[Federal Register Volume 73, Number 152 (Wednesday, August 6, 2008)]
[Proposed Rules]
[Pages 45646-45656]
From the Federal Register Online via the Government Publishing Office [www.gpo.gov]
[FR Doc No: E8-18035]


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SECURITIES AND EXCHANGE COMMISSION

17 CFR Part 275

[Release Nos. 34-58264; IC-28345; IA-2763 File No. S7-22-08]
RIN 3235-AJ45


Commission Guidance Regarding the Duties and Responsibilities of 
Investment Company Boards of Directors With Respect to Investment 
Adviser Portfolio Trading Practices

AGENCY: Securities and Exchange Commission.

ACTION: Proposed guidance; request for comment.

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SUMMARY: The Securities and Exchange Commission is publishing for 
comment this proposed guidance to boards of directors of registered 
investment companies to assist them in fulfilling their fiduciary 
responsibilities with

[[Page 45647]]

respect to overseeing the trading of investment company portfolio 
securities. The guidance focuses on the role of an investment company 
board in overseeing the best execution obligations of the investment 
adviser hired to invest in securities and other instruments on the 
investment company's behalf. In this respect, we address the conflicts 
of interest that may exist when an investment adviser uses an 
investment company's brokerage commissions to purchase services other 
than execution, such as the purchase of brokerage and research services 
through client commission arrangements. The Commission also is 
requesting comment on whether to propose that advisers be subject to 
new disclosure requirements concerning the use of client commission 
arrangements to investment company shareholders and other investment 
advisory clients.

DATES: Comments should be received on or before October 1, 2008.

ADDRESSES: Comments may be submitted by any of the following methods:

Electronic Comments

    <bullet> Use the Commission's Internet comment form (http://www.sec.gov/rules/proposed.shtml); or
    <bullet> Send an e-mail to <a href="/cdn-cgi/l/email-protection#6614130a034b05090b0b030812152615030548010910"><span class="__cf_email__" data-cfemail="dfadaab3baf2bcb0b2b2bab1abac9facbabcf1b8b0a9">[email protected]</span></a>. Please include 
File Number S7-22-08 on the subject line; or
    <bullet> Use the Federal eRulemaking Portal (http://www.regulations.gov). Please follow the instructions provided for 
submitting comments.

Paper Comments

    <bullet> Send paper comments in triplicate to Secretary, Securities 
and Exchange Commission, 100 F Street, NE., Washington, DC 20549-1090.

All submissions should refer to File Number S7-22-08. This file number 
should be included on the subject line if e-mail is used. To help us 
process and review your comments more efficiently, please use only one 
method. The Commission will post all comments on the Commission's 
Internet Web site (http://www.sec.gov/rules/proposed.shtml). Comments 
are also available for public inspection and copying in the 
Commission's Public Reference Room, 100 F Street, NE., Washington, DC 
20549 on official business days between the hours of 10 a.m. and 3 p.m. 
All comments received will be posted without change; we do not edit 
personal identifying information from submissions. You should submit 
only information that you wish to make available publicly.

FOR FURTHER INFORMATION CONTACT: Matthew N. Goldin, Senior Counsel, 
Karen L. Rossotto, Advisor to the Director, or Thomas R. Smith, Jr., 
Senior Advisor to the Director, Office of the Director, at 202-551-
6720, Division of Investment Management, Securities and Exchange 
Commission, 100 F Street, NE., Washington, DC 20549-0506.

I. Introduction and Summary

    Many investment advisers, in connection with trades placed on 
behalf of their registered investment company, or ``fund,'' clients, 
receive brokerage and research services in reliance on the safe harbor 
provided under section 28(e) \1\ of the Securities Exchange Act of 1934 
(``Exchange Act'').\2\ In recent years, changes in client commission 
practices, evolving technologies, and marketplace developments have 
transformed the brokerage and investment management industries and 
securities trading practices. In recognition of changing market 
conditions and current industry practices, in July 2006, we issued an 
interpretive release that provided guidance to investment advisers with 
respect to, among other things, the scope of the safe harbor provided 
under section 28(e) when advisers use brokerage commissions to purchase 
brokerage and research services for their managed accounts.\3\ In 
addition to providing guidance to investment advisers on their use of 
soft dollars, we believe it is important to provide guidance to fund 
boards of directors concerning their responsibilities to oversee the 
adviser's satisfaction of its best execution obligations, including the 
adviser's use of fund brokerage commissions and the overall transaction 
costs that the fund incurs when the fund buys or sells portfolio 
securities.\4\ As we have stated previously, transaction costs are a 
concern for fund investors for two reasons.\5\ First, for many funds, 
the amount of transaction costs incurred may be substantial.\6\ Second, 
fund advisers are subject to a number of potential conflicts of 
interest in conducting portfolio transactions on behalf of clients that 
are funds.\7\ Fund brokerage commissions, which are paid out of fund 
assets, may, for example, be used to obtain brokerage and research 
services under section 28(e) of the Exchange Act that might otherwise 
be paid for directly by the fund's investment adviser.
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    \1\ 15 U.S.C. 78bb(e). For a discussion of the section 28(e) 
safe harbor, see infra section III.C. Whereas section 28(e) refers 
to a money manager as a ``person * * * [who] exercise[s] * * * 
investment discretion with respect to an account,'' we refer to 
money managers to funds in this Release as ``investment advisers.''
    \2\ 15 U.S.C. 78a.
    \3\ Commission Guidance Regarding Client Commission Practices 
Under section 28(e) of the Securities Exchange Act of 1934, Exchange 
Act Release No. 54165 (July 18, 2006) [71 FR 41978 (July 24, 2006)] 
(``2006 Release'').
    \4\ See infra section III (discussing fund directors' 
obligations with respect to overseeing advisers' trading of fund 
portfolio securities). Broadly defined, a fund's transaction costs 
include all of its costs that are associated with trading portfolio 
securities. Transaction costs may include, among other things, 
commissions, spreads, market impact costs, and opportunity costs. 
Concept Release: Request for Comments on Measures to Improve 
Disclosure of Mutual Fund Transaction Costs, Investment Company Act 
Release No. 26313 (Dec. 18, 2003) [68 FR 74820 (Dec. 24, 2003)] 
(``Concept Release''), at section II.A. For purposes of this 
Release, the use of the term ``securities'' includes all instruments 
that an investment company may invest in under the Investment 
Company Act of 1940 [15 U.S.C. 80a] (``Investment Company Act'').
    \5\ See Concept Release at section I. However, we are aware that 
the interests of a fund's adviser and the fund's investors generally 
are aligned when an adviser places fund trades because advisers 
typically seek to minimize transaction costs due to the fact that 
such costs may detract from the fund's performance.
    \6\ For example, one study estimates that the average annual 
trading cost for a sample of 1706 U.S. equity funds during the 
period 1995-2005 was almost 20 percent higher than the average 
expense ratio for those funds. These estimates include the effect of 
commissions, spreads, and market impact costs. Roger M. Edelen, 
Richard Evans & Gregory Kadlec, Scale Effects in Mutual Fund 
Performance: The Role of Trading Costs (working paper dated March 
17, 2007), available at http://papers.ssrn.com/sol3/papers.cfm?abstract_id=951367.
    \7\ See Concept Release at section I.
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    We recognize that conflicts of interest are inherent when an 
investment adviser manages money on behalf of multiple clients. As 
discussed in section II of this Release, conflicts are also inherent in 
the external management structure of funds. Investment advisers are 
required to disclose material conflicts of interest to their clients, 
and those conflicts should be managed appropriately. Fund directors 
play a pivotal role in overseeing conflicts of interest investment 
advisers face when they have funds as clients. As explained in further 
detail in section III of this Release, fund transaction costs may not 
be readily apparent to investors. It is imperative that the fund's 
directors both understand and scrutinize the payment of transaction 
costs by the fund \8\ and determine that payment of transaction costs 
is in the best interests of the fund and the fund's shareholders.\9\ 
Although

[[Page 45648]]

directors are not required or expected to monitor each trade, they 
should monitor the adviser's trading practices and the manner in which 
the adviser fulfills its obligation to seek best execution when trading 
fund portfolio securities.\10\ In doing so, the fund's board should 
demand, and the fund's adviser must provide, all information needed by 
the fund's board to complete this review process.\11\ Without 
sufficient oversight by the fund's board, transaction costs might 
inappropriately include payment for services that benefit the fund's 
adviser at the expense of the fund and that the board believes should 
be paid directly by the adviser rather than with fund assets.
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    \8\ See id. See also infra section II at note 26 and 
accompanying text (discussing the external management structure of 
most funds).
    \9\ See Role of Independent Directors of Investment Companies, 
Investment Company Act Release No. 24082 (Oct. 14, 1999) [64 FR 
59826 (Nov. 3, 1999)], at nn.7 & 12 (``Mutual funds are formed as 
corporations or business trusts under state law and, like other 
corporations and trusts, must be operated for the benefit of their 
shareholders. * * * Under state law, directors are generally 
responsible for the oversight of all of the operations of a mutual 
fund.'').
    \10\ The directors of an investment company have a continuing 
fiduciary duty to oversee the company's brokerage practices. See 
2006 Release at n.6 (citing Order Approving Proposed Rule Change and 
Related Interpretation under section 36 of the Investment Company 
Act, Investment Company Act Release No. 11662 (Mar. 4, 1981) [46 FR 
16012 (Mar. 10, 1981)]). See also 2 Tamar Frankel, Regulation of 
Money Managers 67 (1978) (``The directors should examine the 
adviser's practices in placing portfolio transactions with broker 
dealers and the use of the brokerage business for the benefit of the 
adviser or its affiliates, and ensure that there are no violations [ 
] of the law. * * *'') (citing Lutz v. Boas, 39 Del. Ch. 585, 171 
A.2d 381 (1961) and William J. Nutt, A Study of Mutual Fund 
Independent Directors, 120 U. Pa. L. Rev. 179, 181 (1971)).
    \11\ See Concept Release at section I.
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    We have received requests from fund directors for guidance on our 
view of their responsibilities in overseeing the activities of the 
investment advisers that trade their funds' portfolio securities. These 
requests include inquiries as to how directors may properly fulfill 
their responsibilities with respect to overseeing an adviser's 
satisfaction of its best execution obligations, including the adviser's 
trade execution practices and the adviser's use of fund brokerage 
commissions.\12\ Today we are proposing guidance with respect to 
information a fund board should request that an investment adviser 
provide to enable fund directors to determine that the adviser is 
fulfilling its fiduciary obligations to the fund and using the fund's 
assets in the best interest of the fund. Our proposed guidance also is 
intended to assist the board in directing the adviser as to how fund 
assets should be used.\13\
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    \12\ In connection with these requests for guidance, fund 
directors have informed us that fund boards are spending increasing 
amounts of time on trading practices in light of the growing 
complexity in this area.
    \13\ At the July 12, 2006 open meeting at which the Commission 
considered the 2006 Release, several of the Commissioners 
specifically noted that guidance for fund boards was a critical 
element in protecting investors against abuses in this area. An 
electronic link to an archived webcast of the open meeting is 
available at http://www.connectlive.com/events/secopenmeetings.
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    Our proposed guidance would not impose any new or additional 
requirements. Rather, it is intended to assist fund directors in 
approaching and fulfilling their responsibilities of overseeing and 
monitoring the fund adviser's satisfaction of its best execution 
obligations and the conflicts of interest that may exist when advisers 
trade the securities of their clients that are funds.\14\ In developing 
this proposed guidance, we have taken into account the wide variety of 
funds and advisers in terms of size, asset classes, complexity, and 
operations. We have also considered the changing market environment in 
the brokerage and investment management industries.\15\ We feel that 
with rapidly evolving market conditions and trading practices, it is 
appropriate to give guidance at this time. For these reasons, we are 
proposing guidance for fund directors to consider in performing their 
responsibilities and in determining what is appropriate in light of 
their fund's particular circumstances.
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    \14\ See infra section III. See also 2006 Release at section 
II.A.
    \15\ In light of the advancements in the market and the 
continuously evolving technology influencing industry practices, the 
Commission staff talked with a variety of investment advisers and 
industry representatives, including independent fund directors and 
directors' counsel, to help ensure that our proposed guidance today 
reflects actual market practices and is based on factual industry 
experience.
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    Our intention in this proposed guidance is to assist boards. We 
wish to provide guidance that is relevant, useful, and beneficial to 
fund directors in fulfilling their responsibilities to act in the best 
interest of investors in this area. We request comment on all aspects 
of our proposed guidance to help us in achieving this goal. In 
addition, as the evolving nature of brokerage practices greatly 
influences how directors approach their oversight responsibilities in 
this area, we specifically request comment on the current state of the 
brokerage and investment management industries and its effect on 
advisers' trading of fund portfolio securities.

II. Summary of Law Regarding Fiduciary Responsibilities of Investment 
Company Directors

    In fulfilling their responsibilities to a fund that they oversee, 
fund directors should understand the nature and source of their legal 
obligations to the fund and the fund's shareholders. Because funds are 
generally formed as corporations, business trusts, or partnerships \16\ 
under state law, fund directors and trustees, like other corporate 
directors, are subject to a ``duty of care'' and a ``duty of loyalty'' 
under state and common law fiduciary principles,\17\ as well as the 
obligations imposed on them under the Investment Company Act.\18\
    A director's duty of care generally requires a fund director to 
perform his or her oversight responsibilities with the care of an 
ordinarily prudent person in a like position under similar 
circumstances.\19\ The duty of care thus establishes the degree of 
attention and consideration required of a director in matters related 
to the fund he or she oversees. As such, a director's duty of care 
incorporates a duty to be informed, requiring that a director be 
reasonably informed about an issue before making a decision relating to 
that issue.\20\ To be reasonably informed about an issue, a director 
must inform him or herself of all material information regarding that 
issue reasonably available to him or her.\21\ In fulfilling these 
obligations, a fund director may rely on written and oral reports 
provided by management, auditors, fund counsel, the fund's chief 
compliance officer (``CCO''), and other experts and committees of the 
board when making decisions, so long as the director reasonably 
believes that the reports are reliable and competent with respect to 
the relevant matters.\22\

[[Page 45649]]

    A director's duty of loyalty requires him or her to act in the best 
interests of the fund and the fund's shareholders.\23\ The duty of 
loyalty encompasses a director's obligations to avoid conflicts of 
interest with the fund and the fund's shareholders, not to put his or 
her personal interests before the interests of the fund and the fund's 
shareholders, and not to profit from his or her position as a 
fiduciary.\24\
    In addition to statutory and common law obligations, fund directors 
are also subject to specific fiduciary obligations relating to the 
special nature of funds under the Investment Company Act.\25\ Unlike 
typical operating companies, funds ordinarily do not have any employees 
that are truly their own, but rather are generally formed and managed 
by a separately owned and operated sponsor, commonly an investment 
adviser.\26\ This external management structure of most funds may at 
times create conflicts of interest for investment advisers with clients 
that are funds. When it enacted the Investment Company Act, Congress 
recognized the potential for abuse created by the unique structure of 
funds.\27\ To protect fund shareholders, the Act requires that each 
registered fund be governed by a board of directors with the authority 
to supervise the fund's operations.\28\ The Act further requires that 
at least 40 percent of a fund's board be independent in order to serve 
as ``independent watchdogs'' in monitoring the fund's managing 
organization.\29\ A fund board has the responsibility, among other 
duties, to monitor the conflicts of interest facing the fund's 
investment adviser and determine how the conflicts should be managed to 
help ensure that the fund is being operated in the best interest of the 
fund's shareholders.\30\

III. Board Oversight of Investment Adviser Trading Practices

    In overseeing the use of fund assets and in monitoring the 
conflicts of interest faced by a fund's investment adviser, a fund 
board must consider the investment adviser's practices when it trades 
the fund's portfolio securities.\31\ A fund's investment adviser is a 
fiduciary with respect to the fund and therefore must act in the fund's 
best interest.\32\ Lower transaction costs generally are in the mutual 
interest of a fund's adviser and the fund's investors, and advisers 
typically seek to minimize transaction costs when trading fund 
securities so as not to detract from the fund's performance. At times, 
however, there may be incentives for an investment adviser to 
compromise its fiduciary obligations to the fund in its trading 
activities in order to obtain certain benefits that serve its own 
interests or the interests of other clients. These conflicts of 
interest may exist, for example, when an adviser executes trades 
through an affiliate, when it determines the allocation of trades among 
its clients, and when it trades securities between clients. In 
addition, the use of fund brokerage commissions to pay for research and 
brokerage services may give incentives for advisers to disregard their 
best execution obligations when directing orders to obtain brokerage 
commission services. It also may give incentives for advisers to trade 
the fund's securities in order to earn credits for fund brokerage 
commission services. In accordance with its fiduciary obligations and 
provisions of the Advisers Act, an adviser must make full and fair 
disclosure of these conflicts to a client and disclose how the adviser 
will manage each conflict before the adviser may engage in conduct that 
constitutes a conflict.\33\
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    \16\ See, e.g., A. Joseph Warburton, Should Mutual Funds Be 
Corporations: A Legal & Econometric Analysis, 33 Iowa J. Corp. L. 
745, 748-49 (2008).
    \17\ See, e.g., Md. Code Ann., Corps. and Ass'ns Sec.  2-
405.1(a) (2008) (requiring a director to perform his duties: ``(1) 
In good faith; (2) In a manner he reasonably believes to be in the 
best interests of the corporation; and (3) With the care that an 
ordinarily prudent person in a like position would use under similar 
circumstances.'').
    \18\ 15 U.S.C. 80a. See supra note 4.
    \19\ See, e.g., Model Bus. Corp. Act Ann. Sec.  8.30(b) (3d ed. 
2002); Md. Code Ann., Corps. and Ass'ns Sec.  2-405.1(a)(3) (2008).
    \20\ See, e.g., Smith v. Van Gorkom, 488 A.2d 858 (Del. 1985) 
(explaining that, although directors are assumed to have been 
informed in making a business decision, when the burden of proving 
that a board was insufficiently informed is met, the board will have 
been found to have breached its duty of care).
    \21\ See id. at 872 (discussing the standard for determining 
whether a director's business judgment is informed).
    \22\ See, e.g., Graham v. Allis-Chalmers Manufacturing Co., 188 
A.2d 125, 130 (1963) (explaining that, under general principles of 
the common law, a director is entitled to rely on corporate 
summaries, reports, and records so long as he or she has not 
``recklessly reposed confidence in an obviously untrustworthy 
employee, [ ] refused or neglected cavalierly to perform his duty as 
a director, or [ ] ignored either willfully or through inattention 
obvious danger signs of employee wrongdoing.''). A director should 
be satisfied not only that the person providing the report or 
opinion is doing so about a matter within his or her knowledge or 
expertise and has an appropriate basis for the opinion, but also 
that the scope of the report bears on the matter being decided. See 
Van Gorkom, 488 A.2d at 875. In addition, to fulfill the duty of 
care, a director needs a well-informed decision-making process. This 
process may include, among other things, asking for and reviewing 
regular financial and other reports, questioning managers and 
outside experts about the meaning and implications of reports, and 
making inquiries when there are specific causes for concern. Id.
    \23\ See, e.g., Strougo v. Scudder, Stevens and Clark, Inc., 964 
F. Supp. 783, 801 (S.D.N.Y. 1997) (citing Md. Code Ann., Corps. and 
Assn's Sec.  2-405.1(a)(1) (requiring corporate directors to perform 
their duties in ``good faith'') and James J. Hanks, Jr., Maryland 
Corporation Law Sec.  6.6(b) (1995-1 Supp.) (explaining that a 
director's duty to act in `good faith' is generally synonymous with 
the duty of loyalty or the duty of fair dealing)). See also Pepper 
v. Litton, 308 U.S. 295, 310-311 (1939) (stating that a fiduciary 
``cannot serve himself first and his cestuis second'').
    \24\ See, e.g., Guth v. Loft, Inc., 5 A.2d 503, 510 (Del. Ch. 
1939) (``Corporate officers and directors are not permitted to use 
their position of trust and confidence to further their private 
interests''); see also Pepper, 308 U.S. at 310-311 (stating that a 
fiduciary ``cannot use his power for his personal advantage and to 
the detriment of the stockholders and creditors no matter how 
absolute in terms that power may be and no matter how meticulous he 
is to satisfy technical requirements.''). See also Fed. Regulation 
of Sec. Comm., Am. Bar Ass'n, Fund Director's Guidebook 98 (3d ed. 
2006) (``Simply put, directors should not use their position for 
personal profit, gain, or other personal advantage.'').
    \25\ See, e.g., Strougo, 964 F. Supp. at 798 (holding that a 
fund shareholder has a private right of action under section 36(a) 
of the Investment Company Act against the independent directors of a 
fund for breach of fiduciary duty involving personal misconduct). 
See also Protecting Investors: A Half Century of Investment Company 
Regulation, Division of Investment Management 251 (May 1992) 
(``Protecting Investors'').
    \26\ See Protecting Investors 251 n.3.
    \27\ See Investment Company Act section 1(b)(2) [15 U.S.C. 80a-
1(b)(2)]; U.S. Sec. and Exch. Comm'n, Report on Investment Trusts 
and Investment Companies, H.R. Doc No. 76-279, Part III (1939). See 
also Joseph F. Krupsky, The Role of Investment Company Directors, 32 
BUS. LAW. 1733, 1737-40 (1977); William J. Nutt, A Study of Mutual 
Fund Independent Directors, 120 U. Pa. L. Rev. 179, 181 (1971).
    \28\ See S. Rep. No. 91-184, at 4902-03 (1969) (``The directors 
of a mutual fund, like directors of any other corporation will 
continue to have * * * overall fiduciary duties as directors for the 
supervision of all of the affairs of the fund.'').
    \29\ 15 U.S.C. 80a-10(a). See also Burks v. Lasker, 441 U.S. 
471, 484-485 (1979) (``Congress' purpose in structuring the Act as 
it did is clear * * * it `was designed to place the unaffiliated 
directors in the role of ``independent watchdogs.'' ' (quoting 
Tannenbaum v. Zeller, 552 F.2d 402 (2d Cir. 1977)).
    \30\ See Tannenbaum, 552 F.2d at 406 (noting that the 
independent director requirements under the Investment Company Act, 
in particular, were designed to ensure that ``mutual funds would 
operate in the interest of all classes of [funds'] securities 
holders, rather than for the benefit of investment advisers, 
directors or other special groups.'').
    \31\ See 2006 Release at n.6 (citing Order Approving Proposed 
Rule Change and Related Interpretation under Section 36 of the 
Investment Company Act, Investment Company Act Release No. 11662 
(Mar. 4, 1981) [46 FR 16012 (Mar. 10, 1981)] (``The directors of an 
investment company have a continuing fiduciary duty to oversee the 
company's brokerage practices.'')). See also Compliance Programs of 
Investment Companies and Investment Advisers, Advisers Act Release 
No. 2204 (Dec. 17, 2003) [68 FR 74714 (Dec. 24, 2003)] (``Compliance 
Release''), at Section II.A.2.b (requiring that a fund's board 
approve the policies and procedures of the fund's service providers, 
including its investment adviser; the approval must be based on a 
finding by the board that the policies and procedures are reasonably 
designed to prevent violation of the Federal securities laws by the 
fund's service providers). We have stated that we expect that the 
adviser's compliance policies and procedures will address, to the 
extent that they are relevant, the adviser's trading practices. See 
Compliance Release at II.A.1.
    \32\ Investment advisers are fiduciaries and have an obligation 
under the Investment Advisers Act of 1940 [15 U.S.C. 80b] 
(``Advisers Act'') and state law to act in the best interest of 
their clients. See Restatement (Second) of Trusts Sec.  170(1) 
(2008) (``The trustee is under a duty to the beneficiary to 
administer the trust solely in the interest of the beneficiary''); 
SEC v. Capital Gains Research Bureau, Inc., 375 U.S. 180, 191 (1963) 
(``The Investment Advisers Act of 1940 thus reflects a congressional 
recognition `of the delicate fiduciary nature of an investment 
advisory relationship. * * * ' '' (quoting 2 LOSS, Securities 
Regulation 1412 (2d ed. 1961))); Transamerica Mortgage Advisors, 
Inc. v. Lewis, 444 U.S. 11, 17 (1979) (noting that the legislative 
history of the Advisers Act ``leaves no doubt that Congress intended 
to impose enforceable fiduciary obligations'' on investment 
advisers).
    \33\ See Capital Gains, 375 U.S. at 191, 196-197 (``The 
Investment Advisers Act of 1940 reflects * * * a congressional 
intent to eliminate, or at least to expose, all conflicts of 
interest which might incline an investment adviser, consciously or 
unconsciously, to render advice which was not disinterested.'').
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    The fund's board, in providing its consent on the fund's behalf, 
should be sufficiently familiar with the adviser's trading practices to 
satisfy itself that the adviser is fulfilling its fiduciary obligations 
and is acting in the best interest of the fund. In some cases where the 
Commission has adopted

[[Page 45650]]

exemptive rules that permit funds to engage in transactions otherwise 
prohibited by the Investment Company Act, the Commission has imposed 
conditions designed to address certain conflicts of interest faced by 
advisers by mandating that directors take particular action in 
evaluating those conflicts.\34\ In other cases, the Commission has 
determined that the conflicts relating to a particular practice are 
unmanageable and has therefore prohibited advisers' activities in that 
area altogether.\35\
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    \34\ See, e.g., Investment Company Act rule 10f-3(c)(10) [17 CFR 
270.10f-3(c)(10)] (fund boards must adopt procedures for purchases 
by the fund of securities from an affiliated underwriter and assess 
compliance on a quarterly basis); Investment Company Act rule 17a-
7(e) [17 CFR 270.17a-7(e)] (fund boards must adopt procedures for 
purchases from and sales to affiliated funds and assess compliance 
on a quarterly basis); Investment Company Act rule 17a-8(a) [17 CFR 
270.17a-8(a)] (fund boards must make certain determinations in 
evaluating mergers with affiliated funds); and Investment Company 
Act rule 17e-1(b) [17 CFR 270.17e-1(b)] (fund boards must adopt 
procedures for brokerage transactions with affiliates and assess 
compliance on a quarterly basis).
    \35\ See, e.g., Prohibition on the Use of Brokerage Commissions 
to Finance Distribution, Investment Company Act Release No. 26591 
(Sep. 2, 2004) [69 FR 54728 (Sep. 9, 2004)], at section VII.E 
(explaining that the Commission's adoption in 2004 of Investment 
Company Act rule 12b-1(h) [17 CFR 270.12b-1(h)], which, among other 
things, prohibits a fund from using brokerage commissions to pay for 
the distribution of the fund's shares, was based on a conclusion 
that the practice of trading brokerage business for sales of fund 
shares poses conflicts of interest that the Commission believed to 
be ``largely unmanageable'').
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    Two specific areas where conflicts may arise when an adviser trades 
a fund's portfolio securities concern the adviser's obligation to seek 
best execution and to otherwise use fund assets, including brokerage 
commissions, in the best interest of the fund. The following sections 
provide guidance on the types of information a fund board should seek 
in order to evaluate whether the adviser to its fund has fulfilled its 
obligations to the fund with respect to these concerns.

A. Board Oversight of an Investment Adviser's Duty To Seek Best 
Execution and Consideration of Transaction Costs

    As a fiduciary to a client that is a fund, an investment adviser 
has the duty to seek best execution of securities transactions it 
conducts on the fund's behalf.\36\ As we have stated previously, in 
seeking best execution, an investment adviser must seek to ``execute 
securities transactions for clients in such a manner that the client's 
total cost or proceeds in each transaction is the most favorable under 
the circumstances.'' \37\ In this regard, in seeking to maintain best 
execution on behalf of a client that is a fund, an adviser should 
consider factors beyond simply commission rates or spreads,\38\ 
including ``the full range and quality of a broker's services in 
placing brokerage. * * *'' \39\ These might include, among other 
things, the value of research provided, execution capability, financial 
responsibility, and responsiveness to the adviser.\40\
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    \36\ See Interpretive Release Concerning the Scope of section 
28(e) of the Securities Exchange Act of 1934 and Related Matters, 
Exchange Act Release No. 23170 (Apr. 23, 1986) [51 FR 16004, 16011 
(Apr. 30, 1986)] (``1986 Release''), at Section V (explaining that 
an investment adviser has the obligation to seek ``best execution'' 
of a client's transaction); Delaware Management Company, Inc., 43 
S.E.C. 392 (1967); Arleen W. Hughes, 27 S.E.C. 629 (1948), aff'd sub 
nom. Hughes v. SEC, 174 F.2d 969 (D.C. Cir. 1949).
    \37\ 1986 Release at section V.
    \38\ A fund may incur spread costs rather than commissions when 
a dealer trades with it on a principal basis. Spread costs are 
incurred indirectly when a fund either buys a security from a dealer 
at the ``asked'' price or higher or sells a security to a dealer at 
the ``bid'' price or lower. The difference between the bid price and 
the asked price is known as the ``spread.'' Spread costs include 
both an imputed commission on the trade as well as any market impact 
cost associated with the trade. Dealer spreads compensate broker-
dealers for, among other things, maintaining a market's trading 
infrastructure (i.e., price discovery and execution services), the 
broker-dealer's cost of capital, and its assumption of market risk. 
Spreads may also reflect the impact of large orders on the price of 
a security. The proportion of these two components varies among 
different trades. Concept Release at section II.A.2.
    \39\ 1986 Release at section V.
    \40\ Id.
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    When trading portfolio securities of a client that is a fund, an 
adviser should consider factors related to minimizing the overall 
transaction costs incurred by the fund.\41\ Transaction costs consist 
of explicit costs that can be measured directly, such as brokerage 
commissions, fees paid to exchanges, and taxes paid, as well as 
implicit costs that are more difficult to quantify. Implicit costs, 
which may include, among other things, bid/ask spreads, the price 
impact of placing an order for trading in a security, and missed trade 
opportunity cost, may exceed greatly a transaction's explicit 
costs.\42\ Price impact and opportunity cost can be influenced by a 
variety of factors--each of which should be considered by an investment 
adviser--such as the anonymity of the parties to the trade, the 
willingness of the intermediary to commit capital to facilitate the 
trade, and the speed and price of the execution. Investment advisers 
also can take into account the quality and utility of any research 
provided by the broker-dealer.\43\
---------------------------------------------------------------------------

    \41\ See id.
    \42\ For a more detailed discussion of explicit and implicit 
transaction costs, see Concept Release at section II.A.
    \43\ See 1986 Release at section V (``A money manager should 
consider the full range and quality of a broker's services in 
placing brokerage including, among other things, the value of 
research provided. * * *''). For further discussion regarding 
evaluation of broker-dealer research services, see infra section 
III.D.
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    An aspect of an adviser's best execution process that directors 
should also consider is the adviser's decision whether to use an 
alternative trading system. Newer trading venues, such as ``dark 
pools,'' \44\ and the use of advanced mathematical models or 
algorithmic trading systems, crossing networks, and other alternative 
trading systems, are increasingly prevalent.\45\ Although the use of 
such trading venues may provide funds certain benefits (such as 
potentially lower execution costs),\46\ they can also raise challenges 
to funds in certain situations.\47\
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    \44\ For purposes of this release, our references to the term 
``dark pools'' refer to markets that do not display quotes, but 
rather execute trades internally without displaying liquidity to 
other participants. A number of markets combine non-displayed 
liquidity with display of quotes. A substantial portion of the 
trading volume of these markets may result from interaction of 
orders with their non-displayed liquidity. See, e.g., Elizabeth 
Cripps, Shedding Light on the Dark Liquidity Pools, FTMandate, May 
2007, available at http://www.ftmandate.com/news/printpage.php/aid/1442/Shedding_light_on_the_dark_liquidity_pools.html.
    \45\ One recent report noted that although dark pools currently 
make up seven to ten percent of equities' share volume in the U.S., 
that percentage is steadily increasing. Celent, LLC, Dark Liquidity 
Pools in Europe, Canada, and Japan: A U.S. Phenomenon Goes Abroad 
(2007). See also David Bogoslaw, Big Traders Dive Into Dark Pools, 
Business Week, Oct. 3, 2007, available at http://www.businessweek.com/investor/content/oct2007/pi2007102_394204.htm 
(noting that the Aite Group predicted in September 2007 that 
exchanges' market share of U.S. equity trading would continue to 
decline from the current 75 percent, before stabilizing at around 62 
percent by 2011, with alternative trading systems, including dark 
pools, intensifying fragmentation of the marketplace).
    \46\ Execution costs may be lower on alternative trading 
systems. See, e.g., Jennifer Conrad, Kevin Johnson & Sunil Wahal, 
Insitutional Trading and Alternative Trading Systems, 70 J. of Fin. 
Econ. 99 (2003).
    \47\ For example, we understand that an adviser managing a fund 
that invests in companies with smaller capitalizations and more 
illiquid securities may need an executing broker-dealer to have 
experience and access to a particular market or one with expertise 
in a certain geographical area or industry. Advisers to these types 
of funds have indicated that they must rely on a relatively large 
number of brokers--especially where markets in niche securities have 
not developed on newer trading venues--to provide the execution and 
research they need with respect to a particular asset class.
---------------------------------------------------------------------------

    We ask for comment on how changes in the brokerage industry should 
affect a fund board's oversight of the trading practices of the fund's 
adviser. Is our discussion of the brokerage industry (as relevant to 
funds and their advisers) accurate? Are there other considerations with 
respect to the brokerage industry we should take into account?
    We understand that investment advisers with clients that are funds 
employ a wide range of procedures

[[Page 45651]]

when selecting broker-dealers for fund securities transactions.\48\ In 
consideration of the wide variety of advisers in terms of size and 
operations, each adviser should determine what trading intermediary 
selection process is most appropriate for its circumstances.\49\ 
However, as the Commission has stated previously, in its process for 
choosing trading intermediaries, an adviser should periodically and 
systematically evaluate the performance of broker-dealers handling its 
transactions.\50\ In addition, the Commission has stated that an 
investment adviser should address its best execution obligations in the 
compliance policies and procedures that advisers are required to adopt 
and implement under rule 206(4)-7 under the Advisers Act.\51\ Rule 38a-
1 under the Investment Company Act requires that the policies and 
procedures of a fund adviser be approved by the fund board based on the 
board's finding that the policies and procedures are reasonably 
designed to prevent the adviser's violation of the Federal securities 
laws.\52\
---------------------------------------------------------------------------

    \48\ See infra note 77 and accompanying text (discussing the 
``broker vote'' process employed by many advisers to evaluate 
broker-dealers' brokerage and research services).
    \49\ See Compliance Release at section I.A.1 (explaining that, 
in mandating investment adviser compliance policies and procedures, 
we elected not to impose a single set of universally applicable 
required elements because advisers are too varied in their 
operations).
    \50\ See 1986 Release at section V.
    \51\ See Compliance Release at section II.A.1. Rule 206(4)-7 
under the Advisers Act [17 CFR 275.206(4)-7] requires an investment 
adviser to have written compliance policies and procedures in place 
that are reasonably designed to prevent it from violating the 
Advisers Act and rules the Commission has adopted under the Act. The 
rule does not enumerate specific elements that an adviser must 
include in its policies and procedures. However, the Commission has 
stated that it expects an adviser, in designing its policies and 
procedures, to identify conflicts and other compliance factors 
creating risk exposure for the firm and its clients in light of the 
firm's particular obligations, and then design policies and 
procedures that address those risks. See id.
    \52\ 17 CFR 270.38a-1. See also Compliance Release at section 
II.A.2.
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    Fund directors should seek relevant data from the fund's investment 
adviser to assist them in evaluating the adviser's procedures regarding 
its best execution obligations. These data should typically include, 
but not be limited to: (i) The identification of broker-dealers to 
which the adviser has allocated fund trading and brokerage; (ii) the 
commission rates or spreads paid; (iii) the total brokerage commissions 
and value of securities executed that are allocated to each broker-
dealer during a particular period; and (iv) the fund's portfolio 
turnover rates. Fund boards may also discuss related matters with the 
adviser, which may include the following, where applicable:
    <bullet> The process for making trading decisions and the factors 
involved in the selection of execution venues and the selection of 
broker-dealers;
    <bullet> The means by which the investment adviser determines best 
execution and evaluates execution quality as well as how best execution 
is affected by the use of alternative trading systems;
    <bullet> Who negotiates commission rates, how that negotiation is 
carried out, whether the amount of commissions agreed to depends on 
comparative data with respect to commission rates, and generally how 
transactions costs are measured; \53\
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    \53\ Although we are not suggesting that firms need to do so, we 
understand that some firms have employed third-party vendors to 
assist them in measuring best execution through a transaction cost 
analysis using comparative data from across the industry. We also 
have been informed that not all companies use the same methodology 
to measure trading costs and that there are no commonly accepted 
standards as to how to measure price impact.
---------------------------------------------------------------------------

    <bullet> How the quality of ``execution-only'' trades--trades that 
do not include payment for any additional research or services beyond 
execution--is evaluated compared to that of other trades (for example, 
whether trades that are executed through channels that include an 
additional soft dollar component are reviewed in comparison with 
execution-only trades to discern any discrepancies in the quality of 
execution);
    <bullet> How the performance of the adviser's traders is evaluated, 
as well as the aggregate performance of the firm's traders as a whole, 
how the performance of each broker-dealer the adviser uses for fund 
portfolio transactions is evaluated, and how problems or concerns that 
are identified with a trader or a broker-dealer are addressed;
    <bullet> If sub-advisers are used, how the adviser provides 
oversight and monitors each sub-adviser's activities, including the 
trading intermediary selection process; \54\
---------------------------------------------------------------------------

    \54\ Because sub-advisory arrangements take various forms, 
directors should have an understanding of the structure of these 
arrangements and whether the adviser is appropriately overseeing the 
trading activities of the sub-advisers.
---------------------------------------------------------------------------

    <bullet> To what extent and under what conditions the adviser 
conducts portfolio transactions with affiliates;
    <bullet> The process for trading fixed-income securities and 
determining the costs of fixed income transactions;
    <bullet> How the quality of trade execution is evaluated with 
respect to fixed-income and other instruments traded on a principal 
basis; and
    <bullet> If there are international trading activities, how these 
trades are conducted and monitored.
    We acknowledge that not all funds would require an evaluation of 
each of these factors by their boards. Different factors may be 
appropriate for different funds, depending on a fund's investment 
objective, trading practices, and personnel.
    We also request comment regarding how boards should approach their 
obligations to oversee and evaluate the fund adviser's trading 
practices and procedures. Is there further information fund boards 
should request that the adviser provide to assist directors in their 
review?
    Once the board receives from the adviser information with respect 
to the issues outlined above, fund directors should determine whether 
the adviser's trading practices are being conducted in the best 
interests of the fund and the fund's shareholders. If these interests 
are not being best served, the board should direct the adviser 
accordingly.
    In addition, when an investment adviser seeks the fund board's 
approval of the adviser's compliance policies and procedures, directors 
should satisfy themselves that the adviser's policies and procedures 
are reasonably designed, adequate, and being effectively implemented to 
prevent violations of the Federal securities laws.\55\ Directors may 
evaluate the adviser's compliance policies and procedures through 
updates from different sources, which may include the fund's or the 
adviser's CCO or other appropriate sources.\56\
---------------------------------------------------------------------------

    \55\ 17 CFR 270.38a-1(a)(2)-(3) (requiring that each fund 
``[o]btain the approval of the fund's board of directors * * * of 
the fund's policies and procedures and those of each investment 
adviser * * * which approval must be based on a finding by the board 
that the policies and procedures are reasonably designed to prevent 
violation of the Federal Securities Laws by the fund, and by each 
investment adviser * * *'' and that each fund ``review, no less 
frequently than annually, the adequacy of the policies and 
procedures of the fund and of each investment adviser. * * *''). See 
also Compliance Release at section II.A.2. & II.B.2.
    \56\ 17 CFR 270.38a-1(a)(4)(iii) (requiring that the fund 
designate a CCO who must, ``no less than annually, provide a written 
report to the board that, at a minimum, addresses,'' among other 
things, ``[t]he operation of the policies and procedures of the fund 
and each investment adviser. * * *''). See also Compliance Release 
at section II.C.2.
---------------------------------------------------------------------------

    Furthermore, with the rapid development of increased options for 
trading venues, fund boards need to remain up to date in their 
familiarity with the evolving market in this area. We understand that 
fund directors approach educating themselves on

[[Page 45652]]

industry developments in various ways.\57\
---------------------------------------------------------------------------

    \57\ Some ways we have observed that directors educate 
themselves on developments in this area include: (i) Establishing a 
committee of the board to specialize in portfolio trading practices; 
(ii) requiring that the adviser form special committees to consider 
best execution and the use of client commissions and to provide 
reports to the board on the adviser's trading activities; (iii) 
requesting periodic summaries and analyses from officers of the 
adviser to explain the adviser's portfolio trading practices; (iv) 
attending trade association events, seminars and/or other education 
events relating to brokerage practices; (v) subscribing to third-
party information providers or retaining experts to ensure that 
board members remain knowledgeable with respect to market 
developments; and (vi) periodically meeting with portfolio managers, 
business unit staff, trading personnel and other employees of the 
adviser.
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B. Board Oversight of an Investment Adviser's Use of Fund Brokerage 
Commissions

    When trading portfolio securities on behalf of clients that are 
funds, there are a number of ways in which an investment adviser may 
use a portion of fund brokerage commissions to benefit the fund beyond 
execution of the securities transaction. First, a fund adviser may use 
a portion of fund brokerage commissions to purchase research and/or 
research-related services in accordance with section 28(e) of the 
Exchange Act. The research may be ``proprietary'' research, produced by 
the broker-dealer executing the securities transaction or its 
affiliates,\58\ or it may be ``third-party research,'' produced or 
provided by someone other than the executing broker-dealer.\59\ 
Investment advisers also may purchase third-party research themselves 
using cash payments from their own account, or ``hard dollars.'' 
Furthermore, investment advisers may obtain proprietary and third-party 
research through a ``client commission arrangement.'' In a client 
commission arrangement, an investment adviser agrees with a broker-
dealer effecting trades for the adviser's client accounts that a 
portion of the commissions paid by the accounts will be credited to 
purchase research either from the executing broker or another broker, 
as directed by the adviser.\60\
---------------------------------------------------------------------------

    \58\ See Thomas P. Lemke & Gerald T. Lins, Soft Dollars and 
Other Brokerage Arrangements Sec.  1.04[A] (2005). Proprietary 
research is often provided to an investment adviser partly as a quid 
pro quo for brokerage business given by the adviser to the broker 
producing the research. Alternatively, proprietary research may be 
provided without being expressly requested and considered part of 
the services obtained in exchange for ``full service,'' or 
``bundled,'' commissions that include a sufficient amount of 
compensation to cover the cost of research. Id.
    \59\ See id.
    \60\ See 2006 Release at section III (interpreting section 28(e) 
to permit the industry flexibility to structure arrangements that 
are consistent with the statute and best serve investors).
---------------------------------------------------------------------------

    In addition to obtaining research and research-related services 
with fund brokerage commissions,\61\ an adviser may use fund brokerage 
commissions in other ways. For example, an adviser may utilize a 
commission recapture arrangement, whereby the fund receives a portion, 
or rebate, of the brokerage commission (or spread) charged by the 
broker-dealer handling the trade. Additionally, an investment adviser 
may use fund brokerage to pay certain providers for services utilized 
by the fund through an expense reimbursement arrangement with a broker-
dealer and/or its affiliates.\62\
---------------------------------------------------------------------------

    \61\ See infra note 70 (explaining that only commission-based 
trades (as opposed to mark-ups or mark-downs or spreads) are covered 
under the safe harbor in section 28(e) of the Exchange Act).
    \62\ In expense reimbursement arrangements, also referred to as 
``brokerage/service arrangements,'' a broker-dealer typically agrees 
to pay a fund's service provider fees (such as custodian fees or 
transfer agency fees) and, in exchange, the fund agrees to direct a 
minimum amount of brokerage business to the reimbursing broker. The 
fund adviser usually negotiates the terms of the contract with the 
service provider, and the fees charged under the contract are paid 
directly by the broker-dealer. Brokerage/service arrangements may be 
structurally similar to client commission arrangements. However, 
unlike client commission arrangements, where the receipt of a 
benefit by the investment adviser through the use of fund brokerage 
commissions gives rise to conflicts of interest, brokerage/service 
arrangements generally do not raise these concerns because they 
typically involve the use of fund brokerage commissions to obtain 
services that directly and exclusively benefit the fund. See Payment 
for Investment Company Services with Brokerage Commissions, 
Securities Act Release No. 7197 (July 21, 1995) [60 FR 38918 (July 
28, 1995)] (``1995 Release''), at nn. 1-2 and accompanying text; see 
also 2006 Release at section II.A, n.27.
---------------------------------------------------------------------------

    We specifically request comment on our discussion of the various 
uses of fund brokerage. Have we described the use of fund brokerage 
commissions and client commissions by advisers correctly? Are fund 
brokerage commissions used in ways that we have not addressed but 
should address in this proposed guidance?
    Because fund brokerage commissions are fund assets, investment 
advisers have a conflict of interest when they use commissions to 
obtain research and related services that they would otherwise have to 
pay for themselves. Advisers therefore are subject to certain 
requirements when using fund brokerage in this manner. First, section 
17(e)(1) of the Investment Company Act prohibits investment advisers to 
registered investment companies from using soft dollars to obtain 
research or services outside the confines of the safe harbor provided 
by section 28(e) of the Exchange Act.\63\ Second, investment advisers, 
as fiduciaries, generally are prohibited from receiving any benefit 
from the use of fund assets,\64\ although an investment adviser's use 
of soft dollars creates opportunities for the adviser to benefit in 
ways that may not be in the best interest of the fund. These conflicts 
of interest arise in a number of ways when investment advisers use fund 
assets in soft dollar programs. For example:
---------------------------------------------------------------------------

    \63\ 15 U.S.C. 80a-17(e)(1). Section 17(e)(1) of the Investment 
Company Act generally makes it unlawful for any affiliated person of 
a registered investment company to receive any compensation (other 
than a regular salary or wages from the company) for the purchase or 
sale of any property to or for the investment company when that 
person is acting as an agent other than in the course of that 
person's business as a broker-dealer. Essentially, section 17(e)(1) 
may be violated if an affiliated person of a registered investment 
company, such as an adviser, receives compensation (other than a 
regular salary or wages from the company) for the purchase or sale 
of property to or from the investment company. Absent the protection 
of section 28(e), which provides a safe harbor from liability under 
other federal and state law, an investment adviser's receipt of 
compensation--including in the form of brokerage or research 
services--under a client commission arrangement for the purchase or 
sale of any property, including securities, for or to the investment 
company, may constitute a violation of section 17(e)(1). See U.S. v. 
Deutsch, 451 F.2d 98, 110-11 (2d Cir. 1971), cert. denied, 404 U.S. 
1019 (1972). If a fund adviser's client commission arrangement is 
not consistent with section 28(e), disclosure of the arrangement 
would not cure any section 17(e)(1) violation. See 2006 Release at 
n.31; 1986 Release at n.55.
    \64\ An adviser's obligation to act in the best interest of its 
client imposes a duty on the adviser not to profit at the expense of 
the client without the client's consent. See, e.g., Restatement 
(Second) of Trusts Sec.  170 cmt. a, Sec.  216 (1959). Also, section 
206 of the Advisers Act establishes federal fiduciary standards 
governing the conduct of investment advisers. Under sections 206(1) 
and (2), in particular, an adviser must discharge its duties in the 
best interest of its clients, and must fully disclose a conflict of 
interest with a client, before engaging in conduct that constitutes 
a conflict. See Transamerica, 444 U.S. at 17.
---------------------------------------------------------------------------

    <bullet> The use of fund brokerage commissions to buy research may 
relieve an adviser of having to produce the research itself or having 
to pay for the research with ``hard dollars'' from its own resources;
    <bullet> The use of soft dollars may give an adviser an incentive 
to compromise its fiduciary obligations and to trade the fund's 
portfolio in order to earn soft dollar credits;
    <bullet> The availability of soft dollar benefits that an adviser 
may receive from fund brokerage commissions creates an incentive for an 
adviser to use broker-dealers on the basis of their research services 
provided to the adviser rather than the quality of execution provided 
in connection with fund transactions;
    <bullet> An adviser may seek to use fund brokerage commissions to 
obtain

[[Page 45653]]

research that benefits the adviser's other clients, including clients 
that do not generate brokerage commissions (such as fixed-income 
funds), those that are not otherwise paying more than the lowest 
available commission rate in exchange for soft dollar products or 
services (i.e., ``paying up'' in commission costs), or those from which 
the adviser receives the greatest amount of compensation for its 
advisory services;
    <bullet> The use of soft dollars may disguise an adviser's true 
costs and enable an adviser to charge advisory fees that do not fully 
reflect the costs for providing the portfolio management services; \65\
---------------------------------------------------------------------------

    \65\ See infra section III.E (discussing the obligations of fund 
advisers and fund boards under section 15(c) of the Investment 
Company Act).
---------------------------------------------------------------------------

    <bullet> The use of fund brokerage commissions to obtain research 
and other services may cause an adviser to avoid other uses of fund 
brokerage commissions that may be in the fund's best interest, such as 
establishing a commission recapture program or fund expense 
reimbursement arrangement to offset expenses that are paid for with 
fund assets; \66\ and
---------------------------------------------------------------------------

    \66\ Although these types of arrangements do not involve the 
conflicts posed by soft dollars, they do raise issues related to how 
a fund's assets are being expended and other issues, such as 
disclosure. See Concept Release at section VI.
---------------------------------------------------------------------------

    <bullet> In the case of ``mixed-use'' products--for example, 
research products or services obtained using soft dollars that may 
serve functions that are not related to the investment decision-making 
process, such as accounting or marketing--an adviser has a conflict 
when making an allocation determination between the research and non-
research uses of the product as required to fulfill the requirements 
under section 28(e) of the Exchange Act.\67\
---------------------------------------------------------------------------

    \67\ For a discussion of ``mixed-use'' items, see 1986 Release 
at section II.B and 2006 Release at section III.F. These releases 
stated, as an example of a product that may have a mixed use, 
management information services (which may integrate trading, 
execution, accounting, recordkeeping, and other administrative 
matters such as measuring the performance of accounts). In the 1986 
Release, the Commission indicated that where a product has a mixed 
use, an investment adviser should make a reasonable allocation of 
the cost of the product according to its use, and should keep 
adequate books and records concerning the allocations. The 
Commission also stated: (i) That the allocation decision itself 
poses a conflict of interest for the investment adviser that should 
be disclosed to the client; and (ii) that an investment adviser may 
use client commissions pursuant to section 28(e) of the Exchange Act 
to pay for the portion of a service or specific component that 
assists the adviser in the investment decision-making process, but 
cannot use soft dollars to pay for that portion of a service that 
provides the adviser with administrative assistance. 1986 Release at 
Section II.B. The 2006 Release made clear that ``brokerage'' 
products and services, as defined in the release, may also require a 
mixed-use allocation. 2006 Release at nn.72-73. For a discussion of 
section 28(e) of the Exchange Act, see infra section III.C.
---------------------------------------------------------------------------

    When evaluating an adviser's use of fund brokerage commissions in 
light of these conflicts, a fund board may determine that such use is 
in the best interests of the fund.\68\
---------------------------------------------------------------------------

    \68\ Fund boards are not required to approve brokerage and 
research services simply because they fall within the section 28(e) 
safe harbor. Rather, board determinations regarding the purchase of 
brokerage and research services with fund brokerage commissions 
should be made in accordance with the fund's best interest. In this 
regard, section 28(e) contemplates that funds could enter into 
contracts to reduce or eliminate an adviser's ability to rely on the 
safe harbor. See Thomas P. Lemke & Gerald T. Lins, Soft Dollars and 
Other Brokerage Arrangements Sec.  4.09 (2005) (``[T]he language of 
the safe harbor itself recognizes that the parties to an investment 
management relationship may by contract opt out of Section 
28(e).''); see also Section 28(e) of the Exchange Act [15 U.S.C. 
78bb(e)(1)] (stating that the safe harbor does not apply where 
``expressly provided by contract'').
---------------------------------------------------------------------------

C. Section 28(e) Under the Securities Exchange Act of 1934

    Section 28(e) of the Exchange Act provides a safe harbor that 
protects investment advisers from liability for a breach of fiduciary 
duty solely on the basis that the adviser caused an account over which 
it exercises investment discretion to pay more than the lowest 
commission rate in order to receive brokerage and research services 
provided by a broker-dealer, if the adviser determined in good faith 
that the amount of the commission was reasonable in relation to the 
value of the brokerage and research services received.\69\ As we have 
stated, section 17(e)(1) of the Investment Company Act prohibits 
investment advisers to registered investment companies from obtaining 
brokerage and research services with fund brokerage commissions outside 
the section 28(e) safe harbor.\70\
---------------------------------------------------------------------------

    \69\ 15 U.S.C. 78bb(e)(1). When fixed commission rates were 
abolished in 1975, investment advisers and broker-dealers expressed 
concern that, if an investment adviser were to cause a client 
account to pay more than the lowest commission rate available for a 
particular transaction, then the adviser would be exposed to charges 
that it had breached its fiduciary duty owed to its client. Congress 
addressed this concern by enacting section 28(e). See 2006 Release 
at section II.A.
    \70\ See supra note 63. It should be noted that section 28(e) of 
the Exchange Act does not encompass trades that are not executed on 
an agency basis, principal trades (with the exception of certain 
riskless principal transactions as described below), or other 
instruments traded net with no explicit commissions. See 2006 
Release at n.27. However, the Commission has interpreted the term 
``commission'' in section 28(e) as encompassing fees on certain 
riskless principal transactions that are reported under the trade 
reporting rules of the Financial Industry Regulatory Authority, or 
FINRA (as successor to the National Association of Securities 
Dealers, or NASD). See Commission Guidance on the Scope of section 
28(e) of the Exchange Act, Exchange Act Release No. 45194 (Dec. 27, 
2001) [67 FR 6 (Jan. 2, 2002)], at Section II.
---------------------------------------------------------------------------

    The 2006 Release provides guidance with respect to the appropriate 
framework for analyzing whether a particular service falls within the 
``brokerage and research services'' safe harbor of section 28(e).\71\ A 
fund board should request that the fund adviser inform directors of the 
policies and procedures the adviser uses to ensure that the types of 
brokerage and research services the adviser obtains using fund 
brokerage commissions fall within the safe harbor and that the adviser 
has not engaged in excessive trading in light of the fund's investment 
objectives. In turn, in approving the policies and procedures, a board 
should consider whether they are reasonably designed to ensure that the 
adviser's use of fund brokerage commissions complies with the section 
28(e) safe harbor, as well as all the federal securities laws.\72\
---------------------------------------------------------------------------

    \71\ See 2006 Release at section III.
    \72\ See supra note 52 and accompanying text (discussing a fund 
board's obligation to approve an adviser's compliance policies and 
procedures).
---------------------------------------------------------------------------

    In addition, as we stated in the 2006 Release, to rely on the 
section 28(e) safe harbor, an adviser must: (i) Determine whether the 
product or service obtained is eligible research or brokerage under 
section 28(e); (ii) determine whether the eligible product actually 
provides lawful and appropriate assistance in the performance of his 
investment decision-making responsibilities; and (iii) make a good 
faith determination that the amount of client commissions paid is 
reasonable in light of the value of products or services provided by 
the broker-dealer.\73\ We also reaffirmed an investment adviser's 
essential obligation under section 28(e) to make this good faith 
determination and that the burden in demonstrating this determination 
rests on the investment adviser.\74\ An adviser should demonstrate to 
the board that it has met this burden.\75\ We specifically request 
comment on our proposed guidance in this regard. We also request 
examples of effective practices fund boards employ when evaluating 
whether an adviser has made

[[Page 45654]]

the good faith determination required under section 28(e).
---------------------------------------------------------------------------

    \73\ See 2006 Release at Section III.B.
    \74\ See id.
    \75\ See 2006 Release at n.150 and accompanying text (citing 
House Comm. on Interstate and Foreign Commerce, Securities Reform 
Act of 1975 (H.R. 4111), H.R. Rep. No. 94-123, at 95 (1975) (``It 
is, of course, expected that money managers paying brokers an amount 
[of commissions] which is based upon the quality and reliability of 
the broker's services including the availability and value of 
research, would stand ready and be required to demonstrate that such 
expenditures were bona fide.'')); see also 1986 Release at Section 
IV.B.3 (explaining that, among the responsibilities of the 
disinterested directors of a fund may be to monitor the adviser's 
soft dollar arrangements).
---------------------------------------------------------------------------

D. An Investment Adviser's General Fiduciary Obligations to Clients 
that Are Funds When Using Soft Dollars

    As we have stated, although a fund adviser may satisfy the 
requirements for using client commissions to pay for brokerage and 
research services under the section 28(e) safe harbor, a fund's 
directors still should evaluate the adviser's use of fund brokerage 
commissions to purchase research and services in order to determine 
whether the adviser is acting in the best interest of the fund. If a 
fund board determines that the adviser's use of brokerage commissions 
is not in the best interest of the fund, the board should prohibit or 
limit the use of fund brokerage commissions and direct the adviser 
accordingly.\76\
---------------------------------------------------------------------------

    \76\ See supra note 68 and accompanying text.
---------------------------------------------------------------------------

    In this regard, directors need to understand the procedures that 
the fund's investment adviser employs to address any potential 
conflicts of interest and ensure that fund commissions are being used 
appropriately. For example, to try to address concerns that a broker-
dealer may be chosen by an adviser for reasons other than the quality 
of the broker-dealer's execution (including the brokerage and research 
services it provides), some advisers, particularly larger ones, may use 
an internal process referred to as a ``broker vote'' or ``broker 
tolls,'' whereby the adviser's investment professionals, typically the 
portfolio managers and investment analysts, assess the value of the 
research and services different broker-dealers provide to determine 
which broker-dealer's research and other services the adviser should 
purchase.\77\
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    \77\ Advisers have informed us that, although many employ a 
broker vote, the actual process of determining which brokers to use 
varies among firms, as do the factors upon which each firm's voting 
system is based. Often a system of rating or allocating points is 
used to set targets for each broker, with the better-rated brokers 
receiving additional orders. Other firms have substantially less 
formal broker-selection processes.
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    To assist the board in understanding the adviser's policies and 
procedures regarding the use of fund brokerage commissions to obtain 
brokerage and research services, the board should request that the 
adviser inform the directors as to such matters as the following:
    <bullet> How does the adviser determine the total amount of 
research to be obtained and how will the research actually be obtained? 
In particular:
    <bullet> How does the adviser determine the amount to be spent 
using hard versus soft dollars?
    <bullet> How does the adviser determine amounts to be spent on 
proprietary versus third-party research arrangements?
    <bullet> What types of research products and services will the 
adviser seek to obtain and how will this research be beneficial to the 
fund?
    <bullet> How does the adviser determine amounts to be used in 
commission recapture programs and expense reimbursement programs?
    <bullet> What is the process for establishing a soft dollar 
research budget and determining brokerage allocations in the soft 
dollar program? Is a broker vote process or some other mechanism used?
    <bullet> Do any alternative trading venues that are used produce 
soft dollar credits? If so, how much?
    <bullet> How does the adviser determine that the use of soft 
dollars is within the section 28(e) safe harbor? In particular:
    <bullet> Is the product or service obtained eligible brokerage or 
research, as defined under section 28(e)?
    <bullet> Does the product or service provide lawful and appropriate 
assistance to the adviser in carrying out its investment decision-
making responsibilities?
    <bullet> Is the amount of commissions paid reasonable (based upon a 
good faith determination) in light of the value of brokerage and 
research services provided by the broker-dealer?
    <bullet> How does soft dollar usage compare to the adviser's total 
commission budget?
    <bullet> How are soft dollar products and services allocated among 
the adviser's clients? Are the commissions paid for certain trades in 
fund portfolio securities similar to commissions paid for transactions 
in similar securities, or of similar sizes, by the fund and the 
adviser's other clients (including clients that are not funds)? Are 
other clients paying lower commissions that do not include a soft 
dollar component? If so, does the adviser adequately explain the 
discrepancy in commission rates and provide the board data sufficient 
to satisfy the board that the fund is not subsidizing the research 
needs of the adviser's other client? To what extent are the products 
and services purchased through soft dollar arrangements used for the 
benefit of fixed-income or other funds that generally do not pay 
brokerage commissions?
    <bullet> What is the process for assessing the value of the 
products or services purchased with soft dollars?
    <bullet> What is the process used to evaluate the portion of a 
mixed use product or service that can be paid for under section 28(e)? 
\78\
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    \78\ As we stated in the 2006 Release, in allocating costs for a 
particular product or service, a money manager should make a good 
faith, fact-based analysis of how it and its employees use the 
product or service. It may be reasonable for an investment adviser 
to infer relative costs from relative benefits to the firm or its 
clients. Relevant factors might include, for example, the amount of 
time the product or service is used for eligible purposes versus 
non-eligible purposes, the relative utility (measured by objective 
metrics) to the firm of the eligible versus non-eligible uses, and 
the extent to which the product is redundant with other products 
employed by the firm for the same purpose. See 2006 Release at 
section III.F, n.148.
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    <bullet> To what extent does the adviser use client commission 
arrangements? What effect do these arrangements have on how the adviser 
selects a broker-dealer to complete a particular transaction? How does 
the adviser explain that the use of client commission arrangements 
benefits the fund? \79\
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    \79\ We believe that the availability of electronic methods to 
order, track, and analyze securities trading may make it easier to 
determine whether client commission arrangements benefit a fund. 
With electronic trading, advisers and fund boards may be able to 
determine the costs associated with trade execution, as well as the 
expense of research paid for with fund brokerage commissions, with 
greater certainty. Also, to the extent that they incorporate 
transparency mechanisms such as the invoicing of costs for 
particular research products and services, the use of certain client 
commission arrangements may enable fund boards to more clearly 
determine the actual amount of commission dollars used to pay for 
research and those used to pay for execution.
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    We request comment on the information boards should receive to 
facilitate their review of an adviser's use of soft dollars.\80\ Should 
boards request any further information from advisers in this regard? 
Should boards employ any specific alternative approaches or analyses 
when reviewing an adviser's soft dollar usage? Is further guidance 
needed with respect to how a board should approach reviewing an 
adviser's soft dollar usage?
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    \80\ The staff has outlined some of the specific information 
fund boards have reviewed with respect to soft dollar arrangements. 
See Inspection Report on the Soft Dollar Practices of Broker-
Dealers, Investment Advisers and Mutual Funds, Office of Compliance, 
Inspections and Examinations (Sept. 1998), available at http://www.sec.gov/news/studies/softdolr.htm (``1998 Staff Report''), at 
Appendix G.
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    As with the adviser's trading practices, after receiving 
appropriate input and information from the adviser, if the board 
believes that the fund's brokerage commissions could be used 
differently so as to provide greater benefits to the fund, the board 
should direct the adviser accordingly. For example, the adviser should 
explain to the board that the value the fund receives from the 
brokerage and research services purchased with fund brokerage 
commissions is appropriate,

[[Page 45655]]

and whether the services are inappropriately benefiting another of the 
adviser's clients at the fund's expense. In directing the adviser, the 
board also should consider such matters as: (i) Whether it is 
appropriate for the adviser to refrain from purchasing research 
services in connection with certain types of trades, depending on 
market conditions; (ii) whether it is appropriate for the adviser to 
use fund brokerage commissions to receive brokerage and research 
services on some or all trades; (iii) whether fund brokerage 
commissions should be used only in connection with a commission 
recapture or expense reimbursement program; and (iv) whether some 
combination of these alternatives may be in the best interest of the 
fund.
    In addition, fund boards should inquire as to how the adviser's 
compliance policies and procedures with respect to soft dollars are 
determined and monitored.\81\ In deciding whether to approve these 
policies and procedures, directors should consider, and the investment 
adviser should explain, how the policies and procedures eliminate or 
otherwise mitigate the conflicts of interest that exist when an adviser 
trades portfolio securities on the fund's behalf.\82\ Furthermore, the 
value of research obtained through the use of soft dollars is a factor 
a fund board should consider when determining whether an investment 
adviser has fulfilled its best execution obligations.\83\ The conflicts 
of interest inherent in soft dollar arrangements require boards to pay 
particular attention to investment advisers' activities in this regard 
to ensure that fund assets are being used appropriately on behalf of 
the fund.\84\
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    \81\ The Commission has stated that, in addition to an adviser's 
general best execution obligations, the compliance policies and 
procedures advisers are required to adopt and implement under rule 
206(4)-7 of the Advisers Act should address the adviser's uses of 
client brokerage to obtain research and other services. See 
Compliance Release at Section II.
    \82\ In this regard, fund boards may look to, among other 
sources, the fund's CCO to provide assistance with evaluating any 
potential conflicts of interest with respect to the adviser's 
brokerage practices and determining how those conflicts should be 
addressed. See Compliance Release at section II.A.2.b.
    \83\ See 1986 Release at section V. An adviser should consider 
the full range and quality of the broker's services, including the 
value of research provided, in assessing whether a broker will 
provide best execution.
    \84\ As suggested above, failure by an investment adviser to 
disclose material conflicts of interest to its clients may 
constitute fraud within the meaning of sections 206(1) and (2) of 
the Advisers Act. See supra note 64. See also Capital Gains, 375 
U.S. at 191-193, 200-01 (noting that ``suppression of information 
material to an evaluation of the disinterestedness of an investment 
adviser'' may operate ``as a deceit on purchasers.'').
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    We request comment on our proposed guidance in regard to how a fund 
board should approach its review of an adviser's use of soft dollars 
and the adviser's applicable policies and procedures to ensure that the 
conflicts of interest inherent in these transactions are being managed.

E. Section 15(c) Under the Investment Company Act

    In addition to their oversight and monitoring responsibilities with 
respect to portfolio trading and the conflicts of interest associated 
with soft dollar programs, fund directors have an obligation to review 
the adviser's compensation. This requirement stems from the requirement 
in section 15(c) of the Investment Company Act that the independent 
members of the board review the fund's investment advisory contract on 
an annual basis.\85\ A fund board's review of the adviser's 
compensation under section 15(c) should incorporate consideration of 
soft dollar benefits that the adviser receives from fund brokerage.\86\ 
In considering the advisory contract for approval, fund boards are 
required under section 15(c) to request and evaluate such information 
as may reasonably be necessary to evaluate the terms of the contract, 
and the adviser to the fund has the obligation to furnish to the board 
the information necessary to review the contract.\87\
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    \85\ 15 U.S.C. 80a-15(c). Section 15(c) makes it unlawful for an 
investment company to enter into or renew an investment advisory 
contract unless it is approved by a majority of the company's 
disinterested directors.
    \86\ See 2006 Release; 1986 Release. In connection with the 
board's section 15(c) review of the advisory contract, section 36(b) 
of the Investment Company Act imposes a fiduciary duty on fund 
advisers with respect to their receipt of compensation for services 
or payments of a material nature from the fund or its shareholders. 
15 U.S.C. 80a-36(b). In determining whether an adviser has breached 
its obligations under section 36(b), the seminal case of Gartenberg 
v. Merrill Lynch Asset Mgmt., Inc., 694 F.2d 923 (2d Cir. 1982), 
suggests that all of the facts and circumstances surrounding the 
adviser's relationship with the fund are appropriate for director 
consideration in approving the advisory contract. To the extent an 
adviser receives benefits from the use of soft dollars that are of 
``sufficient substance,'' these benefits should be disclosed and 
considered by the fund's board of directors. Id. at 932-933 (stating 
that ``estimates of * * * `fall-out' and `float benefits' which, 
while not precise, could be a factor of sufficient substance to give 
the Funds' trustees a sound basis for negotiating a lower Manager's 
fee.'').
    \87\ Section 15(a)(1) of the Investment Company Act, which makes 
it unlawful for any person to serve as an investment adviser of a 
registered investment company except pursuant to a written contract 
which has been approved by a majority vote of shareholders and which 
``precisely describes all compensation'' to be paid under that 
contract, also should be considered with regard to soft dollar 
arrangements. 15 U.S.C. 80a-15(a)(1). See 1986 Release at n.40.
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    Although fund boards typically review the use of fund brokerage by 
the adviser (including the adviser's use of soft dollars) during the 
contract review process, Commission examinations show wide variations 
in board practices in this area.\88\ In many cases, fund boards are 
provided with Part II of the adviser's Form ADV. While Form ADV 
provides important information regarding the investment adviser, the 
Form ADV disclosure requirement was not designed for the purpose of 
providing fund directors with all of the information needed to help 
them satisfy board obligations under section 15(c) of the Investment 
Company Act. In order to fulfill their obligations in connection with 
the section 15(c) review process, fund boards often seek additional 
information on soft dollars. However, the types of additional 
information a board may require may vary depending on factors such as: 
(i) The scope and nature of the soft dollar program; (ii) the level of 
clarity and utility of the materials provided; (iii) the board's 
confidence in the adviser's relevant policies and procedures; and (iv) 
the adviser's compliance record. For example, information directors 
seek may range from simple reports on the cost of third-party soft 
dollar services to detailed reports on all fund portfolio securities 
transactions, including transaction volumes, soft dollar credits, 
services provided, and broker reviews.
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    \88\ See 1998 Staff Report at 36. Examinations conducted since 
the 1998 Staff Report continue to document wide variations in the 
fund board review process. For example, our inspection staff has 
observed that, in certain cases, a fund board has not obtained the 
information necessary to evaluate soft dollar arrangements in the 
context of the board's section 15(c) review.
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    To assist fund boards in carrying out their responsibilities under 
section 15(c), we believe it is appropriate for fund boards to request 
certain information regarding the adviser's use of fund brokerage, 
including soft dollar arrangements. Specifically, fund directors should 
require investment advisers, at a minimum, to provide them with 
information regarding the adviser's brokerage policies, and how a 
fund's brokerage commissions, and, in particular, the adviser's use of 
soft dollar commissions, were allocated, at least on an annual basis. 
Fund directors, in turn, should consider this information when they 
evaluate the terms of the advisory contract for the fund. Fund 
directors should, for example, consider whether the adviser properly 
accounts for use of fund brokerage commissions to purchase

[[Page 45656]]

research that primarily or solely benefits another client of the 
adviser. We specifically ask for comment on the information that boards 
should request and that the adviser should provide in connection with 
the board's review of the advisory contract under section 15(c).

IV. Disclosure to Other Advisory Clients and Fund Investors

    Our proposed guidance is designed to provide fund directors with 
information that will help them fulfill their oversight obligations 
with respect to the trading practices of the fund's investment adviser, 
including the adviser's use of soft dollars. The fact that the guidance 
is focused on fund boards should not be interpreted as an indication 
that the current level of soft dollar disclosure that is provided to 
other advisory clients and fund investors cannot be improved.\89\ 
Accordingly, we solicit comment on whether we should propose additional 
disclosure requirements.
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    \89\ We have considered enhancing soft dollar disclosure 
requirements in the past. For example, the Commission proposed a 
rule in 1995 that would have required an adviser to provide its 
clients with an annual report setting forth certain information 
about the adviser's use of client brokerage and the soft dollar 
services received by the adviser. The report would have included 
certain quantitative information about brokerage allocation and 
commissions paid. See Disclosure by Investment Advisers Regarding 
Soft Dollar Practices, Investment Advisers Act Release No. 1469 
(Feb. 14, 1995) [60 FR 9750 (Feb. 21, 1995)].
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    Currently, Part II of Form ADV, the adviser's firm brochure, must 
address the adviser's soft dollar practices. However, a 1998 report 
from our Office of Compliance Inspections and Examinations (``OCIE'') 
observed that advisers' disclosure often failed to provide sufficient 
information for clients or prospective clients to understand the 
advisers' soft dollar practices and the conflicts those practices 
present.\90\ In its report, OCIE stated that most advisers' 
descriptions of soft dollar practices were boilerplate, and urged that 
we consider amending Form ADV to require better disclosure.\91\ We 
sought to address this concern in our proposed amendments to Part 2 of 
Form ADV.\92\ As currently proposed, Form ADV would require advisers to 
discuss the conflicts of interest inherent in an adviser's soft dollar 
practices and to describe the products and services acquired with soft 
dollars with enough specificity to permit clients to evaluate the 
conflicts of interest involved.\93\
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    \90\ See 1998 Staff Report.
    \91\ Id.
    \92\ See Amendments to Form ADV, Investment Advisers Act Release 
No. 2711 (March 3, 2008) [73 FR 13958 (March 14, 2008)]. As 
proposed, Item 12 of Part 2 would require an adviser that receives 
soft dollar products and services to disclose its practices and to 
discuss the conflicts of interest they create. Specifically, Part 2 
would require an adviser to disclose to clients: (i) That it 
receives a benefit because it does not have to produce or pay for 
the products and services; (ii) that it has an incentive to select 
broker-dealers based on its interests instead of clients' interests 
in receiving best execution; (iii) whether or not it pays-up for 
soft dollar benefits; (iv) whether soft dollar benefits are used to 
service all of its accounts or just the accounts that paid for the 
benefits; and (v) the products and services it receives, describing 
them with enough specificity for clients to understand and evaluate 
possible conflicts of interest.
    \93\ Id.
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    The guidance we are proposing today reflects the Commission's view 
of the critical role fund boards play in managing the adviser's 
conflicts of interest. We request general comment on our proposed 
guidance. In addition, we specifically request comment on whether: (i) 
Further disclosure to fund investors of the information we suggest fund 
boards should consider would be helpful; (ii) any specific disclosure 
should be mandated to better assist investors in making informed 
investment decisions; and (iii) the public dissemination of particular 
information regarding a fund adviser's portfolio trading practices 
would have an adverse impact on the fund adviser's relationships with 
the broker-dealers that execute fund portfolio transactions.
    We also request comment on whether we should again consider 
proposing to require investment advisers to provide their clients with 
customized information about how their individual brokerage is being 
used. If so, what types of information would be useful and in what 
detail? Should the information provided be different for institutional 
and non-institutional clients? Do institutional clients already require 
their advisers to provide information to them about soft dollars on a 
regular basis, and if so, what kind of information do they receive? 
What are the cost implications of requiring individual client reports?

V. Solicitation of Additional Comments

    In addition to the areas for comment identified above, we are 
interested in any other issues that commenters may wish to address 
relating to fund board oversight of advisers' portfolio trading 
practices. Please be as specific as possible in your discussion and 
analysis of any additional issues.

    By the Commission.

    Dated: July 30, 2008.
Florence E. Harmon,
Acting Secretary.
[FR Doc. E8-18035 Filed 8-5-08; 8:45 am]
BILLING CODE 8010-01-P


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