------------------------ FRONT PAGE --------------------------

                 PERSONAL INVESTMENT ACTIVITIES
                 OF INVESTMENT COMPANY PERSONNEL
                                
         Report of the Division of Investment Management
        United States Securities and Exchange Commission

                         September, 1994

---------------------- TABLE OF CONTENTS ---------------------

                        TABLE OF CONTENTS

I.   INTRODUCTION AND EXECUTIVE SUMMARY

II.  BACKGROUND
     A.   Regulation of Personal Investing   
          1.   Section 17(j)
          2.   Rule 17j-1
          3.   Other Provisions of the Federal 
               Securities Laws
     B.   Personal Investing and the Division's Inspection
          Program
     C.   Personal Investing and the Commission's Enforcement
          Program
     D.   Recent Media and Congressional Attention to Personal
          Investing
     E.   The ICI Report

III. EXAMINATION OF 30 FUND GROUPS

     A. Request for Information    
     B. Codes of Ethics: Content and Compliance
     C. Analysis of Trading Data   
        1.     Introduction   
        2.     Summary of Findings 
        3.     Limitations of the Data  
        4.     Exclusion of One Fund's Data  
        5.     Securities Transactions of the Fund Managers
               Examined  
        6.     Matching Trades     
        7.     Fund Matching Trades     
        8.     Fund Equity Purchases of Securities Held by the
               Fund's Manager
     D. Need for Further Examinations   

IV.  ANALYSIS OF CERTAIN ISSUES    
     A.   Banning Personal Investing
     B.   Incorporating the ICI Report's Recommendations
            into Commission Rules

V. RECOMMENDATIONS
Recommendation 1:   Disclosure of Personal Investing Policies
Recommendation 2:   Enhanced Board Review  
Recommendation 3:   Disclosure of Pre-Employment Holdings
Recommendation 4:   Notification of Brokerage Activity
Recommendation 5:   Ban on Participating in "Hot Issue" Public   
                    Offerings
Recommendation 6:   Amendment of Section 17(j)

VI.  CONCLUSION

EXHIBIT A -    Letters to 30 Fund Groups
EXHIBIT B -    Statistical Summary of Codes of Ethics
EXHIBIT C -    Description of Codes of Ethics Violations
EXHIBIT D -    Table Illustrating Effect on Data of Transactions
               of One Fund
EXHIBIT E -    Pie Chart Illustrating Relative Number of Personal
               Transactions, Matching Trades, and Fund Matching
               Trades (Not Included In This Text Version)

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                 PERSONAL INVESTMENT ACTIVITIES
                 OF INVESTMENT COMPANY PERSONNEL

I. INTRODUCTION AND EXECUTIVE SUMMARY

     Over the last 15 years, the investment company industry has
been remarkably successful. Between 1979 and 1994, total assets
under management grew from $95 billion to $2.1 trillion. Over 38
million Americans now invest in mutual funds, the most popular
type of investment company, entrusting their retirement savings,
funds for their children's education and their ready cash to
mutual fund managers. By the end of last year, 27% of U.S.
households owned mutual funds.

     The success of the investment company industry is in no
small measure the result of the industry's excellent record; the
industry has generally been free of major scandal for the last
two decades. The industry's continued health, however, depends on
its meeting the expectation of American investors, many of whom
are new to the market. The industry will continue to be trusted
by investors only if it demonstrates that it maintains the
highest possible ethical standards and that it operates free from
abusive and fraudulent practices.

     Recent press reports and Congressional inquiries have raised
questions about the ethical standards of the industry by focusing
on the personal investment activities of investment company
personnel. In seeking to address these questions, the Division of
Investment Management (the "Division") has, over the past seven
months, undertaken a detailed examination of the personal
investment activities of investment company personnel,
particularly fund managers, and conducted an analysis of the
regulatory scheme that governs those investment activities. In
particular, the Division:

          *    examined the personal securities transactions for
               1993 of 622 fund managers employed by 30 companies
               ("fund groups") that, in the aggregate, manage
               1,053 funds with total assets of $521 billion;

          *    examined the restrictions and procedures placed on
               the personal investment activities of fund
               personnel by the 30 fund groups;

          *    analyzed the provisions of section 17(j) of the
               Investment Company Act of 1940 (the "1940 Act")
               and rule 17j-1 under the 1940 Act, the principal
               federal provisions regulating the investment
               activities of fund personnel; and

          *    assessed the recommendations contained in a report
               by a special advisory group formed by the
               Investment Company Institute (the "ICI") that
               surveyed the industry's practices and standards
               governing personal investing by fund personnel.

     This Report describes the Division's findings and contains
recommendations designed to enhance the oversight of the personal
investment activities of fund personnel and improve ethical
standards throughout the fund industry. The vast majority of the
30 fund groups from which the Division collected data reported
moderate to infrequent investing by their fund managers, little
of which was potentially abusive. A small number of fund groups,
however, reported extensive personal investment activity by their
fund managers, who, in several instances, purchased or sold
securities shortly ahead of their funds. The Division currently
is obtaining additional information about all potentially abusive
transactions. 

--------------------- BEGINNING OF PAGE #2 -------------------

The data collected from the 30 fund groups revealed that:

>    Fund managers generally appear not to invest extensively for
their personal accounts. Of the fund managers whose transactions
the Division examined, 75% engaged in ten or fewer transactions
in 1993 (the year covered by the Division's requests for
information), while 43.5% did not buy or sell securities at all.
The median number of personal transactions per manager for 1993
was two.

>    Potential conflict of interest situations caused by fund
managers buying and selling securities ahead of their funds
appear to be infrequent. The overwhelming majority of fund
managers did not buy or sell securities during the ten days
preceding the purchase or sale of those securities by their
funds. In 0.7% of all personal transactions reported to the
Division a fund manager purchased or sold securities at a better
price than received by his fund during the 10 days following the
manager's transaction. In addition, in 1.8% of the reported
transactions a fund manager received a better price than some
fund in the same fund group.

>    Potential conflict of interest situations caused by a fund's
purchase or sale of securities already held by the fund's manager
appear to be infrequent. Less than 3 % of all equity securities
purchased by the funds examined were, at the time of purchase,
also owned by the fund's manager. Many of these securities were
issued by large capitalization companies, and therefore provide a
minimal potential for conflict.

>    The investment activities of a few fund managers were
inconsistent with the general trends reflected in the data. Fund
managers employed by four fund groups accounted for a large
percentage of personal transactions generally and of transactions
that mirrored fund transactions within a ten day period. Although
these four fund groups collectively employed only 15.5% of the
managers whose trades were examined, those managers engaged in
nearly half of all personal transactions reviewed, 70% of
personal transactions that matched transactions made by the
manager's fund, and 50% of personal transactions that matched a
transaction made by the manager's fund or any other fund in the
same fund group.

>    The data collected from the 30 fund groups may overstate the
extent of personal investing and the number of potentially
abusive transactions in the fund industry generally. The Division
intentionally included in its examination three fund groups whose
managers, in the past, traded actively for their personal
accounts. All three groups were among the four fund groups whose
managers engaged in the most personal transactions and the most
transactions ahead of their funds. By contrast, most of the fund
managers employed by 26 of the 27 fund groups that were selected
for examination without regard to the suspected frequency of
personal trading by their managers engaged in few personal
transactions generally and very few potentially abusive personal
transactions.

     The Division has concluded that the data collected, taken as
a whole, suggests that the existing regulatory framework
governing the personal investment activities of fund personnel
has generally worked well, but can be improved. The data, in any
event, does not reveal abusive trading patterns that the Division
believes could be remedied only by a total prohibition on
personal investing by fund personnel.

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     To improve the regulatory scheme, the Division is making six
recommendations. The Division's recommendations are designed to
further protect fund shareholders by making available to the
public additional information about fund policies on personal
investment; enhancing the oversight of personal investment
policies by fund boards of directors or trustees; making it
easier for both funds and the Commission's staff to monitor the
personal transactions of fund personnel; and clarifying the scope
of prohibited activities by fund personnel. The Division believes
that its recommendations, together with the industry's general
acceptance of the principles reflected in the report of the ICI's
special advisory group, would enhance ethical standards
throughout the fund industry which, in turn, should bolster
investor confidence. The Division's recommendations are as
follows:

          *    The Commission should require every fund to
          publicly disclose its policies regarding personal
          investing by fund personnel;

          *    The Commission should require each fund's board of
          directors or trustees to review the fund's code of
          ethics and compliance matters relating to the code at
          least annually;

          *    The Commission should require fund personnel to
          disclose to their employers their personal securities
          holdings at the commencement of employment;

          *    The National Association of Securities Dealers,
          Inc. (the "NASD") should be asked to consider adopting
          a rule requiring its member broker-dealers to notify a
          fund's investment adviser when one of the adviser's
          employees opens a brokerage account and, upon request,
          to transmit duplicate trade confirmations and account
          statements to the adviser;

          *    The NASD should be asked to consider prohibiting
          the participation by certain fund personnel in "hot
          issue" public offerings; and

          *    Section 17(j) of the 1940 Act should be amended to
          include purchases and sales of property other than
          securities, and to clarify the section's scope.

The Division's recommendations are discussed more fully in Part V
of this Report.

II.  BACKGROUND

     A.   Regulation of Personal Investing

     Investment advisers owe their customers the highest duty of
trust and fair dealing and must place the customers' interests
ahead of their own.-[1]- Thus, although federal law does not
specifically prohibit a fund manager from buying or selling the
same securities as the

-------- FOOTNOTES --------
     -[1]-     SEC v. Capital Gains Bureau, Inc., 3?5 U.S. 180
               (1963).

-------------------- BEGINNING OF PAGE #4 --------------------

funds with which he -[2]- is associated, he may not, when making
investment decisions for himself or the funds, place his personal
interests ahead of the funds' interests. -[3]-

     In performing their day-to-day responsibilities, fund
personnel, such as managers, analysts, and traders, may have
access to information about impending fund transactions. Under
current law, these "access persons," like other "insiders," may
not use material nonpublic information to benefit themselves or
others. Access persons of a fund may not, for example, engage in
"front-running," which occurs when an access person engages in a
securities transaction ahead of a fund with the expectation that
the fund's transaction will favorably affect the price of the
securities. Front-running is most likely to benefit an
unscrupulous access person when it involves a security that is
thinly traded.

     Conflicts of interest can arise whenever access persons buy
and sell securities for their personal accounts. Beginning in the
early 1960s, Congress and the Commission attempted to devise a
regulatory scheme that would effectively address these potential
conflicts. Their efforts culminated in the addition of section
17(j) to the 1940 Act in 1970 and the adoption of rule 17j-l
under the Act by the Commission in 1980.

     Three themes run through the extensive legislative and
administrative history of section 17(j) and rule 17j-1. First,
both Congress and the Commission consistently have recognized
that effective regulation of the investment activities of access
persons requires that funds themselves provide a strong first
line of oversight. Second, both Congress and the Commission have
indicated that funds can best provide effective oversight if they
are given the flexibility to adopt restrictions on personal
investment activities, and procedures implementing those
restrictions, that are tailored to the funds' individual
circumstances; indeed, the Commission on occasion has rejected
staff recommendations to formulate uniform standards that would
apply to all funds. Third, Congress and the Commission
consistently have recognized that not all personal securities
transactions by access persons involve conflicts of interest or
are inconsistent with the responsibilities of access persons
toward their funds. As a result, both Congress and the Commission
have to date declined to impose an outright ban on personal
investment by fund personnel.

     1.   Section 17(j)

     In 1961, Congress directed the Commission to undertake a
study of the securities markets, which resulted in the issuance
in 1963 of a Commission staff report known as the Special Study
Report. -[4]-  Although the Special Study Report was concerned
primarily with the securities markets in general, the Report
addressed certain investment company issues, including "insider
transactions in portfolio securities." As part of its analysis,
the staff examined the nature and extent of trading by a
representative sample of mutual funds and

-------- FOOTNOTES --------

     -[2]-     For ease of reading we have used the masculine
               form throughout this Report in referring to fund
               personnel.

     -[3]-     Capital Gains, supra note 1.

     -[4]-     Report of the Special Study of the Securities
               Markets, H.R. Doc. No. 95, 88th Cong., 1st Sess.
               (1963).

-------------------- BEGINNING OF PAGE #5 --------------------

their insiders,-[5]- and concluded that personal trading by
insiders ahead of their funds was "fairly extensive" and
"significant."-[6]- Despite these findings, the staff did not
recommend a ban on personal investment by fund insiders, but
concluded that "each mutual fund, its investment adviser, and
principal underwriter should be required to adopt written
policies covering insider trading and provisions for their
implementation which meet minimum standards established by the
Commission."-[7]-

     In 1966, the Commission published a report dealing with the
public policy implications of investment company growth (the "PPI
Report") that analyzed the need to update the regulation of
mutual funds in light of the fund industry's significant growth
since the passage of the 1940 Act.-[8]- The PPI Report dealt
with, among other things, the issue of personal investing by fund
personnel and identified three areas of particular concern.
First, a fund's insiders can profit by buying or selling
securities ahead of the fund's transactions in the same
securities if the fund's transactions affect the price of the
securities. Second, a fund can be harmed if an insider's
securities transactions adversely affect the transaction prices
received by the fund. Third, a fund can be harmed if an insider
causes the fund to purchase or hold securities to protect or
strengthen the insider's investment in those securities.-[9]-

     The Commission, in the PPI Report, noted that the Special
Study Report had found "widespread" buying and selling by fund
insiders before their funds.-[10]- Nevertheless, the Commission
did not recommend a ban on investing by fund insiders, concluding
that "persons affiliated with investment companies cannot be 
expected to refrain from engaging in securities transactions for
their personal accounts."-[11]-

     The Commission acknowledged in the PPI Report that it had
authority under the broad antifraud provisions of the Securities
Exchange Act of 1934 (the "Exchange Act") and the Investment
Advisers Act of 1940 (the "Advisers Act") to adopt rules against
insider trading abuses by persons affiliated with investment
companies.-[12]- The Commission noted, for instance, that those
provisions would have allowed it to establish uniform minimum
standards governing personal investing by fund insiders. The
Commission, however, stated

-------- FOOTNOTES --------

     -[5]-     The Special Study Report looked initially at 51
               funds with total net assets of $14.9 billion, then
               looked more closely at 28 funds with total net
               assets of $3.2 billion. For this Report, the
               Division collected data with respect to 1,053
               funds with net assets of $321 billion.

     -[6]-     Special Study Report, supra note 4, at 254, 255.

     -[7]-     Id. at 254. The staff further recommended that
               "[t]he standards which are called for should be
               common to the entire industry, and their adoption
               and implementation should not be left to the
               individual companies themselves." Id. The
               Commission consistently has declined to follow
               this particular recommendation.

     -[8]-     Report of the Securities and Exchange Commission
               on the Public Policy Implications of Investment
               Company Growth, H.R. Rep. No. 2337, 89th Cong., 2d
               Sess. (1966).

     -[9]-     Id. at 195.

     -[10]-    Id. at 196 (citing the Special Study Report).

     -[11]-    PPI Report, supra note 8, at 199.

     -[12]-    Id. at 200.

-------------------- BEGINNING OF PAGE #6 --------------------

its preference "to deal with problems of insider trading in
investment company portfolio securities in a more flexible
manner," by requiring every fund subject to the 1940 Act to adopt
its own code of ethics.-[13]- Thus, the Commission asked Congress
for authority under the 1940 Act to adopt rules for the
protection of investors in connection with "insider trading in
portfolio securities by persons affiliated with investment
companies."-[14]-

     In response to the Commission's request for rulemaking
authority in the PPI Report, Congress in 1970 added section 17(j)
to the 1940 Act. Section 17(j) makes it unlawful for persons
affiliated with a registered investment company or with the
company's investment adviser or principal underwriter, in
connection with the purchase or sale of securities held or to be
acquired by the company, to engage in any fraudulent, deceptive,
or manipulative act or practice in contravention of rules adopted
by the Commission. Section 17(j) expressly states that "such
rules and regulations may include requirements for the adoption
of codes of ethics" by funds and their affiliated persons.

     In explaining its decision to provide for Commission
rulemaking in section 17(j), Congress noted that:

     The ability to deal with [personal securities] transactions
     by rule is intended to permit the Commission to draw
     flexible guidelines to prohibit persons affiliated with
     investment companies, their advisers and principal
     underwriters, from engaging in securities transactions for
     their personal accounts when such transactions are likely to
     conflict with the investment programs of their companies.
     -[15]-

Thus, the express language and legislative history of section
17(j) make clear that Congress was not seeking, and was not
authorizing the Commission, to ban all personal investment
activity by fund insiders. Section 17(j) contemplates that the
insiders of a fund could not only buy and sell securities, but
also that they could buy and sell securities held or to be
acquired by the fund. The legislative history of section 17(j)
suggests a concern on the part of Congress about insider
transactions involving conflicts of interest and not about
insider transactions generally.

     2.   Rule 17j-1

     In 1972, the Commission first proposed rule 17j-1 under the
rulemaking authority provided by section 17(j).-[16]- The
proposed rule differed from the rule now in effect primarily in
two ways. First, the proposed rule expressly would have permitted
(but did not require) funds to pre-clear personal trades by
access persons. Second, it would have prohibited an access person
from trading for his personal account any securities that he knew
were being purchased or sold, or were being considered or
recommended for purchase or sale, by the fund. Commenters heavily
criticized the proposed rule, particularly the

-------- FOOTNOTES --------

     -[13]-    Id.

     -[14]-    Id.

     -[15]-    15 H.R. Rep. No. 1382, 91st Cong., 2d Sess., at 28
               (1970) ("House Report"); S. Rep. No. 184, 91st
               Cong., 1st Sess., at 29 (1969) ("Senate Report").

     -[16]-    Investment Company Act Release No. 7581 (Dec. 26,
               1972).

-------------------- BEGINNING OF PAGE #7 --------------------

personal trading prohibition, which they described as "nebulous,"
"difficult to apply," "extremely vague and impossible of
application in specific situations," and "dangerously ambiguous."
-[17]- In response to the negative comments, the Commission
withdrew proposed rule 17j-1 in 1976.-[18]-

     In 1978, the Commission reproposed rule 17j-1 with several
significant changes.-[19]- Among other things, the reproposed
rule did not contain any specific trading prohibitions. The
Commission explained that this revision was made "in view of the
arguments made by public commentators that the trading
prohibitions set forth in the previous proposed rule could lead
to difficulties of interpretation and administration."-[20]-
Moreover, the Commission declined to include suggested personal
trading restrictions in the release that accompanied reproposed
rule 17j-1.

     In 1980, the Commission adopted rule 17j-1.-[21]- The rule,
which has not been amended since its adoption, has four primary
components:

     >    Paragraph (a) prohibits fraudulent, deceptive or
     manipulative acts by any affiliated person (which includes
     an investment adviser) or principal underwriter of an
     investment company, or any affiliated person of the
     company's investment adviser or principal underwriter, in
     connection with their personal transactions in securities
     -[22> held or to be acquired by the investment company.

     >    Paragraph (b) requires investment companies and their
     investment advisers and principal underwriters to adopt
     codes of ethics containing provisions reasonably necessary
     to prevent access persons -[23]- from engaging in the
     fraudulent, deceptive, or manipulative acts prohibited by
     the rule.


-------- FOOTNOTES --------

     -[17]-    Commenters also criticized nearly every other
               aspect of the proposed rule, including the types
               of transactions proposed to be covered by the
               rule, the rule's application to non-interested
               directors, the definition of the term "access
               person," and the proposed requirement that
               violations of a firm's code of ethics be reported
               to the Commission.

     -[18]-    Investment Company Act Release No. 9169 (Feb. 19,
               1976).

     -[19]-    Investment Company Act Release No. 10162 (Mar. 20,
               1978).

     -[20]-    Id.

     -[21]-    Investment Company Act Release No. 11421 (Oct. 31,
               1980).


     -[22]-    The definition of "securities" in rule 17j-1
               excludes, among other things, United States
               government securities, commercial paper, and
               shares of open-end funds. United States government
               securities are excluded because "the value of such
               securities held by an individual could not be
               substantially affected by purchases or sales by an
               investment company." Release No. 10162, supra note
               19. Commercial paper and shares of open-end funds
               are excluded because they "present very little
               opportunity for the type of improper trading that
               the Rule is intended to cover." Release No. 11421,
               supra note 21.

     -[23]-    As defined in rule 17j-1(e), "access persons" of
               an entity generally include officers, directors,
               and any employees who participate in the selection
               of a fund's portfolio securities or who have
               access to information regarding a fluid's
               impending purchases and sales of portfolio
               securities.

-------------------- BEGINNING OF PAGE #8 --------------------

     >    Paragraph (c) requires access persons of investment
     companies and of their investment advisers and principal
     underwriters to report their personal securities
     transactions to their employers on a quarterly basis.

     >    Paragraph (d) requires investment companies and their
     investment advisers and principal underwriters to maintain
     certain records, including their codes of ethics and the
     quarterly reports filed by access persons, and to make those
     records available for inspection by the Commission.

     Rule 17j-1 does not mandate any specific restrictions on
personal investing by access persons, or any procedures to
implement those restrictions. Instead, the rule requires
registered investment companies and their investment advisers and
principal underwriters-[24]- to serve as a first line of
oversight with respect to the investment activities of access
persons by determining for themselves which trading restrictions
and procedures are "reasonably necessary" to prevent access
persons from engaging in the fraudulent, deceptive, or
manipulative acts and practices prohibited by the rule. In
explaining its reason for adopting this approach, the Commission
said:

     [T]he variety of employment and institutional arrangements
     utilized by different investment companies renders
     impracticable a rule designed to cover all conceivable
     possibilities. Moreover, as a matter of policy the
     Commission believes the introduction and tailoring of
     ethical restraints on the behavior of persons associated
     with an investment company can best be left in the first
     instance to the directors of the investment company. -[25]-


     3.   Other Provisions of the Federal Securities Laws

     Abusive personal investment activities by fund access
persons are prohibited not only by section 17(j) and rule 17j-1,
but also by other provisions of the federal securities laws. A
fund manager who engages in front-running or makes investment
decisions for the fund with the intent to benefit personally, for
example, would, in addition to violating section 17(j) and rule
17j-1, violate the antifraud provisions of section 17(a) of the
Securities Act of 1933 (the "Securities Act") and section 10(b)
of the Exchange Act and rule 10b-5 under the Exchange Act. If a
fund and its portfolio manager purchase or sell securities in the
same company, the portfolio manager may have engaged in a "joint
transaction" with the fund in violation of section 17(d) of the
1940 Act and rule 17d-1 under the Act. If a portfolio manager
causes a fund to purchase particular securities in exchange for
any compensation (in the form of securities, private investment
opportunities, favorable trading terms, or other similar
benefits), the manager would violate section 17(e) of the 1940
Act, which prohibits any portfolio manager or other fund insider,
acting as agent, from receiving compensation from outside sources
in exchange for the purchase or sale of any property to or from
an investment company.

     Like the provisions of the 1940 Act, the Exchange Act, and
the Securities Act, described above, certain provisions of the
Advisers Act apply to portfolio managers'

-------- FOOTNOTES --------

     -[24]-    As explained in the text, rule 17j-1 applies to
               registered investment companies and their
               investment advisers and principal underwriters.
               Unless the context requires otherwise, the term
               "fund" as used in this Report includes any entity
               subject to rule 17j-l.

     -[25]-    Release No. 11421, supra note 21.

-------------------- BEGINNING OF PAGE #9 --------------------

personal investment activities. An investment adviser whose
portfolio manager or other employees engage in abusive investing,
for instance, would violate section 206 of the Advisers Act,
which prohibits investment advisers from engaging in certain
fraudulent conduct and imposes a strict fiduciary duty on all
advisers.

     B.   Personal Investing and the Division's Inspection
          Program

     The Division's investment company inspection staff has
played an integral role in the implementation of rule 17j-1 since
the rule's adoption.-[26]- Through its inspection program, the
Division regularly monitors the fund industry's compliance with
the rule, as well as with the Commission's other rules governing
investing by fund access persons. The review of access persons'
securities transactions records is an essential component of all
inspections.

     During every fund inspection, Division examiners review a
sampling of access persons' securities transactions. In addition,
examiners typically: review the fund's code of ethics to
determine whether it is adequate given the fund's investment
operations; evaluate the adequacy of personal transaction
reporting procedures; verify that an appropriate person has
reviewed the personal trading reports submitted by access
persons; and analyze the sample of personal transactions to check
compliance with the fund's code and, more generally, to detect
unlawful trading activities.

     To date, the Division's inspection program has not revealed
a significant number of abusive transactions by fund access
persons. Although, as explained in detail below, this conclusion
is supported by the data collected by the Division in its special
examination of the 30 fund groups, the Division notes that
inspections conducted prior to September 1993 may not accurately
indicate the extent of abusive trading by fund access persons.
During the three-year period prior to September 1993, the
Division's inspection program focused a significant part of its
efforts on money market funds, which typically would not be
expected to raise issues of abusive personal trading.-[27]- In
addition, for many years the Division's inspection program has
been hampered by a lack of resources, which in turn has limited
the number of personal transactions that the Division's
inspectors could examine. The Division anticipates that its
decision to change the emphasis of the inspection program from
money market funds to all types of funds, together with the
Commission's recent decision to allocate greater resources to the
program, will enhance the program's ability to ensure compliance
with rule 17j-1.-[28]-

-------- FOOTNOTES --------

     -[26]-    The inspection program served as an impetus to the
               Commission's adoption of rule 17j-1 in 1980. The
               Commission said that it had determined to adopt
               the rule because "[t]hrough its examination
               program, the Commission has become aware of an
               increasing number of situations involving parallel
               trading by individuals with knowledge regarding
               transactions anticipated or engaged in by
               registered investment companies." Release No.
               11421, supra note 21.

     -[27]-    Under existing Commission rules, money market
               funds must limit their investments to high
               quality, short-term debt instruments. These
               instruments generally do not present opportunities
               for front-running or other abusive transactions by
               access persons.

     -[28]-    See U.S. Securities and Exchange Commission Budget
               Estimate Fiscal 1995, at IV-6 (Feb. 1994) (stating
               that the focus of the Division's investment
               company inspection program would shift to small
               and medium fund complexes and that the inspection
               staff would increase by 54 staff years over 1993);
               see also Ellyn Spragins, Much Ado About. . .,
               Newsweek, Sept. 5, 1994, at 48 ("If corruption
               were rampant, it would likely show up among
               smaller, newer fund companies -- the focus of this
               year's SEC inspections.").

-------------------- BEGINNING OF PAGE #10 --------------------

     C.   Personal Investing and the Commission's Enforcement
          Program

     Like the Division's investment company inspection program,
the Commission's enforcement program serves as a means of
ensuring compliance with the Commission's rules on personal
investing. As Chairman Levitt has said of the program: "[W]e will
be, as we have always been, vigilant in our efforts to detect
abusive trading practices by portfolio managers [and] we will not
hesitate to take action against any portfolio manager whom we
find to have engaged in these practices."-[29]-

     The activities of fund access persons have been the subject
of a number of recent Commission actions. These actions generally
have involved abusive practices other than front-running. Three
recent cases -- In re "Strong/Corneliuson Capital Management",
-[30]- In re "Kemper Financial Services",-[31]- and in re
"Embry"-[32]- -- highlight the Commission's efforts to deter
investment advisers and their employees from engaging in abusive
personal investment activities.

     In "Strong/Corneliuson", the Commission alleged that an
investment adviser and two of its principals violated certain
affiliated transaction provisions of the 1940 Act in connection
with a number of securities transactions between registered funds
managed by the adviser and an unregistered offshore investment
company managed by the adviser in which the principals had a
substantial undisclosed ownership interest. The Commission also
alleged that the adviser and its principals had violated the
antifraud provisions of the Advisers Act by acting inconsistently
with the stated policy in the adviser's disclosure brochure
provided to clients that the adviser and its principals would not
invest in securities that it recommended to clients. In settling
the action, the adviser and its two principals consented to
censures and were subjected to cease and desist orders, and the
adviser agreed to adopt and maintain comprehensive procedures to
review and authorize all personal securities transactions in
which the adviser or any of its access persons engage. The
adviser also agreed to reimburse the funds almost $450,000 for
pricing errors in certain of the securities transactions at
issue. Finally, the adviser agreed to an unprecedented condition
under which it may not serve as investment manager of a
registered investment company unless a specified percentage,
exceeding the percentage otherwise required under the 1940 Act,
of the company's directors or trustees are non-interested persons
of the adviser.-[33]-

     "Kemper" involved an alleged misallocation of transactions
in financial futures contracts between two registered investment
companies managed by a Kemper employee and an account partially
managed by the same employee and in which the employee had a
financial interest. In Kemper, the Commission alleged that the
investment adviser of two registered

-------- FOOTNOTES --------

     -[29]-    Letter from Arthur Levitt, Chairman, U.S.
               Securities and Exchange Commission, to Edward J.
               Markey, Chairman, Subcommittee on
               Telecommunications and Finance of the House
               Committee on Energy and Commerce (Feb. 9, 1994).

     -[30]-    Investment Advisers Act Release No. 1425 (July 12,
               1994).

     -[31]-    Investment Advisers Act Release No. 1387 (Oct. 20,
               1993).

     -[32]-    Investment Advisers Act Release No. 1382 (Sept.
               16, 1993).

     -[33]-    Sections 10(a) and 2(a)(19) of the 1940 Act, read
               together, require that at least 40% of an
               investment company's directors be non-interested
               persons of the company's investment adviser. The
               Commission increased this figure to 60% for
               Strong/Corneliuson.

-------------------- BEGINNING OF PAGE #11 --------------------

investment companies caused violations of the provisions of the
1940 Act prohibiting selfdealing,-[34]- and failed to supervise
one of its fund managers with a view to preventing his violations
of those provisions. In particular, the Commission alleged that
the fund manager placed the two investment companies that he
managed at a disadvantage by allocating favorable transactions in
futures contracts to an employee benefit plan account in which he
had an interest and less favorable transactions to the two
investment companies. In settling the Commission's action, the
investment adviser agreed to a censure and the imposition of a
cease and desist order. Moreover, the adviser agreed to pay $9.2
million into a settlement fund for distribution to the funds'
shareholders, and agreed to undertake certain remedial measures
to correct its procedures for the allocation of investment
transactions.

     In "Embry", the sole owner and chief executive officer of an
investment adviser, and fund manager for three registered
investment companies, profited at the expense of his clients by
engaging in numerous undisclosed personal securities
transactions. In particular, the fund manager: received lucrative
investment opportunities by purchasing high risk bonds for
several of his clients, while purchasing common stock of the same
issuers for himself; acted on several occasions as a principal in
securities transactions with his clients without disclosing the
capacity in which he was acting and without obtaining their
consent; traded jointly, or in a block, with clients to obtain
lower prices, and then resold the securities at a pre-arranged
markup, resulting in substantial profit to himself; and failed to
report over 750 of his personal securities transactions as
required by rule 17j-1. In an administrative proceeding, the
Commission ordered the fund manager to make no personal
securities transactions unless (1) he retained an independent
consultant and adopted the consultant's recommendations for
improved compliance systems at the adviser, and (2) the
consultant audited for five years the fund manager's personal
securities transactions and the adviser's operations.

     The seriousness with which the Commission views the issue of
abusive personal investing by fund personnel is shown not only in
the Strong, Kemper, and Embry cases, but also in a number of
other administrative proceedings brought by the Commission
against advisers failing to adhere strictly with the requirements
of rule 17j-1. The Commission has

-------- FOOTNOTES --------

     -[34]-    Section 17(a) of the 1940 Act prohibits an
               affiliated person of a registered investment
               company from buying from or selling to the company
               any securities or other property. Section 17(d) of
               the 1940 Act and rule 17d-1(a) under the 1940 Act
               prohibit an affiliated person of a registered
               investment company from effecting any transaction
               in connection with a joint enterprise or other
               joint arrangement in which the company is a
               participant.

     -[35]-    Abusive personal investing also has been the
               subject of a number of court cases. See, e.g.,
               United States v. Ostrander, 792 F. Supp. 241
               (S.D.N.Y. 1992), aff'd 999 F.2d 27 (2d Cir. 1993)
               (manager of high-yield bond fund who accepted
               investment opportunities in exchange for investing
               fund assets in certain securities sentenced to
               prison term and made to pay substantial fine);
               United States v. Griggs, Crim. No. 445 (S.D.N.Y.
               May 21, 1992) (analyst employed by an investment
               adviser entered guilty plea in connection with a
               scheme in which outside investor profited on
               information received from the analyst with respect
               to the adviser's recommendations of high-yield
               debt securities and the probable timing of fund
               purchases); SEC v. Bayse, Civ. No. 92~549
               (S.D.N.Y. Jan. 23, 1992) (manager of high-yield
               bond fund who failed to report over 100 personal
               trades and who accepted investment opportunities
               in exchange for investing fund assets in certain
               securities consented to a permanent injunction
               against future violations of several provisions of
               the 1940 Act, including section 17(j) and rule
               17j-l, and the Advisers Act). The Commission
               subsequently barred each of Ostrander, Griggs, and
               Bayse from associating with any investment
               company, investment adviser, broker, dealer, or
               municipal securities dealer. See Investment
               Advisers Act Release Nos. 1371 (May 3, 1993)
               (Ostrander), 1311 (May 28, 1992) (Griggs), and
               1301 (Feb. 26, 1992) (Bayse).

-------------------- BEGINNING OF PAGE #12 --------------------

brought actions, for example, alleging the failure of funds to
adopt codes of ethics and the failure of access persons to submit
required reports.-[36]-

     D.   Recent Media and Congressional Attention to Personal
          Investing

     Fund managers' personal investment activities became the
focus of media attention early this year after Invesco Funds
fired a prominent manager for allegedly failing to report a
number of his personal securities transactions as required under
both the 1940 Act and the Advisers Act.-[37]- Less than two weeks
later, The Wall Street Journal reported that two funds managed by
the same individual had purchased the stock of a small Canadian
biotech company for which the manager served as director and
whose stock he had personally acquired at very low prices.

     At about the same time of the Invesco firing, the media
reported that Fidelity, the country's largest fund complex, had
recently amended its internal rules on personal investing.-[39]-

The Washington Post reported that Fidelity's rule changes were
prompted by several instances of front-running in small company
stocks by employees of Fidelity's investment department.-[40]- 
In response to The Washington Post article, Edward J. Markey,
Chairman of the House Subcommittee on Telecommunications and
Finance, wrote to Chairman Levitt seeking information regarding
"the practice of mutual fund managers trading for their personal
accounts, and the potential conflict of interest that poses in
their

-------- FOOTNOTES --------

     -[36]-    In 1992, for example, the Commission ordered the
               corporate adviser to a large family of mutual
               funds to implement procedures reasonably designed
               to ensure compliance with rule 17j-1, including
               employment of a full-time compliance officer. The
               adviser's access persons consistently had
               submitted their quarterly reports late, in many
               cases as much as one year after the reports were
               due. "In re First Investors Management Co.",
               Investment Advisers Act Release No. 1316 (June 12,
               1992). In 1983, the Commission sanctioned a mutual
               fund access person who, over a three-year period,
               reported only 35 of 250 securities transactions in
               which he had a beneficial interest. In addition,
               at least 15 transactions occurred at or about the
               time that one or more of his employer's advisory
               clients were trading, or considering trading, the
               same security. The Commission suspended the access
               person from associating with any registered
               investment adviser or registered investment
               company, and prohibited him from accepting any new
               advisory clients, for six months. "In re Farrer",
               Investment Advisers Act Release No. 847 (Mar. 31,
               1983). See also "In re Cummings", Investment
               Advisers Act Release No. 1304 (Mar. 23, 1992)
               (failure to adopt code of ethics); "In re Bench",
               Investment Advisers Act Release No. 1202 (Sept.
               19, 1989) (failure to maintain copies of personal
               transaction reports); "In re Frantzman",
               Investment Company Act Release No. 16349 (Apr. S,
               1988) (failure to report personal transactions and
               failure to maintain copies of transaction
               reports); "In re Guilden", Investment Company Act
               Release No. 15578 (Feb. 13, 1987) (failure to
               report personal transactions); "In re Lubart",
               Investment Company Act Release No. 15577 (Feb. 13,
               1987) (same); "In re Flusfeder", Investment
               Company Act Release No. 15575 (Feb. 12, 1987)
               (same); "In re Leibowitz", Investment Company Act
               Release No. 14310 (Jan. 10, 1985) (failure to
               adopt code of ethics).

     -[37]-    E.g., Robert McGough and Sara Calian, Invesco Fund
               Fires Kaweske, a Star Manager, Wall St. J., Jan.
               6, 1994, at C1.

     -[38]-    Sara Calian and Suzanne McGee, Kaweske Scored on
               Canada Play Long Before Funds Did, Wall St. J.,
               Jan. 17, 1994, at CI.

     -[39]-    See, e.g., Brett D. Fromson, Fund Managers' Own
               Trades Termed a Potential Conflict; Biggest Mutual
               Fund Firm Tightens Rules, Wash. Post, Jan. 11,
               1994, at Al.

     -[40]-    Id. at a8.

-------------------- BEGINNING OF PAGE #13 --------------------

work for the funds they manage.-[41]- Chairman Levitt answered
Chairman Markey's inquiry by a letter dated February 9, 1994,
accompanied by a memorandum prepared by the Division describing
the existing provisions of law that prohibit abusive trading by
fund managers and other access persons. Chairman Levitt also said
that the Divisions of Investment Management and Enforcement would
be conducting a special examination of 30 fund groups in an
effort to analyze the fund industry's current policies and
practices relating to personal investment activities of access
persons.-[42]-  That examination serves as the principal basis of
this Report.

     The articles relating to Invesco and Fidelity, as well as
the correspondence between Congress and the Commission, led to a
number of press reports on the investment activities of mutual
fund investment personnel. These articles focused on several
different issues. Some, for instance, described various abusive
transactions in which fund managers might engage, including
front-running, participating on favorable terms in initial public
offerings ("IPOs") or private placements, and investing in
companies on whose boards the fund managers serve.-[43]- Other
articles noted that fund shareholders may not fully understand
the potential conflicts of interest regularly faced by the
managers of their funds-[44]- and reported that many fund groups
were unwilling to make the terms of their codes of ethics
available to the public.-[45]- Finally, a number of articles
raised concerns about the ethical standards maintained by the
fund industry and suggested that a total ban on personal
investing by fund personnel might be the only way to ensure high
moral conduct by industry participants.-[46]-

     E.   The ICI Report

     Shortly alter Chairman Levitt's letter to Chairman Markey
described above became public, the ICI, the national association
of the American investment company industry, formed a special
advisory group "to review practices and standards governing
personal investing and to make any recommendations deemed
necessary or desirable in the interest of

-------- FOOTNOTES --------

     -[41]-    Letter from Edward J. Markey, Chairman,
               Subcommittee on Telecommunications and Finance of
               the House Committee on Energy and Commerce, to
               Arthur Levitt, Chairman, U.S. Securities and
               Exchange Commission (Jan. Il, 1994).

     -[42]-    Levitt letter, supra note 29.

     -[43]-    E.g., Tracey Longo, "SEC Places Front Running On
               the Front Burner," Financial Planning, Feb. 1994,
               at 24; Sara Calian, "Mutual Fund Managers Can
               Often Get Part of the Action in Private
               Placements," Wall St. J., Jan. 28, 1994, at CI;
               Robert McGough, "Mutual-Fund Managers Face
               Conflicts of Interest While Serving as Directors,"
               Wall St. J., Jan. 21, 1994, at C1

     -[44]-    See Fromson, supra note 39, at A1 ("Unknown to
               most of the nation's 38 million mutual fund
               shareholders, many of the fund managers who do the
               investing use information available only to them
               and other big investors to speculate for their
               personal accounts.").

     -[45]-    Christopher Phillips, "Keeping Your Fund Manager
               Honest," Kiplinger's Personal Finance Magazine,
               April 1994, at 57, 58 (noting that "[f]unds are
               tight-lipped about their ethics codes" and that,
               in response to the author's request, a few of the
               largest fund groups sent summaries of their codes,
               while others would not discuss their codes at all,
               or discussed them only generally, without giving
               specifics); John Accola, "Only 1 of Top 4 Mutual
               Fund Firms Reveals Ethics Codes," Rocky Mountain
               News, Feb. 6, 1994, at 93A ("Only one of Denver's
               four biggest mutual fund companies has agreed to a
               Rocky Mountain News request to provide a copy of
               their internal guidelines governing personal
               trading for officers and portfolio managers.").

     -[46]-    "Mutual Funds Need Tighter Rules," Business Week,
               Feb. 14, 1994, at 134.

-------------------- BEGINNING OF PAGE #14 --------------------

investors."-[47]- The advisory group, in a report issued on May
9, 1994 (the "ICI Report"), concluded that "an across-the-board
prohibition on personal investing [would be] unnecessary, unfair
and, in the final analysis, contrary to the interests of
investors."-[48]- Notwithstanding this conclusion, the ICI Report
recommends that all participants in the fund industry adopt
certain policies and procedures governing personal investment
activities of fund personnel, short of a total ban, designed to
address "recognized potential for abuse."-[49]- On June 30, 1994,
the ICI's Board of Governors unanimously endorsed the conclusions
and recommendations in the Report and urged all ICI members,
whose funds hold approximately 95% of total industry assets, to
implement the Report's recommendations by January 1, 1995.

     The ICI Report recommends, among other things, that each
fund adopt the following restrictions and procedures with respect
to the personal investing and other activities of its investment
personnel:-[50]-

     *    investment personnel should be prohibited from
          acquiring any securities in an IPO and should be
          strictly limited in their ability to participate in
          private placements of securities;

     *    each fund manager should be subject to "blackout
          periods" during which he would be prohibited from
          buying or selling securities for seven days before and
          after the fund he manages purchases or sells the same
          securities, and other investment personnel should be
          prohibited from buying or selling securities on a day
          during which the fund or any other fund in the same
          fund group has a pending buy or sell order for those
          securities;

     *    investment personnel should be prohibited from
          profiting from the purchase and sale, or the sale and
          purchase, of the same securities within 60 days, and
          any profits realized on any such short-term trades
          should be required to be disgorged;

     *    investment personnel should be prohibited from serving
          on the boards of directors of publicly traded
          companies, absent prior authorization based upon a
          determination that the board service would be
          consistent with the interests of the fund and its
          shareholders;

     *    investment personnel should be prohibited from
          receiving any gift or other thing of more than "de
          minimis" value from any person or entity that does
          business with, or on behalf of, the fund;

     *    investment personnel should be required to pre-clear
          all personal securities transactions;

     *    investment personnel should be required to disclose to
          the fund all personal securities holdings at the
          commencement of employment and annually thereafter;

-------- FOOTNOTES --------

     -[47]-    Report of the Advisory Group on Personal Investing
               (May 9, 1994) at (i).

     -[48]-     Id. at 25.

     -[49]-     Id.

     -[50]-    As used in the ICI Report, the term "investment
               personnel" is essentially synonymous with the term
               "access person" as defined in rule 17j-1. See
               supra note 23.

-------------------- BEGINNING OF PAGE #15 --------------------

     *    investment personnel should be required to instruct
          their brokers to send copies of trade confirmations and
          account statements directly to their employers;

     *    appropriate procedures should be implemented by the
          fund to monitor personal investment activity by access
          persons after pre-clearance has been granted;

     *    access persons should be required to certify annually
          that they have read and understood the fund's code of
          ethics and recognize that they are subject to it; and

     *    fund management should submit to the fund's board of
          directors or trustees an annual report summarizing,
          among other things, any changes made during the past
          year to the fund's procedures governing personal
          investing by access persons and identifying any
          violations of the procedures by an access person
          requiring significant remedial action during the past
          year.

The ICI Report also recommends that funds disclose in their
prospectuses or, at a minimum, their statements of additional
information,-[51]- the policies applicable to personal investing
by their access persons. In addition, the Report recommends that
the NASD adopt a rule requiring all broker-dealers to notify a
registered investment adviser when any of the adviser's employees
opens a brokerage account.

     Although it contemplates that "substantive standards
[relating to personal investing] should apply across the
industry," the ICI Report acknowledges that "[i]ndividual
investment companies, of course, may elect to implement more
rigorous standards should these be deemed more appropriate in a
specific case."-[52]- Moreover, the Report states that a guiding
principle in drafting its recommendations was that "flexibility
to allow investment companies to tailor restrictions to unique or
exceptional circumstances is critical to successful
implementation of [the] standards [reflected in the
recommendations.]"-[53]- Reflecting this principle, the Report
does not advocate that the Commission adopt the Report's
recommendations as rules under the 1940 Act.

III. EXAMINATION OF 30 FUND GROUPS

     A.   Request for Information

     In his letter to Chairman Markey dated February 9, 1994,
Chairman Levitt reported that, to ensure that the confidence of
the public in the investment company industry is well-founded,
"the Divisions of Investment Management and Enforcement, through
a written request for information, are examining fund managers'
personal trading practices to ascertain the extent to which such
trading occurs and how closely these trades are linked to a
fund's

-------- FOOTNOTES --------

     -[51]-    Forms N-1A and N-2, the forms for registering
               open-end and closed-end investment companies,
               respectively, under the Securities Act and the
               1940 Act, provide for a prospectus and a separate
               "statement of additional information" ("SM"). The
               SM, which is available upon request, is designed
               to provide shareholders with information about the
               registrant that is not required to be included in
               the prospectus but that may be of interest to at
               least some investors.

     -[52]-    ICI Report, supra note 47, at 26.


     -[53]-    Id.

-------------------- BEGINNING OF PAGE #16 --------------------

portfolio."-[54]- The special examination was begun in February
and March of this year when the two Divisions sent letters to 30
fund groups-[55]- requesting the following documents and
information for calendar year 1993:

     *    the identity of each fund in the group and each
          individual who managed a fund;

     *    a copy of the code of ethics for each fund and its
          adviser, any other written or unwritten policies
          regarding personal investing, and descriptions of any
          violations of those codes or policies;

     *    the number of personal transactions made by each fund's
          manager; and

     *    specific information about certain fund manager
          personal transactions and certain fund portfolio
          transactions, as more fully described in Part rn.C. 1.
          of this Report.-[56]-

     B.   Codes of Ethics: Content and Compliance

     Although the 30 codes of ethics reviewed by the Commission's
staff had certain provisions in common, no two codes were
identical. Exhibit B to this Report contains a statistical
summary of the various provisions found in the codes of ethics
reviewed by the staff.

     The most common restriction placed on personal trading (21
of the 30 fund groups) prohibits an access person of a fund from
purchasing or selling any securities that he knows are being
considered for purchase or sale, or are being purchased or sold,
by the fund. In addition, 15 of the 30 groups impose a blackout
period that prohibits trading securities for a specified time
before and/or after one of the funds in the group has purchased
or sold the same securities. The length of the blackout period
varies from one day to 30 days, and the restriction frequently
applies to all employees rather than being limited to access
persons. Five fund groups prohibit or restrict employees from
purchasing securities in an IPO; nine other groups prohibit or
restrict employees from purchasing IPOs that qualify as "hot
issues."-[57]-

     All 30 funds, as mandated by rule 17j-1, require their
access persons (and frequently other employees as well) to report
their personal transactions. Although the rule requires only
quarterly reporting, more than half of the funds require
contemporaneous reporting, accomplished either by requiring
employees to trade through approved (and usually affiliated)
broker-dealers, or by requiring employees (or their broker-
dealers) to provide duplicate confirmations of all personal
securities transactions. Seventeen of the 30 fund groups require
employees to pre-clear all personal securities transactions.
Seven others

-------- FOOTNOTES --------

     -[54]-    Levitt letter, supra note 29.

     -[55]-    Exhibit A to this Report includes copies of the
               February and March letters. The criteria used to
               select the 30 fluid groups are discussed in Part
               III.C.3 of this Report.

     -[56]-    The staff requested information about personal
               transactions by fund managers, and not other
               access persons, because it concluded that managers
               generally have the most information about, and
               control over, impending fund transactions, as well
               as the financial ability to act on that
               information and control.

     -[57]-    The term "hot issue" is defined in the NASD's
               Rules of Fair Practice. See infra note 121.

-------------------- BEGINNING OF PAGE #17 --------------------

require pre-clearance for certain defined categories of
transactions, such as options and futures, or securities on a
"restricted" list.

     Most of the 30 codes of ethics reviewed by the staff provide
for employees to receive a copy of the code upon commencement of
employment. Many funds distribute copies annually thereafter, and
each employee usually must certify each time that he has received
a copy and has read and understood it. When a fund amends its
code, it typically distributes a copy of the amended code to all
employees. It appears that a number of funds regularly review
their codes to determine whether changes are appropriate. At
least six of the 30 fund groups amended their codes in 1993,
including four fund groups that added a preclearance requirement.

     The oversight of employees' compliance with a fund's code of
ethics is usually a function of the fund group's compliance
department. Compliance responsibilities often include determining
whether to pre-clear a trade, or checking an employee's duplicate
confirmations against his quarterly report of transactions to
identify discrepancies.

     In its review of the records of the 30 fund groups, the
staff found that fund groups often deal severely with employees
who violate codes of ethics provisions. Five of the 30 fund
groups reported code violations by 12 employees; the remaining 25
fund groups did not report any code violations.-[58]- Most of the
violations involved failure to preclear a trade. Nine of the 12
employees had their trades cancelled, disgorged profits, or were
required to sell their positions at a loss. The three others
received written reprimands, and one of them also was fined $600.
Exhibit C of this Report contains a description of each violation
reported, and the remedial action taken.

     C.   Analysis of Trading Data

          1.   Introduction

     In response to the staff's requests for information, the 30
fund groups submitted data about their funds' portfolio
transactions and their fund managers' personal transactions
during 1993. As of the end of 1993, the 30 fund groups employed
622 portfolio managers and had $521 billion under management in
1,053 funds. As of the same time, these fund groups managed
approximately 36.5% of the assets, and constituted 28.4% of the
funds, in the investment company industry, excluding unit
investment trusts, money market funds, and funds investing
primarily in United States government securities.-[59]-

     In conducting its examination, the staff requested
information on three categories of personal securities
transactions made by fund managers:

-------- FOOTNOTES --------

     -[58]-    The staff limited its request for information
               about code violations to those violations that
               prompted a fund to take "significant remedial
               action" against an employee.  In its request for
               information, the staff defined significant
               remedial action to include firing, suspending
               (with or without pay), reassigning, or demoting
               the employee; requiring the reversal of a trade or
               the disgorgement of profits; formal censure; and
               any other remedial action that might affect the
               employee's promotion opportunities. This request
               was designed to keep the quantity of information
               manageable by eliminating the need for funds to
               report certain violations, such as the occasional
               late filing of quarterly reports.


     -[59]-    Rule 17j-1 currently excludes money market
               instruments and United States government
               securities from its definition of "securities."
               See supra note 22. Unit investment trusts were
               excluded from our special examination because they
               are not managed investment vehicles.

-------------------- BEGINNING OF PAGE #18 --------------------

     (a)  all personal transactions;

     (b)  personal transactions that were "matching trades,"
          which were defined to include any personal transaction
          that preceded by ten days or less a transaction by a
          related fund on the same side of the market (i.e.,
          buy/buy or sell/sell) in the same or related
          securities;-[60]- and

     (c)  matching trades that were "fund matching trades," which
          were defined to include any matching trade in which the
          related fund was a fund whose portfolio securities were
          selected by the fund manager.

Requests (b) and (c) were designed to identify potential
instances of front-running by fund managers.-[61]-  Fund matching
trades were considered particularly relevant to the Division's
analysis because managers are likely to have more information
about their own funds than about other funds in a fund group, and
thus have more of an opportunity to profit by buying or selling
ahead of their own funds.

     Other information requested by the staff included a listing
of fund purchases of any equity securities that, at the time of
the purchase, were held by that fund's manager (regardless of the
time lapse between the purchases). As noted below in Part III.C.8
of this Report, these purchases can result in potential conflicts
of interest between a fund and its manager.

     2.   Summary of Findings

     The data submitted by the 30 fund groups shows that,
generally, fund managers do not invest extensively for their
personal accounts. In 1993, 43.5% of the fund managers employed
by the groups did not buy or sell any securities; 75% engaged in
ten or fewer transactions. The median number of personal
transactions per manager for 1993 was two.

     The data also indicates that fund managers generally avoid
purchasing or selling securities that might cause a conflict of
interest. Only about one of every 21 personal transactions, for
example, was a matching trade and only about one of every 49
personal transactions was a fund matching trade.-[62]- In the
majority of matching and fund matching trades, the manager did
not receive a better price than the fund.

-------- FOOTNOTES --------

     -[60]-    A "related fund" was defined as any fund whose
               portfolio securities were selected by the fund
               manager, or any other fund in the same fund group.
               For purposes of the examination, two securities
               were deemed "related" if the value of one security
               was related to the value of the other. For
               example, options or warrants to purchase common
               stock, convertible debt, and convertible preferred
               stock were deemed related to the underlying common
               stock. For convenience, all references hereafter
               to "the same securities" include related
               securities, unless specifically noted otherwise.

     -[61]-    In the interest of collecting a manageable
               quantity of relevant data, the staff asked the
               fund groups to exclude equity securities contained
               in the Standard & Poor's 100 Composite Stock Index
               from the data submitted in response to requests
               (b) and (c). Front-running typically contemplates
               the ability of a fund's trade to move the price of
               securities. Because of the degree of liquidity of
               the markets for S&P 100 stocks, it would seem
               highly unlikely that a single fund's purchase or
               sale transaction would affect the price of these
               stocks.

     -[62]-    Exhibit E illustrates, in pie chart form, the
               relative number of matching trades and fluid
               matching trades in relation to the total number of
               personal transactions. (Not included in this
               document).

-------------------- BEGINNING OF PAGE #19 --------------------

     The investment activities of certain of the fund managers
employed by the 30 fund groups were inconsistent with the general
trends. A small percentage of the fund managers invested very
actively for their personal accounts. More significantly, some
managers (usually the most active investors) made a large number
of matching trades. The data also shows that many of the managers
who were the most active investors and who were responsible for
the most matching trades (including fund matching trades) were
associated with four fund groups.

     3.   Limitations of the Data

     The data received from the 30 fund groups must be considered
in the context of certain limitations. First, although the staff
sought to obtain a broad cross-section of the fund industry, the
30 fund groups selected were not selected randomly and are not
necessarily representative of the industry as a whole. The staff
selected an approximately equal number of small, medium, and
large fund groups based on assets under management,-[63]- and
attempted to select funds that employed a variety of investment
strategies and objectives. Other selection criteria included
geographic location and type of sponsoring organization (e.g.,
broker-dealer, investment adviser, or bank). Three fund groups
were selected based on the staff's experience, through prior
inspections, that the groups' managers had invested actively for
their personal accounts. The three groups were among the four
fund groups examined whose managers invested most frequently and
were responsible for the highest number of matching trades and
fund matching trades. The Division believes that, if all 30 fund
groups had been selected without regard to how frequently their
managers had traded in the past, the data from the special
examination may have reflected fewer personal transactions,
matching trades, and fund matching trades.

     Second, the staff's analysis is based on the data as
submitted by each fund group, except that the staff in certain
instances treated serial purchases or sales of the same
securities as a single transaction.-[64]-

     Finally, certain of the 30 fund groups employ unaffiliated
(and separately located) subadvisers to manage all or a portion
of their funds' assets. Two fund groups contended that it was
unnecessary to report as matching transactions the personal
transactions of portfolio managers employed by unaffiliated
subadvisers that matched the portfolio transactions of funds in
the groups managed by other advisers ("unaffiliated matching
trades"). The two fund groups represented that the unaffiliated
subadvisers did not share information about securities under
consideration for purchase or sale with advisers of other funds
in the group. The staff concluded that unaffiliated matching
trades in all probability

-------- FOOTNOTES --------

     -[63]-    For purposes of the examination, the staff
               considered fund groups to be small, medium, or
               large based on whether they managed less than $1
               billion, between $1 billion and $10 billion, or
               more than $10 billion, respectively.

     -[64]-    To avoid overstating the number of personal
               transactions and matching trades, the staff
               consolidated multiple reported transactions into
               one transaction whenever multiple transactions
               resulted from a single investment decision. This
               occurred in two situations -- when a manager
               purchased or sold the same security for multiple
               accounts in which he had a beneficial interest,
               and when a manager's single order to purchase or
               sell a security on behalf of a fund was executed
               in multiple transactions. Each group of
               consolidated transactions was effected by the same
               broker, within approximately 24 hours, and at
               approximately the same price. We consolidated the
               transactions of 10 fund groups that were
               responsible for the overwhelming majority of
               matching trades and fund matching trades (82% and
               86%, respectively). The consolidation had no
               material effect on the outcome of the examination,
               although had the staff combined transactions for
               all 30 fund groups, the data would reflect fewer
               matching trades and fewer fund matching trades.

-------------------- BEGINNING OF PAGE #20 --------------------

were coincidental and therefore did not reflect front-running or
any other abusive practice, and permitted the two fund groups to
exclude such trades from the matching trades they reported. Some
of the other 28 fund groups likewise employ unaffiliated
subadvisers to manage their funds, but did not seek staff
clarification on the manner in which to report subadviser
transactions. If those other groups have in fact reported
unaffiliated matching trades as matching trades, the number of
matching trades reported may be overstated.

     4.   Exclusion of One Fund's Data

     The data presented below excludes data for one of the funds
in one of the 30 fund groups. The fund in question is managed in
a style that is atypical of the fund industry. The staff
concluded, after close analysis of the fund's operations and
investment history and an on-site inspection of two of its
subadvisers, that this management style resulted in personal
trading data that was dramatically inconsistent with the other
1,052 funds covered by the special examination and that was not
necessarily representative of the fund industry.

     The fund in question was designed to provide individual
investors with the opportunity to invest with advisory firm's
that otherwise manage money exclusively for wealthy individuals
and institutional investors. The fund's investment adviser, an
affiliate of the fund's sponsor, allocates a portion of the
fund's assets to each of four subadvisers who are unaffiliated
with the fund's adviser and with each other. None of the four
subadvisers, and none of the four individuals who managed the
fund's portfolio on behalf of the subadvisers, had managed the
assets of a registered investment company prior to serving the
fund. In managing a portion of the fund's assets, two of the
individuals employed investment strategies identical to those
employed on behalf of their other advisory clients. Those
strategies contemplated the two managers' typically purchasing
and selling the same securities for all of their clients, as well
as for their personal accounts, at the same time. Such co-
investment by a manager is characteristic of managers of hedge
funds and other institutional investors, but is not a strategy
generally followed by managers of registered investment
companies.-[65]-

     The investment strategy followed by two of the fund's
managers appears to have resulted in personal investment data for
these managers that is inconsistent with the data collected from
the managers of the other 1,052 funds examined. The two managers
each engaged in over 1,400 personal securities transactions in
1993, or almost three times the number of the next most active
manager in the group of 30 funds examined. The two managers also
had a total of more than 1,000 matching trades, each of which
also constituted a fund matching trade. By contrast, the 618
managers not associated with the fund in question whose
investments were examined by the staff had a total of only 471
matching trades, of which 201 were fund matching trades.

     Because the trading data from the managers of this one fund
deviates so greatly from the data from the other managers, and
because the fund may not be representative of the fund industry
generally, the Division concluded that it was appropriate to
exclude this fund in presenting the results of the special
examination. In the Division's view, including this fund's data
would diminish the significance and utility of the data submitted
by the other 1,052 funds examined. To illustrate the effect of
the data submitted by the fund in question,

-------- FOOTNOTES --------

     -[65]-    Co-investment may not be characteristic of
               registered investment companies because of
               difficult interpretive issues raised by the
               practice under section 17(d) of the 1940 Act.

-------------------- BEGINNING OF PAGE #21 --------------------

Exhibit D of this Report compares the data for the other 1,052
funds with the data for all 1,053 funds included in the
examination.

     The staff conducted an on-site inspection of the two
subadvisers whose managers' personal investment activities were
atypical of the other managers whose investments were reviewed.
The inspection of one subadviser did not reveal evidence of
abusive trading activities. The inspection of the other
subadviser has not yet been completed.

     5.   Securities Transactions of the Fund Managers Examined

     The data provided to the staff revealed that a substantial
majority of the fund managers employed by the 30 fund groups
examined either did not buy or sell securities in 1993, or did so
infrequently; only a small percentage of managers invested
actively for their personal accounts. The 30 fund groups reported
a total of 9,843 personal securities transactions by 618 fund
managers during 1993.-[66]- Of these managers, 269, or 43.5%,
reported no personal transactions. The median number of personal
transactions for all 618 fund managers was two.-[67]-  In
addition, personal transactions were concentrated among a small
number of managers. Ten managers had over 200 transactions each;
two of these individuals had over 500 transactions each. The five
managers who invested most actively accounted for almost 25% of
all personal transactions included in the data received by the
staff; the 10 most active managers accounted for over 37% of all
personal transactions, and the 20 most active managers accounted
for 50% of all personal transactions. The following table
summarizes the number of fund managers' personal securities
transactions:

Number of Personal Transactions    Number of Managers

          0                        269  (43.5%)
          1    -   2               70   (11.3%)
          3    -  10               124  (20.1%)
          11   -  20               59   ( 9.5%)
          21   -  40               43   ( 7.0%)
          41   - 100               37   ( 6.0%)
               > 100               16   ( 2.6%)

     Significantly, most of the active investors were
concentrated among a few fund groups. Of the 20 managers who had
the greatest number of personal transactions, 16 were associated
with four fund groups. As the following table illustrates, fund
managers associated with those four fund groups accounted for
almost half of all personal securities transactions reflected in
the data received by the staff:

-------- FOOTNOTES --------

     -[66]-    Although it received data with respect to 622 fund
               managers, the staff excluded the data from the
               four managers of one fund, for the reasons set
               forth in Part III.C.4 above.

     -[67]-    By contrast, the average number of personal
               securities transactions per manager was 16. The
               wide disparity between the median and average
               figures results from a small number of fund
               managers engaging in a substantial number of
               personal securities transactions. This result may
               be due, in part, to the selection of certain fund
               groups based on the staff's experience that the
               groups' managers had, in the past, invested
               actively for their personal accounts. See supra
               Part III.C.3. The Division concluded that, in this
               instance, the typical fund manager's personal
               investment activities are presented more
               accurately by using the median instead of the
               average.

-------------------- BEGINNING OF PAGE #22 --------------------

                                                   Avg. Number of
                                                   Personal
Number of      Number (%)      Number (%) of       Transactions
Fund Groups    of Managers  Personal Transactions  Per Manager
-----------    -----------  ---------------------  ------------

     4         96 (15.5%)     4,807 (48.9%)            50.0
    26        522 (84.5%)     5,036 (51.1%)             9.6

     6.   Matching Trades

     Of the 9,843 personal transactions reported to the staff,
471(4.8%) were matching trades.-[68]- The staff's examination
revealed that a sizable majority of fund managers had no matching
trades, and that those managers who had such trades had only a
small number of them. Over 80% of the 618 fund managers in our
sample had no matching trades at all. The average number of
matching trades for all 618 fund managers was less than one. The
following chart illustrates that the fund managers whose
transactions were reviewed by the staff generally did not
actively buy or sell securities ahead of a related fund:

     Number of Matching Trades     Number of Managers

              0                    504  (81.6%)
    1     -   2                    73   (11.8%)
    3     -   4                    16   (2.6%)
    5     -  10                    17   (2.8%)
   11     -  20                    4    (0.6%)
          >  20                    4    (0.6%)

     The data showed that a small number of managers engaged in a
large percentage of matching trades. Four managers accounted for
30% of all matching trades; twelve managers accounted for just
under 50% of all matching trades. Eight of those 12 managers (and
all of the four managers who had the most matching trades) were
associated with four fund groups -- the same four groups whose
managers had the highest concentration of personal securities
transactions. The following table illustrates the concentration
of matching trades among these four fund groups:
     
                                                  Avg. Number of
Number of      Number (%)     Number (%) of       Matching Trades
Fund Groups    of Managers    Matching Trades     Per Manager
-----------    -----------    ---------------     -------------

     4          96 (15.5%)    235 (49.9%)              2.45
    26         522 (84.5%)    236 (50.1%)              0.45


     For each matching trade involving equity securities (433 of
the 471 matching trades), the staff examined the length of time
between the manager's transaction and the fund's transaction, and
the difference in the respective transaction prices.-[69]- On
average, fund

-------- FOOTNOTES --------

     -[68]-    This number may overstate the actual number of
               matching trades. See the discussion in Part
               III.C.3 of this Report.

     -[69]-    In comparing the prices that funds and managers
               paid or received in matching trades, the staff
               focused on equity securities because the per share
               price of equity securities affords a basis for
               comparison. Because it would not be helpful in
               this context to compare the price of equity
               securities to the price of a warrant or option
               relating to the securities, the statistics cited
               in the table above relate to matching trades of
               the same securities only, and not to related
               securities. See supra note 60.

-------------------- BEGINNING OF PAGE #23 --------------------

managers purchased or sold equity securities 3.4 days before a
related fund, and did so at a less favorable price than the
fund.-[70]- Notwithstanding the average statistics, fund managers
received a better price than a related fund in 175 transactions
(1.8% of the 9,843 personal transactions reported by the fund
managers covered by the staff's examination). These 175 manager
transactions consisted of 118 purchases and 57 sales. Favorable
purchases by managers, on average, occurred 3.5 days before a
matching fund transaction and the price per share paid by the
manager was $1.24 less than the fund paid. Favorable sales by
managers, on average, occurred 4. 1 days before the matching fund
trade and the price per share received by the manager was $1.47
more than the fund received. Approximately half of the matching
trades in which the fund manager received a better price than a
related fund were pre-cleared by the manager's employer.

     7.   Fund Matching Trades

     The data collected by the staff revealed that, in 1993, the
overwhelming majority of fund managers whose transactions were
examined -- more than 90%-- had no fund matching trades, and most
of those who had fund matching trades had only one or two of
them. The following table summarizes these results:

          Number of
     Fund Matching Trades     Number of Managers

              0                    570  (92.2%)
              1                    25   (4.1%)
              2                    8    (1.3%)
         3 - 10                    12   (1.9%)
        11 - 20                    2    (0.3%)
          >  20                    1    (0.2%)

     The 30 fund groups reported 201 fund matching trades, or
2.0% of all personal securities transactions in 1993. A large
percentage of the 201 fund matching trades was undertaken by a
few managers. One manager, for example, had 60 fund matching
trades and another had 20, accounting for 30% and 10%,
respectively, of all fund matching trades. The four fund groups
responsible for the highest concentration of personal
transactions and matching trades also were responsible for more
than two-thirds of all fund matching trades,
as the following table illustrates:

                                                   Avg. Number of
Number of      Number (%)     Number (%) of Fund   Fund Matching
Fund Groups    of Managers    Matching Trades      Trades Per Mgr
-----------    -----------    ------------------   ------------
    4           96 (15.5%)       140 (69.7%)           1.46
   26          522 (84.5%)        61 (30.3%)           0.12


     The data collected shows a correlation between the size of a
fund and the proportion of personal securities transactions by
the fund's managers that are fund matching transactions. The
proportion is considerably higher for fund managers associated
with small

-------- FOOTNOTES --------

     -[70]-    Of the 295 matching trades that involved the
               purchase of the same equity securities by a fund
               manager and a related fund, the price per share
               paid by the manager averaged $0. 10 higher than
               the fund paid. Similarly, of the 138 matching
               trades that involved the sale of the same equity
               securities by a fund manager and a related fund,
               the price per share received by the manager
               averaged $0.43 lower than the fund received. 

-------------------- BEGINNING OF PAGE #24 --------------------

and medium size fund groups (4.3 % and 3.8%, respectively) than
it is for those associated with large fund groups (0.7%).-[71]-

     For each fund matching trade involving equity securities
(183 of the 201 fund matching trades), the staff examined the
length of time between the manager's transaction and the fund's
transaction, and the difference in the respective transaction
prices.-[72]- Like that relating to matching trades generally,
the data for fund matching trades shows that, on average,
managers purchased and sold securities at less favorable prices
than their funds.-[73]- Notwithstanding the average statistics,
fund managers received a better price than their funds in 69
transactions (less than 1 % of the 9,843 personal transactions
reported by the fund managers covered by the examination). The 69
manager transactions consisted of 46 purchases and 23 sales.
Favorable purchases by managers occurred, on average, 3.7 days
before a matching fund trade and the price per share paid by the
manager was $1.03 less than the fund paid. Favorable sales by
managers occurred, on average, 4.2 days before the matching fund
trade and the price per share received by the manager was $1.90
more than the fund received.

     8.   Fund Equity Purchases of Securities Held by the Fund's
          Manager

     The staff asked the 30 fund groups to identify all fund
purchases of equity securities that, at the time of purchase,
were held by the fund's manager ("matching fund equity
purchases").-[74]- This request was designed to identify
circumstances involving either of two potential conflicts of
interest. First, a manager who causes his fund to purchase
securities he holds may be attempting to increase the price of
the securities. Second, a manager who holds the same securities
as his fund may, in seeking to protect the value of his personal
investment, not sell the securities held by the fund at a time
most beneficial to the fund.

     The number of matching fund equity purchases reported to the
staff was small. Approximately one of every 34 fund equity
purchases (2.9%) was a matching fund equity purchase. The number
of matching fund equity purchases that raised potential conflict
of interest situations was even lower, because many matching
purchases involved actively

-------- FOOTNOTES --------

     -[71]-    The staff believes that these results may indicate
               greater potential for compliance problems at
               smaller fund groups. The concern that smaller
               funds and new entrants to the fund industry may
               have less developed compliance programs caused the
               Division late last year to focus more of its
               inspection resources on these types of funds. See
               supra note 28 and accompanying text.

     -[72]-    See supra note 69.

     -[73]-    Of the 123 fund matching trades that involved the
               purchase of the same equity security by a fund
               manager and the fund he managed, the price per
               share paid by the manager averaged $0.24 higher
               than the fund paid. Similarly, of the 60 matching
               trades that involved the sale of the same equity
               securities by a fund manager and his fund, the
               price per share received by the manager averaged
               $0.99 lower than the fund received. On average,
               managers who purchased or sold stock in advance of
               their funds did so 3.5 days before their funds'
               transactions.

     -[74]-    The data presented with respect to matching fund
               equity purchases covers only 28 of the 30 fund
               groups examined by the staff. Two groups did not
               respond to this request because they could not
               obtain information about their managers'
               securities holdings before the managers began
               working for the groups. The inability of these
               fund groups to obtain information about their
               managers' pre-employment holdings underscores the
               need for a requirement that fund personnel
               disclose their securities holdings at the
               commencement of their employment with a fund or a
               fund's adviser. The Division is recommending that
               the Commission adopt such a requirement. See
               Recommendation 3 in Part v of this Report.

-------------------- BEGINNING OF PAGE #25 --------------------

traded securities of large capitalization companies whose prices
were unlikely to have been affected given the size of a fund's
purchase.

     The number of matching fund equity purchases as a percentage
of a fund group's total equity purchases ranged from a low of
zero to a high of 15.8%. The four fund groups whose managers
accounted for the highest concentration of personal securities
transactions, matching trades, and fund matching trades, were
also among the fund groups with the highest percentages of
matching fund equity purchases. The following table illustrates
these findings:

             Number (%) of    Number (%) of       Avg. Pctg. of
Number of    Fund Equity      Matching Fund       Matching Fund
Fund Groups  Purchases        Equity Purchases    Equity Prchses
-----------  -------------    ----------------    -------------

     4       47,109 (20.0%)   3,991 (57.9%)            8.5%
    24      187,909 (80.0%)   2,902 (42.1%)            1.5%

     The staff found a correlation between the size of a fund
group and the proportion of the group's matching fund equity
purchases. Small groups had the highest proportion of matching
fund equity purchases, 5.1 %, medium groups had 3.0%, and large
groups had 1.7%.

     D.   Need for Further Examinations

     The vast majority of the fund managers subject to the
staff's examination did not invest actively for their personal
accounts, and invested infrequently or not at all in advance of a
related fund. A few managers, however, engaged in a significant
number of transactions, including numerous matching trades. At
this time, the staff lacks sufficient information to assess
whether these transactions involved front-running or other
prohibited practices. The staff is in the process of obtaining
additional information about these transactions, particularly
those in which the manager received a better price than a related
fund. In addition, the staff is examining the compliance programs
of the four fund groups whose managers effected the most personal
securities transactions, matching trades, and fund matching
trades, and a significant number of matching fund equity
purchases, to determine whether these groups exercised adequate
oversight over the personal investment activities of their
employees. If the Division's inspection staff finds evidence of
abusive conduct or materially deficient procedures, it will refer
those matters to the Division of Enforcement for further action.

IV.  ANALYSIS OF CERTAIN ISSUES

     In developing recommendations designed to enhance the
existing rules governing the personal investment activities of
fund access persons, the Division considered two key policy
issues that have been raised by members of Congress, certain
Commissioners, and numerous press articles. Those issues are:
whether personal investing by access persons should be banned
entirely and whether the standards of conduct recommended by the
ICI Report, or other similar or comparable standards, should be
made mandatory for all funds through Commission rules. For the
reasons described below, the Division believes that the
Commission should continue to follow its long-standing positions
that personal investing by access persons should not be banned
and that specific standards governing personal investing should
not be mandated.

-------------------- BEGINNING OF PAGE #26 --------------------


     A.   Banning Personal Investing

     In a letter dated May 23, 1994, Representative John D.
Dingell, Chairman of the House Committee on Energy and Commerce,
asked the Commission to consider whether the practice of personal
investing by fund access persons should be banned entirely.-[75]-

Commissioner Roberts and Judge Stanley Sporkin, former director
of the Commission's Enforcement Division, among others, have
suggested that a ban may be appropriate.-[76]- At least one fund
group reportedly has imposed a ban on certain access persons.

     Commentators have offered several reasons to support a ban
on personal investing by fund access persons. First, some say
that a ban is the only way to deal effectively with real or
perceived conflicts of interest that exist when access persons
invest for their own accounts.-[78]- Others contend that the fund
industry must adhere to the highest possible ethical standards in
light of the substantial number of investors, particularly new
investors, now turning to mutual funds, and the substantial
amount of assets now under the control of fund managers.-[79]-
Still others have said simply that a ban may be the only way for
the industry to retain its "squeaky clean" reputation.  Finally,
some observers maintain that the time spent

-------- FOOTNOTES --------

     -[75]-    Letter from John D. Dingell to Arthur Levitt,
               Chairman, U.S. Securities and Exchange Commission,
               and Matthew Fink, President, Investment Company
               Institute (May 23, 1994).

     -[76]-    "Portfolio Manager Trading, Investment Adviser
               Fees and Bank Mutual Fund Activities," Remarks of
               Richard Y. Roberts, Commissioner, U.S. Securities
               and Exchange Commission, before the District of
               Columbia Bar and George Washington Univ. Merging
               Financial Markets Conference in Washington, D.C.
               (Mar. 25, 1994); "Does an Ethical Dilemma Exist in
               the Financial Services Industry?," Remarks of
               Stanley Sporkin, U.S. District Court Judge, before
               the Association of Investment Management &
               Research Conference in Washington, D.C. (Dec. 1,
               1993).

     -[77]-    Berger Associates, an advisory firm that manages
               three public mutual funds with approximately $2.3
               billion in assets, prohibits its fund managers
               from holding individual stocks in their personal
               accounts. Jonathan Clements, "Personal Trading is
               Common Among Fund Managers," Wall St. J., Jan. 25,
               1994, at C1.

     -[78]-    "Mutual Fund Directors: On the Front Line for
               Investors," Remarks of Arthur Levitt, Chairman,
               U.S. Securities and Exchange Commission, before
               the Mutual Funds and Investment Management
               Conference in Scottsdale, Arizona (Mar. 21, 1994),
               at 6 ("Many in the industry argue that trading by
               managers, create(s] only a perceptual problem.
               That is precisely the point. With millions of
               inexperienced investors leaving the safety of bank
               CDs for the expectation of higher returns in the
               mutual fund market, we can ill afford even the
               perception of conflict. . . . If I were a [mutual
               fund] director I would have reservations about
               trading by managers . . . .") (emphasis in
               original); B.J. Phillips, Mutual Funds, Mutual
               Conflicts, PhiIa. Inquirer, Mar. 9, 1994 ("As
               absolutist as it seems, abolishing personal
               trading entirely may be the only approach the
               investment industry can afford.").

     -[79]-    Levitt remarks, supra note 78; Robert McGough &
               Sara Calian, "SEC Focuses on Personal Trades,"
               Wall St. J., Jan. 13, 1994, at C1, C25 (quoting
               Kathryn McGrath, former Division director) ("The
               mutual fund industry 'has a very clean
               reputation,' she says. But because of the
               industry's explosive growth, 'there is so much
               more money being handled in the care of these
               folks that the standards for watching them need to
               be raised."').

     -[80]-    "Mutual Funds Need Tighter Rules" (editorial),
               Bus. Week, Feb. 14, 1994, at 134 ("One way for the
               mutual-fund industry to retain its squeaky-clean
               image is to forbid its managers from trading for
               themselves."); Tom Petruno, "When It Comes to Fund
               Industry, Public Trust Must Be a Mutual Issue,"
               L.A. Times, Jan. 12, 1994, at D1, D3 ("If
               investors begin to doubt that fund managers are
               much different from the market crooks who paraded
               through federal courts in the 1980s -- people
               whose main goal was to enrich themselves, to
               others' detriment -- the fund industry will lose
               one of its most important selling points with the
               small investor.").

-------------------- BEGINNING OF PAGE #27 --------------------

by fund managers analyzing particular investments should benefit
only fund investors and not the managers themselves.-[81]-

     Opponents of a ban cite a variety of reasons for their view.
Some maintain that a ban is simply unnecessary to encourage high
ethical standards among investment personnel. The ICI Report
argues, for instance, that competitive pressures in the fund
industry should induce funds to adopt high standards. According
to the Report "[n]o investment management firm will succeed in
[today's competitive] environment unless it consistently serves
the interests of the customer first."-[82]- Some commentators
opposed to a ban contend that personal investing potentially
provides benefits to fund shareholders by sharpening fund
managers' skills.-[83]- Other opponents argue that a ban would
place mutual funds at a competitive disadvantage, in terms of
hiring and retaining qualified personnel, to other institutional
investors, such as employee benefit plans, hedge funds, insurance
company separate accounts, and bank trust departments, which do
not prohibit personal investing by their investment
professionals.-[84]-

     From the Division's perspective, it is relevant to consider
whether the Commission's authority under section 17(j) is
sufficiently broad to enable it to prohibit the practice. As
noted above in Part II.A. 1 of this Report, by its terms, section
17(j) does not contemplate a ban on all personal investing. The
legislative history of section 17(j) is consistent with the view
that the Commission's authority under the section is limited. At
no time, in considering the provision that became section 17(j),
did Congress indicate a desire to prohibit personal trading.
Moreover, in making the recommendation to Congress that
ultimately resulted in the enactment of section 17(j), the
Commission, as pointed out above, stated expressly that "persons
affiliated with investment companies cannot be expected to

-------- FOOTNOTES --------

     -[81]-    Susan Antilla, "Fund Managers Testing the Rules,"
               N.Y. Times, Jan. 23, 1994, at F15 (quoting a
               trustee of a mutual fund, who said that fund
               managers are "spending time analyzing stocks that
               aren't benefiting the fund. . . . They can all say
               'I do it at home after my kids are in bed,' but,
               well, give me a break."); Henry Dubroff, "Expect
               Your Mutual Fund Manager to 'Eat His Own
               Cooking'," Denver Post, Jan. 16, 1994, at 1C ("I
               don't want the people who manage my mutual funds
               spending a lot of time or making a lot of money on
               personal deals when they should be watching the
               funds' money.").

     -[82]-    ICI Report, supra note 47, at 21.

     -[83]-    Robert McGough, "A Primer on Questions Surrounding
               Personal Trading by Fund Managers," Wall St. J.,
               Jan. 17, 1994, at C10 (quoting a Fidelity
               spokeswoman, who said "We strongly believe that
               allowing our managers to trade individual stocks
               sharpens their skills, educates them about the
               markets, and ultimately produces even better
               performance for our shareholders."); John Durie,
               "Government Ready to Rein in Funds Biz.," N.Y.
               Post, Jan. 12, 1994 ("It is ridiculous to ban fund
               managers from buying stocks, if for no other
               reason than personal experience in the game makes
               for a better manager.").

     -[84]-    See "Mutual Satisfaction" (editorial), Wall St.
               J., May 25, 1994, at A16 ("[A]n outright
               prohibition on trading . . . would impel more top
               investment pros to leave the public funds, or else
               to demand far higher salaried compensation and
               thus boost management fees for mutual [fund]
               shareholders."); Richard M. Phillips, Christian E.
               Plaza, and Mitchell B. Bimer, "Personal Trading by
               Persons Associated with Mutual Fund Advisers: A
               Time for Re-Evaluation," The Inv. Law., at 3, 4
               (May  1994) ("To... prohibit investment company
               employees from managing their personal portfolios
               could place the mutual fund industry at an unfair
               competitive disadvantage with other money managers
               in competing for qualified personnel."); James M.
               Pethokoukis, "Controversy Has Yet to Sully Funds'
               Image," Investor's Bus. Dally, Mar. 4, 1994
               (quoting A. Michael Lipper, president of Lipper
               Analytical Services) ("And what I think would
               happen [with a ban on personal trading] is that
               the good money managers would leave for hedge
               funds.").

-------------------- BEGINNING OF PAGE #28 --------------------

refrain from engaging in securities transactions for their
personal accounts."-[85> In view of the language and legislative
history of section 17(j), the Division believes that the
Commission should not prohibit all personal trading by fund
insiders unless its authority to do so is clarified and confirmed
by Congress. The Commission's Office of the General Counsel
concurs with the Division's position.

     In the Division's view, whether personal investment
activities by fund access persons should be banned depends on an
analysis of three related issues: the prevalence of abusive
securities transactions by access persons; the potential harm to
fund shareholders caused by access persons' personal investment
activities; and the likelihood that a ban would curb abusive
trading by access persons. The Division has considered each of
these issues and has concluded that prohibiting investment by
access persons is not warranted at this time.

     The evidence the Division has reviewed to date suggests that
abusive investing by fund access persons is not prevalent
throughout the fund industry. The Division's inspectors, who
review personal securities transactions in the normal course of
fund examinations, have found few instances of abusive investing
by fund access persons.-[86]- The results of the staff's special
examination support the experience of the Division's inspection
staff. The data from the special examination shows that a
substantial percentage of fund managers did not invest, or
invested only infrequently, for their personal accounts.-[87]-
The data also suggests that those managers who invested generally
did not engage in transactions that raised potential conflicts of
interest with their funds.-[88]-

     The special examination indicates not only that potentially
abusive personal securities transactions by fund managers are
infrequent, but also that the fund industry seeks to ensure that
abusive transactions do not occur. The examination suggests that
funds review their codes of ethics regularly and that at least
some funds sanction severely employees who violate fund codes.
The Division believes that the recent interest shown by Congress
and the Commission in the issue of personal investing, the
increase in the number of Division examiners currently
contemplated,-[89]- an increase in the frequency of the
Division's investment company inspections, and widespread
acceptance of the recommendations contained in the ICI Report and
this Report should all serve to further minimize abusive
investing by fund access persons.

     In the absence of compelling evidence that abusive personal
investing by fund access persons is widespread throughout the
fund industry, the Division believes that a ban on personal
investing could be justified only on the basis of a finding that
the potential harm to fund shareholders resulting from the
practice is so great as to be contrary to the public interest. In
the Division's view, such a finding is unwarranted.

-------- FOOTNOTES --------

     -[85]-    See supra note 11 and accompanying text.

     -[86]-    As suggested above in Part ll.B of this Report,
               the Division believes that more examinations of
               funds need to be undertaken to confirm this
               finding.

     -[87]-    See Part III.C.5 of this Report.

     -[88]-    See Parts III.C.6 through III.C.8 of this Report.

     -[89]-    The Division currently has 203 investment company
               examiners, an increase of 50 examiners during
               fiscal year 1994. The Division's fiscal year 1995
               budget contemplates the hiring of another 50
               investment company examiners. The Division
               anticipates requesting an additional 50 examiners
               in fiscal year 1996. 

-------------------- BEGINNING OF PAGE #29 --------------------

     As suggested by Congress m enacting section 17(j) and by the
Commission in adopting rule 17j-1, many personal investments by
fund managers raise no public policy concerns.-[90]- Among the
transactions that the Commission itself has cited as not abusive
and not contrary to the purposes of section 17(j) are "ones which
are: non-volitional on the part of the access person involved in
the transaction; only remotely potentially harmful to [the fund
managed by the access person] because they would be very unlikely
to affect a highly institutional market; or clearly not related
economically to the securities to be purchased, sold or held by
the fund." The Commission has said that none of these
transactions is contrary to the interests of a fund's
shareholders because they do not "create the conflict of interest
situations to which Section 17(j) was addressed."-[91]-

     The kinds of transactions to which section 17(j) and rule
17j-1 are addressed all share a common characteristic. Each such
transaction involves an access person's placing his interests
ahead of those of the fund he serves when making personal
investment decisions.-[92]- Because such abusive transactions
already are prohibited by a number of existing provisions of the
federal securities laws,-[93]- banning all personal securities
transactions by access persons is not necessary. A ban on all
forms of personal investing by access persons would not provide
fund shareholders with any additional protection from abusive
investing than they have now, but could deny access persons the
benefits of many legitimate investment opportunities.-[94]- The
Division believes that such a result is not desirable.

     In the Division's view, banning personal investing would in
all likelihood not curb abusive transactions any more effectively
than does the scheme currently contemplated by section 17(j).
Fund managers have in the past made personal investments that are
prohibited under existing laws. In many, if not most, of those
cases the illegal investments were not reported to the managers'
employers.-[95]- It is quite likely that a ban would not, any
more

-------- FOOTNOTES --------

     -[90]-    Because many forms of personal investing are
               consistent with sound public policy, a ban in all
               likelihood would need to be subject to numerous
               exceptions or provide for an exemption procedure.
               Such exceptions or exemptive procedure would
               likely result in the Division's receiving a
               significant number of requests for administrative
               or interpretive relief, which could strain the
               Division's resources even further. The Division's
               compelling need for resources has been discussed
               with Congress on a number of recent occasions.
               E.g., Testimony of Arthur Levitt, Chairman, U.S.
               Securities and Exchange Commission, Concerning the
               Investment Company Industry Before the House
               Subcommittee on Telecommunications and Finance
               (Aug. 5, 1993) (there is a "dangerous shortfall in
               the Commission's resources to oversee" the
               investment company industry and without additional
               resources "the task [the staff] face[s] may become
               too great to provide any real measure of
               deterrence or investor protection'').

     -[91]-    Release No. 11421, supra note 21.

     -[92]-    Id.

     -[93]-    See the discussion in Part II.A.3 of this Report.

     -[94]-    Some observers have suggested that fund managers
               should be allowed to invest only in the funds they
               manage. The Division believes that such a
               limitation on fund managers similarly would not
               afford greater protection to fund shareholders
               than the existing regulatory scheme.  In addition,
               such a limitation could penalize a manager whose
               personal financial situation was inconsistent with
               the investment objectives and policies of the fund
               he manages.

     -[95]-    E.g., Ostrander, supra note 35.  In addition,
               press accounts regarding the transactions
               undertaken by the fired Invesco fund manager have
               noted that his transactions were not reported to
               his employer. E.g., McGough and Calian, supra note
               37, at C1.

-------------------- BEGINNING OF PAGE #30 --------------------

than current regulation, deter persons who are willing to hide
securities transactions from engaging in abusive trading.

     The Division believes that, like a total ban, a partial ban
on investing by access persons, under which they would be
prohibited from holding only securities held by their fund, would
not deter wrongdoers any more effectively than current
regulations. In addition, such a partial ban could encourage an
unscrupulous fund to divide investment opportunities between the
fund and his personal account.-[96]-

     The Division's decision not to recommend an industry-wide
ban on all personal transactions by access persons is not
intended to indicate that it would be inappropriate for
individual funds to prohibit personal investing by some or all of
their personnel. The Division agrees with Chairman Levitt that
each fund's board of directors or trustees, in determining the
appropriate restrictions to place on personal investing by access
persons, should consider whether to ban all personal
transactions.-[97]- In particular, the board should ask fund
management for an explanation of the purpose personal investing
serves. If fund management and the board are satisfied that
personal investing is desirable and not inconsistent with the
interests of shareholders, the board should ensure that the
fund's code of ethics contains comprehensive safeguards,
reporting, and verification procedures.-[98]-

     B.   Incorporating the ICI Report's Recommendations into
          Commission Rules

     Many observers have commented favorably on the ICI Report.
Chairman Dingell has commended the ICI for its "swift and
comprehensive" response and has referred to the Report's
recommendations as "tough and far-reaching. "-[99]- Chairman
Markey has said that he is "very impressed" with the Report's
"forceful and impressive" recommendations.-[100]- Chairman Levitt
has said of the recommendations: "We were pleased with [them.]
They go a long way toward responding to our concerns."-[101]-
Even many industry participants who could be subject to more
stringent investment restrictions praised the Report's
recommendations.-[102]- Like these commentators, the Division
commends the ICI special advisory group for taking a decisive
initiative in addressing the conflicts of interest that can
result from personal investing by fund personnel.

-------- FOOTNOTES --------

     -[96]-    To the extent that a fund manager withholds
               opportunities from the fund to benefit himself, he
               would violate certain provisions of the federal
               securities laws. See, e.g., SEC v. Embry,
               Litigation Release No. 13777 (Sept. 9, 1993).

     -[97]-    Levitt remarks, supra note 78, at 6.

     -[98]-    Id.

     -[99]-    Dingell letter, supra note 75.

     -[100]-   Brett D. Fromson, "Mutual Fund Industry Panel
               Would Curb Personal Trades," Wash. Post, May 10,
               1994, at C5; Susan Antilla, "Raining on Fund
               Managers' Parade," N.Y. Times, May 8, 1994, at
               F13.

     -[101]-   Remarks by Arthur Levitt, Chairman, U.S.
               Securities and Exchange Commission, at the
               Investment Company Institute Annual Conference,
               Washington, D.C. (May 18, 1994), at 1.

     -[102]-   Sara Calian, "Few Funds Gain in Past Three
               Months," Wall St. J., May 10, 1994, at C1, C27
               (quoting Shelby Davis, a portfolio manager and
               president of the Selected/Venture fund group, and
               John C. Bogle, chairman of the Vanguard Group).

-------------------- BEGINNING OF PAGE #31 --------------------

     In light of its assessment of the ICI Report, the Division
believes it appropriate to consider whether the Commission should
adopt some or all of the Report's recommendations as rules under
the 1940 Act or other federal securities laws. Some commentators
specifically have cited standards such as blackout periods, pre-
clearance, and prohibitions on short-term trading as being
particularly appropriate candidates for Commission
rulemaking.-[103]-

     As noted above in Part II.E of this Report, the ICI Report
does not conclude that any of its recommendations should be
adopted as Commission rules. Although certain of the Division's
recommendations mirror, or are substantially similar to, certain
of the Report's recommendations, the Division is not recommending
that any of the substantive restrictions on personal investing
activities recommended by the Report be implemented as Commission
rules.-[104]- While the Division strongly encourages funds to
adopt the ICI Report's recommendations, it believes that the
Commission's rationale for not mandating uniform standards of
conduct governing personal investing was correct in 1980 and is
even more compelling today.

     In determining not to mandate uniform standards when it
adopted rule 17j-1, the Commission emphasized the need for each
fund to have the flexibility to design specific means to prevent
abusive investing by access persons, with restrictions and
procedures suited to the fund's particular size, investment
objectives, structure, and operations. The Commission said at the
time that:

     [t]he broad language of the Rule is intended to permit
     entities to consider transactions by access persons in the
     context of their particular business operations when
     adopting their individual codes of ethics.-[105]-

The Commission added that it:

     has determined. . . to let individual entities take fully
     into account their own unique circumstances in designing
     their codes of ethics prescribing standards of conduct which
     effectuate the purposes of the Rule. . . . The Commission
     believes the current approach is more desirable [than
     mandating or suggesting particular standards] because it
     gives maximum flexibility to the entities which must design
     the codes of ethics.-[106]-

     In affording funds the flexibility to design their own codes
of ethics, the Commission acknowledged, as it and Congress have
recognized consistently over the past 30 years, that no one set
of standards is appropriate for every fund.-[107]- The Division
believes that this

-------- FOOTNOTES --------

     -[103]-   Phillips, Plaza, and Bimer, supra note 84.

     -[104]-   In the Division's view, the Commission's authority
               under section 17(j) to adopt certain of the ICI
               Report's recommendations is unclear. The
               Commission's Office of the General Counsel concurs
               in this view.

     -[105]-   Release No. 11421, supra note 21.

     -[106]-   Id.

     -[107]-   See Part ll.A of this Report.

-------------------- BEGINNING OF PAGE #32 --------------------

principle continues to be valid today.-[108]- Funds need to have
the ability to tailor codes of ethics to their individual
characteristics. Pre-clearing all personal securities
transactions may not be necessary, for example, for a fund that
distributes to its employees a list of restricted securities on a
daily basis. A fund whose investment policies contemplate
significant portfolio turnover will likely need more restrictions
to address ethical concerns than a fund whose investment policies
contemplate only limited trading activities. A fund that invests
primarily in securities of large capitalization companies traded
over major U.S. exchanges may not need as many restrictions in a
code of ethics as a fund that invests in thinly traded securities
of smaller capitalization companies. Finally, a fund that seeks
to mirror the performance of a particular index may not require
the same restrictions as a fund that invests primarily in a
particular industry sector or in the securities of companies
located in a foreign country.

     In determining not to provide for mandatory code of ethics
provisions in rule 17j-1, the Commission spoke not only of the
need for flexibility in developing codes of ethics, but also of
the "difficulties of interpretation and administration" it
concluded were likely to result if it adopted uniform code
standards.-[109]- The Division believes that, in light of the
diversity of fund types that now characterizes the fund industry,
the Commission's adoption of uniform code of ethics provisions
would in fact lead to countless requests for interpretations of,
or exemptive relief from, provisions that did not fit a
particular fund's specific circumstances. Such a result could
only serve to burden further the Division's limited resources,
without necessarily providing increased protection to fund
shareholders.

     Although, for the reasons described above, the Division does
not support amending rule 17j-1 to require all funds to adopt
uniform code of ethics provisions, the Division believes that the
management and board of directors or trustees of each fund should
specifically consider the recommendations in the ICI Report.
Moreover, the Division would expect all funds to adopt the
Report's recommendations, in whole or substantial part, absent
special circumstances.

     The ICI expects that 85-90% of the mutual fund industry will
revise their codes of ethics to meet the standards of conduct
reflected in the ICI Report's recommendations.-[110]- The
Division will request a report from the ICI within the next six
months describing, among other things, the number of ICI members
that have adopted the recommendations and any interpretive,
administrative, or other problems ICI members have experienced in
implementing the recommendations. On the basis of that report,
the Division may reconsider the issue of amending rule 17j-1 to
provide for uniform code of ethics standards.

-------- FOOTNOTES --------

     -[108]-   The need for flexibility may be even more
               compelling today than it was in 1980 when rule
               17j-1 was adopted, in light of the proliferation
               of different types of funds. Lipper Analytical
               Services, for example, currently tracks 56
               different categories of non-money market mutual
               funds.

     -[109]-   Release No. 10162, supra note 19.

     -[110]-   See Fromson, supra note 100, at C5.

-------------------- BEGINNING OF PAGE #33 --------------------

     V.   RECOMMENDATIONS

     Although the Division believes that fundamental changes in
the regulatory scheme governing personal investing by fund access
persons are not warranted at this time, the Division believes
that the regulatory scheme can and should be improved. In seeking
that result, the Division has developed six recommendations.

     The Division's recommendations are designed to further
protect fund shareholders by making available to the public
additional information about fund policies on personal
investment; enhancing the oversight of personal investment
policies by fund boards of directors or trustees; making it
easier for both funds and the Commission's staff to monitor the
personal transactions of fund personnel; and clarifying the scope
of prohibited activities by fund personnel. The specific
recommendations of the Division are described in detail below.

Recommendation 1: DISCLOSURE OF PERSONAL INVESTING POLICIES

     The Division recommends that funds be required to publicly
     disclose their policies and procedures regarding personal
     investing by fund personnel.

     Recent press accounts, as noted above, have suggested that
fund shareholders may not fully understand the potential
conflicts of interest raised when fund personnel invest for their
personal accounts-[111]-> and have reported that many fund groups
are unwilling to make the terms of their codes of ethics
available to the public.-[112]- Correspondence received by the
Division from fund shareholders has confirmed that investors want
more information about funds' personal investment policies. The
Division believes that investors have a right to know whether and
to what extent fund personnel are permitted to invest for their
own accounts. The Division, therefore, recommends that each fund
be required to disclose to existing and prospective shareholders
its policies regarding personal investing.

     The Division contemplates that its recommendation would be
implemented by the Commission requiring each fund to disclose
briefly in its prospectus its policies with respect to personal
investing by its personnel and the manner in which an investor
can obtain a copy of the fund's code of ethics.-[113]- In
addition, the Division anticipates recommending that the
Commission require each fund to attach as an exhibit to its
registration statement under the 1940 Act a copy of its code of
ethics as currently in effect. The latter requirement would be
designed to make the terms and conditions of codes of ethics
available not only to fund shareholders but also to the press and
other media, which could analyze and compare codes for the
benefit of the general public.

-------- FOOTNOTES --------

     -[111]-   See supra note 44 and accompanying text.

     -[112]-   See supra note 45 and accompanying text.

     -[113]-   If, as the ICI expects, the recommendations
               included in the ICI Report become the industry
               norm, the Division would anticipate proposing that
               the Commission expand this disclosure requirement
               to include a discussion by the fund comparing or
               contrasting the terms of its code of ethics to the
               recommendations. See supra text accompanying note
               110.

-------------------- BEGINNING OF PAGE #34 --------------------

Recommendation 2: ENHANCED BOARD REVIEW
     
     The Division recommends that rule 17j-1 be amended to
     require that a fund's board of directors or trustees
     annually review all codes of ethics applicable to the fund.

     Under section 17(j) and rule 17j-1, the board of directors
or trustees of a fund, particularly the fund's directors or
trustees who are not interested persons of the fund, have a
significant oversight role with respect to the personal
investment activities of fund personnel. Consistent with the
rule, the board is responsible for ensuring that the fund
establishes a code of ethics that meets the requirements of the
rule, and for monitoring the ongoing operation of the code. As
suggested above in Part IV.A of this Report,-[114]- the board
should determine as an initial matter whether personal investing
is consistent with the interests of the fund's shareholders and
should be permitted. The board should, among other things, also
examine whether both the fund and its adviser (and any
subadvisers) have adopted appropriate measures designed to
prevent and detect abusive investment practices and whether they
have instituted effective compliance procedures.-[115]- If any
violations of the policies applicable to the fund occur, the
board should consider whether the individual engaged in the
improper conduct received an appropriate sanction.-[116]-

     To enhance board oversight of personal investment activities
of fund access persons, the Division recommends that rule 17j-1
be amended to require each fund's board to review, at least
annually, the fund's code of ethics to determine whether any
changes are appropriate in light of particular violations or
changing circumstances generally. Among the information the
Division believes should be provided to a fund's board to enable
ft to evaluate the fund's code of ethics in a meaningful way is a
copy of the fund's existing code, a description of any code
violations and any significant remedial actions taken in
response, and recommendations (if any) for changes to the code.
The Division notes that this recommendation is similar to a
recommendation in the ICI Report.

Recommendation 3: DISCLOSURE OF PRE-EMPLOYMENT HOLDINGS

     The Division recommends that rule 17j-1 be amended to
     require each access person of a fund to disclose his
     personal securities holdings at the time at which the access
     person is first employed by the fund or its investment
     adviser.

     A fund cannot effectively monitor the potential conflicts of
interest arising when its access persons invest for their own
accounts unless fund management knows the identity of all
securities held by those persons. When examining the records of
the 30 fund groups for

-------- FOOTNOTES --------

     -[114]-   See supra text accompanying notes 97-98.

     -[115]-   Levitt remarks, supra note 78; Phillips, Plaza,
               and Birner, supra note 84, at 8. Many fund boards
               appear to be giving increasing attention to
               personal trading matters as a result of the
               Commission's recent focus on this area. Phillips,
               Plaza, and Birner, at 8.

     -[116]-   The Division believes that the board of a fund
               that is part of a fund group also has the
               responsibility of inquiring of fund management
               whether appropriate policies have been adopted
               with respect to the group to ensure that
               investment personnel of one fund in the group are
               not able to benefit personally as a result of
               investments made or intended to be made by another
               fund in the group.  In the Division's view, this
               obligation is implicit in subparagraph (a) of rule
               17j-1, which prohibits fraudulent personal trading
               by all employees of an investment adviser,
               including those employees whose job
               responsibilities are not related directly to a
               particular fund.

-------------------- BEGINNING OF PAGE #35 --------------------

purposes of the special examination, the Division's inspection
staff found that some of the 30 fund groups did not obtain
information about the securities held by new employees.-[117]-

     The Division believes that potential conflicts of interest
can arise whenever an access person holds the same securities as
his fund, regardless of when the access person acquired the
securities.-[118]- As currently written, however, rule 17j-1 does
not explicitly require access persons to report their existing
personal securities holdings at the time they commence employment
with a fund or an adviser.-[119]- The Division therefore
recommends that rule 17j-1 be amended to require access persons
to disclose their personal securities holdings upon becoming
employed by the fund or its adviser. The Division believes that
implementation of this recommendation would improve a fund's
ability to monitor potential conflicts of interest between the
fund and its access persons, and reduce the potential for abusive
investing by those persons.

Recommendation 4: NOTIFICATION OF BROKERAGE ACTIVITY

     The Division recommends that the NASD be asked to consider
     adopting a rule requiring its members (a) to notify a fund
     or investment adviser whenever an employee opens an account
     with the member, and (b) upon request of the fund or
     adviser, to transmit duplicate copies of the employee's
     trade confirmations and account statements.

     The Division believes that, if the information contemplated
by this recommendation was provided directly to funds and their
advisers, it would serve as an independent verification of
information reported by fund investment personnel to their
employers, thus assisting funds and their advisers in monitoring
their employees' personal investment activities. The proposed
rule would mirror an existing NASD rule that requires member
broker-dealers to take similar action with respect to accounts
opened and maintained by employees of other broker-
dealers.-[120]-

-------- FOOTNOTES --------

     -[117]-   Several fund groups had difficulty responding to
               the staff's request to identify securities
               purchased by a fund that were, at the time, owned
               by the fund's manager. To respond, several fund
               groups had to obtain information from their
               managers about the managers' holdings at the time
               of their employment by the groups. Two fund groups
               could not obtain this information and did not
               respond to this particular request. See supra note
               74.

     -[118]-   The Commission itself has said that a "situation
               which would appear to present a conflict of
               interest of the type of which Section 17(j) is
               addressed might occur where access persons already
               own a particular security and through their
               position of influence over the investment company
               attempt to cause the investment company to
               purchase, sell or hold the same security." Release
               No. 11421, Supra note 21. Several examples
               illustrate the conflict of interest presented by
               an access person's pre-employment holdings. A
               manager who owns a stock (acquired before his
               association with a fund) whose price is declining
               may be tempted to cause the fund to purchase the
               stock in an effort to stabilize or increase its
               price. A manager who received warrants to purchase
               a stock at a fixed price as part of an IPO in
               which he participated before becoming employed by
               a fund or its adviser could increase his personal
               profit by causing the fund to purchase the
               underlying stock shortly before he exercises the
               warrants. Finally, any access person who acquired
               a stock before his association with a fund, and
               who learns that the fund is considering selling a
               large block of the stock, may be tempted to sell
               his personal holdings before the fund's
               transaction causes the stock's price to decline.

     -[119]-   The rule's reporting provisions simply require
               fund access persons to file reports detailing
               information about personal investments made during
               the preceding calendar quarter.

     -[120]-   NASD Rules of Fair Practice  28(b).

-------------------- BEGINNING OF PAGE #36 --------------------

Recommendation 5: BAN ON PARTICIPATING IN "HOT ISSUE" PUBLIC 
OFFERINGS

     The Division recommends that the NASD be asked to consider
     prohibiting the purchase by certain fund access persons of
     hot issue securities.

     Chairman Levitt, as well as certain commentators, have
expressed concern that participation by access persons in IPOs,
especially "hot issue" IPOs,-[121]- creates the potential for
troublesome conflicts of interest.-[122]- Because hot issues are
expected to increase in value, broker-dealers could offer them as
an incentive to induce fund personnel to do business with them.
The purchase of a hot issue by fund personnel, therefore, raises
an appearance of impropriety. In addition, conflicts of interest
can result when access persons compete with their funds for the
same hot issues.

     The ICI Report seeks to address potential abuses associated
with IPOs by recommending that funds prohibit their access
persons from acquiring any securities in an IPO. The Division
believes that the Commission's authority under section 17(j) may
not be sufficiently broad to adopt such a limitation.-[123]-

     In an effort to address the issue of IPO purchases by fund
access persons, the Division recommends that the NASD undertake a
review of the application to fund personnel of its Free-Riding
and Withholding Interpretation (the "Free-Riding Rules") under
its Rules of Fair Practice.-[124]-  In particular, the Division
intends to ask the NASD to examine its Free-Riding Rules to
consider whether the existing ban on sales of hot issues to
broker-dealer employees should be extended to personnel of
investment companies, investment advisory firms, banks, savings
and loans, and insurance companies who have authority to direct
business to NASD members.-[125]- Such a change would effectively
prohibit certain investment company and investment advisory
personnel from participating in hot issue public offerings.

Recommendation 6: AMENDMENT OF SECTION 17(j)

     The Division recommends that Congress amend section 17(j) to
     cover purchases and sales by a fund access person of
     property other than securities and to clarify that the
     section is violated by abusive personal trading in
     securities and other instruments related in value to the
     fund's portfolio securities.

     The Commission's existing rulemaking authority under section
17(j) to define and proscribe fraud is limited to transactions
involving securities. Increasingly, funds are

-------- FOOTNOTES --------

     -[121]-   The NASD defines "hot issue" securities in its
               Free-Riding and Withholding Interpretation under
               its Rules of Fair Practice to be "securities of a
               public offering which trade at a premium in the
               secondary market whenever such secondary market
               begins."

     -[122]-   Levitt remarks, supra notes 78 and 101; ICI
               Report, supra note 47, at 32-33.

     -[123]-   The Commission's Office of the General Counsel
               shares this view.

     -[124]-   The Free-Riding Rules prohibit NASD broker-dealers
               from selling hot issue securities to, among
               others, any employee of a broker-deaIer. The Free-
               Riding Rules, however, currently permit sales of
               hot issues to advisory personnel of investment
               companies, investment advisory firms, banks,
               savings and loans, and insurance companies if,
               among other things, the NASD member can
               demonstrate that the sales are consistent with a
               person's usual investment practice and are
               insubstantial in amount.

     -[125]-   Because bank, savings and loan, and insurance
               company personnel who make investment decisions
               are subject to the same conflicts of interest as
               employees of investment companies and investment
               advisers, the Division believes that any action
               taken by the NASD should apply equally to all of
               these groups.

-------------------- BEGINNING OF PAGE #37 --------------------

engaging in transactions involving instruments other than
securities, such as futures and commodities.-[126]- The Division
believes that the types of abusive conduct to which section 17(j)
was addressed can occur with respect to financial instruments
that are not securities as that term is defined in the federal
securities laws.-[127]- Thus, the Division recommends that
Congress amend section 17(j) to cover purchases and sales by fund
access persons of property other than securities.-[128]-

     The Division recommends that, if Congress determines to
amend section 17(j) in any manner, Congress should at the same
time confirm the section's applicability to transactions by a
fund's access persons involving securities and other instruments
related to, but not the same as, securities held or to be
acquired by the fund.-[129]- Although Congress appears to have
intended section 17(j) to cover activities involving related
securities,-[130]- and the Commission has taken the same position
with respect to rule 17j-1,-[131]- the language of these
provisions, as currently drafted, could be interpreted otherwise.

VI.  CONCLUSION

     Public trust is the foundation underlying the fund
industry's recent success. That trust is threatened when fund
personnel take advantage of their positions to benefit
themselves. Over the past seven months, the Division has examined
the personal investment transactions of over six hundred fund
managers and compared those transactions to the portfolio
transactions of the more than one thousand funds they manage.

     The data the Division reviewed indicates that fund managers
generally have not engaged in extensive investing for their
personal accounts. When engaging in personal securities
transactions, fund managers appear to avoid potential conflict of
interest situations. Nevertheless, a small number of managers,
concentrated within a few fund groups, have actively invested for
their personal accounts, in some cases buying or selling
securities ahead of their funds or other funds in the complex.
The Division currently is examining the personal transactions
made by those managers to determine whether they were improper.
The Division also is examining the compliance programs of these
fund groups to determine whether they exercised adequate
oversight over the personal investment activities of their

-------- FOOTNOTES --------

     -[126]-   E.g., Steven T. Goldberg, "Why Your Bond Fund Got
               Clobbered," Kiplinger's Personal Finance Magazine,
               Sept. 1994; "Amid Fund Losses, SEC Examines
               Derivatives Limits," Wall St. J., Sept. 8, 1994,
               at A20.

     -[127]-   The recent Kemper case, described above in Part
               ll.C, for example, involved the alleged
               misallocation of financial futures contracts and
               not securities.

     -[128]-   If Congress amends section 17(j) in accordance
               with this recommendation, the Division will
               recommend that the Commission amend the reporting
               requirements of rule 17j-1 to include property
               other than securities.
     
     -[129]-   Two securities would be related if, for example,
               one security is convertible into the other, or
               gives its holder the right to purchase the other
               security.

     -[130]-   House Report, supra note 15, at 28; Senate Report,
               supra note 15, at 28-29.

     -[131]-   See Release No. 10162, supra note 19.

-------------------- BEGINNING OF PAGE #38 --------------------

managers. If the examinations indicate abusive conduct or
materially deficient compliance procedures, the Division will
refer matters to the Division of Enforcement for further action.

     The Commission's staff will continue to aggressively
investigate and pursue enforcement actions against any fund
insiders whose trading activities place their personal interests
ahead of their funds'. The Division believes that aggressive
inspection and enforcement programs are the most effective
deterrent to abusive trading. Inspections and enforcement actions
will continue to be effective, however, only if sufficient
resources are allocated to those programs.

     The Division has concluded that the advantages of banning
personal securities transactions, or mandating uniform standards
to restrict such transactions, are outweighed by the
disadvantages. The Division, however, is recommending changes to
the existing regulatory scheme that it believes would enhance
investor protection while preserving the flexibility that
Congress and the Commission have considered important over the
past thirty years. The Division believes that its
recommendations, together with widespread industry acceptance of
the recommendations described in the ICI Report, will enhance the
ethical standards of the industry, thereby benefiting all fund
shareholders.

     The Division will continue to monitor whether the existing
provisions of the federal securities laws are adequate to protect
the interests of investors, and whether fund boards of directors
or trustees are scrutinizing personal investment policies and
activities. As part of its monitoring, the Division will request
a report from the ICI within six months describing the industry's
efforts to implement the ICI Report's recommendations, and will
assess, at that time, the extent to which funds are adhering to
those recommendations. If, in the future, the Division deems it
necessary or appropriate in the public interest, the Division
will recommend that the Commission propose rule amendments or
seek additional legislation to impose stricter and more uniform
standards on the fund industry.

------------------------ EXHIBIT A ------------------------


                        February __, 1994



Mr./Ms. xxxxxx
XYZ Management, Inc.
[ADDRESS]

Re:  In the Matter of Certain Trading by Portfolio
     Managers (MHO-4568)

Dear Mr./Ms. xxxxxx:

     The Divisions of Investment Management and Enforcement are
currently examining issues associated with personal trading by
investment company portfolio managers.-[1]- As part of that
examination, we request that XYZ Management, Inc. ("XYZ") provide
the following documents and information as applicable to calendar
year 1993 (the "reporting period") with respect to each fund
-[2]- for which XYZ or any of its affiliates acts as investment
adviser and/or sub-adviser -[3]- (the "XYZ Funds"):

     1.   General Information

     (a) Please list each XYZ Fund by name and give the fund's
investment objective as characterized by Lipper Analytical
Services, Inc. Identify each fund's portfolio manager(s) and
indicate, for each manager, the dates he or she started and (if
applicable) stopped rendering advisory services to the fund (do
not limit your response to the reporting period).

     (b) For each portfolio manager identified in subparagraph
(a) above: (i) name the manager's employer, (ii) state whether
the employer is affiliated with the XYZ funds other than as
investment adviser, (iii) specify the dates the manager was
employed by the employer; and (iv) provide the names of any
company for whom the manager served during the reporting period
as an officer or director, if any securities issued by that
company were held by any XYZ fund during the reporting period.

     (c) For each XYZ fund that is not a money market fund within
the meaning of rule 2a-7 under the Investment Company Act of 1940
("Investment Company Act"), please state

-------- FOOTNOTES --------

-[1]-     For purposes of this letter, an investment company's
          "portfolio manager" is the person (or persons)
          primarily responsible for the day-to-day management of
          the company's portfolio. See paragraph (c) of Item 5 in
          Form N-1A.

-[2]-     For purposes of this letter, a "fund" is any management
          investment company registered under the Investment
          Company Act of 1940, whether open~nd or closed-end.
          Each series of a registered open-end company should be
          deemed a separate fund for purposes of this letter.

-[3]-     To the extent any XYZ Fund uses the services of an
          investment adviser or sub-adviser not affiliated with
          XYZ, you should provide information about that adviser
          or sub-adviser in response to the following questions.

----------------------- SECOND PAGE --------------------------
Mr./Ms. xxxxxxx
XYZ Management, Inc.
Page 2

(i) the total number of portfolio transactions (purchases and
sales of securities -[4]-) effected during the reporting period,
(il) the dollar value of the securities purchased or sold,
whichever is greater, and (iii) the aggregate net assets at the
beginning and end of the reporting period.

     2.   Code of Ethics

     For each XYZ fund, please submit a copy of any code of
ethics ("Code") required by paragraph (b)(l) of rule 17j-1 under
the Investment Company Act that was in effect during the
reporting period. If the same Code governs more than one XYZ
fund, multiple copies need not be submitted, but please indicate
which XYZ funds were governed by that Code. If a Code was amended
during the reporting period, please submit a copy of each version
that was in effect during the period, and mark each version to
show when it was effective and how it was amended. In addition,
please submit any rules, guidelines, procedures, or policies
(collectively, "Policies"), including but not limited to the
Policies required to be implemented by section 204A of the
Investment Advisers Act of 1940, regarding personal trading
activity by XYZ access persons -[5]- that were in effect during
the reporting period but were not part of a fund's Code. If any
Policies have not formally been reduced to writing, please submit
a written description of those Policies.

     Please attach to each Code submitted in response to this
request a completed questionnaire substantially in the form
attached as Exhibit A to this letter.

     3.   Violations

     For each violation of XYZ's Code(s) or Policies that
occurred within the reporting period please provide: (i) the name
of the violator, (il) the date of the violation, (iii) a
description of the violation, (iv) the name and job title of the
person responsible for discovering and/or investigating the
violation, (v) whether any disciplinary action was taken as a
result of the violation, and (vi) whether any steps were taken to
prevent a recurrence. If you answered affirmatively to either (v)
or (vi) above, provide detailed explanations.

     4.   Personal Trading Activity by Portfolio Managers

     (a) Did any portfolio manager, during the reporting period,
purchase (or sell), for his or her own account, -[6]- any
security that was purchased (or sold) by any XYZ fund (not

-------- FOOTNOTES --------

-[4]-     Unless otherwise noted, for purposes of this letter,
          the term "securities" means: equity and debt securities
          (except as set forth below); options on and warrants to
          purchase equity or debt securities; and shares of
          closed-end investment companies. The term does not
          include: money market securities; securities issued by
          the United States government; or shares of open-end
          investment companies or unit investment trusts.

-[5]-     The term "access persons " is defined in paragraph
          (e)(1) of rule 17j-1 under the Investment Company Act.

-[6]-     For purposes of this letter, the purchase or sale of a
          security for a portfolio manager's own account includes
          any transactions in a security in which the portfolio
          manager has or is acquiring a direct or indirect
          beneficial interest. See paragraph (c)(1) of rule 17j-
          1.

------------------------- THIRD PAGE --------------------------
Mr./Ms. xxxxxx
XYZ Management, Inc.

including any index fund) within the next thirty days? -[7]- If
so, provide the information requested in paragraph (e) below.

     (b) Did any portfolio manager, during the reporting period,
purchase (or sell), for his or her own account, any security
whose value or return was related, in whole or in part, to the
value or return of a different security that was purchased (or
sold) by any XYZ fund (not including any index fund) within the
next thirty days? -[8]- If so, provide the information requested
in paragraph (e) below.

     (c) For purposes of subparagraphs (a) and (b) above, you
should (i) only report instances where a portfolio manager
purchased a security that subsequently was purchased by a fund,
or where a portfolio manager sold a security that subsequently
was sold by a fund; and (ii) exclude a portfolio manager's
purchase or short sale of a security if he or she closed out the
position in its entirety prior to any purchase or sale of the
same, or a related, security by an XYZ fund.

     (d) Did any portfolio manager, during the reporting period,
purchase, for his or her own account, any security that was sold
during the preceding thirty days by an XYZ fund managed by the
portfolio manager? If so, provide the information requested in
paragraph (e) below.

     (e) For each set of transactions identified in response to
subparagraphs (a), (b),and (d) above, name the portfolio manager
and the fund that engaged in the transactions, and provide the
following information about the transaction effected by each
party: (i) a description of the security traded, (ii) the type of
transaction (i.e., purchase or sale (specify if short sale)),
(iii) the trade date, (iv) the price per unit of the security
traded, the quantity traded, and the total amount of the
transaction, and (v) the name of the broker/dealer through whom
the trade was effected.

     (f) Please provide a summary sheet that specifies, for each
portfolio manager, and for all portfolio managers as a group: (i)
the number of personal trades involving securities, (ii) the
number of trades identified in response to each of subparagraphs
(a), (b),and (d) above, and (iii) the number of trades identified
in response to subparagraphs (a) and (b) above that involve a set
of trades by a portfolio manager and the particular XYZ fund(s)
he or she manages.

-------- FOOTNOTES --------

-[7]-     Thirty days may be longer or shorter than the trading
          restriction period, if any, specified in a particular
          fund's Code. The selection of the thirty-day period
          should not be construed as an indication of the
          Commission staff's views as to an appropriate
          restriction period for a code of ethics adopted
          pursuant to rule 17j-1 or for any other purpose.

-[8]-     For example, options or warrants to purchase common
          stock, and convertible debt and convertible preferred
          stock, should be considered "related to" the underlying
          common stock for purposes of Item 4. Preferred stock
          and debt issued by a particular company that are not
          convertible should not be considered related to the
          company's common stock for purposes of Item 4.
          Different classes of a company's common stock should be
          considered to be related securities unless the value or
          return of one class unequivocally is unrelated to the
          value or return of the other class.

------------------------- FOURTH PAGE -------------------------
Mr./Ms. xxxxxx
XYZ Management, Inc.

     5.   Trading Activity by XYZ Funds

     (a) Did any XYZ fund, during the reporting period, purchase
any equity security that at the time was beneficially owned by an
XYZ portfolio manager, regardless of when the portfolio manager
acquired the security? -[9]- If so, for each transaction
identified, name the fund that purchased, and the portfolio
manager(s) who held, the security, and provide the following
information about the transaction effected by each party: (i) a
description of the security acquired, (ii) the trade date, (iii)
the purchase price per share, (iv) the number of shares
purchased, (v) the total value of the shares purchased, and (vi)
whether the security was purchased as part of an initial public
offering.

     (b) Please provide a summary sheet that specifies, for each
XYZ fund: (i) the total number of purchase transactions involving
equity securities effected during the reporting period, and (ii)
the number of purchase transactions that involved an equity
security that at the time of purchase was owned by any XYZ
portfolio manager.

     The information requested in Items 1(a)-(c), 4(e)-(f), and
5(a)-(b) should be submitted in spreadsheet form on the formatted
diskette enclosed with this letter. We have also enclosed a short
set of general instructions to assist you in inputting the
requested data into the spreadsheet. A more detailed set of
instructions will follow.

     This request for documents and information should not be
construed as an adverse reflection upon any person, entity, or
security or as an indication by the Commission or its staff that
any violation of law has occurred. Enclosed is a copy of
Commission Form 1661, which discusses how the Commission can use
the information you provide, and other important matters.

     Please respond by March 31, 1994. The information requested,
and any questions about the spreadsheet format, should be
directed to Greg Jaffray, Financial Analyst, Division of
Investment Management, Mail Stop 10-6, 450 Fifth Street, NW,
Washington DC 20549, phone number (202) 272-3014. All other
inquiries should be directed to the Division of Investment
Management's Office of Chief Counsel, at (202) 272-2072.


               Barry P. Barbash
               Director, Division of Investment Management

               William R. McLucas
               Director, Division of Enforcement

-------- FOOTNOTES --------

-[9]-     For purposes of this item, include all equity
          securities issued by the same issuer unless the value
          or return of one security unequivocally is unrelated to
          the value or return of the other security.

------------------- EXHIBIT A: SECOND LETTER ------------------

                    March ___, 1994

VIA REGISTERED MAIL

Mr./Ms. xxxxxxx
XYZ Management, Inc.
[ADDRESS]

Re:  In the Matter of Certain Trading by Portfolio
     Managers (MHO-4568)

Dear Mr./Ms. xxxxxx:

     This letter supplements our letter to you dated February _
1994 (the "February Letter"), in which we requested information
about the personal trading activities of certain XYZ Management,
Inc. ("XYZ") personnel. We received several inquiries seeking
clarification of the February Letter. In response to these
inquiries, we are amending the February Letter as indicated
below.

     All information requested in the February Letter should be
submitted to the Commission's staff in the manner prescribed in
the February Letter unless otherwise specifically indicated in
this letter. Unless otherwise indicated, all terms used in this
letter have the same meaning as in the February Letter.

     1. Items 1, 4, and 5 of the February Letter require XYZ to
name the portfolio managers of the XYZ Funds. Item 3 (see
paragraph 2 below) requires XYZ to identify individuals who have
committed certain violations of XYZ's Code(s) or Policies. In
responding to these Items, numerical or letter codes, rather than
names, may be used to identify particular individuals. Only one
code, however, may be used for each individual. In addition, XYZ
must make available to the Commission's staff, upon request, the
name of the individual corresponding to each code.

     2. Item 3 of the February Letter is superseded by the
following request:

          Describe generally how XYZ's Code(s) or Policies are
     implemented, administered, and enforced. Identify all
     instances during the reporting period when (i) XYZ took
     significant remedial action against any individual for a
     violation of XYZ's Code(s) or Policies, or (ii) an
     individual resigned from his or her position to avoid
     significant remedial action by XYZ. For purposes of this
     Item, significant remedial action includes any action that
     has a pecuniary effect on an individual, such as firing,
     suspending, or demoting the person, or requiring the
     reversal of a trade or the disgorgement of profits.
     Significant remedial action also includes any nonpecuniary
     action that might affect the person's promotion
     opportunities, such as reassignment, suspension with pay, or
     formal censure. For each significant remedial action taken,
     identify the person who violated XYZ's Code(s) or Policies,
     state the person's job title/position, and describe the
     violation, how it was discovered, the disciplinary action
     taken against the person, and the steps taken, if any, to
     prevent a recurrence of the violation.

------------------------ SECOND PAGE ---------------------------
Mr./Ms. xxxxxx
XYZ Management, Inc.
March ___, 1994


     3.   Item 4 of the February Letter is amended as follows:

          (a) A ten (10) day period should be substituted for the
thirty (30) day period provided for in paragraphs (a), (b),and
(d) of Item 4.

          (b) Except as set forth in the last sentence of this
paragraph, transactions by XYZ Funds or portfolio managers in any
equity or debt security issued by the companies listed in
Attachment A to this letter do not have to be reported. -[1]-
This exclusion does not extend to transactions by XYZ Funds or
managers in options, warrants, and other securities whose value
or return was related, in whole or in part, to the value or
return of a security issued by one of the companies listed in
Attachment A. Moreover, transactions by XYZ Funds in securities
issued by companies listed in Attachment A must be reported if
they occurred ten (10) days or less after a transaction by an XYZ
portfolio manager in an option, warrant, or other security whose
value or return was related, in whole or in part, to the value or
return of a security issued by one of those companies.

          (c) In responding to paragraph (e) of Item 4, indicate
whether the portfolio manager's trade was pre-cleared or
otherwise pre-approved. To answer this question, add a column
(Column S) to Worksheet 3 and enter in this column: "Yes" if the
trade was precleared, "No" if the fund had a pre-clearance
procedure and the trade was not pre-cleared; and "N/A" if the
fund had no pre-clearance procedure.

     4.   Item 5 of the February Letter should incorporate the
changes indicated below:

          (a) The first sentence of paragraph (a) of Item 5 is
amended as follows: "Did any XYZ Fund, during the reporting
period, purchase any equity security that at the time of purchase
also was beneficially owned by its portfolio manager, regardless
of when the portfolio manager acquired the security?" Part (ii)
of paragraph (b) of Item 5 is amended to reflect the change in
paragraph (a), so that the summary sheet specifies, for each XYZ
Fund, "the number of purchase transactions that involved an
equity security that at the time of purchase also was owned by
the fund's portfolio manager.

          (b) Part (vi) of paragraph (a) of Item 5 is amended to
add the underlined material: "(vi) whether the security was
purchased as part of a private placement (PP) or an initial
public offering (IPO)." In Columns H and N of Worksheet 4, enter
"PP," "IPO," or "N/A," as appropriate.

     5.   In addition to responding to all Items in the February
Letter as amended by this letter, please respond to the following
new Item 6:

          (a) Describe XYZ's policies, if any, regarding cross
trading, i.e, do the same prohibitions that apply to personal
trading by a portfolio manager in securities that are held by or
under consideration for purchase or sale by the fund(s) served by
the manager apply to securities that are held by or under
consideration for purchase

-------- FOOTNOTES --------

-[1]-     The stocks listed in Attachment A represent the 100
          stocks that comprised the Standard & Poor's 100
          Composite Index as of June 30, 1993. Since the index
          may have changed during the course of the year, we have
          used the midpoint as a representative date.

------------------------ THIRD PAGE --------------------------
Mr./Ms. xxxxxx
XYZ Management, Inc.
March __, 1994

or sale by other funds or other clients advised by XYZ or any of
its affiliates? If XYZ has no policies regarding cross-trading,
explain why not.

          (b) Describe XYZ's policies, if any, with respect to
its portfolio managers' purchase of securities in offerings not
registered under the Securities Act of 1933 (including, for
example, private placements) and purchase of securities when
initially offered to the public.

     In light of the changes and additional information requested
in this letter, we have determined to extend the date by which
all information must be submitted to the Commission's staff from
March 31, 1994 to April 15, 1994. If you have any questions about
inputting data into the worksheets (provided in diskette form
with the February Letter), including how to add a column to
Worksheet 3 (as requested in paragraph 3(c) above), you should
call Greg Jaffray of the Division of Investment Management at
(202) 272-3014. All other inquiries should be directed to the
Division of Investment Management's Office of Chief Counsel, at
(202) 272-2072.


               Barry P. Barbash
               Director, Division of Investment Management


               William R. McLucas
               Director, Division of Enforcement

------------------------- EXHIBIT B ----------------------------

           STATISTICAL SUMMARY OF THE CODES OF ETHICS
              SUBMITTED BY THE 30 FUND GROUPS -[1]-

Pre-clearance

     *    19 fund groups require certain employees to pre-clear
     all personal securities trades.-[2]-

     *    4 fund groups require certain employees to pre-clear
     defined categories of transactions, such as those involving
     options and futures, or securities on a "restricted" list.

Prohibition on Investing in Securities While Fund is Investing

     *    21 fund groups expressly prohibit certain employees
     from purchasing or selling any securities that they know are
     being considered for purchase or sale, or are being
     purchased or sold, by the fund.

Blackout Period

     *    16 fund groups impose a "blackout period" during which
     certain employees are prohibited from investing in
     securities for a specified time before and/or after the fund
     has purchased or sold the same securities, or the fund's
     adviser has issued a research report covering the
     securities. The blackout periods range from 15 days before
     to 30 days after the securities are bought or sold by a fund
     in the group or appear on a restricted list.

Initial Public Offerings/ Hot Issues

     *    5 fund groups restrict or prohibit certain employees
     from purchasing securities in any IPO.

     *    9 fund groups restrict or prohibit certain employees
     from purchasing "hot issues," including hot issue IPOs.

Private Placements

     *    5 fund groups restrict or prohibit certain employees
     from purchasing securities through a private placement.

-------- FOOTNOTES --------

     -[1]-     The Commission staff reviewed the codes of ethics
               in effect for the 30 fund groups during calendar
               year 1993. For purposes of this Exhibit, the staff
               examined 31 sets of codes of ethics, rather than
               30. Because one of the fund groups consisted of
               two fund groups that had recently merged, the two
               groups operations had not been integrated, and
               each employed different codes of ethics, the staff
               treated each as a separate fund group for purposes
               of this Exhibit only.  In addition, the statistics
               cited sometimes reflect (when such information was
               provided) restrictions and procedures that went
               into effect in 1994, after the reporting period
               for which the staff requested information.

     -[2]-     For purposes of this Exhibit, the term
               "securities" is defined the same as it is in rule
               17j-1.

----------------------- SECOND PAGE -------------------------

     *    2 fund groups require pre-clearance for private
     placement securities but not other purchases of securities.

Scope of Restrictions

     The staff asked each fund group to describe whether the same
     restrictions that apply to personal investment transactions
     by a portfolio manager with respect to securities that are
     held by or under consideration for purchase by the manager's
     fund also apply with respect to securities that are held by
     or under consideration for purchase by other funds or other
     clients advised by the manager's employer.

     *    24 fund groups answered yes.

Short-Term Trading Ban

     *    4 fund groups require certain employees to hold
     securities for a prescribed minimum period of time, whether
     or not the securities are held by a fund in the fund group.

Disclosure of Holdings at Commencement of Employment

     *    Only one fund group indicated that it requires new
     employees to disclose their securities holdings upon
     commencement of their employment.

Periodic Reports

     *    18 fund groups require employees to report their
     securities transactions contemporaneously, either in
     addition to, or in lieu of, filing the quarterly reports
     required under rule 17j-1.

-------------------------- EXHIBIT C ---------------------------

            DESCRIPTION OF CODES OF ETHICS VIOLATIONS

     The staff asked each of the 30 fund groups subject to the
special examination to identify all instances in 1993 when (a) it
took significant remedial action against any individual for a
violation of any applicable code of ethics, or (b) an individual
resigned from his position to avoid significant remedial action
by the fund group.-[1]- Five fund groups (referred to below as
Fund Groups #1 through 5) reported code violations by twelve
employees.

Fund Group #1:

     Fund Group #1 reported that one of its access persons based
outside the United States purchased $34,000 of the equity
securities of a large foreign company on a foreign stock
exchange. The transaction was neither pre-cleared nor reported in
a timely manner. The fund group represented that authorization to
purchase would not have been granted had preclearance been
requested. The fund group concluded that the person's failure to
pre-clear and report was not intentional and was an isolated
incident. The fund group ordered the person to (a) sell all the
shares purchased in the unauthorized transaction; (b) disgorge
his profits to the funds holding shares of the foreign company;
(c) pay a penalty to those funds equal to the amount of the
unauthorized purchases i e., $34,000, and (d) refrain
indefinitely from any personal transactions (other than exempt
transactions), subject to reappraisal after one year.

Fund Group #2:

     Fund Group #2 reported that it had censured one of its
adviser's employees for failing to pre-clear, as required by the
adviser's code of ethics, a number of personal transactions over
a period of approximately 2 to 3 months. The employee was absent
from work during a part of that period and claimed that he had
asked one of his subordinates to obtain the necessary pre-
clearance. Management concluded that the employee's absence did
not excuse his failure to obtain written pre-clearance, and
formally censured him by placing a reprimand in his compliance
file. Because management determined that, had the requisite pre-
clearance procedures been followed, each transaction would have
been approved, the employee was not ordered to disgorge profits.

Fund Group #3:

     Fund Group #3 reported one violation of the adviser's code
and one violation of one of its fund's codes.

     One incident involved an officer of the investment adviser
and the funds it manages who is not involved in any portfolio
management activities. This individual sold securities on the
same day that one of the adviser's non-investment company clients
sold the same securities. The transaction violated the adviser's
policy prohibiting access persons from selling a security within
seven days of a client's sale at a price more favorable than that
obtained by the client. The individual failed to enter his
proposed transaction in the adviser's computer checklist and was
thus unaware of the client's contemporaneous

-------- FOOTNOTES --------

-[1]-     For purposes of this Exhibit, significant remedial
          action includes any action that has a pecuniary effect
          on an individual, such as firing, suspending, or
          demoting the person, or requiring the reversal of a
          trade or the disgorgement of profits. Significant
          remedial action also includes any non-pecuniary action
          that could affect the person's promotion opportunities,
          such as reassignment, suspension with pay, or formal
          censure. 

------------------------ SECOND PAGE ------------------------

transaction. The adviser's compliance personnel quickly
discovered the violation and the individual agreed to disgorge
his profit on the transaction (approximately $2,200) to the
adviser's client.

     The other incident involved a non-interested director who
violated the fund's code by purchasing call options on a stock
that had been sold by the fund during the previous 15 days. The
director was aware of the fund's transactions in the underlying
stock, but did not realize that those transactions prohibited him
from purchasing options on the stock. The adviser's compliance
department discovered the violation on the same day as the
director's options transaction and explained to him why the
transaction was improper. The director immediately sold all of
his call options, sustaining a loss of approximately $1,600.

Fund Group #4:

     Fund Group #4 reported violations of the investment
adviser's code of ethics by four employees.

     In the first incident, a fund manager purchased securities
for his personal account and the next day purchased the same
securities for two of his funds. The manager was given a written
notice and warning and was fined $600.

     In the second incident, a fund manager, without obtaining
prior approval, sold out of his personal account securities that
also were held by the fund he managed. The manager was given a
written notice and warning and was required to cancel the
transaction at his own expense.

     In the third incident, one of the adviser's marketing
employees failed to pre-clear a transaction that involved a
security on the adviser's restricted list. The employee was given
a written notice and warning and was required to disgorge his
$100 profit.

     In the fourth incident, a senior analyst violated a code
provision that allowed employees to buy or sell up to 1,000
shares per day of securities on the restricted list if the
securities had a market capitalization of at least $1 billion.
The analyst exceeded the 1,000-share limit. He was given a
written notice and warning and required to disgorge his $1,000
profit.

Fund Group #5:

     Fund Group #5 reported two incidents involving violations of
the adviser's code of ethics by four of its employees.

     In one incident, a fund manager failed to obtain prior
approval of several securities transactions effected by an
investment partnership over which he exercised investment
discretion. In addition, the manager failed to report these
securities transactions within ten days, as required by the
adviser's code. The fund manager was given a written reprimand
and warned that future violations of the adviser's policies on
personal securities transactions could be grounds for immediate
termination.

     In the other incident, a fund manager, an analyst, and a
trader purchased in the aggregate 3,100 shares of a single
company, and thereafter sold 1,100 of the shares. The individuals
submitted written requests for approval on the same day as the
transactions, but not until after the transactions were executed.
Because the transactions were not preapproved, the adviser's
general counsel directed that all of the transactions be
cancelled.

--------------------------- EXHIBIT D -------------------------

                    Data Without   Data With                     
                    Fund X         Fund X         Fund x
                    (1,052 Funds)  (1,053 Funds)  (1 Fund)
---------------------------------------------------------------
Total
Number of Fund
Managers                 618         622          4
---------------------------------------------------------------
Total Number of 
Fund Managers Who
Traded                   349         353          4
---------------------------------------------------------------
Total Number of 
Personal Trades by All
Managers                 9,843    13,249          3,406
---------------------------------------------------------------
Average Number of 
Personal Trades
Per Manager              15.9      21.3           851.5
---------------------------------------------------------------
Average Number of 
Personal Trades
Per Manager Who Traded   28.2      37.5           851.5
---------------------------------------------------------------
Total Number of 
Matching Trades          471       1,618          1,147
---------------------------------------------------------------
Average Number of 
Matching Trades
Per Manager              0.8       2.6            286.8
---------------------------------------------------------------
Average Number 
of Matching Trades
Per Manager Who Traded   1.3       4.6            286.8
---------------------------------------------------------------
Total Number of 
Fund Matching Trades     201       1,348          1,147
---------------------------------------------------------------
Average Number of 
Fund Matching
Trades                   0.3       2.2            286.8
---------------------------------------------------------------
Average Number 
of Fund Matching
Trades Per Manager 
Who Traded               0.6       3.8            286.8
---------------------------------------------------------------