
affiliates of the merging funds whose interests were limited to serving 
as adviser, director or officer of the merging funds would not have 
both the ability and the pecuniary incentive to affect the terms of the 
merger, and because compliance with the rule's conditions would 
preclude the types of abuses that occurred in connection with fund 
mergers before 1940.\12\
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    \11\ See Mergers and Consolidations Involving Registered 
Investment Companies, Investment Company Act Release No. 11053 (Feb. 
19, 1980) [45 FR 12408 (Feb. 26, 1980)] (``1980 Adopting Release''). 
Funds with the same investment advisers, officers, and/or directors 
do not fit explicitly within one of the categories of affiliation 
set forth in section 2(a)(3) of the Act, 15 U.S.C. 80a-2(a)(3). See 
supra note 3. Such funds, however, may be affiliated under section 
2(a)(3)(C), because they are under common control. The determination 
of whether these funds are under common control turns on whether the 
adviser, officers, or directors control the funds, which depends on 
the relevant facts and circumstances. See, e.g., 1980 Adopting 
Release, supra, at n.2 (rule 17a-8 ``does not represent a Commission 
finding that investment companies having common officers, directors 
or investment advisers are always affiliated persons or affiliated 
persons of an affiliated person. They may or may not be, depending 
on the facts.''); 1979 Proposing Release, supra note 6, at n.5 (``An 
investment company is usually `controlled' by its investment 
adviser. `Only in the very rare case where the adviser's role is 
simply that of advising others who may or may not elect to be guided 
by his advice . . . can the adviser realistically be deemed not in 
control.' '') (quoting Steadman Security Corp., Investment Company 
Act Release No. 9830 (June 29, 1977) [12 SEC Docket 1041 (July 12, 
1977)] at n.81).
    \12\ See 1979 Proposing Release, supra note 6, at text 
accompanying nn.8-9 (in a merger between two funds affiliated by 
reason of sharing an investment adviser, directors and/or officers, 
``no person who is responsible for evaluating and approving the 
terms of the transaction . . . would have a significant personal 
financial interest in improperly influencing these terms''). The 
Commission, in its 1939 report to Congress, identified numerous 
instances in which fund assets had been diverted to fund affiliates 
as a result of mergers. See Securities and Exchange Commission, 
Investment Trusts and Investment Companies, H.R. Doc. No. 279, 76th 
Cong., 1st Sess., at 1414-15 (1939) (``Investment Trust Study''). In 
addition, mergers often effected changes in the nature of the funds' 
assets, the rights associated with certain shares, management 
contracts, and the corporate structure of the funds involved. See 
id. at 1024-28.
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    The relief afforded by rule 17a-8, however, was conditioned upon 
the directors of each merging fund, including a majority of the 
independent directors,\13\ concluding that the merger is in the best 
interests of the fund, and that the merger does not dilute the 
interests of existing fund shareholders.\14\ In connection with our 
recent fund governance initiative, we further conditioned the rule's 
relief on a majority of the board of directors of each fund relying on 
the rule being independent directors and these directors selecting and 
nominating any other independent directors.\15\ In addition, any legal 
counsel for the independent directors of a fund relying on the rule 
must be an independent legal counsel.\16\
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    \13\ We use the term independent director in this release to 
mean a director who is not an ``interested person'' of the fund, as 
that term is defined in section 2(a)(19) of the Act [15 U.S.C. 80a-
2(a)(19)].
    \14\ Rule 17a-8(a).
    \15\ Rule 17a-8(c)(1). Role of Independent Directors of 
Investment Companies, Investment Company Act Release No. 24816 (Jan. 
2, 2001) [66 FR 3734 (Jan. 16, 2001)] (``Fund Governance Release''). 
The compliance date for the new conditions is July 1, 2002.
    \16\ Rule 17a-8(c)(2). See 17 CFR 270.0-1(a)(6)(i) (defining 
``independent legal counsel'').
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    Since we adopted rule 17a-8, fund mergers have been occurring with 
increasing frequency.\17\ These mergers can benefit funds and their 
shareholders by, for example, lowering expenses and improving 
performance.\18\ Although many mergers of affiliated funds qualify for 
relief under the rule, a growing number do not, and therefore require 
exemptive relief to proceed. Based on our experience in evaluating 
these requests for exemptive relief, we are proposing to amend the rule 
to make it available for an expanded range of affiliated mergers, and 
to incorporate conditions designed to protect investors of merging 
funds under the expanded rule. The proposed amendments, which we 
discuss in more detail below, would (i) make the rule available to 
affiliated funds regardless of the source of affiliation, (ii) make the 
rule available for mergers involving certain types of unregistered 
entities, (iii) include in the rule certain factors that fund directors 
must consider, if relevant, in assessing mergers, and (iv) require that 
the merger be approved by the shareholders of each merging fund that 
will not survive the merger.
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    \17\ The staff estimates, based on an analysis of data from 
Morningstar, Inc., that the annual number of mergers increased from 
less than 50 in 1994 to 119 in 1995, and approximately 180 in both 
1998 and 1999. In calendar year 2000, there were 252 mergers. 
Industry observers have remarked on the increasing pace of mergers. 
See, e.g., Business in Brief, Boston Herald, June 21, 2001 (``Mutual 
fund companies, faced with falling asset levels, are killing ailing 
funds at almost double the rate of last year.''); Tamiko Toland, How 
Many Fund Mergers in 2000, MutualFundWire.com, Apr. 11, 2001 (citing 
data from Wiesenberger Financial suggesting that in 2001 the number 
of mergers could be 40% higher than it was in calendar year 2000); 
Lisa Singhania, Companies Consolidate Funds to Get Rid of Laggards, 
Milwaukee Journal Sentinel, Feb. 11, 2001, at 4D (``Mutual fund 
consolidations and liquidations are becoming more frequent because 
of the industry's rapid growth in the 1990s.''); Lori Pizzani, 
Marketing: Scudder Kemper Merges, Eliminates Funds, Mutual Fund 
Market News, Feb. 14, 2000, at 2,10 (observing trend towards 
consolidation in fund offerings by advisers).
    \18\ See, e.g., Narayanan Jayaraman, et al., An Analysis of the 
Determinants and Shareholder Wealth Effects of Mutual Fund Mergers, 
J.Fin. (forthcoming) (manuscript at 23, available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=279971#Paper_Download) 
(finding that target shareholders benefit from improved performance 
and lower expense ratios).
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II. Discussion

A. Mergers Between Registered Investment Companies

    Since the adoption of rule 17a-8, and particularly in recent years, 
we have

[[Page 57604]]

issued many exemptive orders permitting affiliated fund mergers that 
were unable to take advantage of the rule because the funds were 
affiliated for reasons other than having a common adviser, director or 
officer.\19\ In many of these cases, an affiliate of the merging funds 
(often an investment adviser) held more than five percent of one or 
both merging funds, giving the affiliated party what we have presumed 
to be both the incentive (a substantial economic interest in the terms 
of the merger) and the means (influence that comes with being a large 
shareholder) to affect the terms of the merger for its own benefit.\20\ 
In each case, after reviewing the exemptive application, we (or our 
staff acting under delegated authority) determined that the merger was 
fair and did not involve overreaching.
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    \19\ From the beginning of 1989 through the end of 2000, we 
received 130 applications for exemption from section 17(a) for 
affiliated fund mergers. In calendar year 2000 alone the staff 
issued 22 orders for exemptive relief covering 165 fund mergers that 
did not qualify for relief under rule 17a-8. (Typically, one 
exemptive order gives relief to mergers between multiple series or 
portfolios of the participating investment companies.)
    \20\ Ownership by an affiliate of one fund of five percent or 
more of the other fund gives rise to an affiliation that precludes 
funds from relying on current rule 17a-8. The affiliate of the first 
fund, by virtue of its five percent ownership, would be affiliated 
with the second fund also. Each fund, therefore, would be a second-
tier affiliate of the other. See supra note 3, which sets forth the 
Act's definition of ``affiliated person.'' See, e.g., Boston 1784 
Funds, Investment Company Act Release Nos. 24379 (Apr. 6, 2000) [65 
FR 19941 (Apr. 13, 2000)] (notice) and 24435 (May 2, 2000) [72 SEC 
Docket 1058] (order); Touchstone Advisors, Inc., Investment Company 
Act Release Nos. 24371 (Mar. 31, 2000) [65 FR 18393 (Apr. 7, 2000)] 
(notice) and 24405 (Apr. 26, 2000) [72 SEC Docket 874] (order); HT 
Insight Funds, Inc., Investment Company Act Release Nos. 24270 (Jan. 
28, 2000) [65 FR 5709 (Feb. 4, 2000)] (notice) and 24313 (Feb. 23, 
2000) [71 SEC Docket 2214] (order). See generally Adelfio and Ivers, 
supra note , at 14.
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    Today, we are proposing to extend the rule to permit mergers 
between registered funds regardless of the nature of the affiliation. 
As discussed in more detail below, in extending relief in this manner, 
we would rely on the fund board (including independent directors) to 
scrutinize the merger, and would require the merger to be approved by 
the shareholders of any fund not surviving the merger. Finally, we 
would add a provision to rule 17a-8 designed to prevent the use of the 
rule to circumvent the prohibitions against affiliated transactions.
    We request comment on the proposed expansion of rule 17a-8 to 
permit mergers between affiliated funds regardless of the nature of 
their affiliation. We also request comment on whether the proposed 
conditions of the relief under the expanded rule are sufficient to 
protect investors, or whether any of the conditions are unnecessary to 
protect investors.
1. Board Determinations
    Mergers of funds are governed not only by federal law, but also by 
state corporate or other law under which funds are organized. Those 
laws place substantial duties on fund directors considering a merger to 
act in the best interests of the fund and its shareholders.\21\ Rule 
17a-8 similarly relies on fund boards to review mergers of affiliated 
registered funds. The rule prescribes a special role for independent 
directors, a majority of whom must make the findings and thus consent 
to the merger and its terms.\22\ As noted above, we recently amended 
rule 17a-8, along with a number of other exemptive rules, to strengthen 
the role that independent directors play. Under these exemptive rules, 
independent directors must constitute a majority of the board; they 
must be selected and nominated by other independent directors; and if 
they hire legal counsel, that counsel must be an independent legal 
counsel.\23\ These amendments give us greater confidence, in proposing 
the amendments in this release, that independent directors will be in a 
position to influence the terms of the merger and to prevent abuses.
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    \21\ ``Directors of investment companies, like all directors, 
are subject to state law duties of care and loyalty.'' Edward 
Brodsky and M. Patricia Adamski, Law of Corporate Officers and 
Directors: Rights, Duties, and Liabilities Sec. 17.02 (Supp. 2000). 
In the context of a merger, directors ``must be diligent and 
vigilant in examining critically the proposal and any alternatives, 
must act in good faith, must act with due care in considering all 
material information reasonably available, including information 
necessary to compare an offer to alternative courses of action, and, 
in certain contexts, negotiate actively to obtain the best available 
transaction for stockholders.'' Diane Holt Frankle, Fiduciary Duties 
of Directors Considering a Business Combination, PLI/Corp. 525, 531 
(June 2000).
    \22\ Rule 17a-8(a).
    \23\ Rule 17a-8(c). See also 17 CFR 270.10f-3; 17 CFR 270.12b-1; 
17 CFR 270.15a-4; 17 CFR 270.17a-7; 17 CFR 270.17d-1(d)(7); 17 CFR 
270.17e-1; 17 CFR 270.17g-1(j); 17 CFR 270.18f-3; and 17 CFR 
270.23c-3.
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    Relief under rule 17a-8 is conditioned on a determination by the 
board (including a majority of independent directors) of each 
participating fund that the merger is in the best interests of the 
fund.\24\ In addition, a fund board must determine that the merger will 
not dilute the interests of the merging fund's shareholders.\25\ In 
order to satisfy this latter provision, most mergers are effected on 
the basis of each merging fund's net asset value (``NAV''), as 
determined for the purpose of daily pricing under our rules.\26\ The 
transparency of share value at which mergers occur reduces considerably 
the opportunity for affiliated persons to take advantage of the fund by 
mispricing the transaction.
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    \24\ Rule 17a-8(a)(1).
    \25\ Rule 17a-8(a)(2). sp;
    \26\ See rule 2a-4 [17 CFR 270.2a-4] (defining ``current net 
asset value''). Adjustments to NAV may be necessary for tax reasons. 
See, e.g., Travelers Equities Fund, Inc., Investment Company Act 
Release Nos. 13840 (Mar. 22, 1984) [49 FR 12349-02 (Mar. 24, 1984)] 
(notice) and 13893 (Apr. 17, 1984) [30 SEC Docket 474] (order) 
(adjusting price at which merger would take place to compensate 
shareholders of acquired fund for capital gains taxes that might be 
incurred as a result of unrealized appreciation on pre-merger assets 
of the acquiring fund). p;
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    Mispricing is not the only problem that can arise in connection 
with fund mergers. A merger could result in an increase in fees and 
expenses borne by shareholders (despite the greater economies of scale 
that a merger typically will achieve),\27\ and could have negative tax 
consequences for shareholders. The merger also could result in a 
combination of funds with different investment objectives, thereby 
substantially changing the character of the surviving fund,\28\ or the 
costs of the merger could be unfairly allocated to or among the merging 
funds. We have taken these issues into account in considering 
applications for exemptive relief under section 17(b).\29\ In order to 
ensure that boards weigh these issues in their deliberations, we are 
proposing to include in the rule a number of factors that directors 
must consider, if relevant, in determining whether the merger is in the 
best interests of the fund: \30\
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    \27\ See e.g., Charles Gasparino, Do Fund Mergers Hurt Small 
Investors?, Wall Street Journal, July 8, 1997, at C1 (questioning 
whether economies of scale result in lower fees for shareholders). 
But see Jayaraman, supra note 18, at 23 (study of fund mergers 
showing that ``target fund shareholders also benefit from a 
reduction in their fund's expense ratio after the merger'').
    \28\ See, e.g., Sandra Block, Mergers Put More Funds on 
Extinction List, USA Today, Mar. 22, 1999, at 1B (``We're seeing a 
lot of mergers where the new fund doesn't have the same 
objectives''') (quoting Christine Benz of Morningstar Inc.); Carole 
Gould, Poof! For More and More Mutual Funds, A Quick Disappearing 
Act, New York Times, Aug. 16, 1998, at 11 (``While mergers can sweep 
poor track records under the rug, they can pose a danger: Companies 
don't necessarily merge funds with similar objectives, so 
shareholders may end up with a different investment than they 
started with.''); Charles Jaffe, Which Fund's Next to be Vaporized? 
Could be Yours, Seattle Times, Oct. 16, 2000, at E2 (``Some mergers 
move money from one lackluster fund to the next while changing the 
kinds of assets your money is buying.'').
    \29\ As discussed above, one of the standards for exemptive 
relief for affiliated transactions under section 17(b) is that the 
terms of the transaction, including consideration paid or received, 
are reasonable and fair and do not involve overreaching on the part 
of any person concerned.
    \30\ Proposed rule 17a-8(a)(2)(ii).

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     Direct or indirect federal income tax consequences of the 
merger to fund shareholders; \31\
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    \31\ Proposed rule 17a-8(a)(2)(ii)(A).
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     Fees or expenses that will be borne directly or indirectly 
by the fund in connection with the merger;\32\
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    \32\ Proposed rule 17a-8(a)(2)(ii)(B).
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     Effects of the merger on annual fund operating expenses 
and shareholder fees and services; \33\ and
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    \33\ Proposed rule 17a-8(a)(2)(ii)(C) and (D).
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     Changes in the investment objectives, restrictions, and 
policies after the merger.\34\
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    \34\ Proposed rule 17a-8(a)(2)(ii)(E).
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    This list of factors is not intended to be exhaustive and none of 
the factors would necessarily be determinative.\35\ Nor would the 
addition of specific factors for consideration relieve a fund's board 
of directors or adviser of any obligation, under federal or state law, 
to consider other relevant factors.
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    \35\ We set forth some of these factors when we proposed rule 
17a-8 in 1979. See 1979 Proposing Release, supra note 6, at text 
accompanying nn.17-19.
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    We anticipate that our examinations staff, in the course of its 
periodic and other reviews of fund compliance, would review the board's 
analysis of the specific factors that we are proposing to include in 
rule 17a-8. In order to facilitate this review, the amended rule would 
continue to require that the board document its determinations and the 
factors underlying them in the minute books of the fund and retain the 
minute books as part of the record of the merger.\36\
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    \36\ Proposed rule 17a-8(a)(2)(iv) and 17a-8(a)(6). Rule 31a-
1(b)(4) [17 CFR 270.31a-1(b)(4)] requires funds to ``maintain and 
keep current'' minute books of directors' meetings, among other 
things. The Commission would not expect funds to maintain duplicate 
copies of the minute books (or relevant portions thereof) in the 
same place as other merger records.
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    The Commission requests comment whether the rule should include a 
list of factors for consideration by a fund's board in making its 
determination under the rule. Alternatively, should the factors be 
discussed in the adopting release rather than in the rule? Should any 
factors be omitted or modified? Should there be additional factors?
2. Shareholder Voting
    a. Shareholder Approval
    When we adopted rule 17a-8, we assumed that shareholders of 
acquired funds in an affiliated merger would have an opportunity to 
vote on the merger. State corporation statutes that govern funds 
typically impose such a requirement.\37\ Congress recognized the 
importance of shareholder consent when it adopted section 1(b)(6) of 
the Act, which states that ``the national public interest and the 
interest of investors are adversely affected * * * when investment 
companies are reorganized, become inactive, or change the character of 
their business, or when the control or management thereof is 
transferred, without the consent of their security holders.''\38\ When 
funds have sought exemptive orders for affiliated mergers, they have 
typically represented in their applications to us that shareholder 
approval would be obtained by the acquired fund before consummation of 
the merger.\39\ Increasingly, however, funds have organized or 
reorganized as business trusts, which may not be required to receive 
shareholder approval before being acquired by another fund.\40\ In 
light of this trend, we are proposing to amend the rule to require that 
shareholders of acquired funds have an opportunity to vote on 
affiliated mergers.\41\ While a fund's board of directors is well-
equipped to assess a merger, individual shareholders are best able to 
gauge the impact of the merger in light of their personal 
circumstances.
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    \37\ See, e.g., Del. Code Ann. tit. 8, Sec. 251(c) (2000); Md. 
Code Ann., Corps. & Ass'ns Sec. 3-105(e) (2000); Mass. Gen. Laws 
Ann. ch. 156B, Sec. 78(c)(1)(i), 79(c) (2000).
    \38\ 15 U.S.C. 80a-1(b)(6).
    \39\ See, e.g., Barr Rosenberg Series Trust, Investment Company 
Act Release Nos. 24884 (Mar. 2, 2001) [66 FR 13983 (Mar. 8, 2001)] 
(notice) and 24914 (Mar. 26, 2001) [74 SEC Docket 1770] (order); 
Nationwide Mutual Funds, Investment Company Act Release Nos. 24855 
(Feb. 7, 2001) [66 FR 10041 (Feb. 13, 2001)] (notice) and 24880 
(Feb. 28, 2001) [74 SEC Docket 1257] (order); Strategist Growth 
Fund, Inc., Investment Company Act Release Nos. 24487 (June 1, 2000) 
[65 FR 36177 (June 7, 2000)] (notice) and 24546 (June 27, 2000) [72 
SEC Docket 2345] (order).
    \40\ See, e.g., Del. Code Ann. tit. 12, Sec. 3806(a) (2000); Md. 
Code Ann., Corps. and Ass'ns Sec. 12-207(b)(3) (2000) (the governing 
instrument for a business trust ``[m]ay provide for the taking of 
any action, including * * * the accomplishment of a merger or 
consolidation * * * without the vote or approval of any particular 
trustee or beneficial owner, or class, group, or series of trustees 
or beneficial owners''). See also Sheldon A. Jones, et al., The 
Massachusetts Business Trust and Registered Investment Companies, 13 
Del. J. Corp. L. 421, 458 (1988) (``[T]he business trust continues 
to offer a flexibility that corporations may not enjoy * * * The 
declaration of trust may provide that * * * the shareholder vote 
required to approve an action such as a consolidation, the sale of 
assets or an amendment to the declaration of trust can be less than 
required by state corporate law or can be eliminated * * *'').
    \41\ Proposed rule 17a-8(a)(3). The proposed rule requires that 
the outstanding voting securities of any fund that will not survive 
the merger approve the fund's participation in the merger, but 
defers to state law and the fund's governing documents to determine 
the percentage required for approval.
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    We request comment on the requirement that the merger be approved 
by the outstanding voting securities of any fund that will not survive 
the merger. Are there instances in which such a vote should not be 
required? We request comment on whether this provision would be 
inconsistent with the state laws under which some funds are organized. 
Would it be more appropriate to defer to state law? Do these state laws 
anticipate issues raised by mergers of affiliated funds? Would approval 
by independent directors be sufficient to protect investors in these 
funds? In the absence of a shareholder vote, would shareholders receive 
sufficient advance notice of the change in their investment through a 
merger? Should the outstanding voting securities of the fund that will 
survive the merger also be required to approve the merger?
    b. Echo Voting
    As discussed above, when we adopted rule 17a-8 in 1980, we designed 
the rule to be limited to affiliated mergers in which fund affiliates 
would not have both the ability and pecuniary incentive to affect the 
terms of the merger. An affiliate of one fund could have the ability to 
affect the terms of the merger if, for example, it held a large 
position in a second fund that is merging into the first fund. To 
prevent this, we propose to require that if an owner of more than five 
percent of the shares (``owner affiliate'') of the fund holding the 
vote is another merging fund, or an investment adviser, principal 
underwriter, or owner affiliate of another merging fund (``related 
shareholder''), the related shareholder must vote its shares in the 
same proportion as non-related shareholders (``echo voting'').\42\
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    \42\ Proposed rule 17a-8(a)(4)(i). Some fund advisers have 
represented in applications for exemptive relief in connection with 
fund mergers that they will echo vote shares held in their name. 
See, e.g., John Hancock Variable Series Trust I, Investment Company 
Act Release Nos. 24776 (Nov. 30, 2000) [65 FR 76313 (Dec. 6, 2000)] 
and 24797 (Dec. 22, 2000) [73 SEC Docket 4190]; Prudential Series 
Fund, Investment Company Act Release Nos. 15190 (July 2, 1986) [51 
FR 24959 (July 9, 1986)] and 15229 (July 29, 1986) [36 SEC Docket 
347].
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    We propose two exceptions to the echo voting requirement.\43\ 
First, a related shareholder's securities could be voted in accordance 
with instructions received from the beneficial owner of the securities, 
provided that the beneficial owner is not also a related 
shareholder.\44\ Second, a related shareholder's securities could be 
voted in accordance with instructions received from a person appointed 
to

[[Page 57606]]

provide guidance on the voting of securities by a fiduciary of a plan 
under the Employee Retirement Income Security Act (ERISA).\45\ Under 
these circumstances affiliates of merging funds would not seem to be 
able to influence the shareholder vote, and echo voting therefore would 
be unnecessary to protect the interests of shareholders.\46\
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    \43\ Proposed rule 17a-8(a)(4)(ii).
    \44\ Often an investment adviser holds shares in a fiduciary 
capacity for the beneficial owners of the shares. In such a case, 
the fiduciary would be permitted to seek voting instructions from 
the beneficial owners. The proposed rule would not prevent a 
fiduciary or other related shareholder from advising the beneficial 
owners how the shares should be voted, after disclosing the nature 
of its affiliation with the other merging fund.
    \45\ 29 U.S.C. 1001-1461.
    \46\ For purposes of echo voting, the votes of securities that 
are voted pursuant to either of these exceptions would be treated as 
votes of securities held by shareholders who are not related in 
calculating the proportional voting of securities. Proposed rule 
17a-8(a)(4)(iii).
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    We request comment on our echo voting proposal. Does this provision 
raise any issues under state law? Are protections in addition to the 
proposed method of echo voting needed to ensure that shareholders and 
their affiliates do not improperly influence the merger process? Are 
the two exceptions to echo voting appropriate? Should we include in the 
rule any other exceptions to echo voting? Should shareholders other 
than those specified in the proposed rule be required to echo vote?
3. Recordkeeping
    We propose to require, as a condition of rule 17a-8, that the fund 
surviving the merger preserve written records that document the merger 
and its terms.\47\ The records would include, among other things, the 
minute books setting forth the board's determinations and the bases for 
those determinations, any supporting documents provided to the 
directors in connection with the merger, the independent evaluator's 
report in the case of a merger with an unregistered entity, and 
documentation of the prices at which securities were transferred in the 
merger. The recordkeeping requirement is intended to ensure that we 
have adequate information upon which to base an assessment of the 
merging funds' compliance with the rule's conditions.
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    \47\ Proposed rule 17a-8(a)(6) (requiring the company to keep 
these records for six years after the merger and, for the first two 
years, in an easily accessible place). Thus, the Commission 
anticipates that the merger records of the acquired fund would be 
retained together with those of the surviving fund.
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B. Mergers of Registered Investment Companies and Certain Unregistered 
Entities

    We are proposing to amend rule 17a-8 to also exempt mergers of 
funds with bank common trust funds\48\ or bank collective trust 
funds\49\ as long as the survivor of the merger is a registered 
investment company.\50\ Currently, rule 17a-8 is available only for 
mergers of registered investment companies. When we proposed rule 17a-8 
in 1979, we deferred consideration of whether transactions involving 
unregistered entities should be eligible for relief under the rule.\51\ 
Today, there are a growing number of these transactions, particularly 
mergers involving bank common trust funds and bank collective trust 
funds.\52\ These mergers may be effected pursuant to a Commission 
exemptive order under section 17(b).\53\ Alternatively, these mergers 
may proceed under rule 17a-7, which generally permits purchase and sale 
transactions of readily marketable securities between a fund and 
certain of its affiliates if a number of conditions are met.\54\
---------------------------------------------------------------------------

    \48\ Generally, common trust funds and similar funds--for 
convenience, this release refers to all of these funds as ``common 
trust funds''--are eligible to be exempt from registration under 
section 3(c)(3) of the Act [15 U.S.C. 80a-3(c)(3)], which provides 
for the exemption of ``any common trust fund or similar fund 
maintained by a bank exclusively for the collective investment and 
reinvestment of moneys contributed thereto by the bank in its 
capacity as a trustee, executor, administrator, or guardian, if--(A) 
such fund is employed by the bank solely as an aid to the 
administration of trusts, estates, or other accounts created and 
maintained for a fiduciary purpose; (B) except in connection with 
the ordinary advertising of the bank's fiduciary services, interests 
in such fund are not--(i) advertised; or (ii) offered for sale to 
the general public; and (C) fees and expenses charged by such fund 
are not in contravention of fiduciary principles established under 
applicable Federal or State law.''
    \49\ Collective trust funds, which are also known as 
``collective investment funds,'' are exempt from registration under 
section 3(c)(11) of the Act [15 U.S.C. 80a-3(c)(11)], which provides 
for the exemption of ``any collective trust fund maintained by a 
bank consisting solely of assets of [any employee's stock bonus, 
pension or profit-sharing trust which meets requirements for 
qualification under section 401 of the Internal Revenue Code of 1986 
or any governmental plan described in section 3(a)(2)(C) of the 
Securities Act of 1933] or both.''
    \50\ See proposed rule 17a-8(a)(1).
    \51\ See 1979 Proposing Release, supra note 6, at n.14 (``The 
proposed rule * * * would not apply, for example, to a transaction 
involving a company which is not registered under the Act * * * 
However, should such transactions begin to occur frequently the 
Commission then will consider whether those transactions would merit 
consideration as a separate subject for rulemaking.'').
    \52\ See generally Kathy Anderson and Peter Cappacio, The Issue 
of Converting Common Trust Funds to Mutual Funds, Trusts and 
Estates, Sept. 1994, at 18 (discussing reasons for converting common 
trust funds into proprietary mutual funds).
    \53\ Generally, exemptive applications involving the transfer of 
substantially all of the assets of bank common trust funds or 
collective trust funds to affiliated registered open-end investment 
companies represent that these transfers will satisfy the conditions 
in rules 17a-7 [17 CFR 270.17a-7] and 17a-8 with the exception of 
the requirement in rule 17a-7(a) that cash be the only 
consideration. See, e.g., Nations Fund Trust, Investment Company Act 
Release Nos. 24335 (Mar. 9, 2000) [65 FR 14000 (Mar. 15, 2000)] 
(notice) and 24373 (Mar. 31, 2000) [72 SEC Docket 378] (order) 
(common trust fund); Wilmington Trust Company, Investment Company 
Act Release Nos. 23238 (June 2, 1998) [63 FR 31252 (June 8, 1998)] 
(notice) and 23285 (June 25, 1998) [67 SEC Docket 1248] (order) 
(collective investment fund).
    \54\ See rule 17a-7 [17 CFR 270.17a-7]. Affiliated mergers 
generally are not able to satisfy all of the conditions in rule 17a-
7, particularly the requirement in rule 17a-7(a) [17 CFR 270.17a-
7(a)] that the only consideration paid be cash. Typically, assets of 
the unregistered entity are exchanged for shares of the acquiring 
fund rather than for cash. The staff has issued no-action letters 
under section 17(a) and rule 17a-7 to funds seeking to merge with 
unregistered entities despite noncompliance with the cash 
consideration condition. See, e.g., DFA Investment Trust Company, 
SEC No-Action Letter (Oct. 17, 1995); Federated Investors, SEC No-
Action Letter (Apr. 21, 1994); First National Bank of Chicago, SEC 
No-Action Letter (Sept. 22, 1992). In the event that we adopt the 
proposed amendments to rule 17a-8, it is our intention that all 
mergers of funds with other funds, bank common trust funds, and bank 
collective trust funds, or any other affiliated entities will occur 
either (i) in compliance with rule 17a-8 or (ii) pursuant to an 
exemptive order under section 17(b).
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    Funds merging with affiliated common and collective trust funds 
under the proposed amendments to rule 17a-8 would also have to comply 
with a special pricing condition.\55\ As noted above, when two funds 
merge, each board, as part of its determination that the interests of 
existing shareholders will not be diluted, generally has concluded that 
the merger is occurring on the basis of the relative NAVs of the 
merging funds.\56\ Funds' practice of daily calculating their NAVs 
according to well-established procedures diminishes the likelihood that 
assets will be mispriced for purposes of a merger.\57\ No such 
safeguard against mispricing of assets exists for mergers with 
affiliated unregistered entities, which may not calculate NAV on a 
daily basis or in accordance with well-established procedures as funds 
do. Therefore, the proposed rule would require that the board of 
directors of any fund that is merging with an affiliated unregistered 
entity approve procedures for the valuation of the unregistered

[[Page 57607]]

entity's assets.\58\ These procedures, among other things, must provide 
for the preparation of a report by an independent evaluator \59\ that 
sets forth the current fair market value \60\ (as of the date of the 
merger) of each asset that will be transferred by the unregistered 
entity to the fund in the merger.\61\
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    \55\ Proposed rule 17a-8(a)(2)(iii). The trustees of a common 
trust fund or collective trust fund participating in a merger would 
not be required to make the determinations and underlying findings 
set forth in rule 17a-8(a)(2) because those entities are not 
investment companies under the Act.
    \56\ See 1979 Proposing Release, supra note 6, at text 
accompanying n.3 (``The number of shares exchanged for shares of the 
liquidating investment company typically is determined on the basis 
of the relative net asset values of the participating investment 
companies so that the interests of existing shareholders of either 
investment company are not diluted.''). Each merging fund generally 
calculates its NAV in accordance with the valuation procedures set 
forth in the fund's prospectus and statement of additional 
information. The fund's board may determine that adjustments to NAV 
should be made for assets subject to large capital gains taxes or 
for assets that carry with them capital losses.
    \57\ Rule 22c-1(b) [17 CFR 270.22c-1(b)] requires, subject to 
certain exceptions, that funds compute NAV at least daily.
    \58\ Proposed rule 17a-8(a)(2)(iii).
    \59\ We propose to define an ``independent evaluator'' as ``a 
person having expertise in the valuation of securities and other 
financial assets who is not an interested person, as defined in 
section 2(a)(19) of the Act, of the Common or Collective Trust Fund 
or any affiliate thereof except the Merging Company.'' Proposed rule 
17a-8(b)(5).
    \60\ We propose to define ``current fair market value'' as the 
``current market price of securities or similar investments 
determined in accordance with rule 17a-7(b) under the Act * * * or, 
if market quotations are not readily available, the fair value of 
such investments.'' Proposed rule 17a-8(b)(6).
    \61\ The independent evaluator's report would be included in the 
records of the merger that the surviving fund would be required to 
maintain under proposed rule 17a-8(a)(6).
---------------------------------------------------------------------------

    We request comment on the expansion of rule 17a-8 to include 
mergers with common and collective trust funds. We also request comment 
on the proposal to require directors of a fund merging with an 
unregistered entity to approve procedures for the valuation of the 
assets of the unregistered entity and on the use of an independent 
evaluator to value the assets of unregistered entities. We request 
comment on whether the rule should include any additional guidelines 
for the selection of an independent evaluator. Should the availability 
of exemptive relief for mergers involving these unregistered entities 
be subject to any other special conditions? Should mergers with other 
types of unregistered entities be permitted under the rule?

C. Prohibition of Reliance on Rule 17a-8 for Certain Transactions

    Rule 17a-8 is designed to facilitate mergers between affiliated 
funds that will generate benefits for each participating fund and its 
shareholders. We are concerned, however, that non-merger affiliated 
transactions that would otherwise be prohibited under the Act could be 
structured as mergers under rule 17a-8.\62\ Accordingly, we propose to 
make the rule's exemptive relief available only for mergers that are 
not part of a plan or scheme to evade the affiliated transaction 
prohibitions of section 17(a) of the Act.\63\
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    \62\ For example, an adviser could structure a sale of assets to 
an affiliated fund by transferring the assets to an unregistered 
entity and then merging that entity with the affiliated fund.
    \63\ Proposed rule 17a-8(a)(7).
---------------------------------------------------------------------------

    We request comment on this proposed amendment to rule 17a-8. Is the 
proposed amendment necessary in light of section 48(a) of the Act, 
which prohibits a person from doing indirectly through another person 
what the person is prohibited from doing directly? \64\ Would this 
provision serve to bring attention to such issues, or create 
uncertainty concerning the availability of the exception? 
Alternatively, should the rule prohibit specific improper transactions 
that are structured as mergers?
---------------------------------------------------------------------------

    \64\ 15 U.S.C. 80a-47(a).
---------------------------------------------------------------------------

III. General Request for Comment

    The Commission requests comment on the proposed rule amendments 
that are the subject of this release, suggestions for additional 
provisions or changes to the rule, and comments on other matters that 
might have an effect on the proposals contained in this release. The 
Commission encourages commenters to provide data to support their 
views.

IV. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. The proposed amendments to rule 17a-8 are designed to reduce 
costs incurred by funds and advisers by eliminating the need for 
Commission approval of mergers. The amendments also would supplement 
existing conditions of the rule, in order to ensure continued 
protection of fund shareholders in connection with affiliated fund 
mergers. The Commission has identified certain costs, which are 
discussed below, that may result from the proposed rule amendments. We 
request comment on the costs and benefits of the proposed rule 
amendments. We encourage commenters to identify, discuss, analyze, and 
supply relevant data regarding these or any additional costs and 
benefits.

A. Benefits

    We anticipate that funds, their shareholders, and their advisers 
and other affiliates would benefit from the proposed expansion of the 
scope of the rule to include mergers of affiliated funds, regardless of 
the nature of the affiliation, and mergers with common or collective 
trust funds. More merging funds would be able to rely on the rule and 
therefore would not have to obtain exemptive relief, which can be 
costly to merging funds, their shareholders, and their affiliates.\65\ 
Thus, the proposed amendments would remove an obstacle to mergers of 
affiliated funds and could thereby reduce the costs of affiliated 
mergers.\66\ Mergers give shareholders of small or poorly performing 
funds an opportunity to shift their assets to a better performing fund 
without negative tax consequences.\67\ Liquidations are taxable events 
for fund shareholders, whereas fund mergers can be structured to be 
non-taxable. Investment advisers also could benefit from the greater 
ease with which mergers could be effected under the proposed amended 
rule because they often bear all or a portion of the costs of obtaining 
exemptive relief. In addition, investment advisers could realize 
enhanced economies of scale through fund mergers, which spread the 
costs of management, some of which are fixed, across a larger pool of 
assets.\68\ Shareholders may benefit from these economies of scale in 
the form of lower fees and expenses.\69\
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    \65\ In calendar year 2000, exemptive orders were necessary for 
over 30% of affiliated fund mergers. We believe that these mergers 
would have been able to proceed under proposed rule 17a-8. As set 
forth below, we anticipate that there will be approximately 400 
mergers annually. Thus, assuming that 30% of these would have had to 
proceed under an exemptive order, annually, approximately 120 
mergers for which individualized exemptive relief would have been 
necessary will instead be able to proceed under the rule. The staff 
estimates, based on conversations with persons who have prepared 
exemptive applications for merger-related relief under section 
17(b), that it costs an average of $36,000 to obtain an exemptive 
order permitting mergers of multiple portfolios of one or more 
affiliated registered investment companies. As discussed below, some 
funds may incur costs in complying with the rule's conditions that 
they otherwise would not have incurred. See infra Section IV.B.
    \66\ The Commission staff anticipates that eliminating the need 
for merging funds to obtain individualized exemptive relief would 
not cause a significant increase in the number of mergers.
    \67\ See, e.g., Jayaraman, supra note 18, at 24 (finding that 
smaller funds are more likely to merge and that ``poor past 
performance increases the probability of a fund merger''); Michael 
L. Sapir and James A. Bernstein, Reorganizations of Investment 
Companies, 50 Bus. Law. 817, 823 (1995) (explaining that the 
elimination of a ``stunted fund'' is a common reason for a fund 
merger and can benefit the shareholders of that fund).
    \68\ See Sapir and Bernstein, supra note, at 822 (mergers can 
``increase the larger resulting fund's operating efficiencies,'' 
``enhance the ability of the investment adviser to this larger fund 
to effect portfolio transactions on more favorable terms,'' and 
``give the investment adviser greater flexibility and the ability to 
select a larger number of portfolio securities for the resulting 
fund, with the attendant ability to spread investment risks among a 
larger number of portfolio securities'').
    \69\ See Jayaraman, supra note, at 23 (after a merger, ``target 
fund shareholders also benefit from a reduction in their fund's 
expense ratio after the merger''). See also Division of Investment 
Management, Securities and Exchange Commission, Report on Mutual 
Fund Fees and Expenses 56 (2000) (finding an inverse relationship 
between a fund's asset size and its expense ratio); Sapir and 
Bernstein, supra note, at n.22 (citations omitted) (``When one 
investment adviser acquires another investment adviser that provides 
substantially the same investment management and other services to 
another company that has a similar investment objective and policies 
as an investment company advised by the acquiring adviser, a 
reorganization of the two separate investment companies would 
benefit shareholders.'').

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[[Page 57608]]

    We believe that the proposed amendments, in addition to reducing 
costs faced by funds in connection with mergers, also may enhance the 
protections afforded by the rule to fund shareholders. We believe that 
the enumeration of certain factors for consideration by the board, if 
relevant, would assist a fund board, and particularly its independent 
directors, in scrutinizing a fund merger to ensure that it is in the 
best interests of the fund.\70\ We believe that director scrutiny could 
serve as an effective tool for preventing the types of problems, 
discussed above, that can arise in connection with fund mergers.\71\ 
The proposal to condition the rule's relief on approval of the merger 
by a majority of the outstanding voting securities of any acquired fund 
could benefit fund shareholders by giving them an opportunity to assess 
the merger in light of their own financial circumstances. Shareholders 
could benefit from the proposed restrictions on voting by related 
shareholders whose interests in the merger are defined primarily by an 
affiliation with another merger participant and may run counter to the 
interests of the fund holding the vote. These related shareholders 
would not be able to determine the outcome of a shareholder vote. 
Finally, we believe that the proposed rule's recordkeeping requirements 
would ensure that the Commission could assess merging funds' compliance 
with the rule and, therefore would encourage fund boards to carefully 
assess mergers. Shareholders could benefit from the resulting incentive 
on fund boards, because the directors are charged with representing 
shareholders' interests. We request comment on the nature and magnitude 
of the benefits afforded by the rule to funds, their investment 
advisers, and their shareholders.
---------------------------------------------------------------------------

    \70\ See supra Section II.A.1 for a discussion of these factors.
    \71\ See id.
---------------------------------------------------------------------------

B. Costs

    Merging funds that choose to rely on proposed rule 17a-8, and their 
advisers, would incur certain costs in complying with the rule's 
conditions.\72\ The supplemental conditions included in the proposed 
amendments, together with the increased numbers of merging funds likely 
to rely on the rule, could result in an increase in the aggregate 
annual cost of compliance with rule 17a-8.
---------------------------------------------------------------------------

    \72\ The costs of a fund merger may be borne totally or in part 
by the investment adviser to one or both of the merging funds or may 
be borne by one or both of the merging funds. The allocation of 
costs of the merger is a product of negotiation between the boards 
of the merging funds and their investment adviser(s).
---------------------------------------------------------------------------

    The proposed amendments would eliminate the expenses of filing an 
exemptive application for certain merging funds.\73\ Some of these 
expenses, however, are shared by a number of merging funds, and there 
may be certain increased compliance costs under the proposed rules for 
these merged funds.\74\ In addition, some merging funds that would have 
been able to comply with current rule 17a-8, may face higher costs 
under the proposed amendments.\75\ Finally, funds merging with bank 
common or collective trust funds will be able to avoid the expense of 
filing an exemptive application, but some funds may incur greater costs 
under the rule than they would have incurred otherwise, such as higher 
valuation costs because of the required independent evaluator's report. 
We believe, however, that even for these mergers the rule's costs would 
be justified by the combination of quantifiable benefits and intangible 
benefits afforded by the rule, such as enhanced shareholder protection 
and the elimination of the delay associated with obtaining an exemptive 
order.
---------------------------------------------------------------------------

    \73\ See supra note 65 and accompanying text.
    \74\ Except in rare circumstances, it is unlikely that funds 
will experience significantly higher costs in conducting a merger 
under the amended rule. See infra notes 78-79 and accompanying text 
(discussing costs associated with conducting a shareholder vote).
    \75\ These increased costs may be attributable to the proposed 
rule's factors for board review, shareholder voting provisions, or 
recordkeeping requirements.
---------------------------------------------------------------------------

    The proposed rule is intended to ensure that boards thoroughly 
review merger transactions and their terms. Even in the absence of the 
amended rule, fund boards would meet to consider the merger.\76\ 
Because the proposed rule would simply add factors for the board to 
consider during this meeting, the incremental costs attributable to 
consideration of these factors are likely to be minimal. We request 
comment on the nature and magnitude of these costs.
---------------------------------------------------------------------------

    \76\ For a discussion of factors that a board may consider 
during these meetings, see Sapir and Bernstein, supra note 67, at 
825.
---------------------------------------------------------------------------

    In conjunction with the expansion of the rule to unregistered 
entities, we are proposing to require that fund boards establish 
procedures for valuing the assets held by any common or collective 
trust funds participating in the merger. A mandatory part of the 
valuation procedures would be the preparation of a report by an 
independent evaluator, which the staff estimates would impose an 
aggregate annual cost of approximately $150,000.\77\ We request comment 
on the cost of complying with the proposed provision governing the 
valuation of the assets of common or collective trust funds 
participating in a merger.
---------------------------------------------------------------------------

    \77\ The staff estimates, based on a review of fund filings, 
that there will be approximately 10 mergers each year involving 
common or collective trust funds. It is further estimated, based on 
discussions with professionals who have prepared similar valuation 
reports, that the preparation of an independent evaluator's report 
in each of these instances would cost approximately $15,000. We 
request comment on these estimates.
---------------------------------------------------------------------------

    We anticipate that the condition in the rule requiring non-
surviving funds to obtain shareholder approval would result in 
shareholder votes by only a few funds each year that otherwise would 
not have conducted shareholder votes.\78\ The staff estimates that the 
cost of obtaining shareholder approval for a fund merger is 
approximately $75,000.\79\ We request comment on the cost of complying 
with the proposed shareholder approval provision.
---------------------------------------------------------------------------

    \78\ For purposes of our Paperwork Reduction Act analysis, it is 
assumed that twenty funds each year will be affected. See infra 
Section VI. This estimate is based on the fact that the staff rarely 
sees fund mergers in which a shareholder vote is not held. Many 
funds are constrained by state law to conduct a shareholder vote in 
the event of a merger. Even funds that are not required by state law 
to obtain shareholder approval may do so in order to maintain good 
relations with their shareholders. We request comment on this 
estimate.
    \79\ This estimate, which is based on conversations with 
representatives of funds and service providers, includes the legal, 
mailing, printing, solicitation, and tabulation costs associated 
with a shareholder vote. For the estimated twenty affected funds, 
the annual aggregate cost of holding a shareholder vote (at a cost 
of $75,000 per fund) would be approximately $1,500,000. We request 
comment on these estimates.
---------------------------------------------------------------------------

    The echo voting requirement is likely to cause a merging fund that 
conducts a shareholder vote to incur some incremental administrative 
costs.\80\ The fund holding a vote will have to provide a list of 
related shareholders to the entity charged with tabulating the votes 
and directions for implementing the voting method set forth in proposed 
rule 17a-8. The staff estimates, based on discussions with 
representatives of funds and service providers, that each acquired fund 
will incur a cost of $5,000 in complying with this provision.\81\ We 
request comment on the nature and magnitude of these administrative 
costs.
---------------------------------------------------------------------------

    \80\ As described above, the fund's securities must be voted 
through echo voting or according to instructions by the beneficial 
owners of the securities (or according to the guidance provided by a 
person appointed by a named fiduciary acting on behalf of an ERISA 
plan).
    \81\ Although some acquiring funds may solicit shareholder 
approval, in a typical merger, only the shareholders of the acquired 
fund vote on the merger.
---------------------------------------------------------------------------

    We believe that the incremental costs associated with the 
recordkeeping

[[Page 57609]]

requirements in proposed rule 17a-8 would not be significant. We 
believe that most funds already retain the types of records that would 
be required by the proposed rule as a matter of good business practice. 
The current rule requires that the directors' findings and their bases 
be recorded in the minute books of the fund. The amended rule would 
retain this requirement at what we anticipate would continue to be a 
minimal cost even though the proposed amendments set forth a number of 
factors that the board must consider along with other relevant 
factors.\82\ The amended rule would require the retention of written 
records describing the merger and its terms. Although the proposed six-
year retention period for merger records may exceed the period for 
which funds would otherwise keep these types of records, it is 
consistent with the retention period applicable to many other 
records.\83\ We believe, therefore, that the proposed recordkeeping 
requirement is unlikely to impose significant additional costs on 
funds. We request comment on the nature and magnitude of the costs of 
this requirement.
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    \82\ For purposes of the Paperwork Reduction Act analysis, the 
staff estimates that personnel of each fund will spend approximately 
.75 hours (.25 hours of professional time and .5 hours of clerical 
time) to satisfy the proposed rule's recordkeeping requirements in 
connection with a merger. See infra Section VI. We request comment 
on this estimate.
    \83\ See rule 31a-2 [17 CFR 270.31a-2].
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C. Request for Comment

    The Commission requests comment on the potential costs and benefits 
identified in the proposal and any other costs or benefits that may 
result from the proposal. We request comment on the anticipated costs 
and benefits of the proposed amendments to rule 17a-8 compared to the 
costs and benefits of the rule in its current form. For purposes of the 
Small Business Regulatory Enforcement Fairness Act of 1996,\84\ the 
Commission also requests information regarding the potential impact of 
the proposed rule on the economy on an annual basis. Commenters are 
requested to provide data to support their views.
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    \84\ Pub. L. No. 104-121, Title II, 110 Stat. 857 (1996).
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V. Consideration of Promotion of Efficiency, Competition, and 
Capital Formation

    Section 2(c) of the Investment Company Act requires the Commission, 
when engaging in rulemaking that requires it to consider or determine 
whether an action is necessary or appropriate in the public interest, 
to consider whether the action will promote efficiency, competition, 
and capital formation.\85\ The proposed rule amendments are intended to 
make rule 17a-8 available to a greater percentage of affiliated merging 
funds, thereby eliminating the need for most merging funds to obtain 
specific exemptive relief, which can be costly and time consuming.\86\ 
The Commission anticipates that the modest amount of cost savings 
associated with the proposed rule amendments would not significantly 
affect the number of mergers, and therefore the amendments would not 
significantly affect efficiency, competition, or capital formation.\87\ 
The proposed amendments also could eliminate disparities in costs 
incurred by affiliated funds that would have merged under the existing 
rule, versus those that would have merged through an exemptive order. 
This might create a positive, secondary competitive effect. As 
discussed above, however, a small number of funds could incur higher 
costs under the amended rule, and those costs might have some secondary 
effects on efficiency.
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    \85\ 15 U.S.C. 80a-2(c).
    \86\ See supra Section IV.B.
    \87\ See supra Section IV.A. for a discussion of the cost 
savings.
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    The Commission requests comments on whether the proposed rule 
amendments, if adopted, would promote efficiency, competition, and 
capital formation. Will the proposed amendments materially affect the 
number of fund mergers? Will any costs that result from the proposed 
amendments affect efficiency, competition, or capital formation? 
Comments will be considered by the Commission in satisfying its 
responsibilities under section 2(c) of the Investment Company Act. 
Commenters are requested to provide empirical data and other factual 
support for their views to the extent possible.

VI. Paperwork Reduction Act

    Rule 17a-8 enables affiliated investment companies to engage in 
mergers and similar business combinations without first obtaining from 
the Commission exemptive relief from section 17(a). The proposed 
amendments would both expand the rule's scope and include in the rule 
new conditions, some of which constitute new ``collection of 
information'' requirements within the meaning of the Paperwork 
Reduction Act of 1995 (44 U.S.C. 3501-3520). The Commission is 
submitting these proposals to the Office of Management and Budget 
(``OMB'') for review in accordance with 44 U.S.C. 3507(d) and 5 CFR 
1320.11.
    The title for the current collection of information is ``Rule 17a-8 
under the Investment Company Act of 1940 [17 CFR 270.17a-8], `Mergers 
of Certain Affiliated Investment Companies.' '' 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. The approved collection of information, which would be revised 
by the proposed amendments, displays control number 3235-0235. The 
staff believes that the proposed amendments will increase the annual 
hour burden associated with the rule, which is currently estimated to 
be 120 hours, and introduce an annual cost burden associated with the 
rule. The provision of information in accordance with amended rule 17a-
8 would be voluntary, because rule 17a-8 is an exemptive rule and, 
therefore, funds may choose whether or not to rely on it. Because the 
proposed amendments do not require the provision of information to the 
Commission, this release does not address the confidentiality of 
responses under the proposed amendments to rule 17a-8.
    The Commission staff anticipates that substantially all funds that 
engage in mergers with affiliated funds would rely on proposed rule 
17a-8. Assuming that there will be approximately 400 mergers between 
affiliated funds or fund portfolios annually, we estimate that 
approximately 800 registered investment companies, or, in many cases, 
portfolios or series thereof, would be subject to the rule's 
information collection requirements annually.\88\ The Commission staff 
estimates that merging funds would spend annually an aggregate of 600 
hours--200 hours of professional time and 400 hours of clerical time--
recording the relevant determinations of the boards of directors and 
preserving written records of the mergers and their terms.\89\ The 
proposed amendments would require that written

[[Page 57610]]

records describing the merger transaction and terms be maintained for 
six years after the merger, the first two in an easily accessible 
place.
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    \88\ The staff estimate of approximately 400 mergers annually is 
higher than the approximately 279 mergers predicted for calendar 
year 2002 by a simple linear projection of merger data from 1993 
through 2000. The staff believes, based on an evaluation of the 
number of mergers in recent years and current industry conditions, 
that 279 is an underestimate of the number of mergers that are 
likely to occur annually.
    \89\ The staff estimates, based on estimates made by the staff 
in 1999 in connection with the application for an extension of OMB's 
approval for the rule 17a-8 paperwork collection burden, that the 
proposed amendments would cause each of the approximately 800 
participating portfolios or series of registered investment 
companies to incur an annual burden of .75 hours (.25 hours of 
professional time and .5 hours of clerical time) to record board 
resolutions documenting the board's findings and to preserve records 
of the merger transaction.
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    The amended rule would require that directors of funds merging with 
unregistered entities \90\ approve procedures for the valuation of the 
assets held by each unregistered entity. The approved procedures must 
provide for the preparation of a report by an independent evaluator to 
be used to value assets acquired in connection with the merger that 
sets forth the current fair market value (as of the date of the merger) 
of each security to be conveyed. Because a limited number of fund 
mergers involve a common or collective trust fund, the staff estimates 
that approximately ten merging funds would be covered by this provision 
in the first year following the adoption of this rule.\91\ The 
Commission staff estimates, based on discussions with professionals who 
have prepared similar valuation reports, that an independent 
evaluator's report would cost approximately $15,000 and that, in the 
aggregate, the annual burden associated with this aspect of the rule 
will be approximately $150,000.\92\
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    \90\ As discussed above, the proposed amendments would extend 
rule 17a-8 to mergers with only certain types of unregistered 
entities, namely common and collective trust funds. See supra 
Section II.B.
    \91\ This estimate is based on a review of fund filings.
    \92\ See supra note 77, which sets forth the basis for this 
estimate.
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    The Commission staff believes that funds will incur a cost in 
connection with the echo voting provision in the proposed rule. A fund 
that conducts a vote will have to compile a list of each owner 
affiliate of the fund holding the vote that is another merging fund, or 
an investment adviser, principal underwriter, or owner affiliate of 
another merging fund (``related shareholder''). The fund will then have 
to ensure that the securities of related shareholders are echo voted 
unless they are voted according to instructions from the beneficial 
owners or a person appointed by a named fiduciary acting on behalf of 
an ERISA plan. The staff estimates, based on conversations with 
representatives of funds and service providers, that each acquired fund 
will incur a cost of $5,000 in complying with this provision.\93\ The 
staff estimates, therefore, that the total annual cost associated with 
this provision will be approximately $2,000,000.\94\
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    \93\ Although some acquiring funds may solicit shareholder 
approval, in a typical merger, only the shareholders of the acquired 
fund vote on the merger.
    \94\ In each of the estimated 400 mergers each year, we assume 
that there will be one acquired fund.
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    There is a cost associated with obtaining the approval of the 
acquired fund's outstanding voting securities. The staff estimates that 
shareholder approval will be sought by approximately twenty funds each 
year that would not otherwise have conducted a shareholder vote.\95\ 
The funds or their advisers incur legal, mailing, printing, 
solicitation, and tabulation costs in connection with a shareholder 
vote. We estimate, based on discussions with representatives of funds 
and service providers, that the total cost to an acquired fund of 
obtaining shareholder approval for a fund merger is approximately 
$75,000. Thus, we anticipate that the total annual cost associated with 
this provision will be approximately $1,500,000.
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    \95\ This estimate is based on the fact that many funds are 
constrained by state law to conduct a shareholder vote in the event 
of a merger. Moreover, even funds that are not required by state law 
to obtain shareholder approval may do so in order to maintain good 
relations with their shareholders. We request comment on whether the 
estimate of twenty funds is reasonable.
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    The Commission staff estimates that the paperwork burden arising 
from the proposed amendments reflects an increase in the paperwork 
burden associated with rule 17a-8 of 480 hours and an increase in the 
annual cost burden of approximately $3,650,000.\96\ Pursuant to 44 
U.S.C. 3506(c)(2)(B), the Commission solicits comments in order to: (i) 
Evaluate whether the proposed collections of information are necessary 
for the proper performance of the functions of the Commission, 
including whether the information will have practical utility; (ii) 
evaluate the accuracy of the Commission's estimate of the burden of the 
proposed collections of information; (iii) determine whether there are 
ways to enhance the quality, utility, and clarity of the information to 
be collected; and (iv) minimize the burden of the collections of 
information on those who are to respond, including through the use of 
automated collection techniques or other forms of information 
technology.
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    \96\ This figure is the total of the estimated $150,000 annual 
cost associated with valuing the securities of common and collective 
trust funds, the $1,500,000 annual cost associated with obtaining 
shareholder approval, and the approximately $2,000,000 annual cost 
associated with the echo voting provision.
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    Persons wishing to submit comments on the collection of information 
requirements of the proposed rule should direct them to the Office of 
Management and Budget, Attention Desk Officer of the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, Room 
3208, New Executive Office Building, Washington, DC 20503, and should 
send a copy to Jonathan G. Katz, Secretary, Securities and Exchange 
Commission, 450 5th Street, NW., Washington, DC 20549-0609, with 
reference to File No. S7-21-01. OMB is required to make a decision 
concerning the collections of information between 30 and 60 days after 
publication of this Release; therefore a comment to OMB is best assured 
of having its full effect if OMB receives it within 30 days after 
publication of this Release. Requests for materials submitted to OMB by 
the Commission with regard to these collections of information should 
be in writing, refer to File No. S7-21-01, and be submitted to the 
Securities and Exchange Commission, Records Management, Office of 
Filings and Information Services.

VII. Summary of Initial Regulatory Flexibility Analysis

    The Commission has prepared an Initial Regulatory Flexibility 
Analysis (``IRFA'') in accordance with 5 U.S.C. 603 regarding the 
proposed amendments to rule 17a-8 under the Investment Company Act. The 
following summarizes the IRFA.
    The IRFA summarizes the background of the proposed amendments. The 
IRFA also discusses the reasons for the proposed amendments and the 
objectives of, and legal basis for, the amendments. Those items are 
discussed above in this release.
    The IRFA discusses the effect of the proposed amendments on small 
entities. A small business or small organization (collectively, ``small 
entity'') for purposes of the Regulatory Flexibility Act is a fund 
that, together with other funds in the same group of related investment 
companies, has net assets of $50 million or less as of the end of its 
most recent fiscal year.\97\ Of approximately 3,650 active funds, 
approximately 200 are small entities. Funds that are small entities, 
like other funds, will be affected by the proposed amendments only if 
they seek to merge with an affiliated fund or bank common trust fund or 
bank collective trust fund.
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    \97\ Rule 0-10 [17 CFR 270.0-10].
---------------------------------------------------------------------------

    The IRFA states that the proposed rule amendments should not have a 
substantial impact on small entities. Like other funds, small entities 
will be affected by rule 17a-8 only if they enter into a merger with an 
affiliate and choose to rely on the rule.

[[Page 57611]]

    The IRFA states that Commission staff believes that the proposed 
rule amendments would not impose any reporting requirements on any 
person and would not materially increase other compliance requirements. 
As amended, the rule would continue to require that the board's 
findings and bases for those findings be recorded in the minute books 
of each registered company. The proposed rule would specify certain 
factors that the board must consider, if relevant, in connection with 
the finding that the merger is in the best interests of the fund. As a 
basis for the non-dilution finding, the board of directors of a merging 
fund would be required to establish procedures for valuing securities 
to be transferred to the fund by an unregistered entity participating 
in the merger. These procedures would include the preparation of a 
report by an ``independent evaluator'' setting forth the ``current fair 
market value'' of any securities to be received from an unregistered 
entity.\98\ The IRFA describes the two provisions in the proposed rule 
related to shareholder voting.\99\ Finally, the IRFA describes the 
requirement that any surviving fund maintain records relating to the 
merger transaction for six years, the first two in an easily accessible 
place, following the merger.
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    \98\ An ``independent evaluator'' would be defined as ``a person 
having expertise in the valuation of securities and other financial 
assets who is not an interested person, as defined in section 
2(a)(19) of the Act, of the Common or Collective Trust Fund or any 
affiliate thereof except the Merging Company.'' Proposed rule 17a-
8(b)(5). ``Current fair market value'' would be defined as ``the 
current market price of securities or similar investments determined 
in accordance with rule 17a-7(b) * * * or, if market quotations are 
not readily available, the fair value of such investments.'' 
Proposed rule 17a-8(b)(6).
    \99\ Proposed rule 17a-8(a)(3) and 17a-8(a)(4). These provisions 
are discussed above. See supra Section II.A.2.
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    The IRFA explains that the proposed amendments could benefit funds, 
including small entities, by making the rule available to a greater 
number of merging funds. Funds that currently would have to file 
applications for exemptive relief could rely on the proposed rule.
    The IRFA explains that the Commission has not identified any 
federal rules that duplicate or conflict with the proposed rule and 
rule amendments. The written records describing the merger and its 
terms that are required by the proposed rule may sometimes include some 
of the same records required by rules 31a-1 and 31a-2 under the 
Investment Company Act, but the IRFA explains that any overlap with 
these rules is expected to be insignificant.\100\ The proposed rule 
would not require the maintenance of duplicate copies of any 
overlapping records.
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    \100\ 17 CFR 270.31a-1 and 270.31a-2.
---------------------------------------------------------------------------

    The IRFA explains that the Commission has considered significant 
alternatives to the proposed amendments that would accomplish the 
stated objective, while minimizing any significant adverse impact on 
small entities. The Commission believes that no alternative could carry 
out these objectives as effectively as the proposed amendments.
    The Commission encourages the submission of comments on matters 
discussed in the IRFA. Specifically, comment is requested on the 
effects the proposed rule would have on small entities and the number 
of small entities that would be affected. Commenters are asked to 
describe the nature of any effect and provide empirical data supporting 
the extent of the effect. These comments will be placed in the same 
public file as comments on the proposed rule amendments. A copy of the 
IRFA may be obtained by contacting Hester M. Peirce, Securities and 
Exchange Commission, 450 5th Street, NW, Washington, DC 20549-0506.

VIII. Statutory Authority

    The Commission is proposing amendments to rule 17a-8 pursuant to 
the authority set forth in sections 6(c) and 38(a) of the Investment 
Company Act [15 U.S.C. 80a-6(c), 80a-37(a)].

List of Subjects in 17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rule

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

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

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

    Authority: 15 U.S.C. 80a-1 et seq., 80a-34(d), 80a-37, 80a-39, 
unless otherwise noted;
* * * * *
    2. Section 270.17a-8 is revised to read as follows:


Sec. 270.17a-8  Mergers of affiliated companies.

    (a) Exemption of affiliated Mergers. A Merger of a registered 
investment company (or a series thereof) and one or more other 
registered investment companies (or series thereof), Common Trust 
Funds, or Collective Trust Funds is exempt from sections 17(a)(1) and 
(2) of the Act if:
    (1) Surviving Company. The Surviving Company is a registered 
investment company (or a series thereof).
    (2) Board determinations. As to any registered investment company 
(or series thereof) participating in the Merger (``Merging Company''):
    (i) The board of directors, including a majority of the directors 
who are not interested persons of the Merging Company or of any other 
company or series participating in the Merger, determines that:
    (A) Participation in the Merger is in the best interests of the 
Merging Company; and
    (B) The interests of the Merging Company's existing shareholders 
will not be diluted as a result of the Merger.
    (ii) The directors, in making the determination in paragraph 
(a)(2)(i)(A) of this section, consider at least the following factors, 
if relevant:
    (A) Any direct or indirect federal income tax consequences of the 
Merger to the shareholders of the Merging Company;
    (B) Any fees or expenses that the Merging Company will pay 
(directly or indirectly) in connection with the merger;
    (C) Any change in fees or expenses to be paid or borne by 
shareholders of the Merging Company (directly or indirectly) after the 
Merger;
    (D) Any change in services to be provided to shareholders of the 
Merging Company after the Merger; and
    (E) Any change in investment objectives, restrictions, and policies 
after the Merger.
    (iii) The directors, in making the determination in paragraph 
(a)(2)(i)(B) of this section, have approved procedures for the 
valuation of assets held by each Common or Collective Trust Fund 
participating in the merger. The approved procedures provide for the 
preparation of a report by an Independent Evaluator to be used to value 
assets acquired in connection with the Merger that sets forth the 
Current Fair Market Value as of the date of the Merger of each security 
and similar investment to be conveyed by each Common or Collective 
Trust Fund.
    (iv) The determinations of the directors required in paragraph 
(a)(2)(i) of this section and the bases thereof are recorded fully in 
the minute books of the Merging Company.
    (3) Shareholder approval. The outstanding voting securities of any 
Merging Company that is not a

[[Page 57612]]

Surviving Company approve its participation in the Merger.
    (4) Echo voting. (i) General. If a shareholder vote of a Merging 
Company is required to approve the Merger, any person who owns, 
controls, or holds with the power to vote more than five percent of the 
voting securities (``owner affiliate'') of the Merging Company and who 
is another Merging Company, or an investment adviser, principal 
underwriter, or owner affiliate of another Merging Company 
(collectively, ``related shareholders''), must vote those securities in 
the same proportion as the securities voted by shareholders who are not 
related shareholders (``echo voting'').
    (ii) Exceptions. Echo voting of securities is not required if the 
related shareholder votes the securities in accordance with the 
instructions of the beneficial owner of the securities (if the 
beneficial owner is not a related shareholder), or in accordance with 
the instructions of a person who is not a related shareholder and who 
was appointed, for the purpose of providing guidance on the voting of 
securities of the Merging Company, by a fiduciary of a plan established 
under the Employee Retirement Income Security Act, 29 U.S.C. 1001-1461, 
that holds securities of the Merging Company.
    (iii) Calculating the vote. In determining how to vote securities 
according to paragraph (a)(4)(i) of this section, securities voted 
pursuant to the exceptions of paragraph (a)(4)(ii) of this section must 
be treated as the votes of securities of shareholders that are not 
related shareholders.
    (5) Board composition; independent directors. (i) A majority of the 
directors are not interested persons of the Merging Company and those 
directors select and nominate any other disinterested directors.
    (ii) Any person who acts as legal counsel for the disinterested 
directors is an independent legal counsel.
    (6) Merger records. Any Surviving Company that is a registered 
investment company preserves written records that describe the Merger 
and its terms for six years after the Merger (and for the first two 
years in an easily accessible place).
    (7) Prohibition against evasion. The Merger is not part of a plan 
or scheme to evade the affiliated transaction prohibitions of section 
17(a) of the Act.
    (b) Definitions. For purposes of this section:
    (1) Merger means the merger, consolidation, or purchase or sale of 
substantially all of the assets between a registered investment company 
(or a series thereof) and another company;
    (2) Collective Trust Fund means a collective trust fund, as 
described in section 3(c)(11) of the Act;
    (3) Common Trust Fund means a common trust fund or similar fund, as 
described in section 3(c)(3) of the Act;
    (4) Surviving Company means a company in which shareholders of a 
Merging Company will obtain an interest as a result of a Merger;
    (5) Independent Evaluator means a person having expertise in the 
valuation of securities and other financial assets who is not an 
interested person, as defined in section 2(a)(19) of the Act, of the 
Common or Collective Trust Fund or any affiliate thereof except the 
Merging Company; and
    (6) Current Fair Market Value means the current market price of 
securities or similar investments determined in accordance with rule 
17a-7(b) (Sec. 270.17a-7(b)) under the Act or, if market quotations are 
not readily available, the fair value of such investments.

    By the Commission.

    Dated: November 8, 2001.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 01-28583 Filed 11-14-01; 8:45 am]
BILLING CODE 8010-01-P