[Federal Register Volume 69, Number 198 (Thursday, October 14, 2004)]
[Notices]
[Pages 61059-61060]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E4-2606]


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SECURITIES AND EXCHANGE COMMISSION


Submission for OMB Review; Comment Request

Upon written request, copies available from: Securities and Exchange 
Commission, Office of Filings and Information Services, Washington, DC 
20549.

Extension: Rule 17f-4, SEC File No. 270-232, OMB Control No. 3235-
0225.

    Notice is hereby given that, pursuant to the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange 
Commission (the ``Commission'') has submitted to the Office of 
Management and Budget (``OMB'') a request for extension and approval of 
the collection of information discussed below.
    Section 17(f) of the Investment Company Act of 1940 (the ``Act'') 
\1\ permits registered management investment companies and their 
custodians to deposit the securities they own in a system for the 
central handling of securities (``securities depositories''), subject 
to rules adopted by the Securities and Exchange Commission 
(``Commission''). Rule 17f-4 under the Act specifies the conditions for 
the use of securities depositories by funds \2\ and custodians.
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    \1\ 15 U.S.C. 80a.
    \2\ As amended in 2003, rule 17f-4 permits any registered 
investment company, including a unit investment trust or a face-
amount certificate company, to use a security depository. See 
Custody of Investment Company Assets With a Securities Depository, 
Investment Company Act Release No. 25934 (Feb. 13, 2003) [68 FR 8438 
(Feb. 20, 2003)]. The term ``fund'' is used in this Notice to mean 
all registered investment companies.
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    The Commission adopted rule 17f-4 in 1978 to reflect the custody 
practice and commercial law of that time. In particular, the rule was 
designed to be compatible with the 1978 revisions to Article 8 of the 
Uniform Commercial Code (``UCC'') (``Prior Article 8'').\3\ Custody 
practices have changed substantially since 1978, and the drafters of 
the UCC approved major amendments to Article 8 in 1994 to reflect these 
changes (``Revised Article 8'').\4\ While Prior Article 8 reflected 
expectations that depository practice would involve registering 
investors' interests in securities on the issuer's own books, Revised 
Article 8 recognizes that under current practice, an investor usually 
maintains its securities through an account with a broker-dealer, bank 
or other financial institution (``securities intermediary'').\5\ 
Revised Article 8 has significantly clarified the legal rights and 
duties that apply in indirect holding arrangements, and every State has 
enacted Revised Article 8 into law.
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    \3\ Article 8 of the UCC governs the ownership and transfer of 
investment securities. See Uniform Commercial Code, 1978 Official 
Text with Comments, Article 8, Investment Securities (West 1978) 
(``Prior Article 8''); Use of Depository Systems by Registered 
Management Companies, Investment Company Act Release No. 10053 (Dec. 
8, 1977) [42 FR 63722 (Dec. 19, 1977)] at nn. 4-7, 9, 12 and 
accompany text (citing provisions of Prior Article 8).
    \4\ See Uniform Commercial Code, Revised Article 8--Investment 
Securities (With conforming and Miscellaneous Amendments to Articles 
1, 4, 5, 9, and 10) (1994 Official Text with Comments) (``Revised 
Article 8''), Prefatory Note at I.B., C., and D.
    \5\ Revised Article 8, supra note 3, section 8-102(a)(14) and 
Prefatory Note at III.A. (defining a ``securities intermediary'').
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    On February 13, 2003, the Commission adopted amendments to reflect 
the recent changes in custody practices and commercial law.\6\ The 
amendments updated and simplified the rule, and substantially eased 
rule 17f-4's reporting, recordkeeping, and other compliance 
requirements. Most prominently, the amended rule eliminated the 
confirmation, segregation, and earmarking requirements.\7\ In place of 
these detailed requirements, amended rule 17f-4 required funds to 
modify their contracts with their custodians or securities depositories 
to add two provisions. First, a fund's custodian must be obligated, at 
a minimum, to exercise due care in accordance with reasonable 
commercial standards in discharging its duty as a ``securities 
intermediary'' to obtain and thereafter maintain financial assets.\8\ 
Second, the custodian must provide, promptly upon request by the fund, 
such reports as are available about the internal accounting controls 
and financial strength of the custodian.\9\
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    \6\ See supra note 2.
    \7\ Previously, the custodian was required to send the fund a 
written confirmation of each transfer of securities to or from the 
fund's account with the custodian (the ``confirmation 
requirement''). The custodian also had to maintain the fund's 
securities in a depository account for the custodian's customers 
that is separate from the depository account for the custodian's own 
securities (the ``segregation requirement'') and had to identify on 
the custodian's records a portion of the total customer securities 
as attributed to the fund (the ``earmarking requirement''). Revised 
Article 8 made these custodial compliance requirements unnecessary 
to protect fund assets.
    \8\ Rule 17f-4(a)(1). This provision simply incorporates into 
the rule the standard of care provided for by section 504(c) of 
Revised Article 8 when the parties have not agreed to a standard.
    \9\ If a fund deals directly with a depository, similar 
requirements apply to the depository.
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    The Commission staff estimates that 4,866 respondents (including 
4,711 active registered investment companies, 130 custodians, and 25 
possible securities depositories) are subject to the requirements in 
rule 17f-4. The rule is

[[Page 61060]]

elective, but most if not all funds use depository custody 
arrangements.\10\
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    \10\ The Commission staff estimates that more than 97 percent of 
all funds now use depository custody arrangements.
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    The Commission staff estimates that, on an annual basis, about 471 
funds \11\ spend an average of 2 hours annually complying with the 
contract requirements of rule 17f-4. (e.g., signing contracts with 
additional custodians or securities depositories) for a total of 942 
burden hours.
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    \11\ Commission staff estimates that about 10 percent of all 
funds approve new depository custody arrangements yearly or a fund 
changes custodians (or securities depositories) every 10 years.
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    Rule 17f-4 requires that a custodian, upon request, provide a fund 
with any available reports on its internal accounting controls and 
financial strength. The Commission staff estimates that 130 custodians 
spend 12 hours annually in transmitting such reports to funds. In 
addition, approximately 47 funds (i.e., one percent of all funds) deal 
directly with a securities depository and may request periodic reports 
from their depository. The Commission staff estimates that, for each of 
the 47 funds, depositories spend 12 hours annually transmitting reports 
to the funds. The total annual burden estimate for compliance with rule 
17f-4's reporting requirement is therefore 2,124 hours.
    If a fund deals directly with a securities depository, rule 17f-4 
requires that the fund implement internal control systems reasonably 
designed to prevent unauthorized officer's instructions (by providing 
at least for the form, content, and means of giving, recording, and 
reviewing all officer's instructions). The Commission staff estimates 
that 47 funds spend 10 hours annually implementing systems to prevent 
unauthorized officer's instructions, resulting in 470 burden hours for 
this requirement under rule 17f-4.
    Based on the foregoing, the Commission staff estimates that the 
total annual hour burden of the rule's paperwork requirement is 3,536 
hours.
    The estimates of average burden hours are made solely for the 
purposes of the Paperwork Reduction Act. These estimates are not 
derived from a comprehensive or even a representative survey or study 
of the costs of Commission rules.
    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.
    General comments regarding the above information should be directed 
to the following persons: (i) Desk Officer for the Securities and 
Exchange Commission, Office of Information and Regulatory Affairs, 
Office of Management and Budget, Room 10102, New Executive Office 
Building, Washington, DC 20503, or e-mail to: [email protected]; and (ii) R. Corey Booth, Director/Chief 
Information Officer, Office of Information Technology, Securities and 
Exchange Commission, 450 5th Street, NW., Washington, DC 20549. 
Comments must be submitted to OMB within 30 days of this notice.

    Dated: October 8, 2004.
Margaret H. McFarland,
Deputy Secretary.
 [FR Doc. E4-2606 Filed 10-13-04; 8:45 am]
BILLING CODE 8010-01-P