[Federal Register Volume 67, Number 80 (Thursday, April 25, 2002)]
[Notices]
[Pages 20556-20558]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 02-10148]


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SECURITIES AND EXCHANGE COMMISSION

[Rule 10f-3, OMB Control No. 3235-0226 and SEC File No. 270-237]


Submission for OMB Review; Comment Request; Upon Written Request, 
Copies Available From: Securities and Exchange Commission Office of 
Filings and Information Services Washington, DC 20549

    Notice is hereby given that, pursuant to the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange 
Commission (``Commission'') has submitted to the Office of Management 
and Budget (``OMB'') a request for extension and approval of the 
collection of information discussed below.
    Section 10(f) of the Investment Company Act of 1940 [15 U.S.C. 80a-
10(f)] (the ``Act'' or ``Investment Company Act'') prohibits a 
registered investment company (``fund'') from purchasing any security 
during an underwriting or selling syndicate if the fund has certain 
relationships with a

[[Page 20557]]

principal underwriter \1\ for the security (``affiliated 
underwriter'').\2\ Congress enacted this provision in 1940 to protect 
funds and their investors by preventing underwriters from ``dumping'' 
unmarketable securities on affiliated funds.\3\
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    \1\ ``Principal underwriter'' is defined to mean (in relevant 
part) an underwriter that, in connection with a primary distribution 
of securities, (A) is in privity of contract with the issuer or an 
affiliated person of the issuer, (B) acting alone or in concert with 
one or more other persons, initiates or directs the formation of an 
underwriting syndicate, or (C) is allowed a rate of gross 
commission, spread, or other profit greater than the rate allowed 
another underwriter participating in the distribution. 15 U.S.C. 
80a-2(a)(29).
    \2\ Section 10(f) prohibits the purchase if a principal 
underwriter of the security is an officer, director, member of an 
advisory board, investment adviser, or employee of the fund, or if 
any officer, director, member of an advisory board, investment 
adviser, or employee of the fund is affiliated with the principal 
underwriter. 15 U.S.C. 80a-10(f).
    \3\ See Investment Trusts and Investment Companies: Hearings on 
S. 3580 Before a Subcomm. of the Senate Comm. on Banking and 
Currency, 76th Cong., 3d Sess. 35 (1940) (statement of Commissioner 
Healy).
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    In 1958, under rulemaking authority in section 10(f), the 
Commission adopted rule 10f-3, which is entitled ``Exemption for the 
Acquisition of Securities During the Existence of an Underwriting or 
Selling Syndicate.'' The Commission last amended the rule in January 
2001.\4\ Rule 10f-3 currently permits a fund to purchase securities in 
a transaction that otherwise would violate section 10(f) if, among 
other things: \5\
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    \4\ Additional amendments to rule 10f-3 were proposed on 
November 29, 2000. Exemption for the Acquisition of Securities 
During the Existence of an Underwriting or Selling Syndicate, 
Investment Company Act Release No. 24775 (Nov. 29, 2000). These 
proposals, if adopted, would expand the exemption provided by the 
rule to permit a fund to purchase government securities in a 
syndicated offering and modify the rule's percentage limit on 
purchases.
    \5\ See Rule 10f-3(b).

    (1) The securities either are registered under the Securities 
Act of 1933, are municipal securities with certain credit ratings, 
or are offered in certain private or foreign offerings;
    (2) the securities purchases meet certain conditions with 
respect to timing and price;
    (3) the issuer of the securities has been in continuous 
operation for at least three years prior to the issuance of the 
securities;
    (4) the offering involves a ``firm commitment'' underwriting;
    (5) the underwriters'' commission is reasonable;
    (6) the fund (together with other funds advised by the same 
investment adviser) purchases no more than twenty-five percent of 
the offering;
    (7) the fund purchases the securities from a member of the 
syndicate other than the affiliated underwriter;
    (8) each transaction effected under the rule is reported on Form 
N-SAR;
    (9) the fund's directors have approved procedures for purchases 
made in reliance on the rule, regularly review fund purchases to 
determine whether they comply with these procedures, and approve 
necessary changes to the procedures; and
    (10) a written record of each transaction effected under the 
rule is maintained for six years, the first two of which in an 
easily accessible place.\6\
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    \6\ The written record must state (i) from whom the securities 
were acquired, (ii) the identity of the underwriting syndicate's 
members, (iii) the terms of the transactions, and (iv) the 
information or materials on which the fund's board of directors has 
determined that the purchases were made in compliance with 
procedures established by the board. See Rule 10f-3(b)(12).

    These limitations are designed to prevent purchases under the rule 
from raising the concerns that section 10(f) was enacted to address and 
to protect the interests of investors. These requirements provide a 
mechanism for fund boards to oversee compliance with the rule. The 
required recordkeeping facilitates the Commission staff's review of 
rule 10f-3 transactions during routine fund inspections and, when 
necessary, in connection with enforcement actions.
    The staff estimates that approximately 410 funds engage in a total 
of approximately 2050 rule 10f-3 transactions each year. We estimate 
that each fund makes an average of fifteen responses per year and that 
the 410 funds that rely on rule 10f-3 make a total of 6150 total annual 
responses.\7\ Before making a purchase under rule 10f-3, the purchasing 
fund must document that the transaction complies with the conditions in 
the rule, a process which the staff estimates takes an average of 
approximately thirty minutes per transaction at a cost of $22.44 per 
transaction.\8\ Thus, annually, in the aggregate, funds spend 
approximately 1025 hours \9\ at a cost of $46,002 \10\ on pre-
transaction reporting. The staff estimates that, after the transaction 
is complete, an additional thirty minutes is spent completing the 
record of the transaction at a cost of $22.44 per transaction.\11\ 
Thus, annually, in the aggregate, funds spend approximately 1025 hours 
\12\ at a cost of $46,002 \13\ on post-transaction reporting. The staff 
estimates further that preparation of a quarterly report of all rule 
10f-3 transactions for the board of directors takes approximately 1.5 
hours per quarter (in which there are 10f-3 transactions) at a cost of 
$43.78.\14\ The staff estimates that, on average, each of the 410 funds 
engages in rule 10f-3 transactions during two quarters each year. Thus, 
annually in the aggregate, funds spend approximately 1230 hours \15\ at 
a cost of $35,900 \16\ on the preparation of quarterly transaction 
reports. The staff estimates that the board of directors spends fifteen 
minutes reviewing these reports each quarter (in which there are 10f-3 
transactions) at a cost of $500.\17\ Thus, annually, in the aggregate, 
funds spend approximately 205 hours \18\ at a cost of $410,000 \19\ for 
the quarterly review of rule 10f-3 transactions by boards. The staff 
further estimates that reviewing and revising as needed written 
procedures for rule 10f-3 transactions takes, on average, two hours of 
a compliance attorney's time at a cost of approximately $124.02 \20\ 
per year and fifteen minutes of board time at a cost of $500 per 
year.\21\ Thus, annually, in the aggregate, the staff estimates that 
funds spend a total of approximately 922.5 hours \22\ at a cost of 
approximately $255,848 \23\ on monitoring and revising rule 10f-3 
procedures. The staff estimates, therefore, that rule 10f-3 imposes an 
information collection burden of 4407.5 hours \24\ at a cost of

[[Page 20558]]

$793,752.\25\ This estimate does not include the time spent filing 
transaction reports on Form N-SAR, which is encompassed in the 
information collection burden estimate for that form. Commission staff 
estimates that there is no cost burden for rule 10f-3 other than the 
costs associated with the hour burden. These estimates are made solely 
for the purposes of the Paperwork Reduction Act and are not derived 
from a comprehensive or even a representative survey or study of 
Commission rules.
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    \7\ 2050 instances of pre-transaction reporting + 2050 instances 
of post-transaction reporting + 820 quarterly reports + 820 
quarterly reviews by fund boards + 410 instances of monitoring and 
revision of rule 10f-3 procedures = 6150 responses
    \8\ Typically, personnel from several departments, including 
portfolio management and compliance, share this task. The staff 
estimates that the average hourly rate for these personnel is 
$44.87.
    \9\ 2050 transactions per year  x  30 minutes per transaction = 
1025 hours
    \10\ 2050 transactions  x  $22.44/transaction = $46,002
    \11\ As with the reporting at the time of the transaction, the 
task of completing the record of the transaction is shared among 
personnel for whom the staff estimates the average hourly rate to be 
$44.87.
    \12\ 2050 transactions per year  x  30 minutes per transaction = 
1025 hours
    \13\ 2050 transactions per year  x  $22.44/transaction = $46,002
    \14\ The staff estimates that a compliance clerk spends one hour 
of time, at $12.77/hour, preparing the report and a compliance 
attorney spends half an hour of time, at $62.01/hour, reviewing the 
report.
    \15\ 410 funds  x  2 quarters/year  x  1.5 hours/quarter = 1230 
hours
    \16\ 410 funds  x  2 quarters/year  x  $43.78/quarter = $35,900
    \17\ The staff estimates that each hour of a fund board's 
meeting costs $2000.
    \18\ 410 funds  x  2 quarters/year  x  15 minutes/quarter = 205 
hours
    \19\ 410 funds  x  2 quarters/year  x  $500/quarter = $410,000
    \20\ 2 hours  x  $62.01/hour = $124.02
    \21\ These averages take into account the fact that in most 
years, fund attorneys and boards spend little or no time modifying 
procedures and in other years, they spend a significant amount of 
time doing so.
    \22\ 410 funds  x  (2 hours by compliance attorney + 15 minutes 
by board/year) = 922.5 hours
    \23\ 410 funds  x  ($124.02 for compliance attorney time + $500 
for board time) = $255,848
    \24\ 1025 for pre-transaction reporting + 1025 for post-
transaction reporting + 1230 hours for preparing the board report + 
205 hours for board review of rule 10f-3 transactions + 922.5 hours 
for monitoring and revising rule 10f-3 procedures = 4407.5 hours
    \25\ $46,002 for pre-transaction reporting + $46,002 for post-
transaction reporting + $35,900 for preparing the board report + 
$410,000 for board review of rule 10f-3 transactions + $255,848 for 
monitoring and revising rule 10f-3 procedures = $793,752
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    It is mandatory that funds provide the information required by rule 
10f-3 to obtain the benefit of the exemption provided by the rule. The 
information required by rule 10f-3 that is reported on Form N-SAR is 
public and therefore not confidential. Written records of rule 10f-3 
transactions maintained by funds, the written procedures that ensure 
compliance with the rule, and any modifications to these procedures are 
non-public and therefore confidential.
    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 OMB control number.
    Please direct general comments regarding the above information to 
the following persons: (i) Desk Officer for the Securities and Exchange 
Commission, Office of Information and Regulatory Affairs, Office of 
Management and Budget, New Executive Office Building, Washington, DC 
20503; and (ii) Michael E. Bartell, Associate Executive Director, 
Office of Information Technology, Securities and Exchange Commission, 
Mail Stop 0-4, 450 5th Street, NW, Washington, DC 20549. Comments must 
be submitted to OMB within 30 days of this notice.

    Dated: April 17, 2002.
Margaret H. McFarland,
Deputy Secretary.
[FR Doc. 02-10148 Filed 4-24-02; 8:45 am]
BILLING CODE 8010-01-U