6 Federal Register / Vol. 67, No. 1 / Wednesday, January 2, 2002 / Rules and Regulations 

1 15 U.S.C. 78bb(e).

2 Investment Advisers Act Release No. 1469 

(February 14, 1995), 60 FR 9750 (February 21, 

1995). In this release, the Commission stated, ‘‘[t]he 

safe harbor does not encompass soft dollar 

arrangements under which research services are 

acquired as a result of principal transactions,’’

adopting a position originally outlined in a 1990 

staff letter, authorized by the Commission, to the 

Department of Labor. See Letter re: Section 28(e) of 

the Securities Exchange Act of 1934 (July 25, 1990). 

See also Investment Company Act Release No. 

20472 (August 11, 1994), 59 FR 42187 (August 17, 

1994).

3See Letter from Hardwick Simmons, Chief 

Executive Officer, The Nasdaq Stock Market, Inc. to 

Harvey L. Pitt, Chairman, Commission, dated 

September 7, 2001.

4See Exchange Act Release Nos. 41208 (March 

24, 1999), 64 FR 15386 (March 31, 1999) (File No. 

SR–NASD–98–59); 41606 (July 8, 1999), 64 FR 

38226 (July 15, 1999) (File No. SR–NASD–98–08); 

43303 (September 19, 2000), 65 FR 57853 

(September 26, 2000) (File No. SR–NASD–00–52). 

These filing amended NASD Rules 4632 (the trade 

reporting rule for Nasdaq National Market 

securities), 4642 (the trade reporting rule for Nasdaq 

SmallCap Market securities), and 6420 (the trade 

reporting rule for eligible securities).

(4) HPC Serial Number, and HPC time and 

cycles since new and since compressor 

overhaul at the time of the test. 

(5) Results of the test (Pass/Fail). 

Documents That Have Been Incorporated by 

Reference 

(r) The inspection shall be done in 

accordance with the following Pratt & 

Whitney service bulletin (SB), Internal 

Engineering Notice (IEN), Temporary 

Revisions (TR’s), Clean, Inspection, and 

Repair Manual (CIR) repair procedures:

Document No. Pages Revision Date 

PW SB PW4ENG72–714 ................................................................... 1–2 .............. 1 .................................................. November 8, 2001. 

3 .................. Original ........................................ June 27, 2000. 

4 .................. 1 .................................................. November 8, 2001

5–12 ............ Original ........................................ June 27, 2000. 

Total pages: 12. 

PW IEN 96KC973D ............................................................................ All ................ Original ........................................ October 12, 2001. 

Total pages: 19. 

PW TR 71–0026 ................................................................................. All ................ Original ........................................ November 14, 2001. 

Total pages: 24. 

PW TR 71–0018 ................................................................................. All ................ Original ........................................ November 14, 2001. 

Total pages: 24. 

PW TR 71–0035 ................................................................................. All ................ Original ........................................ November 14, 2001. 

Total pages: 24. 

PW CIR 51A357, Section 72–35–68, Inspection/Check–04, Indexes 

8–11.

All ................ Original ........................................ September 15, 2001. 

Total pages: 5. 

PW CIR 51A357, Section 72–35–68, Repair 16 ................................ All ................ Original ........................................ June 15, 1996. 

Total pages: 1. 

This incorporation by reference was 

approved by the Director of the Federal 

Register in accordance with 5 U.S.C. 552(a) 

and 1 CFR part 51. Copies may be obtained 

from Pratt & Whitney, 400 Main St., East 

Hartford, CT 06108, (860)565–6600, fax 

(860)565–4503. Copies may be inspected at 

the FAA, New England Region, Office of the 

Regional Counsel, 12 New England Executive 

Park, Burlington, MA; or at the Office of the 

Federal Register, 800 North Capitol Street, 

NW, suite 700, Washington, DC. 

Effective Date 

(s) This amendment becomes effective on 

January 17, 2002.

Issued in Burlington, Massachusetts, on 

December 12, 2001. 

Robert G. Mann, 

Acting Manager, Engine and Propeller 

Directorate, Aircraft Certification Service.

[FR Doc. 01–31296 Filed 12–31–01; 8:45 am] 

BILLING CODE 4910–13–P

SECURITIES AND EXCHANGE 

COMMISSION 

17 CFR Part 241 

[Release No. 34–45194] 

Commission Guidance on the Scope of 

Section 28(e) of the Exchange Act

AGENCY: Securities and Exchange 

Commission.

ACTION: Interpretation.

SUMMARY: We are publishing 

interpretive guidance on the application 

of Section 28(e) of the Securities 

Exchange Act of 1934 (‘‘Exchange Act’’). 

This section provides a safe harbor to 

money managers who use the 

commission dollars of their advised 

accounts to obtain research and 

brokerage services. The guidance we are 

publishing today clarifies that the term 

‘‘commission’’ for purposes of the 

Section 28(e) safe harbor encompasses, 

among other things, certain transaction 

costs, even if not denominated a 

‘‘commission.’’

EFFECTIVE DATE: The guidance is 

effective on January 2, 2002.

FOR FURTHER INFORMATION CONTACT:

Catherine McGuire, Chief Counsel; 

Joseph Corcoran, Special Counsel, (202) 

942–0073, Office of the Chief Counsel, 

Division of Market Regulation, 

Securities and Exchange Commission, 

450 Fifth Street, NW, Washington, DC 

20549–1001.

SUPPLEMENTARY INFORMATION: 

I. Background 

If money managers use commission 

dollars of their advised accounts to 

obtain research and brokerage services, 

Section 28(e) prevents them from being 

held to have breached a fiduciary duty, 

provided the conditions of the section 

are met.1 Previously, the Commission 

interpreted Section 28(e) to be available 

only for research and brokerage services 

obtained in relation to commissions 

paid to a broker-dealer acting in an 

‘‘agency’’ capacity.2 That interpretation 

prevented money managers from relying 

on the safe harbor for research and 

brokerage services obtained in relation 

to fees charged by market makers when 

they executed transactions in a 

‘‘principal’’ capacity.

The Nasdaq Stock Market, Inc. 

(‘‘Nasdaq’’) asked us to reconsider this 

interpretation of Section 28(e). In 

particular, Nasdaq urged us to interpret 

the Section 28(e) safe harbor to apply 

not just to research and brokerage 

services obtained in relation to 

commissions on agency transactions, 

but also to such services obtained in 

relation to fully and separately 

disclosed fees on certain riskless 

principal transactions effected by 

National Association of Securities 

Dealers, Inc. (‘‘NASD’’) members and 

reported under certain NASD trade 

reporting rules.3 In Nasdaq’s view, the 

recent amendments to its trade reporting 

rules for certain riskless principal 

transactions support a modification of 

the Commission’s interpretation of 

Section 28(e).4

Federal Register / Vol. 67, No. 1 / Wednesday, January 2, 2002 / Rules and Regulations 7

5 15 U.S.C. 78bb(e). See also Exchange Act 

Release No. 23170 (April 23, 1986), 51 FR 16004 

(April 30, 1986).

6 In adopting the position in 1995 that Section 

28(e) does not encompass principal transactions, we 

noted a 1990 staff letter to the Department of Labor. 

In that letter, the Division of Market Regulation 

stated that, ‘‘Section 28(e) refers to ‘commissions’

only, which connote transactions effected on an 

agency basis, and does not refer to markups or 

markdowns, which would more clearly have 

suggested that Congress intended to extend the safe 

harbor to principal transactions.’’ See supra note 2.

7See NASD Rules 4632(d)(3)(B) (for Nasdaq 

Market securities), 4642(d)(3)(B) (for Nasdaq 

SmallCap Market securities), and 6420(d)(3)(B) (for 

eligible securities). Each of these rules defines a 

riskless principal transaction as a ‘‘transaction in 

which a member, after having received an order to 

buy a security, purchases the security as principal 

at the same price to satisfy the order to buy or, after 

having received an order to sell, sells the security 

as principal at the same price to satisfy the order 

to sell.’’

8Exchange Act Rule 10b–10(a)(2)(ii), 17 CFR 

240.10b–10(a)(2)(ii). Nasdaq SmallCap Market 

securities are subject to Exchange Act Rule 10b–10. 

See Exchange Act Release No. 45081 (November 19, 

2001), 66 FR 59273 (November 27, 2001).

9Riskless principal transactions in the debt 

market, however, are not currently subject to 

confirmation and reporting requirements that meet 

these conditions, under either NASD or 

Commission rules, and therefore would not be 

within the Section 28(e) safe harbor. Such 

transactions do not afford money managers the level 

of transparency necessary to determine if the 

remuneration paid is reasonable in relation to the 

value received, as required to rely on Section 28(e). 

The interpretation does not currently extend to 

other securities that may have similar reporting 

requirements, but that do not have the same 

confirmation requirements for market makers, e.g., 

OTC Bulletin Board stocks, Pink Sheet stocks, and 

convertible securities.

II. Discussion 

Section 28(e) of the Exchange Act 

prevents a person who exercises 

investment discretion with respect to an 

account from being ‘‘deemed to have 

acted unlawfully or to have breached a 

fiduciary duty * * * solely by reason of 

his having caused the account to pay a 

[broker-dealer] an amount of 

commission for effecting a securities 

transaction in excess of the amount of 

commission another [broker-dealer] 

would have charged for effecting that 

transaction, if such person determined 

in good faith that such amount of 

commission was reasonable in relation 

to the value of the brokerage and 

research services provided by such 

[broker-dealer]. * * *’’ 5

This release clarifies the meaning of 

the term ‘‘commission’’ in the context of 

Section 28(e), and, therefore, the type of 

fees paid by a managed account to a 

broker-dealer for a securities transaction 

that may be used by the money manager 

to obtain research and brokerage 

services within the safe harbor. As 

noted above, the Commission to date 

has interpreted the term ‘‘commission’’

to include fees paid by a managed 

account to a broker-dealer for effecting 

a transaction in an agency capacity. This 

interpretation is based on the 

understanding that the term 

‘‘commission’’ generally connotes an 

agency transaction.6 However, that 

interpretation is not mandated by the 

language of the statute. In fact, the 

reference to ‘‘dealer’’ in Section 28(e) 

might suggest that the term 

‘‘commission’’ includes fees paid to a 

broker-dealer acting in other than an 

agency capacity.

The meaning of the term 

‘‘commission’’ in Section 28(e) is 

informed by the requirement that a 

money manager relying on the safe 

harbor must determine in good faith that 

the amount of ‘‘commission’’ is 

reasonable in relation to the value of 

research and brokerage services 

received. This requirement presupposes 

that a ‘‘commission’’ paid by the 

managed account is quantifiable in a 

verifiable way and is fully disclosed to 

the money manager. When we issued 

our guidance in 1995, an agency 

transaction had more cost transparency 

than a principal transaction because 

frequently embedded within the cost of 

a principal transaction was undisclosed 

compensation to the dealer. In other 

words, fees on principal transactions 

were not quantifiable and fully 

disclosed in a way that would permit a 

money manager to determine that the 

fees were reasonable in relation to the 

value of research and brokerage services 

received. 

Since that time, the NASD has 

modified its trade reporting rules for 

certain riskless principal transactions. 

Currently, NASD Rule 4632 (applicable 

to Nasdaq National Market securities), 

NASD Rule 4642 (applicable to Nasdaq 

SmallCap Market securities), and NASD 

Rule 6420 (applicable to ‘‘eligible 

securities’’) require a riskless principal 

transaction in which both legs are 

executed at the same price (‘‘Eligible 

Riskless Principal Transaction’’) to be 

reported once, in the same manner as an 

agency transaction, exclusive of any 

markup, markdown, commission 

equivalent, or other fee.7 Coupled with 

Exchange Act Rule 10b–10, this form of 

trade reporting means that a money 

manager agreeing to an Eligible Riskless 

Principal Transaction receives the same 

price as received in the offsetting trade 

and that this price is disclosed on a 

confirmation that also fully discloses 

the remuneration to the NASD member 

for effecting this transaction.8 Thus, a 

money manager opting for an Eligible 

Riskless Principal Transaction would 

now be informed of the entire amount 

of a market maker’s charge for effecting 

the trade.

In recognition of the transparency 

achieved in the Nasdaq market for 

certain riskless principal transactions, 

which allows a money manager to make 

the necessary determination under 

Section 28(e), we are modifying our 

interpretation of Section 28(e). 

Specifically, we now interpret the term 

‘‘commission’’ in Section 28(e) of the 

Exchange Act to include a markup, 

markdown, commission equivalent or 

other fee paid by a managed account to 

a dealer for executing a transaction 

where the fee and transaction price are 

fully and separately disclosed on the 

confirmation and the transaction is 

reported under conditions that provide 

independent and objective verification 

of the transaction price subject to selfregulatory organization oversight. 

Fees paid for Eligible Riskless 

Principal Transactions that are reported 

under NASD Rule 4632, 4642, or 6420 

would fall within this interpretation.9

Fees paid to an NASD member for 

effecting an Eligible Riskless Principal 

Transaction are distinguishable from 

fees paid on traditional riskless 

principal transactions as well as 

traditional principal transactions 

involving a dealer’s inventory. Fees on 

other riskless principal transactions can 

include an undisclosed fee (reflecting a 

dealer’s profit on the difference in price 

between the first and second legs of the 

transaction). Fees on traditional 

principal transactions also can include 

an undisclosed fee based on some 

portion of the spread. In addition, the 

price of the trade, if reported, is to some 

degree within the control of the dealer. 

In contrast, fees on Eligible Riskless 

Principal Transactions that are reported 

under NASD Rule 4632, 4642, or 6420 

must be fully and separately disclosed. 

Moreover, the price of the trade is 

validated by the offsetting leg of the 

transaction.

Required disclosure of fees under 

confirmation rules and reporting of the 

trade under self-regulatory organization 

rules at a single price for both offsetting 

transactions, which provides 

independent verification of this price, 

give money managers information about 

fees and trade prices sufficient to make 

the determination of reasonableness of 

these charges. It is therefore reasonable 

to treat such fees as a ‘‘commission’’ for 

purposes of Section 28(e) only. As other 

markets develop equivalent regulations 

to ensure equivalent transparency, 

transaction charges in those markets 

that meet the requirements of this 

interpretation will be considered to fall 

within the interpretation. 

8 Federal Register / Vol. 67, No. 1 / Wednesday, January 2, 2002 / Rules and Regulations 

III. Conclusion 

For the foregoing reasons, we find that 

this interpretation is consistent with 

Section 28(e) of the Exchange Act and 

the requirements of that section.

List of Subjects in 17 CFR Part 241 

Securities.

Amendments to the Code of Federal 

Regulations

■ For the reasons set forth above, the 

Commission is amending title 17, 

chapter II of the Code of Federal 

Regulations as set forth below:

PART 241—INTERPRETATIVE 

RELEASES RELATING TO THE 

SECURITIES EXCHANGE ACT OF 1934 

AND GENERAL RULES AND 

REGULATIONS THEREUNDER

■ 1. Part 241 is amended by adding 

Release No. 34–45194 and the release 

date of December 27, 2001 to the list of 

interpretative releases.

Dated: December 27, 2001.

By the Commission. 

Margaret H. McFarland, 

Deputy Secretary.

[FR Doc. 01–32199 Filed 12–31–01; 8:45 am] 

BILLING CODE 8010–01–P

DEPARTMENT OF THE TREASURY

Internal Revenue Service 

26 CFR Parts 1 and 602 

[TD 8975] 

RIN 1545–BA21 

Certain Transfers of Property to 

Regulated Investment Companies 

[RICs] and Real Estate Investment 

Trusts [REITs]

AGENCY: Internal Revenue Service (IRS), 

Treasury.

ACTION: Temporary regulations.

SUMMARY: This document contains 

temporary regulations that apply to 

certain transactions or events that result 

in a Regulated Investment Company 

[RIC] or a Real Estate Investment Trust 

[REIT] owning property that has a basis 

determined by reference to a C 

corporation’s basis in the property. 

These regulations affect RICs, REITs, 

and C corporations and clarify the tax 

treatment of transfers of C corporation 

property to a RIC or REIT. The text of 

the temporary regulations also serves as 

the text of the proposed regulations set 

forth in the notice of proposed 

rulemaking on this subject in the 

Proposed Rules section of this issue of 

the Federal Register.

DATES: Effective Date: These regulations 

are effective January 2, 2002. 

Applicability Dates: For dates of 

applicability, see §§ 1.337(d)–6T(e) and 

1.337(d)–7T(f).

FOR FURTHER INFORMATION CONTACT: Lisa 

A. Fuller, (202) 622–7750 (not a toll-free 

number).

SUPPLEMENTARY INFORMATION: 

Paperwork Reduction Act 

These temporary regulations are being 

issued without prior notice and public 

procedure pursuant to the 

Administrative Procedure Act (5 U.S.C. 

553). For this reason, the collection of 

information contained in these 

regulations has been reviewed and, 

pending receipt and evaluation of 

public comments, approved by the 

Office of Management and Budget under 

control number 1545–1672. Responses 

to this collection of information are 

required to obtain a benefit, i.e., to elect 

to recognize gain as if the C corporation 

had sold the property at fair market 

value or to elect section 1374 treatment. 

An agency may not conduct or 

sponsor, and a person is not required to 

respond to, a collection of information 

unless the collection of information 

displays a valid control number. 

For further information concerning 

this collection of information, and 

where to submit comments on the 

collection of information and the 

accuracy of the estimated burden, and 

suggestions for reducing this burden, 

please refer to the preamble to the crossreferencing notice of proposed 

rulemaking published in the Proposed 

Rules section of this issue of the Federal 

Register. 

Books or records relating to a 

collection of information must be 

retained as long as their contents may 

become material in the administration 

of any internal revenue law. Generally, 

tax returns and tax return information 

are confidential, as required by 26 

U.S.C. section 6103. 

Background 

Sections 631 and 633 of the Tax 

Reform Act of 1986 (the 1986 Act) 

(Public Law 99–514, 100 Stat. 2085, 

2272), as amended by section 1006(e) 

and (g) of the Technical and 

Miscellaneous Revenue Act of 1988 (the 

1988 Act) (Public Law 100–647, 102 

Stat. 3342, 3400–01), amended the 

Internal Revenue Code (Code) to repeal 

the General Utilities doctrine. In 

particular, the 1986 Act amended 

sections 336 and 337 to require 

corporations to recognize gain or loss on 

the distribution of property in 

connection with complete liquidations 

other than certain subsidiary 

liquidations. Section 337(d) directs the 

Secretary to prescribe regulations as 

may be necessary to carry out the 

purposes of General Utilities repeal, 

including rules to ‘‘ensure that such 

purposes may not be circumvented 

* * * through the use of a regulated 

investment company, a real estate 

investment trust, or tax-exempt entity 

***’’ Absent special rules, the transfer 

of property owned by a C corporation to 

a RIC or REIT could result in 

permanently removing the property’s 

built-in gain from tax at the corporate 

level, because RICs and REITs generally 

are not subject to tax on income that is 

distributed to their shareholders. 

On February 4, 1988, the IRS issued 

Notice 88–19 (1988–1 C.B. 486) 

announcing its intention to promulgate 

regulations under the authority of 

section 337(d) with respect to 

transactions or events that result in a 

RIC or REIT owning property that has a 

basis determined by reference to a C 

corporation’s basis (a carryover basis). 

Notice 88–19 provided that the 

regulations would apply with respect to 

the net built-in gain of C corporation 

assets that become assets of a RIC or 

REIT by the qualification of a C 

corporation as a RIC or REIT or by the 

transfer of assets of a C corporation to 

a RIC or REIT (a conversion transaction). 

The Notice further provided that, where 

the regulations apply, the C corporation 

would be treated, for all purposes, as if 

it had sold all of its assets at their 

respective fair market values and 

immediately liquidated. The Notice 

provided, however, that the regulations 

would not allow the recognition of a net 

loss and that, except as provided in the 

Notice, the regulations would not affect 

the characterization for tax purposes of, 

or the tax treatment of parties to, any 

transactions to which they apply. For 

example, shareholders of a C 

corporation who received RIC shares in 

a transaction that qualified as a 

reorganization under section 

368(a)(1)(C) would not recognize gain or 

loss solely because the C corporation 

was subject to tax. The Notice also 

provided that immediate gain 

recognition could be avoided if the C 

corporation that qualified as a RIC or 

REIT or the transferee RIC or REIT, as 

the case may have been, elected to be 

subject to tax under section 1374 with 

respect to the C corporation property. 

Notice 88–19 also indicated that the 

regulations would apply retroactively to 

June 10, 1987. Notice 88–96 (1988–2 

C.B. 420), amplifies Notice 88–19 by