[Federal Register Volume 68, Number 242 (Wednesday, December 17, 2003)]
[Proposed Rules]
[Pages 70388-70399]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: 03-31071]



[[Page 70387]]

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Part III





Securities and Exchange Commission





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17 CFR Part 270



Amendments to Rules Governing Pricing of Mutual Fund Shares; Proposed 
Rule

  Federal Register / Vol. 68, No. 242 / Wednesday, December 17, 2003 / 
Proposed Rules  

[[Page 70388]]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 270

[Release No. IC-26288; File No. S7-27-03]
RIN 3235-AJ01


Amendments to Rules Governing Pricing of Mutual Fund Shares

AGENCY: Securities and Exchange Commission.

ACTION: Proposed rule amendments.

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SUMMARY: The Securities and Exchange Commission (``Commission'') is 
proposing amendments to the rule under the Investment Company Act that 
requires forward pricing of redeemable securities issued by registered 
investment companies (``funds''). The amendments would provide that an 
order to purchase or redeem fund shares would receive the current day's 
price only if the fund, its designated transfer agent, or a registered 
securities clearing agency receives the order by the time that the fund 
establishes for calculating its net asset value. The amendments are 
designed to prevent unlawful late trading in fund shares.

DATES: Comments must be received on or before February 6, 2004.

ADDRESSES: To help us process and review your comments more 
efficiently, comments should be sent by one method only. Comments in 
paper format should be submitted in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street NW., 
Washington, DC 20549-0609. Comments in electronic format should be 
submitted to the following E-mail address: [email protected]. All 
comment letters should refer to File No. S7-27-03; if E-mail is used, 
this file number should be included on the subject line. Comment 
letters will be available for public inspection and copying in the 
Commission's Public Reference Room, 450 Fifth Street NW., Washington, 
DC 20549. Electronically submitted comment letters 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: Adam B. Glazer, Attorney, or Penelope 
W. Saltzman, Senior Counsel, Office of Regulatory Policy, (202) 942-
0690, Division of Investment Management, Securities and Exchange 
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Commission, 450 Fifth Street, NW., Washington, DC 20549-0506.

SUPPLEMENTARY INFORMATION: The Commission today is proposing for public 
comment amendments to rule 22c-1 [17 CFR 270.22c-1] under the 
Investment Company Act of 1940 [15 U.S.C. 80a] (the ``Investment 
Company Act'' or the ``Act'').

Table of Contents

I. Background
II. Discussion
    A. Proposed Pricing Requirements
    B. Purchase and Sale Orders; Exchanges
    C. Exceptions
III. General Request for Comment
IV. Cost-Benefit Analysis
V. Paperwork Reduction Act
VI. Initial Regulatory Flexibility Analysis
VII. Statutory Authority
Text of Proposed Rule

I. Background

    Rule 22c-1 under the Investment Company Act, the ``forward 
pricing'' rule, requires funds, their principal underwriters, and 
dealers to sell and redeem fund shares at a price based on the current 
net asset value (``NAV'') next computed after receipt of an order to 
buy or redeem.\2\ The rule also requires that funds calculate their NAV 
at least once a day.\3\ Today, most funds calculate NAV when the major 
U.S. stock exchanges close at 4 p.m. Eastern Time.\4\
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    \2\ 17 CFR 270.22c-1(a). The rule also applies to any other 
person designated in the fund's prospectus as authorized to receive 
purchase orders or tenders of securities for redemption. Id.
    \3\ See 17 CFR 270.22c-1(b)(1). The rule provides exceptions 
from the daily pricing requirement for: (i) days on which changes in 
the value of the fund's portfolio securities will not materially 
affect the current NAV of the fund's redeemable securities; (ii) 
days during which the fund does not receive an order for purchase or 
redemption of fund shares; and (iii) customary national business 
holidays and local and regional business holidays listed in the 
fund's prospectus. Id.
    \4\ Thus, a fund's NAV generally reflects the closing prices of 
the securities it holds. For securities that are not listed on 
exchanges or for which there are otherwise no readily available 
market values, a fund's board of directors must establish a fair 
value for the securities. See 15 U.S.C. 80a-2(a)(41)(B)(ii).
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    Under rule 22c-1, an investor who submits an order before the 4 
p.m. pricing time must receive that day's price, and an investor who 
submits an order after the pricing time must receive the next day's 
price. ``Late trading'' refers to the illegal practice of permitting a 
purchase or redemption order received after the 4 p.m. pricing time to 
receive the share price calculated as of 4 p.m. that day.\5\ A late 
trader can exploit events occurring after 4 p.m., such as earnings 
announcements, by buying on good news (and thus obtaining fund shares 
too cheaply) or selling on bad news (and thus selling at a higher price 
than the shares are worth). In either case, the late trader profits at 
the expense of long-term investors in the fund.
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    \5\ In this Release, we will assume for convenience that all 
funds choose to price their securities daily as of 4 p.m. Some 
funds, however, price their securities more than once per day, and 
many funds price their securities earlier than 4 p.m.
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    Investors do not submit orders directly to funds, but to any one of 
several different types of intermediaries. All order information for a 
particular fund is ultimately submitted to the transfer agent 
(``primary transfer agent'') that acts as the master recordkeeper for 
the fund, keeping track of shares sold and redeemed and cash flowing 
into and out of the fund.\6\ Those investors who deal directly with the 
fund by telephone or computer typically submit their order information 
to the fund's primary transfer agent.\7\ Many, however, invest in 
mutual fund shares through other intermediaries such as broker-dealers, 
banks, and retirement plans \8\ that form a network of intermediaries 
that process and record the transactions.\9\
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    \6\ A ``transfer agent'' is any person who engages on behalf of 
a securities issuer, or on behalf of itself as an issuer of 
securities, in (a) countersigning the issuer's securities when 
issued; (b) monitoring issuance of the securities to prevent 
unauthorized issuance; (c) registering the transfer of the 
securities; (d) exchanging or converting the securities; or (e) 
transferring record ownership of the securities by book entry (i.e., 
record entry of ownership without issuing a physical certificate). 
See 15 U.S.C. 78c(a)(25). Transfer agents are registered with and 
regulated by the Commission. See 15 U.S.C. 78q-1(c).
    \7\ Such intermediaries that are not registered as broker-
dealers need to consider whether the securities activities that they 
are undertaking are brokerage activities that require them to 
register as broker-dealers. Section 3(a)(4) of the Securities 
Exchange Act of 1934 (``Exchange Act'') defines a broker as a person 
engaged in the business of effecting transactions in securities for 
the account of others. It includes several exceptions for certain 
bank activities. See 15 U.S.C. 78c(a)(4). It includes several 
exceptions for certain bank activities. See 15 U.S.C. 78c(a)(4). 
Section 15 of the Exchange Act essentially makes it unlawful for a 
broker or dealer ``to effect any transactions in, or to induce or 
attempt to induce the purchase or sale of, any security (other than 
an exempted security or commercial paper, bankers' acceptances, or 
commercial bills)'' unless the broker or dealer is reegistered with 
the Commission. See 15 U.S.C. 78o)a)(1).
    \8\ A large portion of these investors invest through tax-
advantaged retirement plans, such as 401(k) accounts. About one-
third of all mutual fund shares are held through retirement 
accounts. See Investment Company Institute, Mutual Funds and the 
U.S. Retirement Market in 2002, Fundamentals, June 2003, AT 1, 2.
    \9\ See supra note 7.
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    Instead of submitting hundreds or even thousands of individual 
purchase and redemption orders each day, intermediaries typically net 
orders received from investors against each other and submit a single 
file containing net or omnibus purchase or redemption

[[Page 70389]]

order information to the fund's primary transfer agent.\10\ Many of the 
purchase and redemption orders are routed to fund primary transfer 
agents through the National Securities Clearing Corporation (``NSCC''), 
currently the only registered clearing agency \11\ that operates an 
automated system for processing those orders for funds \12\ (``Fund/
SERV'').\13\ Fund/SERV provides a central processing system that 
collects order information from clearing brokers and others, sorts all 
the incoming order information according to fund, and transmits the 
order information to each fund's primary transfer agent.\14\
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    \10\ Some intermediaries submit one aggregated purchase order 
and one aggregated redemption order in a single ``batch.'' Others 
submit orders in multiple batches in the course of the day. The 
intermediary will batch customer orders it receives during the day 
at various times, with a 4 p.m. cut-off time for orders that are 
included in the last batch transmitted to the fund's primary 
transfer agent for same-day pricing. Orders received by the 
intermediary after the last cut-off time are included in a batch of 
orders transmitted to the fund's primary transfer agent for next-day 
pricing.
    \11\ A ``clearing agency'' is a person that acts as an 
intermediary in making payments or deliveries (or both) in 
connection with transactions in securities, or that provides 
facilities for comparing data with respect to the terms of 
securities transactions to reduce the number of settlements or the 
allocation of securities settlement responsibilities. See 15 U.S.C. 
78c(a)(23)(A). A clearing agency is a self-regulatory organization, 
and its rules of operation are subject to approval by the 
appropriate federal regulatory agency. See 15 U.S.C. 78c(a)(26), 
78s(b).
    \12\ Shares of exchange-traded funds (``ETFs''), however, are 
cleared through NSCC and the Depository Trust Company. An ETF 
typically is a registered open-end investment company with shares 
that trade intra-day at market-determined prices. See Actively 
Managed Exchange-Traded Funds, Investment Company Act Release No. 
25258, nn. 6-8 and accompanying text (Nov. 8, 2001) [66 FR 57614 
(Nov. 15, 2001)].
    \13\ ``Fund/SERV'' is an acronym for the Mutual Fund Settlement, 
Entry and Registration Verification Service. Only NSCC members who 
are Fund/SERV participants may use the system. Funds or their 
distributors are NSCC members, who designate the primary transfer 
agent to receive information on share transactions on the fund or 
distributor's behalf.
    \14\ The primary transfer agent provides Fund/SERV with its 
electronic confirmation of the order, and Fund/SERV forwards those 
confirmations back to the clearing brokers. In 2002, Fund/SERV 
processed 83 million fund transactions at a value of $1.3 trillion. 
See DTCC Business Volumes Set Records in 2002, The Depository Trust 
& Clearing Corporation, Press Release (May 5, 2003) (available at 
http://www.dtcc.com/PressRoom/2003/2002review.html).
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    Although purchase and redemption orders must be submitted to retail 
dealers and other intermediaries by 4 p.m. in order to receive that 
day's price, our rules permit those intermediaries to forward the order 
information to Fund/SERV or fund primary transfer agents at a later 
time.\15\ These intermediaries, which include broker-dealers, banks, 
and administrators of retirement plans, typically process orders 
received before 4 p.m. in the early evening hours before submitting 
them to Fund/SERV or fund primary transfer agents. The process is 
typically completed in the middle of the night.
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    \15\ See Staff Interpretive Position Relating to Rule 22c-1, 
Investment Company Act Release No. 5569 (Dec. 27, 1968) (rule 22c-1 
``contemplates that the time of receipt of the order by the retail 
dealer is controlling'' for purposes of determining the price 
obtained by the dealer). See also Charles Schwab & Co., Inc., SEC 
Staff No-Action Letter (July 7, 1997) (the time an order was 
received by a person designated in the fund's prospectus will be 
deemed the time the order was received for purposes of rule 22c-1).
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II. Discussion

    Investigations by Commission staff and state securities authorities 
have uncovered late trading of fund shares by intermediaries in 
violation of our rules, in some cases with the assistance of fund 
managers.\16\ Our investigations and examinations are ongoing, but to 
date suggest that late trading of fund shares is not isolated, nor is 
it limited to any one type of fund or intermediary.\17\
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    \16\ See, e.g., In the Matter of Steven B. Markovitz, Investment 
Company Act Release No. 26201 (Oct. 2, 2003).
    \17\ See Testimony of Stephen M. Cutler Concerning Recent 
Commission Activity to Combat Misconduct Relating to Mutual Funds 
Before the Senate Subcommittee on Financial Management, the Budget, 
and International Security, Committee on Governmental Affairs, 108th 
Cong., 1st Sess., 11-15 (Nov. 3, 2003). y
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    Fund managers themselves have permitted late trades by favored 
investors. Late trading not only violates rule 22c-1, but managers who 
permit late trading also breach their fiduciary duties to the funds and 
fund shareholders. We have approved a new rule requiring that all funds 
have policies and procedures in place designed, among other things, to 
prevent late trading facilitated by fund personnel. We believe these 
new policies and procedures, administered by a chief compliance officer 
reporting directly to the fund's board of directors, will make such 
schemes more difficult. Vigorous civil enforcement, as well as criminal 
enforcement actions, when appropriate, will further deter such 
behavior.
    Fund intermediaries have blended late trades with legitimate trades 
in the file containing net order information submitted to Fund/SERV or 
a fund's primary transfer agent after 4 p.m., effectively concealing 
the late trades from fund managers and from our compliance examiners. 
When we adopted rule 22c-1, we also amended our broker-dealer 
recordkeeping rules to require time-stamping of fund orders, which 
would permit us to detect late trades.\18\ The rule has been 
circumvented by, for example, routinely permitting favored investors to 
place orders before 4 p.m., but cancel them after late news is 
received. Purchase orders would survive only when good news released 
after 4 p.m. increased the value of the fund's portfolio, while 
redemption orders would survive only when bad news depressed the value 
of the portfolio. Similarly, orders have been placed before 4 p.m. to 
be modified or changed after 4 p.m. Also clients that had placed an 
order for one fund's shares before 4 p.m. that was rejected by the 
fund, have been permitted to substitute an order for another fund's 
shares after 4 p.m. In each of these circumstances, the broker's 
records would appear to support a series of bona fide trades all of 
which were time-stamped before 4 p.m.
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    \18\ See Adoption of Rule 22c-1 Under the Investment Company Act 
of 1940 Prescribing the Time of Pricing Redeemable Securities for 
Distribution, Redemption, and Repurchase, and Amendment of Rule 17a-
3(a)(7) Under the Securities Exchange Act of 1934 Requiring Dealers 
to Time-Stamp Orders, Investment Company Act Release No. 5519 (Oct. 
16, 1968) [33 FR 16331 (Nov. 7, 1968)]. See also 17 CFR 240.17a-
3(a)(6)(i) (requiring broker-dealers to record each brokerage order 
and information pertaining to the order, including the time the 
order was received and the time of entry).
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    We are very concerned that our current rules, which permit 
intermediaries to process trades after 4 p.m., have failed to prevent 
late trading, and that available tools to control late trading 
facilitated by fund intermediaries have proven inadequate. Fund 
managers have informed us that, although they contractually require 
intermediaries to segregate orders submitted before 4 p.m. from those 
submitted later, they have no practical way to enforce that contractual 
obligation because they cannot discern late trades. Some broker-dealers 
engaging in late trading appear to have successfully concealed their 
activities from our examination staff and the self-regulatory 
organizations. Other fund intermediaries are not subject to our regular 
examination, and we cannot take steps we believe are adequate to 
prevent late trading through those intermediaries.
    To eliminate late trading through fund intermediaries, we are 
proposing to amend rule 22c-1, as discussed in more detail below, to 
require that all purchase and redemption orders be received by the 
fund,\19\ a single transfer agent

[[Page 70390]]

designated by the fund and required by written contract to receive 
order information and maintain a record of the date and time it 
receives the information (``designated transfer agent''), or a 
registered clearing agency (e.g., Fund/SERV) no later than the time at 
which the fund prices its securities (e.g., 4 p.m.), in order to obtain 
the current day's price.\20\ As a consequence, fund intermediaries, 
such as broker-dealers, banks, and administrators of retirement plans 
would have to submit orders to the fund before 4 p.m. in order for 
their customers to receive the 4 p.m. price.\21\ Orders received later 
would have to receive the following day's price.
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    \19\ Under the rule, orders submitted to various intermediaries, 
such as third-party administrators, would not be considered orders 
received by the ``fund,'' even if those intermediaries are agents of 
the fund.
    \20\ See proposed rule 22c-1(a).
    \21\ The general requirement of the rule would be subject to a 
few limited exceptions. See infra Section II.C.
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    We recognize that this proposed rule change, if adopted, would 
likely require substantial changes in the way fund intermediaries 
process fund purchase and redemption orders. The capacity of computer 
systems that process those orders will likely have to be expanded to 
handle more transactions within a shorter period of time. 
Intermediaries will likely require investors to submit purchase orders 
at an earlier time in the day (e.g., 2 p.m.) to obtain the 4 p.m. 
price, in order to allow the intermediary time to process the purchase 
and redemption orders before submitting them to the fund, its 
designated transfer agent, or the clearing agency. Administrators of 
defined contribution employee pension plans, (e.g., 401(k) plans) have 
informed us that they likely will be unable to process any purchase and 
redemption requests the same day they are made.\22\
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    \22\ See, e.g., Letter from Robert G. Wuelfing, The Spark 
Institute, Inc., to Paul F. Roye, Director, Division of Investment 
Management, Securities and Exchange Commission, and Cynthia M. 
Fornelli, Deputy Director, Division of Investment Management, 
Securities and Exchange Commission (Oct. 31, 2003) (``Spark 
Institute Letter'') (available in the public comment file). Another 
administrator has noted that orders would have to be placed several 
hours earlier than 4 p.m. See Testimony of E. Scott Peterson, Global 
Practice Leader of Defined Contribution Services, Hewitt Associates, 
Submitted for the Record, U.S. Senate Subcommittee on Financial 
Management, the Budget, and International Security, Committee on 
Governmental Affairs, Hearing on Mutual Funds, Trading Practices and 
Abuses that Harm Investors, 108th Cong., 1st Sess. 6 (Nov. 3, 2003).
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    We seek comment on these costs, and whether they are justified by 
the benefits of the proposed amendments. In proposing these amendments, 
we assume investors and intermediaries will adapt to the new 
requirements, just as they adapted when we required forward pricing in 
1968. Investors for whom it is important to be able to place orders 
shortly before 4 p.m. will seek out fund complexes that permit 
investors to submit orders directly to the fund's designated transfer 
agent. Some fund intermediaries also may compete for such investors by 
developing more efficient order processing systems. Others may eschew 
such customers because they tend to be short-term traders or market-
timers. We believe that the burden on most fund investors will be small 
because most are not sensitive to the time at which their purchase or 
redemption orders are priced. They make longer-term investments, often 
as part of an automatic purchase program, and treat the time and date 
of the purchase order as a random event controlled by their employer's 
payroll processing protocols, or the delivery of the mail. In some 
cases, a purchase order executed at the next day's price will be 
executed at a lower price than it would the same day; in other cases, 
it will be executed at a higher price.
    We also seek comment on an approach that has been suggested.\23\ 
This approach would require fund intermediaries, in order to be 
eligible to submit orders to designated transfer agents or Fund/SERV 
after 4 p.m., to have adopted certain protections designed to prevent 
late trading.\24\ Such protections could include:
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    \23\ Several groups have urged us to adopt such an approach. 
See, e.g., Letter from Marc E. Lackritz, President, Securities 
Industry Association, to Paul F. Roye, Director, Division of 
Investment Management, Securities and Exchange Commission (Oct. 31, 
2003); Spark Institute Letter, supra note 22. See also Letter from 
Edward L. Yingling, Executive Vice President, American Bankers 
Association, to Paul F. Roye, Director, Division of Investment 
Management, Securities and Exchange Commission (Nov. 12, 2003); 
Letter from Steve Bartlett, President, The Financial Services 
Roundtable, to Paul Roye, Director, Division of Investment 
Management, Securities and Exchange Commission (Nov. 10, 2003); 
Letter from Geof Gradler, Senior Vice President and Head, Office of 
Government Affairs, Charles Schwab & Co., Inc., to Paul F. Roye, 
Director, Division of Investment Management, Securities and Exchange 
Commission, Cynthia M. Fornelli, Deputy Director, Division of 
Investment Management, Securities and Exchange Commission, and 
Douglas J. Scheidt, Chief Counsel, Division of Investment 
Management, Securities and Exchange Commission (Oct. 27, 2003) 
(advocating similar approaches). Each of the letters cited is 
available in the public comment file.
    \24\ These protections would be required for intermediaries 
other than the fund's designated transfer agent or the registered 
clearing agency.
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    [sbull] Electronic or physical time-stamping of orders in a manner 
that cannot be altered or discarded once the order is entered into the 
trading system;
    [sbull] Annual certification that the intermediary has policies and 
procedures in place designed to prevent late trades, and that no late 
trades were submitted to the fund or its designated transfer agent 
during the period; and
    [sbull] Submission of the intermediary to an annual audit of its 
controls conducted by an independent public accountant who would submit 
his report to the fund's chief compliance officer.
    We have identified these three protections as important components 
of this approach. Would each of these protections be appropriate to 
preventing trading in fund shares? Are there other protections that 
would be necessary or appropriate to prevent unlawful late trading 
while permitting intermediaries to continue processing purchase and 
redemption orders after 4 p.m.? If so, what are they?
    Would such an approach be effective at stopping late trading? Some 
broker-dealers appear to have easily circumvented current system 
controls, including the time-stamping required by our rules. Our staff 
reports that at least one broker-dealer that had obtained an annual 
audit of its internal controls by an independent auditor has submitted 
late trades. We are therefore concerned that an independent auditor may 
fail to detect weaknesses in internal controls that allow late trading 
to occur. How could we prevent any such protections and controls from 
being circumvented similarly in the future? How would we police 
compliance with the controls by the fund intermediaries over which we 
have no regulatory authority? Finally, we recognize that this approach 
might require different systems changes than those required under the 
proposed amendments discussed in this Release. What costs would this 
approach impose on intermediaries? Would these costs be passed on to 
fund investors? Are there other conditions that would be more 
effective, or equally effective but less costly?

A. Proposed Pricing Requirements

    Rule 22c-1 currently deems a purchase or redemption order to be 
received, for purposes of determining the appropriate day's price, when 
the retail dealer receives the order, even if it is actually submitted 
to the fund's transfer agent at a later time. The proposed amendments 
would deem an order received only when it is received \25\ by (i) the 
fund itself, (ii) the fund's designated transfer agent, or (iii) a 
clearing agency registered with the

[[Page 70391]]

Commission (e.g., NSCC's Fund/SERV system).\26\
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    \25\ We use the term ``receive'' in the proposed rule text for 
purposes of proposed rule 22c-1 only. Receipt of an order in NSCC's 
Fund/SERV refers only to its role as an electronic communication hub 
that transmits fund orders from the broker-dealer to the appropriate 
mutual fund processor.
    \26\ See proposed rule 22c-1(a). The proposed amendments would 
retain the requirements in the current rule concerning the frequency 
and time of determining NAV, but would reorganize and reword those 
provisions. The proposed amendment would use the phrase ``based on 
the current net asset value established as of the next pricing 
time'' instead of the phrase ``based on the current net asset value 
which is next computed.'' This amendment is intended to clarify the 
current requirement that orders received after the pricing time, but 
before calculation of the NAV is complete, do not receive same-day 
pricing.
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    Under the proposed rule, fund designated transfer agents would be 
required to record the date and time they receive order 
information.\27\ These transfer agents and NSCC will operate, in 
effect, as time-stamping organizations, ensuring that orders are 
assigned the correct day's price.\28\ We believe these organizations, 
which are regulated by the Commission \29\ and operate large automated 
processing systems, will serve to ensure the integrity of fund 
pricing.\30\
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    \27\ The proposed rule defines ``designated transfer agent'' to 
mean the single registered transfer agent, as defined in section 
3(a)(25) of the Securities Exchange Act of 1934 [15 U.S.C. 
78c(a)(25)], that is designated, in the fund's registration 
statement, and required by written contract to receive order 
information and maintain a record of the date and time it receives 
the order information. See proposed rule 22c-1(c)(1).
    \28\ Although orders would have to be received by Fund/SERV or 
the designated transfer agent by 4 p.m. to ensure same-day pricing, 
the clearing agency and designated transfer agent each may complete 
its processing after the pricing time.
    \29\ See supra notes 6, 11.
    \30\ Some groups have endorsed this approach. See Statement of 
Paul G. Haaga, Jr., Chairman, Investment Company Institute on 
``Mutual Funds: Who's Looking Out for Investors,'' Before the House 
Subcommittee on Capital Markets, Insurance and Government Sponsored 
Enterprises of the Committee on Financial Services, 108th Cong., 1st 
Sess. (Nov. 4, 2003) (available at http://www.ici.org/statements/tmny/03_house_haaga_tmny.html); Letter from David B. Yeske, 
President, The Financial Planning Association, to William H. 
Donaldson, Chairman, Securities and Exchange Commission (Nov. 7, 
2003) (available in the public comment file).
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    Are there other intermediaries that could also serve this role? Are 
there intermediaries that may become involved in processing order 
information in the foreseeable future that would be capable of serving 
this role? We recognize that this proposal will require fund transfer 
agents, NSCC, and other intermediaries to modify, and in some cases to 
expand, their data processing systems to reflect the rule proposals. If 
we adopt these proposals in similar form, we would expect to provide a 
one-year transition period to accommodate system changes. Would such a 
transition period be adequate? We also note that transfer agents 
currently are not required under Commission rules to time-stamp 
information they record.\31\ Nevertheless, only a transfer agent that 
has the ability to time-stamp order information it receives and 
maintain a record of that information could be a ``designated transfer 
agent'' under the proposed amendments. Should our transfer agent rules 
include time-stamping and record retention requirements for designated 
transfer agents? If so, should any information in addition to the order 
information and date and time of receipt be included in the record? In 
what form and for how long should the record be maintained?
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    \31\ The proposed amendments would not impose any new 
recordkeeping requirements on transfer agents in general.
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B. Purchase and Sale Orders; Exchanges

    We propose to define the term ``order'' in the rule to clarify when 
an order is complete (and therefore has been received) for purposes of 
obtaining the appropriate day's price. Under the proposed amendments an 
``order'' would mean the direction to purchase or sell either (i) a 
specific number of shares of a fund (e.g., all the shares held in the 
account), or (ii) an indeterminate number of shares of a specific value 
(e.g., $10,000 of shares of the fund).\32\ The definition also would 
state that each order would be deemed irrevocable as of the next 
pricing time after receipt by the fund, its designated transfer agent, 
or registered clearing agency.\33\ This provision is designed to 
prevent the cancellation or modification of orders after the pricing 
time applicable to the order.
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    \32\ See proposed rule 22c-1(c)(3).
    \33\ Id.
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    Our proposed amendment also contains a special provision for 
exchange orders. An investor who exchanges between two funds actually 
engages in two transactions--a redemption of the securities he owns in 
one fund and a purchase (using the redemption proceeds) of securities 
in another fund. Typically, exchanges between funds in the same fund 
complex, and sometimes in different complexes, are processed as a 
single transaction so that they receive the same day's prices. In the 
case of an exchange involving a fixed number of shares (e.g., in which 
the investor redeems all of his shares of the first fund), neither the 
amount nor the number of shares of the second fund will be known until 
the NAV of the first fund is determined, which will be sometime after 4 
p.m. To preserve the ability of funds to offer ``seamless'' exchange 
transactions, we propose to define ``order'' to include a direction to 
purchase redeemable securities of the fund using proceeds of a 
contemporaneous order to redeem a specific number of shares of another.

C. Exceptions

    Rule 22c-1 contains several exceptions from the forward pricing 
requirements, all of which we would preserve.\34\ We would add to those 
exceptions another exception that would permit investor orders to 
receive same-day treatment if, as a result of an emergency, a dealer 
(or its agent) was unable to transmit the orders, or NSCC or the fund's 
designated transfer agent was unable to receive the orders.\35\ The 
exception would prevent investors from losing the current day's price 
for orders received by dealers before 4 p.m., if those orders could not 
be transmitted to or received by NSCC or the fund's designated transfer 
agent by 4 p.m. because of, for example, a power failure, hurricane or 
other emergency.\36\
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    \34\ The rule preserves three existing exceptions. The first 
permits sales of unit investment trust shares in the secondary 
market involving backward pricing under conditions that do not 
dilute existing shareholders' interest in the trust. See proposed 
rule 22c-1(b)(3). The second permits insurance company separate 
accounts to price initial purchase payments up to two days after 
receipt of a complete contract application and up to five days while 
obtaining additional information to complete the application. See 
proposed rule 22c-1(b)(4). The third permits a fund to adjust the 
price of its redeemable securities sold pursuant to a sale, merger, 
consolidation, or purchase of substantially all the assets of 
certain companies. See proposed rule 22c-1(b)(5).
    \35\ See proposed rule 22c-1(b)(1)(i).
    \36\ See, e.g., Amendment to Pricing Rule and Adoption of Rule 
on Pricing of Redemptions, Investment Company Act Release No. 14559 
(June 6, 1985) (distinguishing circumstances, such as a natural 
disaster or other external occurrence, that constitute an emergency 
for purposes of rule 22c-1, from other circumstances, such as 
internal operational difficulties, that do not).
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    The emergency exception would be available to dealers only if the 
chief executive officer certifies to the fund (i) the nature, 
existence, and duration of the emergency, and (ii) that the 
intermediary received the orders before the applicable pricing 
time.\37\ A fund also would be required to keep a record of each 
certification it received for six years.\38\ If an emergency prevented 
the designated transfer agent or the clearing agency from receiving 
order information, the chief executive officer of the designated 
transfer agent or clearing agency would have to provide notice of the 
emergency to the fund.\39\
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    \37\ See proposed rule 22c-1(b)(1)(i)(A).
    \38\ The fund, or its designated agent, would be required to 
keep the records for six years, the first two years in an easily 
accessible location. See proposed rule 22c-1(b)(1)(ii).
    \39\ See proposed rule 22c-1(b)(1)(i)(B).
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    The second exception addresses ``conduit'' funds, which invest all 
their

[[Page 70392]]

assets in another fund and therefore must calculate their NAV on the 
basis of the other fund's NAV.\40\ These funds are registered 
investment companies, and are subject to regulation and oversight by 
the Commission. The exception would permit a conduit fund, such as a 
``master-feeder'' fund or an insurance company separate account, to 
submit its orders based on the NAV established by the other fund on the 
same day.\41\
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    \40\ Proposed rule 22c-1(b)(2).
    \41\ Conduit funds rely on section 12(d)(1)(E) of the Act, and 
include most insurance company separate accounts. See 15 U.S.C. 80a-
12(d)(1)(E). Section 12(d)(1)(E) permits a fund's acquisition of 
securities issued by another fund if, among other requirements, the 
security is the only investment security the acquiring fund holds 
(or the securities are the only investment securities the acquiring 
fund holds if it is a registered unit investment trust that issues 
two or more classes or series of securities, each of which provides 
for the accumulation of shares of a different fund). The separate 
account invests the proceeds from the sale of interests in variable 
annuity and variable life insurance contracts in shares of the 
underlying mutual fund according to the directions of the investor 
in the insurance contract. ``Master-feeder funds'' typically are 
arrangements in which two or more funds invest in a single fund. 
Investors purchase shares in the ``feeder'' fund, which is an open-
end fund and a conduit to the master fund. See H.R. REP NO. 622, 
104th Cong. 2d Sess., at 41 (1996).
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    We request comment on the exceptions included in the amended rule. 
Are there other exceptions that we should consider?

III. General Request for Comment

    The Commission requests comment on the proposed amendments to rule 
22c-1, suggestions for additions to the proposed amendments, and 
comment on other matters that might have an effect on the proposals 
contained in this Release. We note that the comments that are of 
greatest assistance are those that are accompanied by supporting data 
and analysis of the issues addressed in those comments.

IV. Cost-Benefit Analysis

    The Commission is sensitive to the costs and benefits imposed by 
its rules. As discussed above, the proposed amendments to rule 22c-1 
would require that an order to purchase or redeem fund shares be 
received by the fund, its designated transfer agent, or a registered 
securities clearing agency, by the time that the fund's board of 
directors establishes for calculating the fund's NAV in order to 
receive the current day's price.

A. Benefits

    We anticipate that funds and shareholders would benefit from the 
proposed amendments. The amendments to rule 22c-1 are designed to 
prevent late trading in fund shares. Preventing late trading would 
ensure that the value of a fund's outstanding redeemable securities 
would not be diluted through the sale of a fund's securities at a price 
below its NAV, or the redemption or repurchase of a fund's securities 
at a price above its NAV.\42\ This dilution harms the fund's long-term 
shareholders who lose at least as much as late traders gain in profits. 
By preventing this dilution, long-term investors would have more 
confidence in the financial markets as a whole, and funds in 
particular.
---------------------------------------------------------------------------

    \42\ It has been estimated that shareholders lose as much as 
$400 million per year as a result of late trading. See Eric 
Zitzewitz, How Widespread is Late Trading in Mutual Funds? (Sept. 
2003)http://gobi.standord.edu/ResearchPapers/Library/RP1817.pdf.
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    Funds would benefit by the increase in investor confidence, as 
investors would be less likely to seek alternative financial products 
in which to invest. Long-term investors also would benefit. Without 
these protections, many long-term investors, who would prefer to invest 
in mutual funds, may choose other investment instruments to avoid 
losses to late traders. Finally, these reforms will reduce the 
transaction costs that funds incur. When a late trader rapidly moves a 
large amount of money into and out of a fund, the fund incurs 
significant costs in buying securities and then selling them. These 
transaction costs include commissions and the spread between the bid 
and ask prices.

B. Costs

    Currently, orders for a fund's shares received by broker-dealers, 
401(k) plan administrators, and other third-party intermediaries from 
their customers prior to the fund's pricing time are eligible to 
receive that day's price. The proposed amendments to rule 22c-1 would 
limit same-day pricing to orders received by the fund, its designated 
transfer agent, or a registered clearing agency prior to the fund's 
pricing time. As a result, third-party intermediaries (including 
broker-dealers and retirement plan administrators) and NSCC would incur 
certain costs, and funds and investors might incur costs.\43\ In 
addition, fund designated transfer agents would incur costs as a result 
of a recordkeeping requirement contained in the proposed amendments.
---------------------------------------------------------------------------

    \43\ See supra notes 11-12 and accompanying text.
---------------------------------------------------------------------------

    Third-party intermediaries would have to combine their fund share 
orders for processing prior to the pricing time, and therefore their 
customers may have to place their orders earlier in the day than 
investors who conduct business directly with the fund's designated 
transfer agent in order to receive that day's price.\44\ This would put 
intermediaries at a competitive disadvantage with designated transfer 
agents, and may result in a number of an intermediary's customers or 
potential customers bypassing the intermediary and purchasing or 
redeeming shares directly with the designated transfer agent. 
Alternatively, intermediaries, in order to compete with designated 
transfer agents, may upgrade their computer systems in order to process 
orders more quickly, thus allowing customers to place their orders as 
close to the pricing time as possible while qualifying for that day's 
price.\45\ We would expect that the systems would become increasingly 
efficient over time and thus reduce the delay between the 
intermediary's receipt of the order and transmission to Fund/SERV or 
the designated transfer agent. The Commission, however, has no 
reasonable basis for determining the number of customers or potential 
customers that intermediaries might lose or the costs associated with 
the potential lost customer orders. The computer system upgrade would 
impose one-time costs. The Commission, however, has no reasonable basis 
for determining the costs of the technological upgrades intermediaries 
might incur as a result of the proposed amendments, because each 
intermediary could upgrade in a way that it deems best for its 
particular computer system.
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    \44\ Some have estimated that orders would have to be submitted 
from two to four hours before pricing time. See Tom Lauricella, 
Funds, Regulators Seek Balanced Fix in U.S. Industry, Wall St. J. 
Eur., Oct. 31, 2003 at M1.
    \45\ Some administrators of 401(k) plans have informed us that 
they likely would not be able to process any purchase or redemption 
requests the same day they are made due to the myriad of rules 
governing 401(k) plans. See supra note 22 and accompanying text.
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    NSCC, which operates Fund/SERV, would incur costs as a result of 
the proposed rule amendments. Under the proposed amendments, orders 
transmitted to Fund/SERV by broker-dealers and other intermediaries 
prior to a fund's pricing time would receive that day's price. Orders 
transmitted to Fund/SERV after a fund's pricing time, including orders 
received by the intermediary prior to a fund's pricing time, would 
receive the fund's next-day price. Intermediaries, therefore, would 
likely transmit a number of orders to Fund/SERV close to the pricing 
time, resulting in a substantial increase in the volume of 
transmissions received by Fund/SERV just prior to the pricing time. In 
response to this increase, NSCC would likely have to increase Fund/
SERV's capacity to handle the expected

[[Page 70393]]

concentration of orders just prior to the pricing time. We do not know 
what the cost estimate for the increased capacity might be.
    Funds might incur costs as a result of the proposed rule 
amendments. First, if third-party intermediaries, such as retirement 
plan administrators, find it too expensive to upgrade their computer 
systems, potential investors may end up investing in alternative 
financial products. For example, if a retirement plan sponsor 
determines that the system upgrades necessary to complete fund orders 
in a timely fashion are too expensive, the plan may discontinue 
offering investments in some or all funds and offer investments in 
alternative financial products, causing funds to lose potential 
investors. The Commission, however, cannot predict the potential loss 
in investments to funds. Second, some funds, particularly smaller 
funds, that do not have the financial resources to increase their 
advertising expenditures might lose potential investors as a result of 
investors bypassing third-party intermediaries and purchasing shares 
from fund designated transfer agents. Financial intermediaries are 
likely to be aware of and offer many or most funds regardless of 
whether the funds advertise. Individual investors, however, are less 
likely to be aware of funds that do not advertise extensively. 
Therefore, as a result of investors bypassing financial intermediaries, 
smaller funds may lose some potential investors.
    Finally, if a fund chooses to select a designated transfer agent to 
receive order information, the fund would incur costs. A fund would 
have to identify its designated transfer agent in its registration 
statement and include a provision in its contract with the designated 
transfer agent requiring the designated transfer agent to receive order 
information and to maintain a record of the date and time it received 
the order information.\46\ For purposes of the Paperwork Reduction Act, 
Commission staff has estimated that the one-time cost of identifying a 
designated transfer agent in the fund's registration statement would be 
negligible. The one-time cost of modifying the fund's existing contract 
with one of its transfer agents would be approximately 4.5 hours and 
$287.66 per fund. It is estimated that all funds together would spend 
17,662.5 hours and $1,129,065.50 to comply with this contract 
modification requirement.
---------------------------------------------------------------------------

    \46\ See proposed rule 22c-1(c)(1).
---------------------------------------------------------------------------

    As noted above, as a result of the proposed amendments, some 
investors might choose to send order information directly to a 
designated transfer agent instead of to an intermediary that transmits 
information through Fund/SERV. In that case, designated transfer agents 
might have to augment their capacity to handle increased order 
information and an expected concentration of orders shortly before 
pricing time. The Commission has no reasonable basis for predicting the 
increase in orders that may be directed to designated transfer agents, 
and therefore does not know how to estimate the cost for the increased 
capacity. An increase in order information directed to designated 
transfer agents also would result in the transmission of larger numbers 
of individual orders, rather than smaller numbers of aggregated and 
netted orders for omnibus accounts. We do not know what, if any, costs 
to funds would result if there were such an increase in order 
information.
    We believe the costs of these rule amendments will be minimal for 
long-term investors. Long-term investors (who invest both on their own 
and through retirement funds) attempt to save for events that are years 
in the future, such as retirement. They may find a deposit or 
redemption is delayed by one day because it reached the fund after 4 
p.m. However, because they have no special information about day-to-day 
deviations in a fund's NAV from its fair market value, long-term 
investors are likely to receive a better price as often as they receive 
a worse one. In addition, because day-to-day changes in NAVs are 
generally small, the effect on long-term investors who receive a worse 
price because their orders were received after 4 p.m. is likely to be 
small.
    A possible consequence of the proposed amendments is that some 
long-term investors will choose other financial instruments to avoid 
the risk of getting the next day's price. These investors may believe 
the instruments they choose are inferior to mutual funds (which were 
these investors' first choice). However, this disadvantage is likely to 
be minimal because products such as exchange-traded funds are 
available.\47\ These instruments offer features very similar to 
conventional mutual funds but are actively traded intra-day at market-
determined prices. In addition, the proposed amendments would allow 
many investors, for whom mutual funds would be a first choice but for 
fear of share value dilution resulting from late trading, to invest in 
mutual funds with greater confidence. If returns on investments in the 
alternative financial products were higher than the returns on 
investments in funds that investors would have chosen, investors would 
benefit. Conversely, if returns on investments in the alternative 
financial products were lower than the returns on investments in funds 
that investors would have chosen, investors would incur costs. The 
Commission, therefore, cannot quantify the potential costs (or 
benefits) to investors.
---------------------------------------------------------------------------

    \47\ See supra note 12.
---------------------------------------------------------------------------

    As discussed above, the proposed amendments would include an 
emergency exception so that orders would receive same-day treatment if, 
as a result of an emergency, the fund intermediary was unable to 
transmit the orders, or NSCC or the fund's designated transfer agent 
was unable to receive the orders.\48\ The emergency exception would be 
available to fund intermediaries only if the chief executive officer of 
the intermediary certifies to the fund (i) the nature, existence, and 
duration of the emergency, and (ii) that the intermediary received the 
orders before the applicable pricing time.\49\ A fund, or its 
designated agent, also would be required to keep a record of each 
certification it received for six years.\50\ The certification 
requirement would impose costs on the intermediary, and the 
recordkeeping requirement would impose costs on funds. If an emergency 
prevented the designated transfer agent or the clearing agency from 
receiving order information, the chief executive officer of the 
designated transfer agent or registered clearing agency would have to 
provide notice of the emergency to the fund.\51\ We have not specified 
the manner in which the chief executive officer must notify the fund, 
and seek comment on what method these entities are likely to use. The 
Commission, however, expects emergencies to occur infrequently. 
Therefore, we believe the costs involved in qualifying for the 
emergency exception would be minor.\52\
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    \48\ See proposed rule 22c-1(b)(1)(i).
    \49\ See proposed rule 22c-1(b)(1)(i)(A).
    \50\ The fund would be required to keep the records for six 
years, the first two years in an easily accessible location. See 
proposed rule 22c-1(b)(1)(ii).
    \51\ See proposed rule 22c-1(b)(1)(i)(B).
    \52\ Notification for emergencies preventing the receipt of 
orders by the designated transfer agent or NSCC could be by 
telephone or in writing and would not need to be certified. 
Therefore, the notification requirement would involve minimal, if 
any, costs. For purposes of the Paperwork Reduction Act, the 
Commission staff has estimated that it would take a total of 
approximately 1 hour and $163.53 per broker-dealer to comply with 
the certification requirement. It is estimated that all broker-
dealers together would spend 2,203 hours and $360,246 to comply with 
the certification requirement. For purposes of the Paperwork 
Reduction Act, the Commission staff has estimated that it would take 
a total of approximately 1 hour and $18.92 per fund to comply with 
the recordkeeping requirement. It is estimated that all funds 
together would spend 3,925 hours and $74,261 to comply with the 
recordkeeping requirement.

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[[Page 70394]]

    If a fund chooses to select a designated transfer agent to receive 
order information and the transfer agent accepts this designation, the 
proposed amendments would impose a recordkeeping requirement on the 
fund's designated transfer agent. The designated transfer agent would 
be required to maintain a record of the date and time it receives order 
information.\53\ For purposes of the Paperwork Reduction Act, the 
Commission staff has estimated that it would take a total of 
approximately 100 hours and $1,892 per designated transfer agent to 
comply with the time of receipt recordkeeping requirement. It is 
estimated that all designated transfer agents together would spend 
20,800 hours and $393,536 to comply with this recordkeeping 
requirement.
---------------------------------------------------------------------------

    \53\ See proposed rule 22c-1(c)(1).
---------------------------------------------------------------------------

C. Request for Comment

    The Commission requests comment on the potential costs and benefits 
of the proposed rule amendments. We also request comment on the 
potential costs and benefits of the approach under which 
intermediaries, in order to be eligible to submit orders to the fund 
after 4 p.m., would be required to adopt certain protections designed 
to prevent late trading. The Commission also requests comment on the 
potential costs and benefits of any other alternatives suggested by 
commenters. We encourage commenters to identify, discuss, analyze, and 
supply relevant data regarding any additional costs and benefits. For 
purposes of the Small Business Regulatory Enforcement Act of 1996,\54\ 
the Commission also requests information regarding the potential impact 
of the proposals on the U.S. economy on an annual basis. Commenters are 
requested to provide data to support their views.
---------------------------------------------------------------------------

    \54\ Pub. L. 104-121, Title II, 110 Stat. 857 (1996).
---------------------------------------------------------------------------

V. Paperwork Reduction Act

    Certain provisions of the proposed amendments to rule 22c-1 would 
result in new ``collection of information'' requirements within the 
meaning of the Paperwork Reduction Act of 1995.\55\ 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 collection of information requirements is 
``Rule 22c-1 under the Investment Company Act of 1940, `Pricing of 
redeemable securities for distribution, redemption and repurchase.' '' 
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.
---------------------------------------------------------------------------

    \55\ 44 U.S.C. 3501.
---------------------------------------------------------------------------

    To eliminate late trading through fund intermediaries, we are 
proposing to amend rule 22c-1 to require that all purchase and 
redemption orders be received by the fund, its designated transfer 
agent, or a registered clearing agency no later than the time at which 
the fund prices its securities, in order to obtain the current day's 
price. As a consequence, certain fund intermediaries, such as broker-
dealers, banks, and retirement plan administrators would have to submit 
orders to the fund before 4 p.m. in order for their customers to 
receive the 4 p.m. price. Orders submitted later would have to receive 
the following day's price. The proposed amendments to rule 22c-1 would 
allow a fund to designate a transfer agent to receive orders to 
purchase or redeem fund shares. Orders received by that designated 
transfer agent no later than the fund's pricing time would receive 
same-day pricing. The amendments would require that the fund designate 
the transfer agent in its registration statement filed with the 
Commission, and include a provision in the fund's contract with the 
designated transfer agent requiring the transfer agent to receive order 
information and maintain a record of the date and time it receives the 
order information.\56\ These collection of information requirements 
would be voluntary, because a fund does not need to select a designated 
transfer agent unless the fund chooses to have same-day pricing 
available for orders received by its transfer agent. These collection 
of information requirements are needed to ensure that designated 
transfer agents do not allow late trading to occur, and to assist the 
Commission's examination staff in assessing whether late trading is 
occurring.
---------------------------------------------------------------------------

    \56\ See proposed rule 22c-1(c)(1).
---------------------------------------------------------------------------

    The proposed rule amendments would contain an exception that would 
permit investor orders to receive same-day pricing if, as a result of 
an emergency, a dealer (or its agent) was unable to transmit the 
orders, or NSCC or the fund's designated transfer agent was unable to 
receive the orders by the fund's pricing time.\57\ The exception would 
prevent investors from losing the current day's price for orders 
received by dealers before 4 p.m., if those orders could not be 
transmitted to or received by NSCC or the fund's designated transfer 
agent by 4 p.m. because of, for example, a power failure, hurricane, or 
other emergency. The emergency exception would be available to dealers 
only if the chief executive officer of the dealer certifies to the fund 
(i) the nature, existence, and duration of the emergency, and (ii) that 
the dealer received the orders before the applicable pricing time.\58\ 
A fund also would be required to keep a record of each certification it 
received for six years.\59\ In the event an emergency prevented the 
designated transfer agent or the clearing agency from receiving order 
information, the chief executive officer of the designated transfer 
agent or clearing agency would have to provide notice of the emergency 
to the fund.\60\ These information collections are voluntary because 
they are only required for an exception for orders that are not timely 
received due to an emergency and, therefore, funds may choose not to 
rely on the emergency exception. These collections are needed to ensure 
that the emergency exception is limited to bona fide emergencies that 
prevent the orders from reaching the fund's designated transfer agent 
or Fund/SERV by 4 p.m. and that late trading is not occurring. The 
recordkeeping information collection requirement also would assist the 
Commission's examination staff in assessing whether a particular event 
constituted an emergency for purposes of the exception.
---------------------------------------------------------------------------

    \57\ See proposed rule 22c-1(b)(1)(i).
    \58\ See proposed rule 22c-1(b)(1)(i)(A).
    \59\ The fund would be required to keep the records for six 
years, the first two years in an easily accessible location. See 
proposed rule 22c-1(b)(1)(ii).
    \60\ See proposed rule 22c-1(b)(1)(i)(B).
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    The proposed amendments would require a fund that chooses to have a 
designated transfer agent to identify that transfer agent in the fund's 
registration statement. This information collection would be a one-time 
event, and the Commission believes that this burden would be 
negligible. A fund that chooses to select a designated transfer agent 
also would be required to include in its contract with the transfer 
agent a provision obligating the transfer agent to receive order 
information and maintain a record of the date and time the transfer 
agent receives order information. The Commission staff estimates that 
there are currently 3,925 funds (3,100 registered open-end investment 
companies and 825 registered unit investment trusts) and that each fund 
would select one of its current transfer agents to be its designated 
transfer

[[Page 70395]]

agent.\61\ As such, each fund would have to modify the existing 
contract it has with the transfer agent it selects to be its designated 
transfer agent. This modification would create a one-time burden of 4.5 
hours per fund (4 hours by in-house counsel, .5 hours by support staff) 
or about 17,662.5 burden hours.\62\
---------------------------------------------------------------------------

    \61\ These numbers are based on Commission filings and are 
current as of the end of September 2003.
    \62\ 3,925 funds x 4.5 hours = 17,662.5 hours.
---------------------------------------------------------------------------

    Under the proposal, a transfer agent that is designated by the fund 
would have to maintain records of the date and time it receives order 
information. There are currently approximately 208 registered fund 
transfer agents.\63\ The Commission estimates that these transfer 
agents receive approximately 83 million fund share orders per year.\64\ 
Each of the 208 transfer agents, therefore, receives approximately 
399,038 orders per year. The Commission estimates that each designated 
transfer agent would spend approximately 100 hours per year maintaining 
records of the time it received order information.\65\ Thus, the annual 
aggregate burden hours associated with the time of receipt 
recordkeeping requirement would be 20,800 hours.\66\
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    \63\ The number of fund transfer agents is based on Form TA-2 
filings with the Commission between January 1, 2003 and November 11, 
2003.
    \64\ The Commission staff estimates that transfer agents receive 
approximately half of the total number of fund share orders made 
each year. Fund/SERV processes the other half of the total number of 
fund share orders made each year. In 2002, Fund/SERV processed 83 
million fund transactions. See supra note. Based on that 
information, the Commission estimates that there were 166,000,000 
total fund share orders processed in 2002. Transfer agents received 
approximately half of those 166,000,000 orders. Therefore, transfer 
agents directly received approximately 83,000,000 fund share orders. 
We request comment on our estimate of the number of fund orders 
submitted directly to designated transfer agents.
    \65\ For purposes of this supporting statement, the Commission 
assumes that transfer agents receive most fund share orders 
electronically, and that designated transfer agents would maintain 
the records of the time of receipt electronically.
    \66\ 208 transfer agents x 100 hours = 20,800 hours.
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    Broker-dealers and funds that choose to rely on the emergency 
exception would have collection of information requirements. There are 
currently approximately 2,203 broker-dealers that are classified as 
specialists in fund shares.\67\ The Commission estimates that each 
broker-dealer would incur no more than one emergency per year that 
would qualify for the emergency exception. The Commission also 
estimates that each broker-dealer is involved in the sale of shares of 
approximately 300 funds. Thus, approximately 2,203 broker-dealers could 
be subject to preparing and transmitting one certification each year to 
each of the 300 funds whose shares they sell, for a total of 300 
certifications per year for each broker-dealer. We estimate that the 
average annual hour burden for all certifications per broker-dealer 
emergency would be one hour, or one burden hour per year for each 
broker-dealer.\68\ Thus, the annual aggregate burden hours associated 
with the certification requirement would be 2,203 hours.\69\
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    \67\ The number of broker-dealers is based on year-end 2002 
Commission filings.
    \68\ Because the certification to each of the 300 funds would be 
based on the same emergency, the information required to be included 
in the certification would be the same for each of the 300 
certifications. Therefore, little time would be required after the 
preparation of the first certification to prepare the remaining 
certifications.
    \69\ 2,203 broker-dealers x 1 hour = 2,203 hours.
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    The staff estimates that each fund would spend one hour annually, 
on average, maintaining the records of the certifications required by 
proposed rule 22c-1(b)(1)(ii). Thus, the annual aggregate burden hours 
associated with the emergency exception recordkeeping requirement would 
be 3,925 hours.\70\ In total, the collections of information associated 
with the emergency exception contained in the proposed amendments to 
rule 22c-1 would entail 6,128 burden hours.\71\ Using a three-year 
period, the average information collection burden under the proposed 
amendments to rule 22c-1 would be 32,815.5 hours.\72\
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    \70\ 3,925 funds x 1 hour = 3,925 hours.
    \71\ 2,203 hours for the certification of the emergencies + 
3,925 hours maintaining records = 6,128 hours.
    \72\ The average of the first year burden of 44,590.5 hours 
(17,662.5 hours for the contract modification collection of 
information + 20,800 hours for the time of receipt recordkeeping 
collection of information + 6,128 hours for the emergency exception 
collections of information) and the burden of 26,928 hours for each 
of the next two years (20,800 hours for the time of receipt 
recordkeeping collection of information + 6,128 hours for the 
emergency exception collections of information) is 32,815.5 hours.
---------------------------------------------------------------------------

    We request comment on whether these estimates are reasonable. 
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.
    Persons wishing to submit comments on the collection of information 
requirements of the proposed amendments 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 10102, New Executive Office Building, 
Washington, DC 20503, and should send a copy to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW, 
Washington, DC 20549-0609, with reference to File No. S7-27-03. 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-
27-03, and be submitted to the Securities and Exchange Commission, 
Records Management, Office of Filings and Information Services.

VI. Initial Regulatory Flexibility Analysis

    This Initial Regulatory Flexibility Analysis (``IRFA'') has been 
prepared in accordance with 5 U.S.C. 603. It relates to the amendments 
to rule 22c-1 under the Investment Company Act that we are proposing in 
this Release.

A. Reasons for the Proposed Action

    Section I of this Release describes the background and reasons for 
the proposed action. As discussed above, late trading appears to have 
been facilitated by fund managers, intermediaries, and investors in 
violation of our rules.\73\ Our investigations are ongoing, but suggest 
that late trading of fund shares is not isolated, nor limited to any 
one type of fund or intermediary.\74\
---------------------------------------------------------------------------

    \73\ See supra note 17 and accompanying text.
    \74\ See supra notes 16-17 and accompanying text.
---------------------------------------------------------------------------

B. Objectives of the Proposed Action

    Section II of this Release discusses the objectives of the proposed 
amendments. As discussed above, the Commission is proposing amendments 
to the rule under the Investment Company Act that requires forward 
pricing of redeemable securities issued by funds. The

[[Page 70396]]

proposed amendments would deem an order received for purposes of 
determining the applicable pricing time only when it is received by (i) 
the fund itself, (ii) the fund's designated transfer agent, or (iii) a 
clearing agency registered with the Commission.\75\
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    \75\ See proposed rule 22c-1(a).
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C. Legal Basis

    The amendments to rule 22c-1 are proposed pursuant to the authority 
set forth in sections 22(c) and 38(a) of the Investment Company 
Act.\76\
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    \76\ 15 U.S.C. 80a-22(c), 80a-37(a).
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D. Small Entities Subject to the Proposed Rule and Amendments

    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.\77\ Of approximately 3,925 funds (3,100 
registered open-end investment companies and 825 registered unit 
investment trusts), approximately 163 are small entities.\78\ A broker-
dealer is considered a small entity if its total capital is less than 
$500,000, and it is not affiliated with a broker-dealer that has 
$500,000 or more in total capital.\79\ Of approximately 6,800 
registered broker-dealers, approximately 880 are small entities, with 
approximately 400 of these classified as specialists in funds. A 
transfer agent is considered a small entity if it has: (i) received 
less than 500 items for transfer and less than 500 items for processing 
during the preceding six months (or in the time that it has been in 
business, if shorter); (ii) transferred items only of issuers that 
would be deemed ``small business'' or ``small organizations'' as 
defined in rule 0-10 under the Securities Exchange Act of 1934; \80\ 
(iii) maintained master shareholder files that in the aggregate 
contained less than 1,000 shareholder accounts or was the named 
transfer agent for less than 1,000 shareholder accounts at all times 
during the preceding fiscal year (or in the time that it has been in 
business, if shorter); and (iv) is not affiliated with any person 
(other than a natural person) that is not a small business or small 
organization under rule 0-10. We estimate that 40 out of approximately 
208 registered fund transfer agents qualify as small entities.
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    \77\ 17 CFR 270.0-10.
    \78\ Some or all of these entities may contain multiple series 
or portfolios. If a registered investment company is a small entity, 
the portfolios or series it contains are also small entities.
    \79\ 17 CFR 240.0-10.
    \80\ 17 CFR 240.0-10(h).
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    As we discuss above, under the proposed rule amendments, an order 
placed with a registered broker-dealer (or with any other intermediary) 
would no longer receive a fund's NAV price calculated on the day the 
intermediary received the order, unless the order were transmitted to 
the fund, its designated transfer agent, or a registered clearing 
agency prior to the pricing time.\81\ These amendments would apply to 
all intermediaries and third-party administrators, including those that 
fall within the various definitions of small entities. How much these 
amendments would affect these small entities would be determined 
largely by the importance these intermediaries and their clients place 
on receiving the NAV calculated on the day a client places an order.
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    \81\ The proposal would permit exceptions in very limited 
circumstances. See proposed rule 22c-1(b).
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    The Commission staff expects that these rule changes may alter the 
manner in which some intermediaries transmit their purchase (or 
redemption) orders to funds, what they charge for their services, and 
perhaps how they market these services. A broker-dealer, for example, 
that commits to transmitting its orders to a fund (or to the designated 
transfer agent or clearing agency) prior to the fund's pricing time may 
need to modify its existing computer system. Because the Commission and 
its staff are not familiar with the full range of available 
technologies associated with these upgrades, we request that commenters 
address the cost of such upgrades, including specific data when 
available.

E. Reporting, Recordkeeping, and Other Compliance Requirements

    The proposal would contain one new recordkeeping requirement and 
one new compliance requirement for funds that choose to designate a 
transfer agent. If a fund designates a transfer agent, the fund would 
be required to identify the designated transfer agent in the fund's 
registration statement filed with the Commission, and include a 
provision in the fund's contract with the transfer agent requiring the 
transfer agent to receive order information and maintain a record of 
the date and time it receives the order information. All funds, 
regardless of size, would be subject to the reporting requirement and 
the compliance requirement. The designation of a transfer agent would 
occur once and involve minimal compliance efforts. The inclusion of the 
contract provision also would occur once and involve minimal compliance 
efforts. Funds that are small entities would not be unduly burdened by 
these requirements.
    The proposed amendments also would introduce one new recordkeeping 
requirement for transfer agents that choose to become a ``designated 
transfer agent.'' In order to be a designated transfer agent under the 
proposal, a transfer agent would have to maintain a record of the date 
and time it receives order information. All designated transfer agents, 
regardless of size, would be subject to this recordkeeping requirement. 
The time of receipt recordkeeping requirement for designated transfer 
agents would be minimal; designated transfer agents that are small 
entities would not be unduly burdened by the record maintenance duty.
    The proposal also would contain new compliance and recordkeeping 
requirements for a registered broker-dealer that sought to rely on the 
proposed rule's emergency exception. The exception would permit 
investor orders to receive same-day treatment if, as a result of an 
emergency, the dealer (or its agent) was unable to transmit the orders, 
or NSCC or the fund's designated transfer agent could not receive the 
orders. The exception would permit investors to receive the same day's 
price for orders received by a dealer before 4 p.m. that could not be 
transmitted to the fund, its designated transfer agent, or the 
registered clearing agency (or could not be received by the designated 
transfer agent or the registered clearing agency) because of, for 
example, a power failure, hurricane or other emergency. The exception 
would be available only if the chief executive officer of the dealer 
certifies to the fund (i) the nature, existence, and duration of the 
emergency, and (ii) that the orders were received before the applicable 
pricing time.\82\ In addition, a fund, or its designated agent, would 
be required to keep a record of each certification it receives.\83\ If 
the emergency were experienced by the fund's designated transfer agent 
or NSCC, the chief executive officer of the designated transfer agent 
or NSCC would have to provide notice of the emergency to the fund.\84\
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    \82\ See proposed rule 22c-1(b)(1)(i)(A).
    \83\ The fund would be required to keep these records for six 
years, the first two years in an easily accessible location. See 
proposed rule 22c-1(b)(1)(ii). The fund would not have to keep a 
record of the notices it receives from its designated transfer agent 
or NSCC.
    \84\ See proposed rule 22c-1(b)(1)(i)(B).
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    All intermediaries and funds, regardless of size, would be subject 
to these notification and recordkeeping

[[Page 70397]]

requirements in the event they rely on the exception. Neither the 
certification that the broker-dealer would be required to send, nor the 
notification that the designated transfer agent or registered clearing 
agent would be required to provide as a result of an emergency that 
delayed the transmission or receipt of orders, is intended to be a 
lengthy document, and small entities should not bear a disproportionate 
expense in complying with this condition. Furthermore, because the 
proposed emergency exception would be optional, a small entity might 
not use the exception, particularly if it concluded that any costs 
borne are unlikely to be offset by the resulting benefits. Similarly, 
the recordkeeping requirements for funds that receive emergency 
certifications are minimal; funds that are small entities would not be 
unduly burdened by these record maintenance duties.

F. Duplicative, Overlapping, or Conflicting Federal Rules

    The Commission has not identified any federal rules that duplicate, 
overlap, or conflict with the proposed rule or amendments.

G. Significant Alternatives

    The Regulatory Flexibility Act directs the Commission to consider 
significant alternatives that would accomplish the stated objective, 
while minimizing any significant adverse impact on small entities. 
Alternatives in this category would include: (i) establishing different 
compliance or reporting standards that take into account the resources 
available to small entities; (ii) clarifying, consolidating, or 
simplifying the compliance requirements under the rule for small 
entities; (iii) using performance rather than design standards; and 
(iv) exempting small entities from coverage of the rule, or any part of 
the rule.
    The Commission does not presently believe that the establishment of 
special compliance requirements or timetables under the proposals for 
small entities is feasible or necessary.\85\ Because the proposed 
amendments arise from a concern that fund shareholders are 
disadvantaged by abuses of a deadline, exceptions for small entities 
could compromise the effectiveness of the amended rule. Except for 
funds that are small entities, the other small entities affected by the 
proposed amendments (e.g., broker-dealers and designated transfer 
agents) would have no formal compliance requirements as a result of 
these proposed amendments.
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    \85\ The proposal would permit exceptions in very limited 
circumstances, such as well-documented emergencies that prohibit 
timely transmission. See proposed rule 22c-1(b)(1)(i).
---------------------------------------------------------------------------

    A recordkeeping requirement would arise for small transfer agents 
that choose to be a fund's designated transfer agent. The time of 
receipt recordkeeping requirement is necessary to enable the Commission 
and its staff to verify that late trading has not taken place. 
Reporting or compliance obligations would arise for a small broker-
dealer that invoked the proposed emergency exception allowing for an 
order to receive same-day pricing for orders transmitted to the fund, 
its designated transfer agent, or registered clearing agency after 4 
p.m. These minimal compliance and reporting requirements would be 
necessary to enable the Commission and its staff to verify that late 
trading has not taken place. Accordingly, the Commission cannot further 
clarify, consolidate, or simplify the requirements associated with this 
exception.
    The Commission is asking for comment on an approach that would 
allow certain intermediaries to continue to obtain same-day pricing for 
orders they receive before the pricing time even if they submit those 
orders to the fund (or its designated transfer agent or a registered 
clearing agency) after the pricing time. This approach would be 
available to intermediaries who have technology-based systems, as well 
as controls, that demonstrably limit the ability of the intermediary to 
trade after the pricing time.\86\ We request comment on any concerns 
raised by this approach. Assessing the reliability of such technology, 
for example, may be difficult for funds and the Commission. Would the 
Commission or its staff need to establish and then verify the standards 
of such systems?
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    \86\ See supra notes 23-24 and accompanying and following text.
---------------------------------------------------------------------------

    Moreover, under this approach, small intermediaries desiring same-
day pricing might have to choose between potentially costly 
technological and telecommunication upgrades in order to compete with 
larger firms. Would this approach place small intermediaries at a 
disadvantage with respect to their larger competitors?\87\
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    \87\ We have found through investigations and examinations of 
transfer agents that clients of broker-dealers that have a small 
volume of business in fund share transactions rely on paper-based 
applications in 10-40% of mutual fund share transactions. There is 
no discernible time sensitivity in this mode of fund investment, in 
which account applications and bank checks are sent to funds or 
their transfer agents through regular or express mail.
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H. Solicitation of Comments

    The Commission encourages the submission of comments with respect 
to any aspect of this IRFA. Comment is specifically requested on the 
number of small entities that would be affected by the proposed 
amendments, and the likely impact of the proposals on small entities. 
Commenters are asked to describe the nature of any impact and provide 
empirical data supporting the extent of the impact. These comments will 
be considered in connection with the adoption of the proposed rule and 
amendments, and reflected in the Final Regulatory Flexibility Analysis.
    Comments should be submitted in triplicate to Jonathan G. Katz, 
Secretary, Securities and Exchange Commission, 450 Fifth Street, NW., 
Washington, DC 20549-0609. Comments also may be submitted 
electronically at the following E-mail address: [email protected]. 
All comment letters should refer to File No. S7-27-03, and this file 
number should be included on the subject line if E-mail is used.\88\ 
Comment letters will be available for public inspection and copying in 
the Commission's Public Reference Room, 450 Fifth Street, NW., 
Washington, DC 20549-0102. Electronically submitted comment letters 
also will be posted on the Commission's Internet Web site (http://www.sec.gov).
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    \88\ Comments on the IRFA will be placed in the same public file 
that contains comments on the proposed rule and amendments 
themselves.
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VII. Statutory Authority

    The Commission is proposing amendments to rule 22c-1 pursuant to 
the authority set forth in sections 22(c) and 38(a) of the Investment 
Company Act [15 U.S.C. 80a-22(c) and 80a-37(a)].

List of Subjects in 17 CFR Part 270

    Investment companies, Reporting and recordkeeping requirements, 
Securities.

Text of Proposed Rule

    For 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, and 80a-
39, unless otherwise noted.
* * * * *
    2. Section 270.22c-1 is revised to read as follows:

[[Page 70398]]

Sec.  270.22c-1  Pricing of redeemable securities for distribution, 
redemption and repurchase.

    (a) Forward pricing required. It is unlawful for any registered 
investment company issuing redeemable securities (``fund''), its 
principal underwriter, and any dealer to sell, redeem, or repurchase a 
redeemable security issued by the fund at a price other than the price 
based on the current net asset value established as of the next pricing 
time after the fund, its designated transfer agent, or a registered 
clearing agency receives an order to purchase or redeem the security.
    (1) Time. The fund's board of directors must initially set the time 
or times during the day as of which the current net asset value of the 
fund's redeemable securities must be calculated, and may make and 
approve any changes the board deems necessary.
    (2) Frequency. The fund must calculate the current net asset value 
of any redeemable security at least once daily, Monday through Friday, 
at the specific time or times during the day that the fund's board of 
directors sets, except on:
    (i) Days on which changes in the value of the fund's portfolio 
securities will not materially affect the current net asset value of 
the fund's redeemable securities;
    (ii) Days during which the fund, its designated transfer agent, and 
registered clearing agency receives no order to purchase or redeem the 
fund's redeemable securities; or
    (iii) Customary national business holidays described or listed in 
the prospectus and local and regional business holidays listed in the 
prospectus.
    (b) Exceptions permitted. Notwithstanding paragraph (a) of this 
section:
    (1) Emergencies. (i) The fund may deem an order to have been 
received by the fund, its designated transfer agent, or a registered 
clearing agency immediately before the applicable pricing time if:
    (A) An emergency prevents a dealer (or any agent of the dealer) 
from timely transmitting the orders to the fund, its designated 
transfer agent, or a registered clearing agency; and the chief 
executive officer of the dealer provides a written certification to the 
fund as to the nature, existence, and duration of the emergency, and 
that the orders were received by the dealer before the applicable 
pricing time; or
    (B) An emergency prevents a designated transfer agent or registered 
clearing agency from timely receiving orders, and the chief executive 
officer of the designated transfer agent or registered clearing agency 
notifies the fund as to the nature, existence, and duration of the 
emergency.
    (ii) The fund, or its designated agent, must maintain a written 
record of each certification it receives under paragraph (b)(1)(i)(A) 
of this section for at least six years after the end of the fiscal year 
in which it receives the report, the first two years in an easily 
accessible place.
    (2) Transactions through conduit funds. A fund may deem receipt of 
an order to have occurred immediately before the applicable pricing 
time if the fund, its designated transfer agent, or registered clearing 
agency receives the order from a registered investment company that 
invests in the fund in reliance on section 12(d)(1)(E) of the Act (15 
U.S.C. 80a-12(d)(1)(E)).
    (3) Secondary market transactions. A sponsor of a unit investment 
trust (``trust'') engaged exclusively in the business of investing in 
eligible trust securities (as defined in Sec.  270.14a-3(b)) may sell 
or repurchase trust units in a secondary market at a price based on the 
offering side evaluation of the eligible trust securities in the 
trust's portfolio, determined at any time on the last business day of 
each week, effective for all sales made during the following week, if 
on the days that such sales or repurchases are made the sponsor 
receives a letter from a qualified evaluator stating, in its opinion, 
that:
    (i) In the case of repurchases, the current bid price is not higher 
than the offering side evaluation, computed on the last business day of 
the previous week; and
    (ii) In the case of resales, the offering side evaluation, computed 
as of the last business day of the previous week, is not more than one-
half of one percent ($5.00 on a unit representing $1,000 principal 
amount of eligible trust securities) greater than the current offering 
price.
    (4) Insurance company separate accounts. A registered separate 
account offering variable annuity contracts may apply the initial 
purchase payment for any such contract at a price based on the current 
net asset value of the contract established as of the next pricing 
time:
    (i) Not later than two business days after receipt of the order to 
purchase by the insurance company sponsoring the separate account 
(``insurer''), if the contract application and other information 
necessary for processing the order to purchase (collectively, 
``application'') are complete upon receipt; or
    (ii) Not later than two business days after an application which is 
incomplete upon receipt by the insurer is made complete, provided that, 
if an incomplete application is not made complete within five business 
days after receipt:
    (A) The prospective purchaser is informed of the reasons for the 
delay; and
    (B) The initial purchase payment is returned immediately and in 
full, unless the prospective purchaser specifically consents to the 
insurer retaining the purchase payment until the application is made 
complete.
    (5) Mergers. Any fund may adjust the price of its redeemable 
securities sold pursuant to a merger, consolidation or purchase of 
substantially all of the assets of a company that meets the conditions 
specified in Sec.  270.17a-8.
    (c) Definitions. For purposes of this section,
    (1) Designated transfer agent means the single registered transfer 
agent (as defined in section 3(a)(25) of the Securities Exchange Act of 
1934 (15 U.S.C. 78c(a)(25))) that is designated, in the fund's 
registration statement filed with the Commission, and is required by 
written contract to receive order information and maintain a record of 
the date and time it receives the order information.
    (2) Initial purchase payment means the first purchase payment 
submitted to the insurer by, or on behalf of, a prospective purchaser.
    (3) Order means a direction to purchase or redeem a specific number 
of fund shares or an indeterminate number of fund shares of a specific 
value. Each order is deemed to be irrevocable as of the next pricing 
time after the fund, its designated transfer agent, or registered 
clearing agency receives it. If a fund, its designated transfer agent, 
or registered clearing agency receives a direction to purchase 
redeemable securities of the fund using the proceeds of a 
contemporaneous order to redeem a specific number of shares of another 
fund (an exchange), the first fund may deem the direction to purchase 
its redeemable securities to be an order.
    (4) Pricing time means the time of day as of which the fund 
calculates the current net asset value pursuant to paragraph (a)(1) of 
this section.
    (5) Prospective purchaser means either an individual contract owner 
or an individual participant in a group contract.
    (6) Qualified evaluator means any evaluator that represents it is 
in a position to determine, on the basis of an informal evaluation of 
the eligible trust securities held in a unit investment trust's 
portfolio, whether:
    (i) The current bid price is higher than the offering side 
evaluation, computed

[[Page 70399]]

on the last business day of the previous week; and
    (ii) The offering side evaluation, computed as of the last business 
day of the previous week, is more than one-half of one percent ($5.00 
on a unit representing $1,000 principal amount of eligible trust 
securities) greater than the current offering price.

    By the Commission.

    Dated: December 11, 2003.
J. Lynn Taylor,
Assistant Secretary.
[FR Doc. 03-31071 Filed 12-16-03; 8:45 am]
BILLING CODE 8010-01-P