• • • • • 

• 

• • 

• 

• • 

• 

• 

• 

• 

• 

• 

• 

• 

19986 '. 

(v) Alternate procedure for flling Declaration-(D Scope. An alternate proce­ dure 1 for 1illng Declarations covering general license shipments (other than 

temporary exPorts made under the provi­ sions of General License GTE: § 371.22 of Chapter II-Securities and Exchange
 

this subchapter) via. aircraft or vessel to Commission
 

destinations in Country Group T, V, or [Rele'ases Nos. 33-'5118, 34:-9046, 35--16940,
 

X is established, under which such a 39,-288, IC4l297}
 

Declaration may be delivered to the ex- . PART ,20o-0RGANIZATION; CON..
 

porting carrier or his shippilig agent at 

the port of expOrt, or to a domestic airUne' at or near the point of or1lrtn of the 

cargo, without first'having been authenticated by the customs office. 

PART 387-ENFORCEMENT 

In § 387.11, paragraph (c) is am.ended 

to read as follows: 

§ 387.11 Recordkeeping. 

(e) Records to be kept. The records 

to be kept pursuant to this § 38'1.11 shall 

inclUde memoranda, notes, corresPondence, books, export conkol documents,' 

and other written matter pertaining to 

the transactions described in paragraph 

(a) of this section, which may be made or obtained by a person described in paragraph (b) of this section. In addition to 

the records required to be kept by this 

§ 38'1.11, the provisions of §§ 368.2, 

371.22, 372.1, 372.5, 372.6, 373.3, 373.4, 

373.5, 373.6, 373.7, 3~3.8, 374.7, 376.8, 

376.10, 378.2, 379.4, 386.3, and 386.6 of 

the Export Control RegtiIations of this 

subchapter require certain records to be 

made and kept by persoils in the United 

states or abroad in connection with ex­ port' transactions. The revocation or revision of any such provision of the 

Export Control Regulations which re­ quires the making and keeping of records 

shall not be retroe,ctive in effect unless 

specifically provided and shall not affect 

the original re<Iuirement to keep such 

records for the prescrIbed period. 

(F.R. Doc. 70-17590: Filed, Dec. 30, 1970: 

8:49 a.m.} 

1The lI1ternate procedure does not apply when an inland sbJpper elects to have h1s 

Declaration authenticated under the port. or-orIgin procedure set forth in § 386.8. 

2For purposes of thls regulation an "exporting carrier" Is defined as the office of 

either a steamshlp Une or an airline at the 

port of export, or the shlpplI!C agent of a steamsbJp line at the port 01. export. A "domestic alrUne" Is one that (a) holds a cer­ t11lcate 01. publlc convenience and necessIty Issued by the CIvil Aeronautics Board for 

scheduled servke pursuant to section 401 (d) 

(1) or 401 (d) (2) of the Federal Aviation Act 

of 1958, as amended (49 U.S.C. 1371), and (b) carries cargo to a port or export I.or transfer 

to lin international 1llgbt or the same or another alrUne. 

RULES AND REGULATIONS 

Title 17-COMMODITY AND
 

SECURITIES EXCHANGES
 

DUCT AND' ETHICS; AND INFORMATION AND REQUESTS 

Assignment of Functions fo Director 

of Division of Corporation Finance 

The Securities and Exchange CoIDlDis~

sion has amended § 200.18 of Title 17 of 

the Code of Federal Regulations. Th1s 

section relates to the assignment of func~

tIon to the Director of the Commission's 

Division of Corporation Finance. The 

amendment authorlzes that Division to 

1nstitute injunctive proceedings arising under sections 12, 13, and 15(ci) of the 

Securities Exchange Act of 1934 wIth the 

General Counsel retaining sUpervision over civlllltigation. This.has been done 

because it is belieVed that the Division of 

CorPoration Finance by reason of its famWarIty with the facts involved in a par­ ticular case is in a position to proceed exPeditiously and efnciently with the institution and prosecution of injunctive proceedings. The cha1'1ge will also serve to lighten, somewhat, the workload of the 

Office of General Cotiilsel. Section 200.18 

has also been further amended to clarify the Division's functions with reference 

to sections 12(g), 14(c), and 15(c) of the 

Act. 

The Commission reemphasizes the ne­ cessity for timely compliance by issuers 

and others with the periodic reporting requirements of the Securities Exchange 

Act. 

Commission action. Section 200.18 of 

Chapter IIof Title 17 of the Code of Federal Regulations is hereby amended as follows: 

§ 200.18 Director of the Division of 

Corporation Finance. 

(b) All matters, except those pertaining to investment companies registered under the IIlvestment Company Act of 

1940, alising under the Securities Exchange Act-oY 1934 in connection with: 

(1) The registration of securities pur~

Stl~~)t t~;t:~~~~ation and processln~ of periodic reports filed pUrsuant to sec­ tiona 13 and 15(d). 

. (3) The examination and processing of proXy soliciting material flled pursuant 

(4), and 15(d) and the deternili1ntlon of 

whether the avallable evidence supporw the allegationsIn thoproposed cOlnplahlt, (c) All matters relat1n~ to tho 01:­

aminatlon and processlna of stntements

of beneficial owner.ship of securltlcil nnd

changes in such ownership fllcd undor 

section 16(e.) of the Secur1t1es Exolianao 

Act of 193t, sectIon 1'1<0.) of tho Pub. 

lic utility Holding Company Act of 1036 

and section 30m of tho Investment 

Company Act of 1940. 

(d> The exatnbiatlon and processJriC' of proxy and :In!ormntion mnterlnl1110d 

under the PUblic Utility Holdlnff comPall.V Act of 1935Jlnd subject to ReffU}l\­ tlon 14A (sections 240.1411-1 to 240.141\" 

12 of this chapter) or RecuIatlon 140 

(sections 240.140-1 to 240.14c-7 of this 

chapter) issued under tho Scourltle:l 

E."change Act of1934, 

(e) All matters, except those pertatning to investment companies rcttlstorcd

under the Invesbnent Company Allt of 

1940, arising under tile Trust Indenturo 

Act of 1939. 

The Commission 11nds that tho forogoing amendtnel1t involves tnntt.erll of 

agency organization; procedure or prnll­ tice and that notice and procedure pur. 

suant to 5 u,S.C. 553 aro not rc<tU1red, 

By the Comml.."Slon, December 21,1070, 

[sEALl OnvAL L. DiJBoIS,

Secrctaru, 

(F.R. Doc. '10-1'16581 Filed, Dca. 3D, ID70; 

8:46 a.m.] 

[Releases Noo. 40-6295, 33-5120, 34-D04.D, 

AS-118] 

PART 211-INTERP~ETATIVE RE. 

LEASES RELATING TO ACCOUNTING MATTERS (ACCOUNTING 

SERIES RELEASJ:S) 

PART 231-INTERPRETATIVE RELEASES· RELATING TO TfiE SECURI~

TIES ACT OF 1933 AND RULES AND 

REGVLAT]ONS THEREUNDER 

PART 241-INTERPRETATIVE RE~

. LEASES RELATING TO THE SECURITIES EXCHANGE: ACT OF 1934 AND RUL~S AND REGULATIONS THEREUNDER 

PART 271-INTERPRETATIVE RELEASES RELATING TO THE INVI:STMENT COMPANY ACt OF 1~40 AND RULES AND nEGULATIONS 

THEREUNDER 

Accounting for Investment Securltlos 

to section 14(a) and information rna- ,by Jzegisfered Invoshncnt Companlos 

terlal filed pursuant to section 14(e). 

(4) Thedenialorsuapens1on,pursuant

to section 19(a) (2), of registration of 

securities registered on national securities exchanges pursuant to section 12Cb)

arising from failure to comply with the 

reporting provisions of the Act. 

(5) The institution and prosecution of 

administrative and injunctive proceed­ ings arising under sections 12, 13, 15(c) 

,The Securities and ExchaD~l' Commfssion today announced the publ1cntion or 

its views relating to some of tho mOl'O 

important questions concernJOlt tho no. counting by registered l1Westment com­ panies for investment securities in th~ir

financial statements and in the perJodl0 

computations of net asset value for {·ho

purpose of pricing their shares. Tho llU~Stions relate both to the amounts I\t whIch 

FEDERAL ItEGISTER, VOL. 35, NO. 253-THURSDAY, DECEMBER 31, 1970 
investment securities should be carried 

and to the circumstances under which 

individual securities may be include_I! 

among the assets. This release discusses 

certain "accounting matterS in order to 

give additional guidance to the mlUlagement of investment companies, as well as 

certain related auditing. procedures which are considered appropriate for the 

guidance of independent accountants. A 

release was issued by the COmmJssion. on October 21, 1969 1 on the specific subject of the problems relating to so-called 

"restricted securities," i.e., those which 

must be registered under section 5 ofthe 

Securities Act of 1933 prior to public . sales, and the discussion of valuation 

herein does not alter any of the special Considerations applicable to such securities as discussedin that release. 

The financial statements of registered investment companies appearing in reg­ istration statements, proxy statements, 

and annual reports filed with the COmmission are governed by various provi­ sions of the Investment Company Act of 

1940 (the "Act"). the rules thereunder, 

and by Regulation S-X. Article 6 .(17 

CF.R 210.6) of which sets forth accounting rules applicable to such companies. 

While Regulation S-X does not by its 

terms apply to periodic reports to stockholders. section 30(d) of the Act provides that such reports "shall not be misleading in any material respect in the light of 

the reports" <including annual reports) required to be filed under section 30 (a)

and .(b). To the extent that any provisionsin aninvestment companY's articles 

of incor:Poration, trust indenture or other 

governing legal instruments specify ac­ counting procedures inconsistent with 

those required by Re~tion S-x, the 

latter must be followed in accordance 

with Rule 6-02-1 (17 CFR 210.6-02-1)

thereof. 

Inclusion of securities in the port/oUo. 

.The statement of assets and liabilities of a registered investment company com­ prises. for the most part, not only investments iIi securities which are held by a custodian or are on hand, but also fre-' 

quently includes securities as to which 

contracts to purchase have been entered

into but which have not been. received. 

Securities held by a custodian or on hand 

that have been contracted to be sold are excluded from the investments in such 

statement. In. the ordinary transaction 

through a. broker, recording the transaetiot!" on tIm date the broker advises the 

inyestment company that the securities 

have been purchased or sold (the "trade 

date"), rather than when delivery is 

made or due (the "settlement date"), is 

the established and acceptable practice in investment company accounting. 

In the case of purchases or sales of 

securities other than in the USUal brokerage transactions, the date on which 

• Investment Company Act Release No. 

584'1; Accounting Serles Release No. '113. See 

also a supplementary release 1ssued on Apr. 13, 19'10. Investment Company Act Release No•. 6026; Accounting Serles Release 

No. 116. Nom: Letter to the AmerIcan Instltute or Certi1ied PubUc Accountants, attachmentA 1lled as part of the orIginal document. 

".

RULES AND REGULATIONS 

the investment company obtaIns nn en­ forceable right to demand the securities or the payment therefor-the dnte the 

transactionshould be recorded-Is some­ times dimcult t<l determine. The consIderations involved in dC!termlnin~ such 

transaction date nre s1Dillnr t<l those discussed at page 3 of the aforementioned 

release on restricted securltles. When a. 

question arises as t<l the date an cn!oreeable right is obtalDed by the irivestment 

company, an opInIon of legnl counsel as 

to when the right occurred should nor­ nially be obtainedby theCOmpllny'smm­ agement and made avnlIable to the independent accCiuntant. Such an opInIon should be in wiitfug, and a copy should 

be mcluded in the accountant's v,'orkiog 

papers. 

Where the propriety or valldity of an investment in a security by an in\·cst.,. 

ment company is questionable because of 

particuInr pro\,isions of the Act (or State 

law, or the company's in\'cstment polley or other representatIons as stated in its 

filings with the Cottunlsslon. or Iczal 

obligations in respect of II. contract or transaction, 1I. written opinion of legal counsel should also be obtaliled by the 

company's management, ma'de llvallnble 

to the independent account.:lnt. and a.. 

copy inclUded in the workJng papers. U 

the questions of propriety or vnlJdity are not satisfactorIly resoh'cd, the circumstances of the investment should be 

dIsclosed in the financIal statements or notes thereto. 

Securities held by the comp:my or its 

custodian should be substantlnted by the 

company's iIidependei1t accountant in 

the coUrse of an audit by inspection or such securities or by obtaining conflrJDation from a custodian which mnlntalns 

the securities in custody pursuant to 

clause (l) of section 17(f) o! the Act. 

When securitIes contracted to be pur­ chased but not yet received arc iJicllided 

in the statement of assets and llnbWtfes, 

confirmation of the contI'actto purchase should be obtained from the bank, 

broker, or other perSon responsIble for 

the deUvery of such securities. Where 

satisfactory confirmatlon has been re­ ceived, audit procedures normnlly need 

not be extended to obtain evidence of 

subsequent receipt of the securities by the company or its custodian unless 

additional substantlation is consIdered 

necessary by the independent accountant undettSe circumstances. Where satisfactory confirmation has not been 

received, subsequent receJpt of such se­ curities should be sUbstnntfntcd by other 

appropriate procedures.

In accordance With section 30(e) of 

the Act, the certificate of the company's independent accountant should inclUde n. 

brief statement concerning the substantiation of securitIes owned. Except for 

securities contract~d to be purchased but 

not received, the certlficntc should state 

that the securltfes were either inspected by the independent accountant or, where 

the coinpllIlY'S securities were maintained in cust.ody pursuant to clause (1) . 

of section 17(f) of the Act, were con­ firmed to him by the custodlan. In the case of seeurltles contrncted to be pur­ chased but not received by the company 

1998·1 

or its custodian, reference should be 

made to confirmation by banks, brokers•. or others or to alternative procedures. as 

appropriate in the circumstances. 

Valuation of seCUrities. Under Rule 

6-tJ2--6 <17 CFR 210,6-02-6) of Regulation .S-X, the statements of assetslUid 

IlnbWties or open-end investment com­ p:m1es must reneet an a..<:sets at value, 

showing cost parenthetically, while 

closC<l-end compames may elect to USe 

either thls basis or to reflect all assets 

nt cost, showing value parentheticallY. "Vnluo" is deJlned in section 2(a) (39) 

of the Act. For PurPoses of det~

the aniounts at which securities and 

other a..~t!ts are earned in the statements of assets and llabllitiesincltlded 

in nnnunl and other reports and in 

registration statements flIed by investment companies, "valUe" is defined in 

pertinent part: as: "0> With respect to 

securities :for which market quotations 

are readily aVailable. the m~ket value 

of such securities: and 01) with respect 

to other securities and assets, fair value as determined in sood faith by the board 

of directors • • .," '1'hIs definition is 

also used inRule 2a-4 (17 cPR 270.2a-4)

under the Act as the required b3.sis for 

compuUng periodically the current net 

asset \'aIue of redeemable securities of 

investment companies for the purpose of 

pricing their shares. 

In some circumstances value can be 

determined fairly in more than ona way. Renee, the standards set forth below 

should be considered as guidelines. one or more of which may be appropriate 

in the clrewnstances of a partiCular case. These standards should be fonowed. and 

a compaiJy's stated valuation polici:.s 

should be consistent with. them. AnY 

vnrintlon from the standards should be 

disclosed in the ilnandal statements or notes thereto even though the variation 

is in accordance with the company's stated vnIuation polley. In addition. any 

deviation from a stated Valuation poliey, whether or not in conformity with the 

standnrds, should be dIsclosed in the 

1lnancIll1 statements or notes thereto. 

Securities listed or traded on a national securities exclla.nge. Ordinaril~, little 

difilculty sbould be eA"perienced in valuiDg securltf~ IJsted or traded on one or morc nntlonal securities exchanges, sfuce 

quotations of completed transactions are 

pubIIshed dally. If a security was traded on the valuation date, the last quoted sale prico generally is used. In the case of securities IIsted on more than one nationnl secuiiti~ exchange the last quoted sale, up to the time of valuation, on the c....chansc on which the secutitY' is prin­ cIpally traded should be used or, if there were no snl~ on that exchange on the 

valuation· date, the last quoted sale, up 

to tho time of valuation, on the o~her

exchanges should be used. With re.--pect 

to the time or valuation Rule 22c-l (1'1 

em 270.220-1) under the Act requires that current net asset value shall be 

computed not less frequently than.once 

daily as of the time of the close of trad1n{: on the New York Stock Exchange. 

U there Wali no sale on the valuation 

date but pubIIshed closing bId and asked 

, FEDERAL REGISTER, VOL. 35, NO. 253-THURSDAY, DECE/.\BER 31, 1970 

No. 253-3 
19988 RULES _AND REGULATIONS, 

prices are ava.ilable,. the valuation in 

such circumstances should be within the 

range of these quoted prices. Some com­ panies as .a matter of general policy use the bid price, others use the mean of 

the bid and asked prices, and still others uce a valuation within the range consid· 

ered best to represent the value in the 

circumstances; each of these policies is 

accl:.ptable if consistently applied. Norma.lly, it is not acceptable to use the 

asked price alone. Where, on the valuation date, only a bId price or an asked 

price is quoted or the spread between ' the company's portfolio. The directors 

bid and asked prices is SUbstantial, quo­ tations for several days should be re· viewed. U sales have been infrequent or there is a thin market in the security, further consideration should be given to 

whether "market quotations are readily ava.Uable." U it is decided that they are not readily available, the alternative 

method of valuation prescribed by sec­ tlon 2(a) (39)-"fa.1r value as determined 

in good faith by the board of directors'!­

should be used. 

Over·the-counter securities. Quotatlons are aVailable from various sources for most Unlisted securities traded regtt­ larly in the over-tha-counter market. 

These sources include tabUlations in the 

financial press, .publications of the Natlonal Quotation Bureau and the "Blue 

List" of municipal bond offerings, several 

financial reporting services, and indivld· uw broker-dealers. These quotations generally are in the form of inter-dealer 

bid and asked prices. Because of the 

availability of mUltiple sources, a com­ pany frequently has a greater number of 

options open to it in valuing securities 

traded in the over-the-counter market 

than it does in valuing listed securities. 

A company may adopt a pollcy of using a mean of the bid prices, or of the bid 

and asked prices, or of the prices of a representative selection of broker-dealers 

quoting on a particular security; or it may use a valuation within the range of bid and asked prices considered best 

to represent value in the circumstances. 

Any of these policies is acceptable if con­ sistently applied. Normally, the use of 

asked prices alone is not acceptable. .. Ordinarily, quotations for a security should be obtained from more than one broker-dealer, particularly if quotations are available only from broker-dealers 

not known to be established marke~

markers for ~tsecUrity, and quotations for several days should be reviewed. U 

the validity of the quotations appears to 

be questionable, or if the number of quo· tatlons is such as to indicate that there 

is a thin market in the security, further 

consideration should be given to whether 

"market quotations are readily available." U it is decided that they are not 

readily available, the security should be 

considered one required to be valued at 

"fair value as determined in good faith 

by the b~,:rd of direct~rs." . Secuntle8 valued. ''In good. !alth". To 

comply with section 2(0.) (39) of the Act 

and Rule 2a-4 (17 CFR 270.2&-4) lID.der 

the Act, it is incumbent upon the Board 

of Directors to satisfy themselves that 

all appropriate factors relevant to the 

value of securities for which market quo· tations are not readily available have 

been considered and to determine the 

method of arriving at the fa.1r value of 

each such security. To the extent con­ siderednecessary, the boardmay appoirit 

persons to assist them in the determina. 

tion of such value, and to make the ac­ tual calculations pursuant to the board's 

direction. The board must also, consist-. 

elit with this responsiblity, colltinuously review the appropriateness of the method 

used in valuing each :issue of security in 

must recognize their responsibilities in 

this matter and whenever technical as· sistance is requested from individuals 

·who are not directors, the findingS of 

such individuals must be carefully. re­ Viewed by the directors in order to satisfy themselves that the resulting valuations are fair. 

No single standard for detl!rm1n1ng "fa.1r value • .. • in- good faith" can be 

laid down, since fair value depends upon the circ'iDnstances of each individual case. As a general principle, the current 

"fair value" of an issue of securities 

being valued by the Board of Directors 

woqld appear to be the amount which 

the owner might reasonably expect to re­ ceive for them upon their current sale. 

Methods which are in accord with this 

principle may, for example, be·based on a mUltiple of eamings, or a discount from 

market of a similar freely traded secu· rity, or yield to maturity .with respect 

to debt issues, or a combination of these 

and other methods. Some of the general factors which the directors shoUld con­ sider in determining a valuation method 

for an individual issue of securities include: Q> The fundamental analytical data relating to the investment, (2) the 

nature -and duration of restrictions on disPoSition of the securities, and (3) an evaluation of the forces which infiuence 

the market in which these securities are purchased and sold. Among the more specific factors which are to be consldered are: type of security, financial state· 

ments, cost at date of purchase, size 

of holding, discount from market value 

of uilrestricted securities of the flame 

class at time of purchase, special reports prepared by analysts, information as to 

any transactions or offers with i'espect 

to the security, e.'dstence of merger pro· posals or tender offers affecting'the se· curities. price and extent of public trading in similar securities of the issuer or comparable companies. and other rele· 

vant matters. 

This release does not purport to delineate all factors which may be con­ sldered. The directors shoUld take into 

consideration all indications of value 

available to them In determining the 

"fair.value" assigned to a particUlar se­ curity." The information so considered 

together with, to the extent practicable, judgment factors· considered by the 

board of directors in reaching its deci· 

,. With regard to restrIcted securItIes, con­ sideration should be given to the dIscussion on pages 2 through 5 ot the release on thls 

subject (see Note 1 supra). 

sions should be documented in tho mln~

utes of the directors' meetin~ and the 

supporting data retBined for tho 1n:;pce· tion of the company's independent accountailt. 

Auditing security valuations. In tho case of securities for whlch market quo~

tations are readilY available. the independent account-ant should indcpt'nd~

ently verify, all the quotations wed by the company at the balllJlce sheet date 

and satisfy himself that such quot~Uons

may properly be used under tho standards stated above. 

Inthe case of securities carried nt "fnir 

value" as determined by the Board of 

Directors in"good iaith," the accountant 

does not function as an apprniser and 

is not expected to substituto his jud~­

ment for that of the c()mpnny'El direc· 

tors; rather, he should review lill1nfor~

mation considered by the board or by analysts reporting to it, read relevant 

minutes of directors' meetinBs, llJld ns~

certain the procedures followed by.the 

directors. If the accountant is unablo to 

express an unqullJified opinion becauso

of the uncertoJnty inherent in the valua~

tions of the securities based on tho direc· 

tors' su~jectlve jUdl:Jl1ent, he should noV'~

ertheless make appropriate mentIon in 

his certificate whether in tho circum~

stances the procedures appear to bo rcn~

sonable and the underlymcr documentn·

tion appropriate. 

When considerina values IIssitmcd to 

securities by the company, the indopond· 

ent a.ccountant should consider any in~

vestment limitations or conditions on the acquisition or holding of such so· curIties which mllY be imposed on the 

company by the Act, by its cortlflcnto or bylaws, by contrllct, or by its f11illl:s 

with the Commission. If such restric· 

tions are met by a narrow mntain, tho

independent accountant may need to ox~

ercise extra care in sl1tisfyincr hllrtsolf 

that the evidence indicates that tho 6e~

curity valuation detertnlnatfons Vlero not 

biased to meet those restrictions. 

Investments in affiliates or ctffillCltcct llersons. Various rules of Re8U1ations 

S-X (1'7 CFR Part 210) require that tho 

financial statements of' llJl investment 

company state separately investmt'nt.s

in, investment income from, Bain or loss on sales of securities of, and mnnnr.o~

ment or other service fees Pllynblo to, 

(a) controlled companies nnd tb) otht'r

"afIiliates." As stated in Rule 6-02-4 (17 

CFR 210.6-02-4) of RerruIntion S-X, tho

term "afflliate" mellns an nfIlllntcd pl'r­ son as defined in section 2(a) (3) of tho 

Act, and the tonn "control" hns tho 

meaning given in section 2(11) un of tho 

Act. T1;J.e term "amI1ated person" is do· 

fined in section 2(a) (3) of the Act in 

lSuch n. manner as to encompass ~moh

control relationships and nlso tho direct or indirect ownership of 5 porcent (11' 

more of the outstandlncr votina seourlt·le:J 

of any Jssuer. An amllnted person Rll 

there defined also includes nny OmCN', 

director, partner, copartner, or employeo

or, with reSPect to an investment com~

pany. any investment adviser or membt'r 

of an advisory .bonrd thereof'. 

FEDERAL REGISTER, VOL. 35, NO. 253-THURSDAY, DECEMBER 31, 1970 
19989 

In ascertaining the existence of any such afiiliations. the independent ac­ countant should consider the facts obtained during the course of an auellt and 

also make inquiries of the company's 

management; and his working papers should include written representations from the management as evidence Of suelr inquiries. The representations should Qe in the form of a statement 

that the 'COmpany. except to the extent -. indicated. (1) does not own any securities 

either of persons who are directly afiiliated. or. to the best information and 

belief of management. of persons who are indirectly afiillated, (li) has not re­ ceived income from or realized gain or loss on sales of investments in or indebtedness of such persons. (ill) has not incurred expenses for management or other service iees payable to such per-.. sons. and Civ) has not otherwise engaged in transactions with SUch persons. Where 

there is a question as to the existence 

of an. afilliation, a written opinion of 

legal counsel should be obtafned by the 

company's management, made available 

to the independent accountant. and a. copy included in the working papers. Regulation S-X (1'1 CFR Part 210) re­ quires disclosure in the financial state.. 

ments-or notes thereto of details of such 

investments and transactions. 

By the Commission, December 23 1970 

, • 

[SEAL] ORVAL L. DuBoIS. 

Secretary. 

[FoR. Doc. '16-1'155'1; FUed. Dec. 30. 19'10: 

8:46 a.m.] 

[Releases Nos. 40-584'1. AS-113] 

PART 211-INTERPRETATIVE RELEASES RELATING TO ACCOUNT-· 

ING . MATTERS (ACCOUNTING 

SERIES RELEASES) . 

PART 271-INTERPRETATIVE RELEASES RELATING TO THE INVEST-· 

MENT ·COMPANY ACT OF 1940 

AND RULES AND REGULATIONS 

THEREUNDER 

Restricted Securities 

The Securities and Exchange CommlsJion .today made public· the following 

statement. 

"Restricted securities". The Comnlission is aWjXe that many investment com­ panies have been acquiring substantial 

quantities of securities that cannot be 

offered to the public for sale without first

being:registered under the Securities Act 

of 1933 ("restricted securities") • For the 

year 1968, annual reports filed by regis­ teredinvestment companies indicate that 

open-end and closed-end companies together held in excess of $4.2 billion of 

restricted equity securities. Open-end 

companies-excluCUng exchange fundsaccounted for abOut $3.2 billion of these 

restricted securities which l'epresented 4.4 percent of their total net assets. The 

acquisition by investment companies of 

such securities raises certain problems under the securities laws of which shareRULES AND REGULATIONS 

holders. distrIbutors. mlUlllgements and 

directors of these comp:lD.1es should be aware. This statement discusses these 

problems. No inference should be drawn 

from pubUcation of this statement. how­ ever. as to the desirnbUlty or merlts oC 

the acquisition of restricted securities by a regl:rtered investment company. Problems fOT the seller. BectIon 4(2)

of the SecurIties Act 01' 1933 exempts from the registration requlrements o( that Act "transactions by an 1ssper not 

involving any pubUc offcrlDg." ThIs Is 

the so-called "prIvate offerlDg" provisIon in the SecurIties Act. The securities involved in transllctIons effected pursuant 

to this e...emptIon are re1'erred to as re­ stricfed securIties because they cannot be 

resold to the pubUc wIthout prIor regls­ tration. They are also sometlm.es re1'erred 

to as "investment letter securities" be­ cause of the practice frequently followed 

by the,seller in such a transnctIon. in 

order to substantInte the clnIm thllt the 

transaction does not invo!\'e a pubUc offering. of requ1r1ng thnt the buyer furnish a so-called "investment letter" 

representing that the purchase is for investment and notfor resale to the general pubUc.

The private offerlDg e...empt1on o( sec­ tion 4(2) of the SecuritIes Act is avaUnble f only where the offerees do not need the 

protections afforded by the registration procedure. As the Court 01' Appeals for 

the Second CIrcult recently st:J.ted in 

Katz v. Amos Treat & Co.• CCR Fed'!. 

Sec. Law ReP. paragraph 92.409 (19G9): - TheSupremo Court blIslnstructed tbnttbo 

appUCIlbWty orthe cltcmptlon llhouJd tum-on 

whether tho parttculnr cll1SS or paZZOllll affected need tho protection or the Act. 

S;EO V. Rntston PIll'lDa Co•• SolG U.s. 110, 120 

(1953). 

The test of the avallnbWty of the sec­ tion 4(2) exemption is whether the 

offerees are in such a posltlon with re­ spect to the issuer as to have access to 

the kind of information tbat would be 

made avaUable in a regIstration statement :fUed pursuant to the SecurIties Act. 

This test is no dlfIerent when the offeree 

is an investment company. 

Problems fOT the buyer-I. Tile problems oj Valuation. It Is crItically important that an investment company prop­ erly value its portfoUo securities. It is 

obvIous, for example, thnt any distortion

in the valuation of a restricted security held by an..mvestment company w1ll distort the prIce at which the shares of the inv~tment company nrc sold or re­ deemed. It Is also clear that investment 

managers who are compensated on the 

basis of net asset vlllue or performance

may be unduly compensated U 0. re­ stricted securIty. purchased at a discount 

from the market quotation for unre­ strIcted securIties of the same clnss. Is 

overvalued. In such a case. investors mny also be mIsled by the reported perform.­ ance of the investment company. 

The acquIsition of restrIcted securities 

by both open-end and closed-end investment companIes creates serious problems of valuation. Section 2(1l) (39) o( the Investment Company Act of 1940 and RUle 

2:1-4: (17 CPR 270.2a-4:) thereunder re:­

quIres that in determinlng net asse~

value. "securities for which market. quo.: tations are readilY a.vaUable" must be 

valued at current market value while 

other securities and assets must be valued at "lair value as determined in good faith, by the board of dIrectors." 

ReacWy available market quotations refers to reports of current public quo­ tations for securities slmUar in all re.­

spects to the securities in question. No 

SUch current publlc quotations can. exist 

in the case of restrict~d securities. For 

valuntion purposes. therefore. restricted

securities constitute securities for which. 

market.quotations are not readDy avail;. 

able. Accordingly, their fair values must 

be determlned in good faith by the bOard 

of dIrectors andthfs obUgation necessarIly continues throughout the period these securIties are reta.1Ded in the com­ pany's portfolIo. Restricted securities should be inclUded in the portfolIo of a Company and 

vlllued to determine current net asset 

vlllUe on the date that the investment 

company has an enforceable right to demand the securities from the seller. 

Where the investment company nego­ tlntes the acquisItion or the restricted 

securities CUrectly with the owner of the 

securities. there are three significant dntes. The first occurs when the investment company and thesellerorallY agree 

upon the prIce and the amount or the 

securities (the "handshake date"). At 

thIs point. there wOuld not seem to be 

any enforceable right or the investment 

company to demand the securities from 

the seller since, in most states, partic­ ularly thosewhichhave adopted.the Uniform CommerCilll Code. there is no enforceable right unless there exists some wrltlDg "suffiCient to indicate that a con­ tract has been made for sale of a stated 

quantity of described secur1tiesat a defined or stated price" (section "'8-319 (a) 

oC the Unl1'orm Commercial Code).Ifthe 

terms of the oral understandlDg do not 

contemplate compllance 'With any condition by the seller. itis suggested that the 

investment company procure. from the 

seller. a signed memorandum. setting forth the price and quantity of securities 

to be sold. Upon receipt or that memo­ randum. an en!orceable right would be 

obtained. The securities should be valued IlS of that date. 

In those sItuations where the oro 

understanding contemplates the execu­ tion oC a formal contract ofpurchase and 

sale. no enforceable right exists until 

the time the formal contract is signed (the "contract date") •Ifthe formal con­ tract does not reqUire compliance with 

any conditions by the seller. an enforceable right Is then obtained, and the se­ curities should be valued as of that date. 

Where the formal contract requires compUance with stated condItioils which.

the investment company believes should 

not be waived. no enforceable·rightis obtnined untu the stated conditions are sntlsfled. In that situation, the valuation 

date should be the date upon which the 

conditions are sat1s1Ied (the "closing anto"). 

FEDERAL REGISTER, VOr.. 35, NO. 253-THURSDAY, DECEMBER 31. 1970