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 ~n.An' 1 L . . JCC

& Co., 

RESPONSE OF THE OFFICE OF CHIEF COUNSEL
 

DIVISION OF INVESTMNT MAAGEMENT
 

Your letter dated July 1, 1997 requests our concurrence with
 

your interpretation of Rule 22c-1 under the Investment Company
 

Act of 1940 e" 1940 Act"). Specifically, you have asked whether a
 

registered investment company ("fund") may, in compliance" with
 

Rule 22c-1, price an order for the purchase" or sale of fund
 

shares based on the fund's net asset value per share ("NAV") next
 

computed after the order is 
 placed with a third party, when the
 

order is not transmitted to the fund until after NAV has been
 

computed. 

Facts 

Charles Schwab & Co., Inc. ("Schwab"), a registered broker-


dealer, sponsors" The Schwab Mutual Fund MarketplaceR and the
 

Schwab Mutual Fund OneSourceR Programs (the "Programs"). The
 

Programs enable customers to purchase and redeem shares of
 

participating funds (" Funds") through Schwab. Under the
 

Programs, Schwab accepts customer/ orders to purchase and redeem
 

Fund shares each business day that the New York Stock Exchange is
 

open up until 3:00 p.m. Eastern Time ("Daiiy Deadline"). Schwab
 

aggregates all Program customer orders received prior to the
 

Daily Deadline into a single omnibus purchase order and a single
 

omnibus redemption order and 
 transmits the daily orders to each
 

Fund, the Fund's transfer agent or another Fund-designated agent
 

(" Fund Agent") through accounts established in Schwab's own name
 

for the benefit of Program customers. Any Program customer
 

orders that Schwab receives after the Daily Deadline are not
 

included in the omnibus orders for that day, but instead are
 

included in the orders for the next day. i/
 

You state that, because most funds calculate their NAV at
 

4:00 p.m. Eastern Time ("Pricing Time"), Schwab's current
 

procedures for handling Program customer orders disadvantage
 

Program customers because they must place their orders with
 

Schwab an hour earlier than investors who place their orders
 

directly with the Funds, the Funds' transfer agents or Fund
 

Agents. To eliminate this disadvantage, Schwab proposes to amend
 

its existing agreements with each Fund or the Fund's transfer
 

i/ You state that Schwab usually transmits the daily orders
 

prior to the time that most Funds calculate their NAV.
 

Schwab may transmit orders after that time, however, due to
 

unforeseen circumstances such as computer system failures,
 

natural catastrophes or other emergencies, or human error.
 

You state that ~ on these rare occasions ~ the Fund, the
 

Fund's transfer agent or Fund Agent usuallý permits Schwab
 

to transmit the orders at a later specified time.
 
agent or Fund agent ("Agreements") to authorize Schwab or an
 

. entity designated by Schwab ("Sub-designee") to ac~ept Program
 

customer purchase and redemption orders for a Fund each day up
 

until the Fund's Pricing Time. 2/ Each Agreement also will
 

authorize Schwab to aggregate all Program customer orders that it
 

has accepted that day into omnibus orders, and transmit the
 

omnibus orders' to the Fund, the Fund's transfer agent or Fund
 

Agent at a later agreed upon time. 'J/ You represent that ..each
 Agreement will provide that (1) Schwab and, if applicable'~:' its 

Sub-designee,' is authorized to receive customer purchase and
 

redemption orders on the Fund's behalf for purposes of
 

Rule 22c-1¡ (2) Program customers will receive the Fund's NAV
 

next computed after they place their purchase or redemption
 

orders with Schwab or its Sub~designee¡ and (3) the Fund's board
 

of directors has approved the authorization or will ratify it
 

within a specified time 'period after the Agreement is revised or
 

becomes effective and will periodically review the
 authorization. 4/ 

You rèpresent that an independent public accountant .,;i: other 

qualified independent party will annually review Schwab's'.


internal controls and prepare a written report to Schwab
 

concerning their adequacy. You also represent that Schwab will
 

s.eek to require each Sub-designee to retain an independent
 

accountant or. other independent party to annually review the Sub-


designee's internal controls and prepare a written report to
 

Schwab and to the Sub-designee. You represent that Schwab will
 

make both its internal èontrol reports .and the Sub-designee's
 

internal control reports available to a Fund upon request.
 

You also represent that each Fund's prospectus wiii identify
 

Schwab and its Sub-designees as parties that may accept purchase
 

and redemption orders on behalf of the Fund. rnthis regard, you
 

4/ Each Agreement between Schwab and a Fund or between Schwab 

and its Sub-designee will contain procedures for Schwab or 

the Sub-designee to follow in accepting customer orders and 

transmitting them to the Fund, the Fund's transfer agent or

Fund Agent. 

- 2 ­
': : 

represent that each Agreement will require the following
 

disclosure in .a Program Fund's prospectus: (1) that the Fund has
 

authorized one or more brokers to accept on its behalf purchase
 

and redemption orders; (2) if applicable, that the brokers are
 

authorized to designate other intermediaries to accept purchase
 

and redemption orders on the Fund's behalf; (3) that the Fund
 

will be deemed to have received a purchase or redemption order
 

when an authorized broker or, if applicable, a broker's
 

authorized designee, accepts the order; and (4) that customer
 

orders will be priced at the Fund's NAV next computed after they
 

are accepted by an authorized broker or the broker's designee.
 

Analysis 

Rule 22c-1, in relevant part, provides that no fund issuing
 

redeemable securities, no person designated in the fund's
 

prospectus as authorized to sell or redeem the fund's shares, and
 

no principal underwriter of, or dealer in, the fund's shares, may
 

sell or redeem fund shares except at a price based on the current


NAV' of such' shares which is next computed after receipt ~::."a 

"tender of such security." The primary purpose of the rulë is to
 

prevent "backward pricing" (the purchase or sale of fund shares
 

at a price based upon a previously determined NAV). 2/
 

In an interpretive release published shortly after the
 

adoption of Rule 22c-1, the staff took the position that when a
 

customer transmits an order to a retail dealer~ the time of
 

receipt of the order by the retail dealer, rather than the time
 

of receipt by the fund or its unde~ritèr, is controlling for
 

purposes of da.termining the price to be received by the customer
 

under Rule 226-1: 6/ This position reco~nized that a customer
 

would have no opportunity to take advantage of recent changes\ in
 

the prices of a fund's portfolio securities if the customer
 

receives a price for fund shares that is calculated after the
 

customer placed the order. Moreover, the staff has indicated on
 

several occasions that receipt of an order by a person designated


by the fund, whether or not a dealer, would be "receipt of' a 

tender" for purposes of Rule 22c-1. 2/ You maintain that under
 

5/ Investment Company Act ReI. No. 5519 (Oct. 16, 1968). In
 

adopting Rule 22c-1, the Commission. expressed the view that
 

backward pricing could peEmit a speculator to take advantage
 

of fluctuations in the prices of the fund's portfolio
 

securities that occurred after the fund had last calculated
 

its NAV.
 

. 6/ Investment Company Act Rel. No. 5569 (Dec. 27, 1968).
 

7/	 See Letter from Allan S. Mostoff, Director, Division of 

Investment Management, Securities and Exchange Commission, 

to Robert L. Augenblick, President, Investment Company 

" - 3 ­
the proposed arrangement, "receipt of a tender" under Rule 22c-1
 

will occur at the time that Program customers place their orders


with Schwab or with a Sub-designee. '.
 

Conclusion 

We agree that customer orders placed directly with Schwab or
 its Sub-designee may be deemed to have been received by a ..Fund 

for purposes of Rule 22c-1 at the time that Schwab or itffH.Subdesignee accepts them. We therefore would not object if a
 

Program customer who places an order with Schwab or its Sub-


designee before a Fund's Pricing Time receives the price
 

calculated .as of the Pricing Time, even if the order is
 

transmitted to the Fund after the Pricing Time. You should note
 

that different facts or representations might require a different


conclusion. 

In ratifying the Agreements and in subsequent periodic
 

reviews, a Fund's board of directors should consider whether
 

Schwab has adopted and implemented internal controls reaagnably
 

designed to prevent customer orders received after the Fund's
 

Pricing Time from being aggregated with the orders received
 

before the Fund's Pricing Time. In instances where Schwab has


retained a Sub-designee, the board also should, in our view, 

consider whether Schwab has determined that the Sub-designee has
 

adopted and implemented its own adequate internal controls. A
 

board also may wish to consider whether Schwab has implemented
 

internal controls designed to minimize errors that could result
 

in late transmissions of orders to the Fund, the Fund's transfer
 

agent or Fund Agent.


~!~~

Senior Counsel
 

Institute (Feb. 9, 1973) ("service agents") i letter from
 

Solomon Friedmn, Director, Division of Corporate Regulation
 

to David Silver, General Counsel, Investment Company
 

Institute (Mar.. 24, 1970) (lldesignees" including custodian
 banks and transfer agents) . 

- 4 ­
P.82 

FROM MORGRNLEWIS D C
 87.83.1997 18:21
 

180 M Strr. N.W.
 

Washingtn, D.C. 20'6.589 Morg, Lewis
 

202.467-7o: & BockÏus LLP
 

Fax: 202-467-7176 

c a U'N S Ii LOR. SAT LAW 

LaWi'nCé P. Stadulls 

202.467.7405 

July 1, 1997 

VI HA DELIVRY
 

./ 

John V. O'Hanon, Esq. 

Assistant Chief Counsel 

Division of 
 Investment Management 

Securities and Exchange Commission 

450 Fifth Street, NW 

Washington, D.C. 20549 

Re: Chatles Sch1pab & Co., Inc.
 

Dear Mr. Q'Hanon: 

We are wrting to åsk that the staff concur with our view that, under Investment Company Act 

of 1940 ("1940 Act") Rule 22c-1, investors may purchase or redeem mutual fund shaes 

through certain brokerage programs ("Programs")! sponsored by Charles Schwab & Co., Inc.. 

("Schwab") at the fud's net asset value per share CCNAV') next computed afer the inv~stor's
 

order is placed with Schwab or an entity designted by Schwab ("Sub-Designee"), even though 

Schwab may not transmit the order to the fund, the fud's transfer agent or another fund~ 

designated agent until afer the NA V ius been computed. We believe ths practice fully 

complies with Rule 22c-l IS terms and underlyi policies, as well as relevant SEC and SEe staf 

positions. 

We understand. however, th there may be 
 some industI confsion concernng the application of Rule 22c- i to funds parcipating in the Programs Or to simlar types of. arangements offered 

by .other brokers. Schwab ha asked us to submit tlus request to help resolve the matter. 

11 The two PrograI are the Schwab Mutual Fund Marketplac~ and the Schwab Mutual
 

Fund QneSource~ Programs. Schwab prevously has obtained staff no-action and 

interpretive relief concerning the Programs under 1940 Act Section 22( d). See Charles 

Schwab & Co., Inc. (Aug. 6, 1992, June 30, 1987, Feb. 2, 1987, and Feb. 8, 1982). 

UA02A1265a6_ , 

! .--.. . 

Philadelphl¡ WashinglD New Yorl( Los Angeles MIami Harrisburg Princetor lDOf Bri=is Fr¡rikfur ¡- oko
 
P.83 FRoM MORGANLEWIS 0 C
 87.83.1997 18:22
 

',' ,1'.-


Motg Le
 

John V. O'Hanlon & Bock lL
 

July 1, 1997
 

Page 2 

I. BACKGROUN
 

Schwab is a registered bi:oker~dealer and a member of 
 the National Association of'"Secunties
 

Dealers, Tnc. Tn addition to providing traditional discount brokerage seÍ'ces, Schwab sponsors 

the Programs, which enable customers to purchase and redeem shares of 
 paricipating funds
 

("FundsU) through Schwab. Schwab's current procedures for hadlig Program customer 

. purchase and redemption orders generally are discussed below. 

Schwab accepts Program customer orders to purchase and redeem Fund shares each business 

day tht the New York Stock Exchange is open ("Work Day") up until 
 3 :00 p.m. Easern Time 

("Daily Deadline"), an hour before the net asset values (NA Vs) for most Program Funds are calculated ("Pricing Time"). .-

Schwab aggregates all Program customer orders it has accepted on each Work Dåyinto a single 

omnbus purchase order ("Purchase Order") and a single omnbus redemption order 

("Redemption, Ordet') (collectively, the "Daily Orders") and transmits the Daily Orders to the 

Fund. the Fund's tranfer agent C'T AU) or another Fund-designated agent ("Fund Agent")!
 

through accounts it has established with the Fund, TA or Fund Agent in Schwab's own name 

for the benefit of Program customers. 
 Any customer orders that Schwab receives after the 

Daily Deadlie are riot included in the Daiy Orders for that Work Day but, intead, are included 

in the Daily Orders for the next Work Day. 

Under normal circumstances, Schwab tranmits the Daily Orders to the Fund, TA or Fund 

Agent before the Fulld's Pncing Time. However, due to unforeseen circumstances, such as 

computer system faiures, natural catastrophes or other emergencies or huma error. Schwab 

may not be able to transmit the Daly Orders un~ later ("Afer Hours Transnuttal"). 

On these rare octasions, the Fund, TA or Fund Agent usually. 
 instcts Schwab to tranmit the
 

Daiy Orders at a later specifed time wmCih the Fund, TA or Fund Agent has determed wi be 

in sufcient time so that (1) the impact of Schwab's order on the Fund's net sales or
 

y For exaiple~ cert Funds whose shares are purchased and redeemed through the
 

Programs parcipate in Fund/SERV. a centralized and automatëd system for mutual 

fund purchases and redemptions. Under Fund/SERV, the National Securities Cleag 

Corporation ("NSeen) collects mutual fud purchase and redemption orders from 

member broker-dealers and other financial institutions each day for delivery to the Funds 

or the T As. NSCC then tranmits the orders to the Funds or the -T As in an electronic 

format. 

\lA02AI26506.1 " 
P.84 

FROM MORGRNLEWIS D C
 87.83.1997 18:22
 

I: . 

Morg, ~ JOM V. Q'Hanlon & BockÏs LLP 

July 1, 1997 

Page 3
 

redemptions can be known and taken into account by the Fund's portfolio manager in deciding 

the next day's portfolio transactions and (2) the transmission delay will not otherv~e adversely' 

afec the Fund or its shareholders, e.g. by dilution of other shareholder's interests -fn the Fund 

("Final Deadline"). 

There have been intances where a Fund. TA or Fund Agent has refused to accept an Afer 

Hours Transmittal from Schwab. Nonetheless, Program customers whose orders Schwab 

accepted durig a Fund's Work Day before the Daily Deadline have received a price equal to 

the Fund)s NAVas ofthat Work Day's Pricing Time, and Schwab has had to Cover the 

tranaction at a priêe equaJ to the Fund's NA V at t~e next Work Day's Pricing Time. 

ll. PROPOSAL
 

A. Revised Ora.er Acceptance Procedures
 

Schwab's current procedures for acceptig Program customer orders to purchase and redeem
 

Fund shaes disadvantage Program Customers because Program customers must place their 

orders with Schwab an hour earlier tha other investors who place their orders directly with the . 

Fund, TA or Fund Agent. To avoid this disadvantage, Schwab proposes to amend its existing 

agreements with each Program Fund or the Fund's servce provider ("Agreements"). Under 

each Agreement, the Fund or the Fund's servce provider wil authonze Schwab to accept 

Program 'customer purchase and redemption orders for a Fund each Work Day up until the 

Funds Pricing Tìme. The Agreement wil then authonze Schwab to aggegate aU Progra 

customer orders it has accepted that Work Day into the Daiy Orders and transmit the Daily 

Orders to the Fund, TA or Fund Agent at a later agreed upon time. 

The Agreement will further provide tht, under nonnal circumsances, Schwab wil transmit the 

Daily Orders by 
 8:00 p.m. Eastern Time, "J or Some other specifed time later that evening. On 

rare occa,sioDSl due to unoreseen circumstances discussed abovel Schwab will notif the Fund 

tha.t it is unle to mee the speced tie, and the Fund wil make a reasonable accmmodation 

to enale Schwab to transmi.t the Daily Orders by the Fin Deadline. 

'J Ths is consistent with industr practice. For ex:ample, we understand that FundlSERV
 

member broker-dealers and other fiancial institutions tyicaly forward mutual fund 

purchase and redemption orders they have accepted during a Fundls Work Day to 

NSCC by 7;00 p.m., Eastern Time, and then NSCC transmits rhe orders to the Funds or 

the TAs by 8:00 p.m. Eastern Time. 

IJA.2A126506.1 
P.05 

FROM MORGRNLEWIS D C
 07.83.1997 18:23
 

." 

John V. O'Hanon Motg, Les

& Bockius u.
 July 1, 1997 

Page 4 

B. Sub-Designee Proposals
 

Schwab also proposes to designate one or more Sub-Designees to accept Program customer 

purchasi. and redemption orders on behaf of Schwab and, in turn on behalf of the Funds. To 

do ttis, Schwab would enter into a separate written agreement with each Sub-Designee C'SubDesignee Agreement"). The Sub-Designee would be authorized to accpt Fund purchase and 

redemption orders from its customers each Work Day up until the Fundls Pricing Time. The 

Sub-Designee would then transnut the customer orders to Schwab ("Sub-Designee Orders") at 

an agreed upon time (the "Sub-Designees Daiy Deadlie") and Schwab, in tuIA would 

aggregate them Ì!to the Daiy Orders it transmits to the Fund, T A or Fund Agent, as discussed 

above. , 

. =.-,.. "=.-,.. m. ISSUE
 

Rule 22c-l prohibits a fund,. 
 the fund's principal underwter, a dealer in the fund's shaes or
 any person designated in the fund) prospectus as 'authorized to sell or redeem shares, from
 

seIlng or redeeniing 'fud shares "except at a price based on the current net asset value of such 

security wmch is next computed afer receipt of a tender of such security for redemption or of 

an order to purchase-or sell such securtY." Schwab and the Sub-Designees will be described, 

either generically or specifcally, in the Funds' prospectuses as entities authorized to accept 

orders to sell and red.eem Fund shares. Therefore, we believe that "receipt of a tendet' will 

occr at the time Progr customers place their orders with Schwab or. for those customer
 

orders placed. with a Sub-Designee. at the time they are placed with the Sub-Designee.
 

However. we are r~questing the stafs conftion of our view to res~lve any uncertaity.
 

IV. ANALYSIS
 

A. Rule Text
 

By its ters. Rue 22c-l requies (1) a person described as authonzed to sell Or redeem a fud's
 

shares (2) in the fud's prospects (3) to sell or redeem the shaes at a price equal to the fud's 

NA V next computed afer receipt of an order. We believe the arrangements deseribed in this 

letter wi :tlly comply with each element of 


the role. 

UA02A/26S06. , 
P.86 

FROM MORGRHLEWIS D C
 e7.83.1997 18:23
 

Morgl. John V. O'Hanlon & Bockius LLP
 

July 1, 1997 

Page 5
 

1. Authorization 

Fìrst, Schwab and the Sub.Designees will be authorized to sell or redeem the Fuñds' shares. 

Schwab will have a formal Agreemènt with each Fund or a Fund's servce provider authonzing 

Schwab or Schwab's Sub-Designees to sell or redeem shares purchased thIough the Programs 

with specific provisions governing Schwab.s obligations in connection with such sales and 

redemptions. 

Each Agreement will provide or represent: (1) that Schwab and, if applicable, Schwab's SubDesignees, are authonzed to receive Program customer purchase and redemption orders on the 

. Funds behal for Rule 22c-l pricing puroses (the "Authorization")~ (2) that, as.~ result of 
 the Authoriation, Program customers will receive the Fund.s NA V next computed ål~r. they place' 

their purchase or redemption orders with Schwab or, in the case of Sub-Designeë,::àfer they 

place their orders with the Sub-Designees; (3) that the Fund's board of directors has approved 

the Authoriation or will rati it within a specified time period afer the Agreement is revised or
 

becomes effectve (the "Ratification"), and wi thereafer periodically review the Authoriation. 

It is, of course, the responsibilty of each furid's board of directors to determe the factors it 

should consider in maldng the Ratification and subsequent periodic reviews. A board may wish 

to consider. among other thigs, the followig crteria ("Internal Controls"): (1) that Schwab 

has adopted and implemented internal controls reasonably designed to prevent customer orders 

received on a Work Day afer the Fund's Pncing Time from being aggregated with the Daiy 

Orders for that Work Day; and (2) that Sc4wab has established and implemented internal 

controls designed to rnze emergencies or errors that could result in late transiissions of 

Daiy Orders to the Fund, TA or Fund Agent. In those instances where Schwab has retaied a
 

Sub-Design.ee, the Board also may wish to consider whether Schwab has determined that the
 

Sub.Desìgnee has its own adequate Internal Controls.
 

To assist the Board in considerig the foregoing, Schwab wi follòw the procedures described 

below or such other pro~ures mutualy acceptable to Schwab and a Fund. Schwab's
 

independent public accountant or another quaed independent par wi anualy review
 

Schwab's Internal Controls and prepare a wrtten report concerng their adequacy ("Internal
 

.controls Reort"). The Internal Controls Report will identif any noted deficiencies and any
 

corrective actions taken to address the deficiencies. Schwab wi make the Internal Controls 

Report avaiable to the Fund upon request. Schwab also wil seek to require each Sub-Designee
 

to retai an independent accountat or other independent pary to annually review the Sub-


Designee's Intern Controls and prepare an Internal Control Report ("Sub-Designee Intern 

I.A02A/26S06.1 
.' 

Morg, Le John V. O'Hanon & Bockus UJ' 

July 1, 1997 

Page 6
 

Control Report"). Schwab will make each Sub-Designee's Internal Control Report available to 

the Fund upon request. 

2. Prospectus Disclosure
 

Each Fund's prospectus will identify Schwab and its Sub-Designees (either specifically or 

generically) as parties that may accept purchae and'redemption orders on behalf ofthe Fund. 

In this regard. each Agreement will require the following prospectus disclosures: (1) that the 

Fund has 
 authoried one or more brokers to accept on its behalf purchase and redemption . 

orders that are in "good form"; (2) if applicable, that the brokers are authorized to designate 

other intermediaries to accept purchase and redemption orders on the Fund's behalf; (3) that 

the Fund will 
 be deemed to have received a purchase or redemption order when an ~ '!~thorized 

broker or, if 
 applicable, a broker's authorized designee,accepts the order; and (4) diat:'.cusromer 

orders will be priced at the Fund's NA V next computed afer they are accepted by an 

authorized broker or the broker's designee.
 

3, Pricing
 

Finaly, a Fund's shares wil be sold .and redeemed at a price equal to the Fund's NA V next 

computed afer Schwab or its Sub-Designee accepts an order. Each Agreement between . 

Schwab and a Program Fund or the Fund's servce provider, and each Sub-Designee Agreement 

between Schwab and a Sub-Designee will contain procedures for Schwab or the Sub-Designee 

to follow in accepting customer orders and transmitting them to the Fund. T A or Fund Agent. 

In most cases, Schwab anticipates that these procedures will require it to aggregate all the 

orders accepted each Work Day up uritil the Fund's Pncing Time by Schwab or its SubDesignees into the Daily Orders. Schwab will then transmit the Daily Orders to the Fund, T A 

or Fund Agent between 7:00 and 8:00 p.m., Eastern Time, or later that evening. In any event, 

when unforseen circumstances arise, the procedures wil require Schwab to transmit the Daily 

Orders by the FinalDeadline. 

B. ." SEÇ and SEe Staff Positions
 

The pricing methodology discussed in this Letter is consistent with SEe and SEe staff positions 

under Rule 22c-l. In 1968, the SEe published an interpretive release (the" i 968 Release") 

stating the staf s view that where customer orders arc placed with a retail dealer authorized to 

sell and redeem the fund's shares "the time of receipt of the order by the retail dealer is 

UA02Al26506. i 
P.87 

FROM MORGRNLEWIS 0 C
 87.83.1997 18:23
 

JOM V. O'Hanlon Morg'Le
 

July 1, 1997 & Bockius LQ
 

Page 7 

controllg" for Rule 22c-1 pricing purposes"! Consequently, customer purchase and
 

redemption orders must receivë a price equal to the fund's NA V next computed ater the 

. customer order is accepted by 
 the retail dealer and not when the fund's principal underwriter receives the order from the retail dealer. However, the 1968 Release also states tht "¡tis the 

responsibilty of 
 the retai dealer to establish procedures which would assure that Upon his receipt of a customer's order it will be transnutted so that it wil be received by the underwter 

before the time when the pnce applicable to the customer's order expires. JJ 

The staf revised the 1968 Release in a 1973 letter to the Investment Company Institute (the
 

"1973 Letter")ß The 1973 Letter directly addresses situations such as Schwab's where "orders 

are forwarded by dealers or investors diectly to a 'seiv.ce agent' and there pmcessed on behalf 

of the dealers. thus by-passing the dealers' back offces." It concludes that the ståt'L."would 

have no objection to such orders being considered as having been received for putõses of 


Rule at the time that they are received by the · seMee agent,' provided that such arangements 

are fully disclosed 
 in the mutual fund's.prospectus." . the

Finaly, in 1~85. the SEC claried the stafPs views concernng the application ofRuIe 22c~1 to
 

situations where a fund or the fud's designee is not able to 


unforseen emergencies (e.g., 
 price CUstonier orders due to a snow stonn and unrelated operational problems (e.g., a compuI-er system fai1.e at the fund's transfer agent) ("'1985 Release").!! The 1985 Release 

states that under these circumstances, a "fund is expected to make eveiy effort to price investor 

orders for purchase and redemption on the day the order is actully reGeived, and to establish 

procedures so as to be reaonably able. . . to ensure that investor orders can be given the price 

that, but for the emergency, would have been computed on the day of actu receipt." The 

1985 Release fuher states, however, that where "opertiona problems unrelated to an 

emergency closing result in tranactions being processc;d'on an 'as of basis, the adviser. transfer 

agent or another responsible par may be liable to the fund for any resulting dilution." 

The pricing methodology discussed. 


in this letter is fully consistent with each of
 First, and most importt the Funds' prospecses wi identif Schwab and Schwa's Sub-


Designees (either specficaly or genencaly) as paries thafmay accept Program customer
 

these positions.

purchase and redemption orders on their behalf Therefore. consistent with the 1973 Letter, 

~I Investment Company Act Releae No. 5569 (Dec. 27, 1968).
 

~ Iflestment Compay Institute (June 13, 1973). 

§l Investment Company Act Release No. 14559 (June 6, 1985).
 I

\lA.OZA/26506.1 

.' 
P.08 

r'ROM MORGRNLEWIS D. C 07.83.1997 10:24
 

"; I \ 

Morg Le John V. O'Hanon & Bock ID 

July 1. 1.997
 

Page g
 

customer orders placed directly with Schwab wil be deemed to have been received for Rule' .
 

22c-l purposes at the tie Schwab accepts them. Similarly. orders placed with a Sub-Designee
 

wil be deemed to have been received when the Sub-Designee accepts them.
 

Secnd. although Schwab acts as abrokedn connection with the Programs and is not a retail 

dealer described in the 1968 Release~ each Agreement wi contain procedures to ensure tht the
 

Daily Orders for each WorkDay are trånsmitted to the Fund or 
 the TA before the Final Deadlie when the 
 price applicable to the Daiy Orders expires. Finally, to deal with possible 

problems resulting from Paiy Orders tranmitted afer the applicable price expires. Schwab has 

established mechanisms to make sure customers whose orders ithas accepted are made whole. 

C. Underlying Policies
 

The order hadling procedures discussed in this letter are 
 consistent with the policies underlyig Rule 220-1. The SEe release adopting the rue states that one of its purposes is to eliminate 

any share value dilution resulting from (1) the sale of shares at a pnce below their current NA V; 

or (2) the redemption of shares at a price above their NA V.Y The earlier situation could arise 

where a fund's shares are sold for a specified time period at a price based on a previously 

determed NA V. This situation could pennta potential investor to take advantage of an 

upswig in the market and the resulting increase in the fund's NA V by purchasing' 


the shares at
 a price that does not reflect the increase, causing a dilution in the value of previously 

outstanding shares. ..
 

Rule 22c-l's adopting release also states that the rue was intended to address certain practices, 

aside from diution, that could disadvantage existig shareholders: . 

The Comnssion believes that the practice of sellng secrities for a certai 

period o(time. at a price based upon a previously established net asset value, 

encourages speclative tradin practices wmch so compromise regiered 

investent companes as to be unfair to the holders of 
 their outsanding secries. Ths practice allows speculators to buy large blocks of such securities 

under cicustances where the net asset value of the securities has increased but 

where the increase in value is not refle,?ted in the price. The speclators hold 

11 Investent Company Act Release No. 8429 (Oct. 16. 1968). 

UA02A/26506.1 

.. 
FRO~~MORGANLEWIS 0 C
 87.83.1997 18:.24 P.B9 

. ., 1
 

John V. O'Ranon 

July 1, 1997 Morg, l. 

Page 9 . & &cks r.IJ 

I. 

such secwines until the nei net asset value is deterned and then redee th", 

a.t large profits.lI .
 

The proedur dised in ths letter do not raie either ofthe'e Concers si Pud shar 

ar not sold and rodeèed at a P~ousJy deterined NA V. On the contr, ail Proll
 

CusODler reve a Fu's NA V nOJ coniuted afer their order ar accepted by Schwab or, 

where th order .. plaed wi a Sub-Desig... af the Sub-Desgnee accis them
 

V. CONCLUSION
 

W. believe the furegoing arangements ar fuy Consisent with Rule 22 I 's le_ and
 

underyi p'olicies as we 


as SEe an SEe st positions. an ask tha th: ~t.li1 iSSUe a
 conciirng wi our 
 view. '",:: letter Please oall DIe if you have an questions or CODiens concerg this matter. We would 

apprecat a prompt respousc 10 our request in ligh of its importance to the mutual fund 

industryf 

Sincerely, 'J~~.~ 

Lawrence P. StaduIis 

cc; Nancy A Petanto
 

Vice President and Associate General Counsel 

Charles Schwab &. Co.. Inc. 

Kathr B. McGrath
 

Morgan Lews & Bockius LLP 

B/ ld. 

IJAOZA/26506.1