[Federal Register Volume 70, Number 122 (Monday, June 27, 2005)]
[Notices]
[Pages 36969-36972]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E5-3325]


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SECURITIES AND EXCHANGE COMMISSION


Proposed Collection; Comment Request

Upon Written Request, Copies Available From: Securities and Exchange 
Commission, Office of Filings and Information Services, Washington, DC 
20549

Extension:
    Rule 17f-5, SEC File No. 270-259, OMB Control No. 3235-0269
    Rule 17f-7, SEC File No. 270-470 , OMB Control No. 3235-0529
    Form N-17D-1, SEC File No. 270-231, OMB Control No. 3235-0229
    Rule 19b-1, SEC File No. 270-312, OMB Control No. 3235-0354

    Notice is hereby given that, pursuant to the Paperwork Reduction 
Act of 1995 (44 U.S.C. 3501-3520), the Securities and Exchange 
Commission (``Commission'') is soliciting comments on the collections 
of information summarized below. The Commission plans to submit these 
existing collections of information to the Office of Management and 
Budget (``OMB'') for extension and approval.
    Rule 17f-5. Rule 17f-5 under the Investment Company Act of 1940 [15 
U.S.C. 80a] (``Investment Company Act'' or ``Act'') governs the custody 
of the assets of registered management investment companies (``funds'') 
with custodians outside the United States.\1\ Under Rule 17f-5, the 
fund's board of directors must find that it is reasonable to rely on 
each delegate it selects to act as the fund's foreign custody manager. 
The delegate must agree to provide written reports that notify the 
board when the fund's assets are placed with a foreign custodian and 
when any material change occurs in the fund's custody arrangements. The 
delegate must agree to exercise reasonable care, prudence, and 
diligence, or to adhere to a higher standard of care. When the foreign 
custody manager selects an

[[Page 36970]]

eligible foreign custodian, it must determine that the fund's assets 
will be subject to reasonable care if maintained with that custodian, 
and that the written contract that governs each custody arrangement 
will provide reasonable care for fund assets. The contract must contain 
certain specified provisions or others that provide at least equivalent 
care. The foreign custody manager must establish a system to monitor 
the contract and the appropriateness of continuing to maintain assets 
with the eligible foreign custodian.
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    \1\ 17 CFR 270.17f-5. All references to rules 17f-5, 17f-7, 17d-
1, or 19b-1 in this notice are to 17 CFR 270.17f-5, 17 CFR 270.17f-
7, 17 CFR 270.17d-1, and 17 CFR 270.19b-1, respectively.
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    The collection of information requirements in rule 17f-5 are 
intended to provide protection for fund assets maintained with a 
foreign bank custodian whose use is not authorized by statutory 
provisions that govern fund custody arrangements,\2\ and that is not 
subject to regulation and examination by U.S. regulators. The 
requirement that the fund board determine that it is reasonable to rely 
on each delegate is intended to ensure that the board carefully 
considers each delegate's qualifications to perform its 
responsibilities. The requirement that the delegate provide written 
reports to the board is intended to ensure that the delegate notifies 
the board of important developments concerning custody arrangements so 
that the board may exercise effective oversight. The requirement that 
the delegate agree to exercise reasonable care is intended to provide 
assurances to the fund that the delegate will properly perform its 
duties.
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    \2\ See section 17(f) of the Investment Company Act [15 U.S.C. 
80a-17(f)].
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    The requirements that the foreign custody manager determine that 
fund assets will be subject to reasonable care with the eligible 
foreign custodian and under the custody contract, and that each 
contract contain specified provisions or equivalent provisions, are 
intended to ensure that the delegate has evaluated the level of care 
provided by the custodian, that it weighs the adequacy of contractual 
provisions, and that fund assets are protected by minimal contractual 
safeguards. The requirement that the foreign custody manager establish 
a monitoring system is intended to ensure that the manager periodically 
reviews each custody arrangement and takes appropriate action if 
developing custody risks may threaten fund assets.
    The Commission's staff estimates that each year, approximately 207 
registrants \3\ could be required to make an average of one response 
per registrant under rule 17f-5, requiring approximately 2 hours of 
director time per response, to make the necessary findings concerning 
foreign custody managers. The total annual burden associated with these 
requirements of the rule would be up to approximately 414 hours (207 
registrants x 2 hours per registrant). The staff further estimates that 
during each year, approximately 15 global custodians \4\ would be 
required to make an average of 4 responses per custodian concerning the 
use of foreign custodians other than depositories. The staff estimates 
that each response would take approximately 275 hours, requiring 
approximately 1,100 total hours annually per custodian. The total 
annual burden associated with these requirements of the rule would be 
approximately 16,500 hours (15 global custodians x 1,100 hours per 
custodian). Therefore, the total annual burden of all collection of 
information requirements of rule 17f-5 is estimated to be up to 16,914 
hours (414 + 16,500). The total annual cost of burden hours is 
estimated to be $1,032,000 (414 hours x $500/hour for director time, 
plus 16,500 hours x $50/hour of professional time). Compliance with the 
collection of information requirements of the rule is necessary to 
obtain the benefit of relying on the rule's permission for funds to 
maintain their assets in foreign custodians.
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    \3\ This figure is an estimate of the number of new funds each 
year, based on data reported by funds in 2004 on Form N-1A and Form 
N-2 [17 CFR 274.101]. In practice, not all funds will use foreign 
custody managers, and the actual figure may be smaller.
    \4\ This estimate is the same used in connection with the 
adoption of the amendments to rule 17f-5 and of rule 17f-7 in 1999, 
based on staff review of custody contracts and other research. The 
number of global custodians has not changed significantly since 
1999.
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    Rule 17f-7. Rule 17f-7 permits funds to maintain their assets in 
foreign securities depositories based on conditions that reflect the 
operations and role of these depositories.\5\ Rule 17f-7 contains some 
``collection of information'' requirements. An eligible securities 
depository has to meet minimum standards for a depository. The fund or 
its investment adviser generally determines whether the depository 
complies with those requirements based on information provided by the 
fund's primary custodian (a bank that acts as global custodian). The 
depository custody arrangement has to meet certain risk limiting 
requirements. The fund can obtain indemnification or insurance 
arrangements that adequately protect the fund against custody risks. 
The fund or its investment adviser generally determines whether 
indemnification or insurance provisions are adequate. If the fund does 
not rely on indemnification or insurance, the fund's contract with its 
primary custodian is required to state that the custodian will provide 
to the fund or its investment adviser a custody risk analysis of each 
depository, monitor risks on a continuous basis, and promptly notify 
the fund or its adviser of material changes in risks. The primary 
custodian and other custodians also are required to agree to exercise 
reasonable care.
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    \5\ Custody of Investment Company Assets Outside the United 
States, Investment Company Act Release No. IC-23815 (April 29, 1999) 
[64 FR 24489 (May 6, 1999)].
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    The collection of information requirements in rule 17f-7 are 
intended to provide workable standards that protect funds from the 
risks of using securities depositories while assigning appropriate 
responsibilities to the fund's primary custodian and investment adviser 
based on their capabilities. The requirement that the depository meet 
specified minimum standards is intended to ensure that the depository 
is subject to basic safeguards deemed appropriate for all depositories. 
The requirement that the custody contract state that the fund's primary 
custodian will provide an analysis of the custody risks of depository 
arrangements, monitor the risks, and report on material changes is 
intended to provide essential information about custody risks to the 
fund's investment adviser as necessary for it to approve the continued 
use of the depository. The requirement that the primary custodian agree 
to exercise reasonable care is intended to provide assurances that its 
services and the information it provides will meet an appropriate 
standard of care. The alternative requirement that the fund obtain 
adequate indemnification or insurance against the custody risks of 
depository arrangements is intended to provide another, potentially 
less burdensome means to protect assets held in depository 
arrangements.
    The staff estimates that each of approximately 980 investment 
advisers \6\ would make an average of 4 responses annually under the 
rule to address depository compliance with minimum requirements, any 
indemnification or insurance arrangements, and reviews of risk analyses 
or notifications. The staff estimates each response would take 5 hours, 
requiring a total of approximately 20 hours for each adviser. The total 
annual burden associated with these

[[Page 36971]]

requirements of the rule would be approximately 19,600 hours (980 
advisers x 20 hours per adviser). The staff further estimates that 
during each year, each of approximately 15 global custodians would make 
an average of 4 responses to analyze custody risks and provide notice 
of any material changes to custody risk under the rule. The staff 
estimates that each response would take 500 hours, requiring 
approximately 2,000 hours annually per custodian.\7\ The total annual 
burden associated with these requirements of the new rule would be 
approximately 30,000 hours (15 custodians x 2,000 hours). Therefore, 
the staff estimates that the total annual burden associated with all 
collection of information requirements of the rule would be 49,600 
hours (19,600 + 30,000). The total annual cost of burden hours is 
estimated to be $2,480,000 (49,600 hours x $50/hour of professional 
time). The estimate of average burden hours is made solely for the 
purposes of the Paperwork Reduction Act. The estimate is not derived 
from a comprehensive or even a representative survey or study of the 
costs of Commission rules and forms. Compliance with the collection of 
information requirements of the rule is necessary to obtain the benefit 
of relying on the rule's permission for funds to maintain their assets 
in foreign custodians.
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    \6\ At the start of 2005, there were more than 36,800 investment 
company portfolios that were managed or sponsored by more than 980 
mutual fund complexes. A fund complex is a group of funds, all of 
which typically have the same adviser.
    \7\ These estimates are based on conversations with 
representatives of the fund industry and global custodians.
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    Form N-17D-1. Section 17(d) [15 U.S.C. 80a-17(d)] of the Investment 
Company Act authorizes the Commission to adopt rules that protect funds 
and their security holders from overreaching by affiliated persons when 
the fund and the affiliated person participate in any joint enterprise 
or other joint arrangement or profit-sharing plan. Rule 17d-1 under the 
Act prohibits funds and their affiliated persons from participating in 
a joint enterprise, unless an application regarding the transaction has 
been filed with and approved by the Commission. Subparagraph (d)(3) of 
the rule provides an exemption from this requirement for any loan or 
advance of credit to, or acquisition of securities or other property 
of, a small business concern, or any agreement to do any of the 
foregoing (``investments'') made by a small business investment company 
(``SBIC'') and an affiliated bank, provided that reports about the 
investments are made on forms the Commission may prescribe. Rule 17d-2 
designates Form N-17D-1 (``form'') as the form for reports required by 
rule 17d-1(3).
    SBICs and their affiliated banks use form N-17D-1 to report any 
contemporaneous investments in a small business concern. The form 
provides shareholders and persons seeking to make an informed decision 
about investing in an SBIC an opportunity to learn about transactions 
of the SBIC that have the potential for self dealing and other forms of 
overreaching by affiliated persons at the expense of shareholders.
    Form N-17D-1 requires SBICs and their affiliated banks to report 
identifying information about the small business concern and the 
affiliated bank. The report must include, among other things, the 
SBIC's and affiliated bank's outstanding investments in the small 
business concern, the use of the proceeds of the investments made 
during the reporting period, any changes in the nature and amount of 
the affiliated bank's investment, the name of any affiliated person of 
the SBIC or the affiliated bank (or any affiliated person of the 
affiliated person of the SBIC or the affiliated bank) who has any 
interest in the transactions, the basis of the affiliation, the nature 
of the interest, and the consideration the affiliated person has 
received or will receive.
    Up to five SBICs may file the form in any year.\8\ The Commission 
estimates the burden of filling out the form is approximately one hour 
per response and would likely be completed by an accountant or other 
professional. Based on past filings, the Commission estimates that no 
more than one SBIC is likely to use the form each year. The estimated 
total annual burden of filling out the form is one hour and the total 
annual cost is $53.\9\ The Commission will not keep responses on Form 
N-17D-1 confidential.
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    \8\ As of April 22, 2005, five SBICs were registered with the 
Commission.
    \9\ Commission staff estimates that the annual burden would be 
incurred by accounting professionals with an average hourly wage 
rate of $53.08 per hour. See Securities Industry Association, Report 
on Management and Professional Earnings in the Securities Industry--
2003 (2003) (reporting median salary paid to senior accountants 
outside New York).
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    Rule 19b-1. Rule 19b-1 prohibits funds from distributing long-term 
capital gains more than once every twelve months unless certain 
conditions are met. Rule 19b-1(c) permits unit investment trusts 
(``UITs'') engaged exclusively in the business of investing in certain 
eligible fixed-income securities to distribute long-term capital gains 
more than once every twelve months, if: (i) The capital gains 
distribution falls within one of several categories specified in the 
rule; and, (ii) the distribution is accompanied by a report to the unit 
holder that clearly describes the distribution as a capital gains 
distribution. The purpose of this notice requirement is to ensure that 
unit holders understand that the source of the distribution is long-
term capital gains.
    Rule 19b-1(e) permits a fund to apply for permission to distribute 
long-term capital gains more than once a year if the fund did not 
foresee the circumstances that created the need for the distribution. 
The application must set forth the pertinent facts and explain the 
circumstances that justify the distribution. An application that meets 
those requirements is deemed to be granted unless the Commission denies 
the request within 15 days after the Commission receives the 
application. The Commission uses the information required by rule 19b-
1(e) to facilitate the processing of requests from funds for 
authorization to make a distribution that would not otherwise be 
permitted by the rule.
    The staff understands that funds that file an application generally 
use outside counsel to prepare the 19b-1(e) application. The staff 
estimates that, on average, the fund's investment adviser spends 
approximately four hours to review an application. The staff estimates 
that, on average, seven funds file an application per year under this 
rule for an estimated annual collection of information burden of 28 
hours.
    There is a cost burden associated with rule 19b-1(e). As noted 
above, the staff understands that funds that file for exemption under 
rule 19b-1(e) generally use outside counsel to prepare the exemptive 
application. The staff estimates that, on average, 10 hours is required 
to prepare a rule 19b-1(e) exemptive application by outside counsel, 
including 8 hours by an associate and 2 hours by a partner. The staff 
estimates that the average cost of outside counsel preparation of the 
19b-(e) exemptive application is $3,500. An average of 7 funds file 
under 19b-1(e) for an exemptive application each year, therefore the 
staff estimates that the annual cost burden imposed by rule 19b-1(e) is 
$24,500.
    The Commission staff estimates that there is no hour burden 
associated with paragraph (c) of rule 19b-1. There is also a cost 
burden associated with rule 19b-1(c). The staff estimates that there 
are approximately 6,485 UITs. For purposes of this Paperwork Reduction 
Act analysis, the staff has assumed that each of these UITs could rely 
on rule 19b-1(c) to make capital gains distributions. The staff 
estimates that, on average, UITs rely on rule 19b-1(c)

[[Page 36972]]

once a year to make a capital gains distribution.\10\ The staff 
estimates that a UIT incurs a cost of $50, which is encompassed within 
the fee the UIT pays its trustee, to prepare a notice for a capital 
gains distribution under rule 19b-1(c). These notices require limited 
preparation, the cost of which accounts for only a small, indiscrete 
portion of the comprehensive fee charged by the trustee for its 
services to the UIT. There is no separate cost to mail the notices 
because they are mailed with the capital gains distribution. Thus, the 
staff estimates that the notice requirement imposes an annual cost on 
UITs of approximately $324,250.
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    \10\ The number of times UITs may rely on the rule to make 
capital gains distributions depends on a wide range of factors and, 
thus, can vary greatly from one year to another. A number of UITs 
are organized as grantor trusts, and therefore do not generally make 
capital gains distributions under rule 19b-1(c), or may not rely on 
rule 19b-1(c) as they do not meet the rule's requirements. Other 
UITs may distribute capital gains biannually, annually, quarterly, 
or at other intervals.
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    Based on these calculations, the total number of respondents for 
rule 19b-1 is estimated to be 6,492 (6,485 UIT portfolios + 7 funds 
filing an application under rule 19b-1(e)), the total annual hour 
burden is estimated to be 28 hours, and the total annual cost burden is 
estimated to be $348,750. These estimates of average annual burden 
hours and costs are made solely for purposes of the Paperwork Reduction 
Act. The collections of information required by 19b-1(c) and 19b-1(e) 
are necessary to obtain the benefits described above. Responses will 
not be kept confidential.
    The estimate of average burden hours is made solely for the 
purposes of the Paperwork Reduction Act, and is 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 OMB control number.
    Written comments are invited on: (a) Whether the collection of 
information is necessary for the proper performance of the functions of 
the Commission, including whether the information has practical 
utility; (b) the accuracy of the Commission's estimate of the burden of 
the collection of information; (c) ways to enhance the quality, 
utility, and clarity of the information collected; and (d) ways to 
minimize the burden of the collection of information on respondents, 
including through the use of automated collection techniques or other 
forms of information technology. Consideration will be given to 
comments and suggestions submitted in writing within 60 days of this 
publication.
    Please direct your written comments to R. Corey Booth, Director/
Chief Information Officer, Office of Information Technology, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549.

    Dated: June 17, 2005.
Jill M. Peterson,
Assistant Secretary.
[FR Doc. E5-3325 Filed 6-24-05; 8:45 am]
BILLING CODE 8010-01-P